The United States of Uncertainty: what will Trump mean for FDI?

Shortly after US president Donald Trump’s inauguration, Nestlé USA announced it was moving its corporate headquarters across the country from Glendale in California, to Arlington, a suburb a few kilometres outside of Washington, DC.

This move was long in coming – the company had been considering it for 16 years, weighing up 19 other locations around the country as possibilities. By October 2016, it had narrowed the selection to another east coast city, Atlanta, and Arlington. It did not take long for corporate executives to make the final choice. Arlington “allows us to be closer to our business operations and to our customers”, says company spokesperson Edie Burge. 

This makes sense as some 75% of Nestlé USA’s factories and 85% of its key customers are located in the eastern half of the US. However, industry chatter has suggested one reason that nudged Nestlé to choose Arlington over Atlanta was its proximity to the US capital and the new president. According to Ms Burge, Nestlé “made the decision to come to Washington independent of the election of the president”. But she also says Arlington “provides proximity and convenience for collaboration with business and other important stakeholders, including regulatory groups and relevant non-governmental organisations”.

Paradigm shift

Nestlé would hardly be the first company to establish a location close to Washington, DC to curry favour with the political establishment. But with the election of Mr Trump, a nearby location could now be viewed as essential to any company that wishes to stay on top of (and hopefully influence) the many changes under way in such areas as industry regulations, corporate taxes, workforce and immigration-related regulations.  

“It is not business as usual,” says Carlo Dade, director of the Centre on Trade and Investment Policy at the Canada West Foundation in Calgary, Alberta. “The world has spent decades responding to and dealing with the US in a certain way. None of these old paradigms hold with Mr Trump.”

Nestlé, of course, is heavily invested in the US market. It is difficult to imagine it leaving, no matter who is president. But what of other companies considering expanding in the US? They have a lot to think about.

After all, these numerous policy changes are being promulgated by a businessman-turned-president who has no policymaking experience. On his best days, Mr Trump could be described as charismatic and forward-looking, and on his worst, erratic, thin-skinned and prone to conspiracy theories.

And while some of his ideas are intriguing – a proposal to invest $1000bn in US infrastructure, for instance – others are downright unfriendly to business. For example, the Trump administration has twice tried to institute a travel ban on select Muslim-majority countries. Foreign companies with operations in the US tend not to look favourably at this law, whether they admit it publicly or not. How can they be certain their staff will be able to travel freely to and from their US offices?

As of mid-March, both proposals had been blocked by the US courts. There is a good chance, though, some variant will make its way into law; if any court ruling appears destined for the US Supreme Court, it is this one. The Trump administration is making it tougher for millions of visitors to enter the US by demanding new security checks before giving visas to tourists, business travellers and relatives of American residents. Diplomatic cables sent in late March from secretary of state Rex W Tillerson to all US embassies instructed consular officials to broadly increase scrutiny. It was the first evidence of the “extreme vetting” Mr Trump promised during the presidential campaign.

Visa threat

Another example is how, on the campaign trail, Mr Trump signalled very strongly he would curtail the use of the H-1B visa, which allows employers to temporarily hire foreign workers in specialist occupations. It is heavily used in engineering, advanced manufacturing and tech industries. Since he has become president, it is unclear what Mr Trump’s policies will be in this area – his tone is far less aggressive about the visa – but it remains a topic closely watched by companies.

Mr Trump and the US Congress are also pushing to overhaul the US corporate tax code, with generous incentives for US companies to repatriate foreign profits. The flip side of this, however, may be a clampdown on inversions – a financial structure that allows a US company to be acquired by a foreign one and then assume that country’s legal address. Essentially, they renounce their US corporate citizenship.

Another proposal being considered is a so-called border adjustment tax, which would exempt exporters’ profits from taxes and remove existing tax deductions for what importers purchase from foreign countries, imposing a value-added tax of 20% almost overnight.

It is unclear what the ramifications would be if this proposal were enacted – and there are industry groups lobbying fiercely to prevent this happening – but the effects would be far reaching. Theoretically, the demand for imported goods would fall sharply, causing the flow of US dollars to exporters in foreign countries to dry up. The US dollar would get stronger, giving US importers more purchasing power.  

However the forces of supply and demand rarely meet so neatly in the middle and with such perfect timing. The US dollar may rise but not for several months or even years, leaving US importers – including foreign companies with US operations that rely on imported goods – struggling with a 20% tax increase. And an even stronger US dollar would be worthy of an article of its own.

Rethinking the US?

By this point, an impartial observer may be wondering if the US is worth it. After all, FDI into the US has slipped in the past two years as the appeal of China and India has grown.

India surpassed the US in 2015 as the world’s top recipient for greenfield capital investment and retained its top spot for FDI last year following an increase in investment of 2% to $62.3bn, according to figures from crossborder investment monitor fDi Markets.

China, meanwhile, has overtaken the US as the second biggest country for FDI by capital investment, recording $59bn of announced FDI, compared to $48bn-worth of FDI announced in the US.

But then China and India have their own set of issues, such as less than transparent policies, questionable (in the case of China) economic statistics and less than ideal living conditions for local workers and expats. The US, by contrast, has a rule of law widely seen as fair and beyond political influence. Mr Trump’s proposed travel ban may become law one day but it will be tested and challenged by the legal system at every conceivable point.

Ultimately, though, with the largest economy in the world, the US can hardly be dismissed from foreign investment calculations simply because the new president is cut from a different cloth than other politicians. “Globally, the US is still a desirable investment location and always will be,” says Mr Dade. “The only change is the calculation of the potential risks and returns under the new administration. Companies need to widen their analysis to include that.”

The case for Trump

A case could be made that a foreign company would be foolish to avoid the US now. Mr Trump may not be to everyone’s taste but it is telling that the US stock market has been trending positively – more or less – since his election. While this is partly a factor of solid economic growth and momentum, it also reflects the market’s confidence that he and Congress will create a business-friendly environment.

Mr Trump has already begun fulfilling his promise to slash regulations. In his first 30 or so days, he has rolled back or delayed about 90 industry regulations, according to the White House website, in areas ranging from pharmaceuticals to automobiles to telecoms.

Finally, given his job-creation mission, companies that do locate in the US are bound to receive incentives from the federal government as well as state and local officials. This has typically been the case but Mr Trump, at least in these early days, is eager to highlight his victories.

There is one more consideration though: Mr Trump and his Twitter account. US executives do not like it, according to a survey of US chief financial officers by Duke University’s Fuqua School of Business. According to John Graham, a finance professor at Duke and director of the survey, they “don’t like the fluctuations and uncertainty that result from how Mr Trump communicates to the public”.

Thus far, Mr Trump has shown no inclination to cease his Twitter habit, even as his more outrageous messages turn the spotlight away from his agenda. So to the many complicated factors considered when making an FDI decision in the US, another must be added for the next four years: global humiliation per the US president could well be part of the mix.

Companies have a lot to consider before deciding if the US market, with all its riches, is worth it.