The global conversation about politics and business has shifted drastically since Joe Biden replaced Donald Trump as president. Nations and regions that were alienated by former President Trump’s nationalist agenda are now giving President Biden some goodwill as the United States is more focused on engagement than isolation.
While this shift is eliciting optimism among developed and developing countries about Biden’s impact on global business, multinational companies and institutional investors need to take a nuanced approach when considering global business transactions involving the USA.
In an effort to refine the global conversation and provide actionable advice to global investors, the following explains the climate for inbound investments (to the USA) and outbound investments (from the USA).
While President Biden ostensibly encourages outbound investment from the US, he has been very clear that he aims to reduce the protections included in US bilateral investment treaties (BITs) with other countries. More specifically, he has promised to refrain from including the dispute resolution clause that are a staple in most BITs.
A BIT is an agreement between two countries that establishes the terms and conditions for private investment by nationals and companies of one state in the other state.
The BIT’s dispute resolution mechanism gives investors a cause of action against host governments. With this in place, investors need not rely on their own governments to file claims against the government of their host state. The ability to sue foreign governments in international arbitration deters host countries from interfering with FDI projects and provides comfort to US investors.
In 2020, China surpassed the United States as the most desirable location for inbound foreign direct investment. Certainly, this resulted from a confluence of factors: Donald Trump’s isolationist agenda and the Coronavirus. The extent to which Biden’s foreign investment agenda will represent a departure from his predecessor’s remains unclear.
In the absence of a clear roadmap, President Biden’s tone of collaboration and compromise with foreign governments is more conventional (than Trump’s), and is likely to boost investor confidence in the USA. The tangible impact is likely to manifest earlier in portfolio investments as opposed to direct investments. Direct investment involves ownership and control of the assets while portfolio investment involves purchases of securities or a minority holding of shares.
Don’t Assume When Investing
It is important for asset managers, multinational companies, advisors, and fund managers to refrain from assuming that Biden’s foreign policy strategy of engagement guarantees an increase in cross-border monetary flows.
It is incumbent on investors to consider the type of investment, the dynamics between the US and the relevant other countries, and the long-term objectives. Taking it step by step will help investors cut through the rhetoric and the clouds of confusion.