Mexico wins in the push to friend-shore

U.S. direct investment abroad increased 3.3%, or $212 billion, to $6.58 trillion in 2022.  Inbound foreign investment in the U.S. increased 4.3, or $217 billion, to $5.25 trillion, making the net investment flow almost negligible. While there were no wild swings, several stories are important.

Earlier this week, Mexico displaced China as the main trading partner to the U.S. Proximity to the U.S. market and the USMCA trade agreement, as well as the geopolitical and commercial uncertainty that comes from the increasingly polarized world, have attracted $130 billion in U.S. investment. Meanwhile, Mexico invested $34 billion north of the border.

According to OECD data, Mexico’s real average annual wages are the lowest in the OECD and have therefore been attracting significant near-shoring/friend-shoring interest. Vacancies in industrial properties have dropped to zero across much of the country, meaning there will be a rush to construct new production facilities.  It is not a coincidence that more than 50% of the annual increase in U.S. investment in Mexico was allotted to manufacturing. 

Outbound investment to Russia fell from $12 billion in 2021 to $9 billion in 2022.  Despite the war, which started in February 2022, and subsequent financial sanctions and export controls, investment was not deterred, although the overall figure is small.  The investments were mostly made in wholesale trade and manufacturing. 

China, the U.S.’s competitor in the technology space, did not send or receive substantially more investment in the technology-oriented sub-sectors such as machinery, a field that includes semiconductor fabrication machines or computers and electronic products. That was surprising given all the rhetoric around national security and the CHIPS and Science Act, which designated $280 billion for improving domestic U.S. chip fabrication capacity. Outbound investment restrictions on high-tech manufacturing aren’t likely to show up until the 2023 data is released.

Due to China’s export restrictions on rare earths for production chips, solar panels and military equipment, there should be an uptick in U.S. outbound investment in 2023 to find replacement sources.  Major firms have been pushing to improve relations between the two countries because realigning supply chains is easier said than done.

The next shoes to drop will be investment and export controls, potentially including cloud computing. The goal is to preserve cybersecurity and limit AI development in China. In retaliation, China has adopted export restrictions. It has banned rare earths essential for production of chips, solar panels and military equipment. In 2021, the U.S. received 74% of its rare earth compounds from China; the U.S. is over 95% reliant on imports for these materials according to the U.S. Geological Survey.

In the center of the semiconductor world sits Taiwan.  More than one-third of U.S. investment in Taiwan was in computers and electronic products.  Nearly half of all Taiwanese investment in the U.S. was in manufacturing with concentrations in chemicals and computers and electronic products.  The latter sub-sector’s growth is important because it represents a 90% increase from the previous year; the quest for semiconductor capacity is well underway.

In terms of raw investment size, the United Kingdom, the Netherlands, Luxembourg, Ireland and Canada were the biggest recipients of U.S. outbound investment.  Most of that was concentrated in nonbank holding companies.  Inbound investment was dominated by Japan, the Netherlands, Canada, the United Kingdom and Germany.  Inbound investment focused on chemicals,  manufacturing and finance and insurance.