New Articles
  May 4th, 2017 | Written by

Don’t Believe What They Tell You About Foreign Investment

[shareaholic app="share_buttons" id="13106399"]


  • Foreign investments hurt the US economy and don't create jobs.
  • Bigger trade deficits give rise to net incoming foreign investment.
  • Last year's foreign investment into the US totaled $385 billion, 75 percent of the trade deficit.

We often hear of state and federal officials chasing after foreign investment dollars, trying to bring money into the United States.

Recently a dozen CEO’s of foreign companies met with the Trump administration to make the case that foreign investment is an unabashed good for America. Only a few days ago, Chinese President Xi Jinping reportedly told President Trump that one solution to the huge US trade deficit with China would be to allow China to buy more American companies.

The basic rule is that bigger trade deficits give rise to net incoming foreign investment. If we had a trade surplus, the US would be a net investor in other countries. America should strive to be both a net exporter of goods and a net exporter of investment dollars. Unfortunately, we are a net importer of both.

While a small fraction of foreign investments into the US are for genuinely new physical plant and equipment that create jobs, most of these investments are purely paper transactions and actually hurt our economy. Despite what investment bankers and local officials may say, foreign direct investment (FDI) is a poisoned chalice. Rather than a gift, it’s simply part of a global financial system that sustains our huge trade deficit and deprives the US of jobs and productive industry.

Ninety seven percent of foreign direct investment (FDI) represents the purchase by foreigners of US existing businesses with no net job creation. Federal data show that greenfield plants and physical expansion of plants account for only three percent of FDI. The transfer of assets to foreigners soaks up the excess supply of US dollars in the world market, keeps the dollar artificially high, and keeps us on the downward path to de-industrialization.

The sale of goods to foreigners (i.e. exports) reduces our trade deficit and creates jobs and income for Americans. When the US had trade surpluses, we were not only a net seller of goods but we were a net buyer of foreign assets. Today, as a trade deficit country, the basic economic math results in America being a net seller of our assets to other countries.

For the last 41 years, we’ve been running a trade deficit. That means we’ve been pumping dollars out into the world to purchase goods. As those dollars pile up in the bank accounts of foreign companies, individuals, and governments, they use some of those dollars to buy American goods. But some of our largest trading counterparties (especially China and Germany) run their economies with such a tight grip on consumer spending that they don’t buy a sufficient volume of goods. They restrain domestic consumption through fiscal, monetary, and other policies while ensuring that corporate profits rise. This enables them to produce more than they consume, export the difference, and rely excessively upon US consumers for their economic growth.

When they buy fewer US goods than they sell to us, what are they doing with the rest of their dollars? The answer is that they buy our assets.

That has two negative consequences for the US. First, it creates debts or liabilities that we will have to pay back at some point in the future. We pay dividends or interest payments on those debts before they come due.

Second, and more importantly, by buying US businesses and other assets with those dollars, they keep the dollar’s value high. Instead of selling goods, which would create jobs and prosperity here at home, we sell pieces of paper that represent a claim on the future of American companies or taxpayers. In effect, those foreign governments are exporting their unemployment to us. And whatever conventional mainstream economists may say, there is no mechanism to push our economies towards an equilibrium that would eliminate our deficit and other countries’ surpluses. As long as surplus countries find other uses for their dollars (and some governments will even hold dollars at zero interest, although most prefer investments like profitable US companies), we can remain in deficit indefinitely.

How significant is this phenomenon? According to United Nations data, last year foreign direct investment into the US totaled $385 billion. That’s about 75 percent of our trade deficit! If instead of buying up US assets, foreigners had spent that money on American goods, it could have wiped out 75 percent of our trade deficit and created at least 1.9 million jobs. (That’s based on rough estimates we published earlier this year that every $1 billion improvement in our trade deficit creates around 5,000 jobs.)

So while it might feel nice to hear that foreigners find American assets desirable, in reality, it is the result of global imbalances, including our problematic trade deficit and excessive surpluses in other countries. They deploy their excess dollars in a way that perpetuates the imbalances, with little or no economic benefit to the US.

China’s argument that the US should let them purchase more assets is exactly the opposite of the direction we ought to go. We need to make it more difficult, not easier, for China to invest its dollars here in the US. We need to use every tool in our arsenal to encourage China to buy more American goods.

Jeff Ferry is research director at the Coalition for a Prosperous America.