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*Karl P. Sauvant, PhD* *Resident Senior Fellow* *Columbia Center on Sustainable Investment* Columbia Law School - The Earth Institute, Columbia University 435 West 116th St., Rm. JGH 825, New York, NY 10027 | p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask] | w: www.ccsi.columbia.edu | t: @CCSI_Columbia <https://twitter.com/CCSI_Columbia> "International Investment Facilitation: By Whom and for What?", "Moving the G20's Investment Agenda Forward", "Emerging Markets and the International Investment Law and Policy Regime", "Sustainable FDI for Sustainable Development", "Towards an Investment Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!", "Towards an Indicative List of FDI Sustainability Characteristics", “The Importance of Negotiating Good Contracts", "A New Challenge for Emerging Markets: the Need to Develop an Outward FDI Policy”, "China Moves the G20 toward an International Investment Framework and Investment Facilitation", "The Next Step in Governance: The Need for Global Micro-regulatory Frameworks", and "The Evolving International Investment Law and Policy Regime: Ways Forward" *are* available at https://ssrn.com/author=2461782 and http://www.works.bepress.com/karl_sauvant/. View this email in your browser <https://mailchi.mp/law/perspective-230?e=7665370649> 哥伦比亚大学国际直接投资展望中文版都可以在我们的网站查看：http://ccsi.columbia.edu/ publications/columbia-fdi-perspectives. *Columbia FDI Perspectives* Perspectives on topical foreign direct investment issues No. 230 July 16, 2018 Editor-in-Chief: Karl P. Sauvant ([log in to unmask]) Managing Editor: Marion A. Creach ([log in to unmask]) *Foreign direct investment and “peak globalization”* <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=00223788c9&e=7665370649> *** <#m_3321639626866159083__edn1> by Carlos A. Primo Braga** <#m_3321639626866159083__edn2> Globalization is characterized by the growing economic interdependence across countries, fostered by international trade, migration, knowledge, and capital flows. Attitudes toward this process vary significantly. More recently, they have been impacted by the global financial crisis and the rise of populist leaderships that blame globalization for job destruction and rising income inequality. Financial globalization has slowed down significantly since 2008. By 2016, global cross-border capital flows had declined roughly 65% vis-à-vis the peak (of US$12.4 trillion) reached in 2007.[1] <#m_3321639626866159083__edn3> Most of this adjustment was associated with the reduction of foreign exposure by Eurozone banks amid the Eurozone crisis.[2] <#m_3321639626866159083__edn4> But FDI flows also fluctuated significantly over the past few years, and they only recovered to levels similar to those reached at the eve of the crisis by 2016. Merchandise trade had been growing on average 7% per year before the onset of the global financial crisis. Since 2008, however, trade growth has been anemic and in some years below the expansion of world output (e.g., 2.3% at market exchange rates for global GDP versus 1.8% for global trade volume in 2016).[3] <#m_3321639626866159083__edn5> All of these trends raise the question of whether globalization has reached its peak and is it now retreating. What are the implications for FDI decisions and policies? There are cyclical factors that help explain the slowdown in trade. Weak aggregate demand and political uncertainty (dragging down business investment that tends to be trade-intensive) are often identified as the main culprits in this context. But there seem to be more structural forces at work. The shortening of supply chains to cope with environmental and geopolitical risks, trade protectionism, increased local content in Chinese exports, and the evolving shift toward services in the world economy are some of the usual suspects identified in this context. There is evidence that discrimination against foreign commercial interests has increased significantly in the post-crisis era.[4] <#m_3321639626866159083__edn6> Subsidies, localization requirements and trade finance have been playing an important role in this new wave of discriminatory actions that often evade multilateral disciplines. It is difficult to quantify their exact impact on global trade flows, but there is no doubt that they are contributing to the trade slowdown. Moreover, recent technological developments (as illustrated by the impact of advanced robotics on re-shoring decisions by MNEs) have also impacted globalization trends. Concerning FDI flows, it seems that efficiency-seeking investments (typically export-oriented) are being affected not only by protectionist policies, but also by the retrenchment of global value chains (as the incentives for process fragmentation decline) and by technology, to the extent that labor costs are becoming less influential in localization decisions.[5] <#m_3321639626866159083__edn7> All these factors are generating incentives for localization in smaller, flexible production facilities closer to end-markets. As a consequence, MNEs are rethinking their localization strategies to adapt to the increased adoption of local content requirement policies and to explore industry 4.0 manufacturing. It may be too early to announce that we have reached “peak globalization”. One could even argue that we are in a moment of resetting global production structures, and that digital flows associated with e-commerce, social networks and entertainment are today the main drivers of globalization. As the global economy regains strength (as illustrated by the latest IMF forecasts for 2018) and demand for consumer and capital goods recovers, one should also expect a recovery of traditional trade flows. The elasticity of trade with respect to income has already rebounded closer to its historical average (1.5) in 2017.[6] <#m_3321639626866159083__edn8> However, the specter of a less integrated world economy is real.[7] <#m_3321639626866159083__edn9> Recent developments (e.g., Brexit, the adoption of protectionist measures by the Trump administration and reactions from trade partners) underscore the potential for economic disintegration. The volume and composition of FDI flows are bound to be affected by these developments that tend to create incentives for market-seeking investment while feeding doubts about the benefits of export-oriented FDI. Policy-makers need to resist the temptation to adopt policies that further advance these trends, such as restrictions of FDI flows designed to force technology transfers. More attention should be given also to the rules of the game and the infrastructure required to promote digital globalization. For example, rules on local data storage/processing and cross-border data transfer should be carefully evaluated since they may threaten the business models of digital firms and hamper FDI flows in this new era of globalization. ------------------------------ * <#m_3321639626866159083__ednref1> *The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.* ** <#m_3321639626866159083__ednref2> Carlos A. Primo Braga ( [log in to unmask]; [log in to unmask]) is Associate Professor, Fundação Dom Cabral, Brazil, and Visiting Professor, IMD, Switzerland. The author is grateful to Manuel Agosin, Helge Hveem and Patrick Low for their helpful peer reviews. [1] <#m_3321639626866159083__ednref3> Susan Lund, et al., “The new dynamics of financial globalization,” *McKinsey Global Institute Report* (2017). <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=c8a756f0cc&e=7665370649> [2] <#m_3321639626866159083__ednref4> Bank for International Settlements, *87th Annual Report* (Basel: BIS, 2017). [3] <#m_3321639626866159083__ednref5> WTO, “Strong trade growth in 2018 rests on policy choices,” Press/820. [4] <#m_3321639626866159083__ednref6> See, http://www.globaltradealert.org. [5] <#m_3321639626866159083__ednref7> See M.P. Timmer et al., “An anatomy of the global trade slowdown based on the WIOD 2016 release,” *GGDC Research Memorandum*, 162 (University of Groningen, 2016). [6] <#m_3321639626866159083__ednref8> WTO, “Strong trade growth in 2018 rests on policy choices,” Press release 820 (April 12, 2018) <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=9b99de573f&e=7665370649> . [7] <#m_3321639626866159083__ednref9> For a detailed discussion, see Carlos A. Primo Braga, “The threat of economic disintegration,” in Carlos A. Primo Braga and Bernard Hoekman, eds., *Future of Global Trade Order* (EUI, IMD and FDC, 2017), pp. 29-47. *The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Carlos A. Primo Braga, ‘Foreign direct investment and “peak globalization”,’ Columbia FDI Perspectives, No. 230, July 16, 2018. Reprinted with permission from the Columbia Center on Sustainable Investment (**www.ccsi.columbia.edu <http://www.ccsi.columbia.edu>**).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at **[log in to unmask]* <[log in to unmask]>*.* For further information, including information regarding submission to the *Perspectives*, please contact: Columbia Center on Sustainable Investment, Marion A. Creach, [log in to unmask] *Most recent Columbia FDI Perspectives* <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=103d2f1ec2&e=7665370649> - No. 229, John Gaffney, “Could BITs and BATs be combined to ensure access to human rights remedies?” July 2, 2018 - No. 228, Felipe Hees and Pedro Barreto da Rocha Paranhos, “Investment facilitation: moving beyond investment promotion,” June 18, 2018 - No. 227, Rob van Tulder and Jan Anton van Zanten, “MNEs and the Sustainable Development Goals: what do first steps reveal?” June 4, 2018. *All previous FDI Perspectives are available at **http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/ <http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/>**. * *Other relevant CCSI news and announcements* - *On September 26, 2018*, CCSI and the UN Sustainable Development Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs, Special Advisor to the UN Secretary-General on the SDGs, and Laurent Fabius, President of the Constitutional Council of the French Republic, will host a conference to discuss the Global Pact for the Environment <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=460fc8103e&e=7665370649>. The Global Pact for the Environment aims to unify international environmental governance and codify a human right to the environment in international law. *For more information, and to register, please see our website here <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=d3466f6b11&e=7665370649>.* - *On September 26, 2018*, CCSI and the Sabin Center for Climate Change Law will host a conference on "Climate Change, the Courts, and the Paris Agreement." In recent years citizens, sub-national governments and NGOs have turned to litigation to hold governments and corporations accountable for their contributions to climate change. *For more information about this event, including registration, please see our website here <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=02df75bba3&e=7665370649>.* - *On September 27-28, 2018*, CCSI will hold its Annual Columbia International Investment Conference (CIIC) on “Multinationals in the Age of Sustainable Development: New Thinking on the Role of International Investment Agreements.” The Conference, taking place alongside the 73rd Session of the UN General Assembly in New York, will build on a multi-year effort to identify guiding principles and practical approaches for aligning international investment treaties with the Sustainable Development Goals (SDGs).* Additional information will be posted shortly on our website here <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=7383326541&e=7665370649>.* Karl P. 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