TSMC is not alone. CMA CGM, a privately held French logistics firm, recently announced a $20 billion investment in America over the next four years. German industrial giant Siemens plans to build two factories in California and Texas that cost $285 million. Asahi, the Japanese beer maker, has said it will expand production at its Wisconsin plant. And several carmakers, including Honda, Mercedes-Benz and Stellantis, have said they plan to increase production in America.
By The Economist
Will Trump’s tariffs boost foreign investment in America? Companies like Asahi and TSMC are expanding production in the country. For now. For global companies, there’s no place like America. While growth in China and Europe has slowed, the US economy has continued to expand at a healthy pace. America remains the world’s largest consumer market, accounting for almost 30% of total spending, and is home to the largest stock of Foreign Direct Investment, at around $5 trillion, The Economist reports. However, since Donald Trump came to power, doing business in America has become more difficult for foreign companies. Tariffs are making it more expensive to export goods to the country.
And the erratic way these tariffs are announced and imposed creates uncertainty. Just days after imposing a 25% tariff on Canada and Mexico, a month-long exemption was granted for cars and other goods covered by the North American Free Trade Agreement.
A new 10% tariff on Chinese goods, months later, was doubled. On March 11, Trump announced a 50% tariff on Canadian steel and aluminum, up from the 25% he had previously announced. Hours later, he backed down. Most recently, he threatened a 200% tariff on wine and other alcoholic beverages from the EU. All of this creates a dilemma for foreign companies that sell in the US market. Will they respond by moving some of their production to America to avoid the tariffs and appease Trump? Or will they look elsewhere for new customers? Foreign investment in America has surged in recent years. Annual inflows of “greenfield” FDI are set to reach a record $231 billion in 2024, up from $97 billion five years ago, according to FDI Markets, a data service.
This boom was fueled by the Biden administration’s massive subsidies to build factories in America for chips, electric vehicles, solar panels and more. Trump’s approach, however, is one of punishment, not withdrawal. He hopes the tariffs will spur even more investment in American manufacturing, filling government coffers.
This is particularly worrisome for foreign companies that generate a large portion of their sales in the United States but have limited operations there. To identify the companies most at risk, we looked at the 100 largest non-U.S. firms in the world by market value, excluding businesses in service industries and those that report insufficient data. We used publicly available data to measure their U.S. revenues. To estimate costs, we used reported assets, capital expenditures, headcount, and data from LinkedIn.
Our panel concluded that four groups of foreign companies are particularly vulnerable. First are drugmakers, such as Novo Nordisk and Roche. America accounts for more than two-fifths of their sales but less than a third of their costs. Electronics makers, including TSMC and Samsung, are also vulnerable, as are European luxury clothing giants such as LVMH. Foreign carmakers are also at risk, though to varying degrees. Some, such as Porsche, import all the cars they sell in America. Others, such as BMW and Mercedes, have American factories that produce SUVs, many of which are sold domestically.
Some foreign companies have already chosen to move more production to America. This month, TSMC announced that it will increase investment in the country from $60 billion to $165 billion between 2020 and 2030.
It will build three additional chip factories, two packaging facilities and a research and development center. Morgan Stanley warns that a 100% tariff on chips from Taiwan that Trump has mentioned would make TSMC’s import price higher than the cost of production at its Arizona factory.
TSMC is not alone. CMA CGM, a privately held French logistics firm, recently announced a $20 billion investment in America over the next four years. German industrial giant Siemens plans to build two factories in California and Texas that will cost $285 million. Japanese beer maker Asahi has said it will expand production at its Wisconsin plant. And several automakers, including Honda, Mercedes-Benz and Stellantis, have said they plan to increase production in America. Investors are responding in different ways to the strategy. Of the six firms that have announced plans to invest in American facilities, half saw their shares rise, while the other half fell, in the days following the news.
As one boss points out, factories often depreciate in value over 20 years, meaning companies will be stuck with these factories long after Trump leaves office, when the threat of tariffs may have dissipated.
Moreover, moving operations to America is not easy for many companies. During Trump’s first term, Bernard Arnault, the head of LVMH, dodged tariffs by expanding handbag production in America. But repeating that trick will be difficult. A key reason luxury goods are so attractive is their European origins. Complicated supply chains make things even more difficult. Some drugs and cars, for example, cross borders multiple times during their production process. Some companies may quietly cancel investment plans. In 2017, Foxconn, a Taiwanese electronics manufacturer, pledged to spend $10 billion on a factory in Wisconsin that would employ 13,000 people.
Trump visited the proposed site, declaring it the “eighth wonder of the world.” But after many changes to plans, the company said last year that it had spent just $1 billion on the project and created just 1000 jobs.
Faced with U.S. tariffs, some foreign companies may turn their attention elsewhere. That’s what happened to Chinese companies, which were hit hardest during Trump’s first term. FDI flows from China to the United States fell from $8.2 billion in 2016 to $6.5 billion last year. According to Morgan Stanley, Chinese companies will generate about a quarter of foreign sales in the United States by 2024, down from about half in 2016. Instead, they have turned to economies in the global south, which are experiencing rapid economic growth. If Trump’s goal is to encourage foreign businesses to build in America, there are more effective policies than tariffs. During the campaign, he also promised to cut red tape.
Cumbersome planning processes have long hampered American manufacturing. For foreign firms, regulating them would be a much more incentivizing option than tariffs.
