By Alan Murray and David Meyer
January 23, 2019

Good morning from Davos.

The trade war between the U.S. and China has had dramatic affects on the global economy — that much is clear from conversations with executives here. U.S. companies have shifted supply chains out of China to avoid tariffs. And more dramatically, Chinese companies have reduced investment plans in the U.S. As I mentioned Monday, the percentage of Chinese executives who cite the U.S. as their top market for investment dropped precipitously in PWC’s annual CEO survey from 59% last year to 17% this year.

Chinese investors have pulled back because of clear signals both from their own government and from the U.S. Speaking on a panel here yesterday, Nobel prize-winning economist Michael Spence pointed out that investment flows “carry with them both employment and knowledge transfer.” The move by Japanese car companies to build plants in the U.S. in the 1980s played a significant role in reducing trade tensions; this time, that process has been stopped short. And while China critics are right that American companies, willingly or unwillingly, transferred technology to China over the past two decades, the reverse flow is being cut off just as the Chinese have moved from imitators to innovators.

This is what former Treasury Secretary Hank Paulson referred to last year as the “economic iron curtain” that is descending between the U.S. and China. Negative effects for both the short-term and long-term prospects of the global economy are becoming clearer.

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

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