It has been six months since the Biden administration and the new Congress took charge of foreign and domestic policies, and foreign investment flows suggest a vote of confidence in the economy and its institutions.
The latest data from the Treasury International Capital (TIC) System indicates a 65% increase in net foreign long-term portfolio investment in U.S. securities compared to the imposition of tariffs on China in July 2018, and a 138% increase since February 2019, the month before the pandemic.
Increasing demand for U.S. securities adds to the downward pressure on U.S. long-term interest rates. That makes the Federal Reserve’s efforts to keep the cost of investment lower that much easier, with investment adding a long-term aspect to the recovery effort.
An encouraging outlook would also be expected to boost foreign direct investment in the economy. Such investment has been discouraged during the past two decades by restrictive policies centered on technology transfers.
This is according to Adam Posen, president of the Peterson Institute for International Economics, who finds that the inflow of “greenfield investment” dropped from $13 billion in 2000 to $4 billion in 2019.
Posen reminds us that there are long-term costs of economic nationalism. The declining trend in foreign direct investment since 2018 is one of those costs.
There are encouraging signs, however. As of the first quarter of this year, foreign direct investment has managed to recoup losses during the pandemic and is now approaching a break above the downtrend of 2018 to 2021.
For those concerned about the value of the dollar in regard to foreign demand for U.S. securities and goods, our analysis suggests that a dollar is fair-valued, with room for appreciation.
A strengthening dollar is attractive for foreign investors, adding to the total return on their investment. As the world economy recovers, we expect the commodity currencies to strengthen as well, which would temper any overvaluation of the dollar.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
