I don't get excited one way or the other about foreign direct investment (FDI) in the U.S. It doesn't scare me, but I also don't see it as necessarily any great boon. Investment is generally good (it increases productivity and growth), and that includes foreign investment. For this reason, I mostly find the Bush administration's effort to hype the virtues of FDI in the Economic Report of the President (ERP) entertaining. When the press buys the hype, it is disappointing. So, the WSJ shouldn't have uncritically bought the line that FDI helps "finance the large trade deficits." Time for some basic accounting. The trade deficit is caused by an over-valued dollar. When people buy imported products at Wal-Mart, its because they cost less than domestically produced goods, that's pretty straightforward. The reason they cost less is because a high dollar makes imports cheap. This is all really simply. FDI gets into the story because when foreign corporations want to invest in the U.S., they need to get dollars. This means that they increase the demand for dollars, and push the value of the dollar higher. This increases the trade deficit. Let's get the causation straight in this story. This causation gets to one other point raised in the ERP and the article. The ERP notes the declining share of FDI in U.S. investment. There is a very simple explanation for this. If foreign firms recognize that the U.S. trade deficit is unsustainable (as everyone does) and that it will eventually lead to a large fall in the value of the dollar, then they would rightly be reluctant to invest heavily in a currency that is about to decline in value. It would make much more sense to put off your investment until the dollar does fall. In other words, no big surprise here.
--Dean Baker
