The US Bureau of Economic Analysis (BEA) last week released its 2020 data on the US direct investment position abroad on the part of its multinational enterprises. This allows us to update the analysis of US investment in Australia contained in my report, Australia-US bilateral investment in 2020: Taxing times.
The calculation of direct investment in the US data differs in methodology from that employed by the Australian Bureau of Statistics. In particular, it measures US investment abroad on a historical costs basis, which does not account for subsequent changes in the value of US investment due to movements in exchange rates and prices. However, it is useful to benchmark Australia’s performance attracting US investment because it allows for consistent comparisons to be made with US investment in other countries and regions.
As noted in my report, US direct investment in Australia peaked in 2014 at US$177.4 billion. Since 2017, when President Trump’s Tax Reform and Jobs Act lowered the US corporate tax rate from 35 per cent to 21 per cent, US direct investment in Australia has fallen by nearly 4 per cent to US$163.5 billion in 2020.
The following table shows how Australia compares to the rest of the world and selected peer economies and regions. Growth in US investment in Australia lagged behind the rest of the world in both 2020 and for the period from 2017-20. Text
In my report, I analysed some of the factors behind this underperformance. While a range of factors are at work, Australia’s relatively high corporate tax rate and tax burden on capital in the wake of President Trump’s tax reforms is one factor.
The BEA data also allows us to calculate the return on US investment in Australia by dividing direct investment income without current cost adjustment by the direct investment position on a historical cost basis. US direct investment in Australia returned 4.5 per cent in 2020, down from 5.6 per cent in 2019 and compared to an average of 7 per cent since 1999. These lower returns on US investment in Australia are also likely a factor behind the cooling interest on the part of US firms.
The Biden administration has proposed a number of changes to the US corporate tax system, which would raise the tax burden on US corporations both at home and abroad. This includes an increase in the US corporate income tax rate from 21 per cent to 28 per cent, although state taxes will increase the combined state and federal top rate to above 30 per cent. The increase in the US corporate tax rate, if passed by Congress, will make Australia a more attractive destination for US investors on a relative basis. However, it is also likely to reduce investment by US firms and may see a significant restructuring of the operations and ownership of US multinational enterprises. The net effect on US investment abroad, and US investment in Australia in particular, is ambiguous. However, there is always opportunity for Australia to implement tax and other policy changes that are more friendly to foreign investors, including those from the United States.
Australia is running large current account surpluses, at least for now. As such, the need to import foreign capital to fund domestic investment is reduced. However, other forms of foreign capital inflow are not a perfect substitute for US direct investment. The knowledge and intellectual property transfers, as well as access to managerial talent and supply chains, that accompany FDI are often firm- and country-specific. These are all important benefits associated with US direct investment in Australia. Australian policymakers should be concerned that our biggest traditional investor appears to have gone decidedly cool on Australia compared to its peers.