Gabrielle Fernandez

IMS Assignment 4
18 October 2016

Ideas on: The Effect of U.S. Fiscal Policies on the Ebb and Flow of FDI
The flowing changes of FDI has everything to do with politics, and the U.S. Federal
Reserve. The Foreign Policy article hints towards an "upcoming era of a more normal monetary
policy." In this case, normal means an increase to the near zero federal funds rate. This change
in U.S. policy will have rippling effects on GDP and investing behaviors throughout the world.
The U.S. is deeply rooted in foreign direct investments which has lead to a global economy that
is linked together through various business contracts.
By increasing interest rates, the U.S. government is floating the value of their currency.
The purchasing power of the dollar will be stimulated by an inflow of foreign capital. High
interest rates are a massive incentive for foreign investors. Meaning, this policy change will
lead to an influx of investors, who will be retracting capital from other foreign economies. For
the U.S. this inflow of FDI will have a positive effect on the economy, but this will not be the
case across the globe. As the value of U.S. currency rises, some foreign currencies could loose
market value. During periods of change, many companies will engage in currency hedging to
gain from the fall or rise of foreign exchange rates.
There is an ethical stigma around this policy change. Should the Fed be concerned with
the global effect of their policy on other counties? Each country ultimately has their own best
interests at the core of their agenda. Political agenda directly influences economic actions and
reactions. For the U.S. two leading goals that drive policy are high employment and stable

prices, within home borders. Fluctuations or relative price difference will have an effect global
exchange rates. In order for one country gain an inflow of FDI, another will experience
retraction, as there is a limited amount of FDI flowing through the global economy.
Changes in U.S. fiscal policy will also influence the kinds of assets investors choose for
their portfolios. With the current interest rates, riskier assets, like junk bonds, have been
yielding higher returns. If the Fed adjusts rates, the yield from investment in safer assets will
rise and the investors will follow the money. Strategies and business styles differ across
culture, creating differences in how the investors will react to economic changes. The supply
and demand of FDI is subject to change at anytime and if changed abruptly, could trigger an
economic crisis.
Economic gain and loss can not be fully balanced on a global scale. The U.S. is tightly
engaged with China in global trade, but the benefits differ from each perspective. Currently,
the U.S. is in a massive trade deficit with China because imports are greatly exceeding exports.
However, this deficit can not be attached to a strictly positive or negative classification. The
U.S. has stimulated the Chinese economy through manufacturing by increasing jobs. Higher
employment has allowed greater market participation from the Chinese middle class in the
exchange of goods and services. The trade relationship between China and the U.S. is
intertwined, creating risks and benefits for both parties. The game of FDI is strategically
approached by each country, with the ultimate goal of profit.

https://www.whitehouse.gov/the-press-office/2015/09/25/fact-sheet-us-china-economicrelations

https://www.thebalance.com/u-s-china-trade-deficit-causes-effects-and-solutions-3306277