Fact of the Week: US Export Controls Reduce Foreign Direct Investment in the US by 13 Percent

Source: Naoto Jinji and Shunya Ozawa, "Impact of Technological Decoupling between the United States and China on Trade and Welfare," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI),no. 24-E-041 (March 2024).

Commentary: A recent working paper by Naoto Jinji and Shunya Ozawa analyzed how the decoupling of the United States (U.S.) and China from global supply chains has affected those countries' consumer welfare, exports, imports, and foreign direct investment (FDI). The data came from the UN's Commodity Trade Statistics Database for 89 countries between 2016 and 2022. The study's findings suggest that trade and technology restrictions not only reduce consumer welfare and exports, but also negatively influence other indicators such as foreign investment due to declines in associated technology transfer.

The authors found that bilateral trade and technology restrictions between the U.S. and China together have reduced consumer in the U.S. and China each by about 0.41 percent. In particular, bilateral trade restrictions alone reduced welfare in the U.S. and China by about 0.08 percent and 0.27 percent, respectively. At the same time, bilateral technology restrictions reduced welfare in the U.S. and China by 0.33 percent and 0.13 percent, respectively. Unsurprisingly, the restrictions had a more noticeable effect on imports and exports. In particular, both trade and technology restrictions reduced exports from the U.S. and China by 6.9 percent and 9.9 percent, respectively. At the same time, those restrictions reduced imports to the U.S. and China by 3.6 percent and 5.9 percent, respectively. Additionally, both restrictions together reduced inward FDI to the U.S. and China by 1.8 percent and 1.1 percent, respectively.

The authors also looked at the effects of unilateral export controls imposed by the U.S. and China on the rest of the world. When looking at the effects of U.S. export controls, consumer welfare in the U.S. decreased by about 0.61 percent. Unsurprisingly, U.S. export controls reduced U.S. exports by about 53 percent, while also increasing Chinese exports by about 2.8 percent. Additionally, U.S. export controls also reduced inward FDI to the U.S. by about 13 percent. When looking at the effects of Chinese export controls, consumer welfare in China fell by about 1.4 percent. Unsurprisingly, Chinese export controls reduced Chinese exports by about 55 percent, while also increasing U.S. exports by about 5.2 percent. Additionally, Chinese export controls also reduced inward FDI to China by about 6.5 percent.