Why Cutting Foreign Investment Hurts America

By. Austin Gienger

DOI. 10.57912/30855338

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Despite the United States historically serving as a paragon of foreign direct investment (FDI), in March 2025, the United States pulled out of the Just Energy Transition Partnership (JETP), a $45 billion agreement to provide capital to support the transition to clean energy. Historically, programs like these have provided critical financing for energy generation and port infrastructure  in developing countries, bolstering trade and spurring globalization. However, with the implementation of flat tariffs, the closure of USAID, and consistent withdrawals from global financing agreements, the fidelity of these investments is under serious threat. If the United States retreats from its FDI and other global financing commitments, international capital will become scarcer, more expensive, and less transparent, constricting global economic gains from trade and specialization among developing economies. The United States must reestablish itself as a reliable source of infrastructure financing by investing in ports and energy generation in developing economies, or it will not only set the global economy back but also limit domestic economic growth through higher import costs and fewer opportunities abroad. 

Currently, the G20 estimates that the world is $15 trillion below optimal levels of infrastructure investment, with much of this gap concentrated in developing nations. Infrastructure enables developing nations to join global markets, increasing GDP and living standards through specialization and trade, not only for those nations but also for their trading partners. Despite these benefits, building infrastructure requires significant up-front capital that emerging economies rarely have. To bridge this gap, international banks and developed nations offer financing. The cheapest and most secure sources of financing are international development banks like the World Bank Group, which contributed $89 billion in 2024. While this aid provides invaluable services to its recipients, it represents only a tiny fraction of the G20’s estimated gap. 

The next source of funding for most nations is other developed economies. In 2024, the United States invested $311 billion, followed by China at $163 billion and Singapore at $160 billion. However, at the start of 2025, the United States instituted its “America First” economic plan and began introducing and then reneging on tariffs for nearly all countries worldwide. While these tariffs do not directly impact FDI, they signal a shift towards economic protectionism that, coupled with explicit withdrawals from investment commitments, represents a significant step back from the United States as a provider of global financing. Under these conditions, if the U.S. continues its trend of significantly reducing its FDI supply, the cost of capital, represented by the interest rate that firms and countries pay to get loans for infrastructure, will increase. 

Despite the adverse global effects of a withdrawal of FDI from the U.S., some argue that the U.S. must solely focus on attracting foreign investment, and that outward U.S. FDI has limited domestic benefits compared to higher domestic costs. However, a smaller role in FDI for the U.S. would harm the domestic economy by limiting innovation and increasing import costs. Firstly, research shows that U.S. foreign investment into emerging economies increases innovation for U.S. firms. This empirical dynamic is supported by economic theory: access to new markets and consumers creates new opportunities for firms, incentivizing innovation. In addition to lowering economic potential through decreased innovation, reduced investment in ports could limit the U.S. economy by depriving it of gains from trade. Not only does effective investment in ports directly yield welfare from trade, but there are spillover effects across ports, meaning that the construction of one port increases the value of other connected ports. Therefore, when the U.S. invests in improving or creating ports in other countries, it makes its own ports more efficient and valuable. 

Given the lack of ample funding, the U.S. must specifically target the most important areas of investment to encourage developing economies to join global trade. Two of these critical sectors are ports and energy generation. Ports are crucial because they provide a physical link between goods produced in different countries, and over 80% of the world’s trade is carried by sea. In addition, energy generation is vital because it is an irreplaceable part of industrialization and scalable production advances. By targeting these two areas, the U.S. can most effectively mitigate the global and domestic losses that would result from its current path of decreasing FDI. 

Within this framework of increasing transportation and energy generation, the U.S. plays a crucial role in keeping the cost of capital low through its FDI programs. The most apparent way a reduction in American FDI will impact infrastructure investment is by raising interest on loans that fund these projects. If the supply of a good, in this case capital, decreases and the demand stays fixed or increases, the price of that good will increase similarly, a dynamic that would stunt developing nations’ entrance into global trade and the surplus it leads to. To incentivize these nations to undertake projects that advance international development and trade, such as energy generation and port development, the U.S. must commit to international partnerships that make low-cost capital available and reduce the risk for these developing economies. Under the U.S.’s current trend away from FDI, these increases in the cost of capital will lead to less energy and transportation infrastructure, placing limits on globalization, specialization, and trade, and resulting in a weaker,  less stable global economic outlook.

Policymakers in the United States must reverse course on reductions to foreign direct investment, not only to maintain global economic stability and growth, but also to maximize the potential of the domestic economy. To effectively put America first, the U.S. should increase the capital it invests in infrastructure in developing nations, focusing on projects that unlock globalization, such as ports and energy generation. By systematically supporting the integration of emerging economies into global markets, the U.S. will create more economic partners who can buy goods produced by U.S. firms and sell goods to U.S. firms and consumers at lower prices. This dynamic process would not only create economic gains for the U.S. and its trading partners but also help reinforce a virtuous cycle in which surpluses from globalization and trade finance further infrastructure investment. Overall, the U.S. must not continue cutting investment in energy generation and ports to support global economic progress and optimize domestic economic strength.