Joseph Mariathasan: America first – or America last?

US president Donald Trump’s actions are proving to have the exact opposite effect to his objective of “America First”.

In a recent article, economist Adam Posen, president of the Peterson Institute for International Economics, makes the case that the president is actually ruining the US’s attractiveness as a place to do business – a case of putting “America last”.

One strong piece of evidence supporting Posen’s view is foreign direct investment (FDI) into the US. According to the US Bureau of Economic Analysis, in the first quarter of 2016 the total net inflow of investments was $146.5bn (€128.4bn). For the same quarter in 2017 it had gone down to $89.7bn, and by 2018 it was down even further to $51.3bn.

As Posen makes clear, this precipitous drop cannot be ascribed to changes in Chinese investment, which flow both ways with little contribution to changes in the figures. The falloff, he says, is a result of a general decline in the US’s attractiveness as a place to make long-term business commitments.

But it may not just be in investment flows that the US is losing its attractiveness. The best and brightest from across the world have always been attracted to its shores and its ability to attract them has been one of its great strengths. Silicon Valley would not be where it is today without Chinese and Indian immigrants.

Immigrants have founded half the start-ups in recent years, but – according to a recent study from Duke University and the Kauffman Foundation – the rate of start-ups has declined significantly, primarily as a result of immigration policies in the US. Trump’s isolationist stance is likely to exacerbate this trend significantly.

As Posen argues elsewhere (for example, in this article from February this year), if the US continues its retreat from economic leadership, it will impose serious pain not only on the rest of the world but also on itself.

Trump puts forth the belief that the US has somehow been taken advantage of by its allies and trading partners in the multilateral US-led post-war world. There may be some truth in the area of defence: the US provides security guarantees to its allies and an umbrella of nuclear deterrence. The US military also polices the freedom of navigation in international waters and airspace. These, as Posen points out, are classic public services provided by the US, essentially on its own, that every country benefits from whether or not it contributes.

When it comes to the everything else in the global multilateral ecosystem, many, including Posen, argue that it is the US that has been the one free-riding in recent years.

From accusations of not paying its dues to international organisations on time, to spending a far smaller share of its GDP on aid than other wealthy countries, according to the OECD, and withdrawing from international efforts to combat climate change even as other countries have begun to shift toward greener growth. 

Is the world moving towards a post-American era?

China’s president Xi Jinping appears to have become the global spokesman for the cause of global free trade and capitalism. Indeed, at the World Economic Forum in Davos in 2017 he declared: “Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries, and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible. Indeed, it runs counter to the historical trend.”

Posen argues that, so long as the US economy remains very large (which it will) and at the technological frontier (which it probably will), and maintains its commitment to globally attractive values, the country will be capable of remaining the leader.

However, even he admits that it is worth watching the flows of direct investment, especially of net FDI, into the US as an early indicator of how far the global economy has moved toward a post-American era. The data on flows of both investment and people suggest that Trump’s approach to globalisation is certainly moving the world in that direction.