Question

China is one of the most popular investment destinations in the world. Throughout much of the 1990s, China accounted for 50% of foreign direct investment (FDI) going into developing countries and between 1994 and 1997, China was the second largest recipient of FDI in the world, after the United States. Do you think the recent corporate tax cuts in the U.S. and the changes in tariff rates in both countries could affect FDI in China? Why? How? What about the FDI in the U.S.?

Answer 1

Chinese economy for a long period of time has benefitted immensely from the investment through FDI route. It actually helped the country sustaining the double digit growth in the economy for a significant number of years but in recent years there has been a shift because of the unemployment in US as more companies choose to move their manufacturing to China as there cost of production is low and globally other countries are also competing for the same FDI. The reduce in corporate tax in US might actually help in retaining the existing companies continue to manufacture there even though not much FDI could be attracted as because of the minimum labor wage the cost of production would be slightly high, that is the reason even companies like APPLE have their manufacturing base there. The FDI inflow to China would reduce to as other emerging economies like India have also taken steps to attract the FDI. It is also because now the perception of China is changing, cost is increasing because of tariffs. The FDI in US might not be that much because of the cost of production but increase in tariffs and reduction of corporate taxes can actually helps in retaining the existing companies there.