Hello from London, where the government is in the throes of lowering trade barriers with smaller and faraway trading partners after having increased those with its largest and closest ones.
The UK government has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes fast-growing countries such as Vietnam, Mexico and Malaysia.
The problem is the UK exported almost five times more goods to the EU than to those countries last year. Moreover, EU membership was hardly an impediment for UK exporters considering Germany exported three times the value of goods of the UK to those countries, according to data from International Trade Centre, a UN organisation.
But, we digress. Today’s main piece will focus on a somewhat brighter theme, looking at a story of exceptional resilience in Asia’s foreign direct investment (FDI) inflows, hidden by the most dramatic fall of global FDI of at least this century. Policy watch, meanwhile, comes with a recommendation for an excellent primer on the implications of the EU’s export controls on vaccines.
In 2020, global FDI inflows plummeted 42 per cent, according to recently published data by the United Nations Conference on Trade and Development or Unctad.
This is by no means a small drop. Indeed, last year’s value of FDI was more than 30 per cent below the investment trough that followed the 2008-2009 global financial crisis. It also compares unfavourably with an 8 per cent drop estimated for global trade in 2020 or the 4.4 per cent fall in global output, according to the IMF.
About 1m fewer jobs were added globally in 2020 because of the contraction in cross-border greenfield investment — those involving creating or expanding a new business — according to an FT analysis of data by fDI Markets, an FT owned company tracking greenfield foreign investment. The number of global cross-borders greenfield investment projects was down 36 per cent overall, and 46 per cent in manufacturing. While FDI stemming from mergers and acquisitions activity was much more resilient, it still contracted 19 per cent in the rest of the world besides Asia, according to an FT analysis of data from Refinitiv, a global financial data and services provider.
The divergence between Asia and the rest is a key part of the story of what happened in 2020. It could hardly be greater. In China and India, FDI inflows actually increased, by 4 and 13 per cent respectively. In contrast, FDI inflows in advanced economies fell 69 per cent.
As a result, China overtook the US as the world largest recipient of FDI in 2020. Developing countries attracted 72 per cent of global FDI in 2020, their highest share on record. Asia on its own accounted for more than half of global cross-border investment.
At the other side of the Asian success story, there is Africa and Latin America, which registered the largest contractions of any other regions for many components of FDI including M&A, project finance and greenfield investment.
The investment spree in China and India was largely driven by M&A targeting information technology and communications, ecommerce and pharmaceutical companies. China’s FDI inflows were supported by the growing economy and was boosted by government facilitation programmes.
In India, the economy appears to have shrunk sharply in 2020, but its fast-rising middle class coupled with government efforts to create a favourable environment for foreign investors contributed to rising foreign M&A targeting Indian businesses in ecommerce platforms, data processing services, digital payments and video streaming, according to Unctad.
The FDI story presents a double blow for regions such as Latin America and Africa, where domestic markets have not been rising as fast as in Asia and where cost reduction might be a greater incentive for investment. For those regions, the drying up of foreign investment came on top of large economic downturns.
In Peru, “all sectors registered severe declines of flows with virtually no new investment in the services, manufacturing and utilities industries”, said Unctad. In Africa, “the pandemic’s negative impact on FDI was amplified by low prices of and low demand for commodities”.
The trend for China and India is, of course, in stark contrast with the many warnings of rapid reshoring or nearshoring as a result of supply chain disruption during the pandemic, and it points to businesses planning to access growing markets and seeking strategic assets.
Caroline Freund, global director of trade, investment and competitiveness at the World Bank, said in December that the expectations of reshoring or nearshoring “may be driven more by rhetoric than reality”.
The World Bank is monitoring foreign investors’ sentiment regularly since the crisis, due to the key role of FDI as a source of finance and of economic growth for many developing nations.
Almost half of foreign investors surveyed said they were planning to reshore their operations. But at the same time the bank found many multinationals were planning to invest in China, while they expressed a much weaker appetite for Europe and central Asia, an often-cited nearshoring region.
It doesn’t really tally. And makes us — and others — suspect this trend of larger cross-border investment inflows in Asia will continue. Martin Kaspar, head of development at German automotive supplier Fränkische, said at an FDI conference in June that despite the pandemic and the smaller wage gap “people will still be investing in India and China because there is access to Asia”.
The trade story that’s dominated the global news agenda in recent days has been the EU’s rushed moves to curb vaccine exports, which have perturbed officials from London to Tokyo. If anyone is seeking a primer of what the EU has done and what the implications are, we’d recommend this excellent summary from Simon Evenett, a professor at the University of St Gallen in Switzerland.
The paper, Export Controls on Covid-19 Vaccines: Has the EU opened Pandora’s Box?, examines seven grounds of legitimate concern for the region’s trading powers and five scenarios that could play out. His conclusion: “Having dropped the ball on the roll out of Covid-19 vaccines, public health officials should not be allowed to inflict collateral damage on the world trading system. As we have learned from history, when it comes to trade restrictions, all too often governments act in haste and repent at leisure.” Let’s hope that’s not the case this time around.
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