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What lessons, if any, can Australia take from U.S. President Donald Trump’s pro-business One Big Beautiful Bill (OBBB)? On the face of it, it is designed to deal with a problem that Australia faces to an even greater extent: the decline in the manufacturing base.

The first takeaway is that it signals a clear shift by the United States towards bolstering sovereign economic power and a move away from the cross-border supply chains that characterise globalisation. Both the OBBB and the imposition of tariffs are designed to support the domestic industry base by bringing capital back onshore.

As the American and Australian economies are very different in scale and there are big differences in the capital markets and entrepreneurial culture, comparisons should be conducted with caution. Nevertheless there are some lessons for Australia from the OBBB.

Taxation Focus

Much of the focus is on taxation policy. The legislation restores and makes permanent a 100 per cent depreciation for short-lived asset investments, such as improvements to technology. Those costs can be deducted against taxable income.

America’s National Association of Manufacturers (NAM) said that this will mean there will be a greater ability for manufacturers to buy equipment, hire workers, increase pay and expand operations with greater certainty and confidence.

The OBBB will allow 100 per cent expensing in the first year for new factory construction or improvements. This significantly changes the capital cost implications for businesses looking to start up or expand manufacturing facilities, affecting their ability to borrow. In Australia, deductions must be calculated over a longer period of time, defined as “the effective life” of a depreciating asset. For a factory, that period would be many years.

The OBBB introduces 100 per cent deductibility on research and development initiatives in the year the money is spent. This is not very different from Australia, where the general rule is that R&D activities are claimable in the same income year as the activity occurs. Moreover, the R&D Tax Incentive (RDTI) scheme provides small and medium enterprises with a 43.5 per cent refundable offset, making it one of the more attractive schemes globally.

The OBBB will remove taxes on tips, overtime and auto loan interest. It expands the number of things individuals can claim as business interest deductions on their tax. That pales into insignificance, though, when compared with Australians’ massive use of negative gearing on property. The United States does not have a formal policy of negative gearing, although there is some more limited deductibility allowed.

These tax changes in the OBBB are being applied in a very different financial environment from Australia’s. America’s commercial banking sector is deep, and many companies are skilled in assessing the viability of loans to non-real estate enterprises, including manufacturers.

In Australia, such skills largely vanished after the decline of industry specialist merchant banks in the 1980s. Australian banks regard business lending as almost three times more risky than housing, according to the Australian Prudential Regulatory Authority (APRA). APRA says the risk weighting on lending to business is at the maximum rate of 100 per cent, compared with 35 per cent on housing. In America even small business loans, which are considered the highest risk, are usually weighted at only 85 per cent.

It is not just banks. Australia’s large superannuation industry will only invest in brownfields operations (already partly established) because they do not have the skills necessary to assess and manage new industrial, business or infrastructure ventures. Australia’s venture capital industry has $7.3 billion in funds under management; in the United States the equivalent figure is $US126 billion. Plus the U.S. has the NASDAQ, the place where start-ups go to raise capital.

Transfer Pricing Remedy

The OBBB will implement changes to the international tax regime, which may have implications for Australia. There will be current taxation on all offshore subsidiaries, which may be a negative for U.S. multinationals because they might not have had to bear that cost in other countries – probably including Australia – where their effective tax rate is lower.

Second, the OBBB will offer a preferential tax rate for income from exporting goods and services, or for licensing intellectual property abroad.

These initiatives may affect American companies’ transfer pricing activities in Australia, which have been a persistent problem for decades. Transfer pricing is the practice of shifting profits geographically for the purpose of reducing tax liabilities. The amounts involved are unknown because they are hidden, but it is reasonable to conclude that it has adversely affected the competitiveness of Australian-based companies, especially manufacturers, who are required to pay local tax.

To combat transfer pricing, Australia’s Federal Government has just introduced a 15 per cent global minimum tax and domestic minimum tax for multinational enterprise groups that have revenues of over $1.2 billion. This may limit some avoidance, but it applies to profits rather than revenues, so it is unlikely to have much of an effect. Profits are easy to manipulate. But this, in conjunction with the changes to U.S. tax treatment of subsidiaries, may put a halt to some of the malfeasance.

Relocation Strategy

To understand America’s push to reindustrialise, it is necessary to see the OBBB in a wider strategic context. The oft-stated emphasis of the Trump Administration is to entice American global corporations to relocate operations, especially in manufacturing, onshore. It also wants foreign multinationals to locate some of their operations in America – which is happening.

In support of that logic, the OBBB even has a provision for a “revenge tax”: “Enforcement of Remedies Against Unfair Foreign Taxes”. This targets countries that the Trump Administration believes impose unfair or discriminatory taxes on U.S. companies and individuals, and will allow the U.S. to levy additional taxes on entities from those countries.

Australia is unlikely to be on the list, but nothing is certain. There is also an exemption for foreign pension funds, so that, even if Australia is targeted at some point it will not affect the superannuation industry, which invests about a quarter of its funds offshore, much of it in America.

The policies of the Trump Administration, especially with tariffs, are unpredictable, which is widely interpreted as a sign of irrationality. That is one explanation, but there is another possibility that resonates with Trump’s business history.

Uncertainty is the enemy of corporate strategy, which relies on financial predictability. The more erratic the Trump policies are, the more inclined global businesses will be to avoid the problem entirely by locating their operations inside America.

There is another telling indicator. The Trump Administration’s foreign policy is conspicuously changeable, although he has got European nations to agree to increase their defence expenditure, to commit to industrial expansion and to diversify their trade away from China. But his domestic economic and finance policies are the opposite: coherent, deliberate and preplanned. It suggests that national sovereignty, rather than globalism or the international environment, has become the priority and that will define this next period of geoeconomics and geopolitics.

Australia’s Self-Interest?

When is Australia going to adopt economic policies in its own sovereign interests? This is a question that has not been asked with any seriousness for decades. Rather, for those decades, Canberra has adopted a supine approach to industry policy that has allowed manufacturing to decline from about 14 per cent of GDP in 1990 to 5 per cent now.

It has been an intellectually lazy and socially catastrophic approach. Instead of doing the hard work of identifying how the government can support Australian industry, Canberra’s bureaucrats and politicians have instead merely kept score, watching while the manufacturing sector and other important industries burned.

They scrupulously accumulated statistics that detailed the decline, bragging all the while that they were supporting the purity of the price mechanism. Anyone who dared question their circular arguments was relentlessly attacked as ignorant of universal economic truths.

Consequently, Australia has moved from being a country that produces things to a nation engaged in bank-supported financial speculation, mainly on the price of land. It has split the nation along generational lines.

The first lesson of the Trump Administration’s big policy changes is that, without copying exactly his OBBB, Australia needs to develop the same inward focus on developing its industrial base – and quickly.

A necessary requirement should be to protect essential industries and areas of the economy critical for national resilience, or even survival.

A second priority should be to increase manufacturing, not just because it is good in itself – it has intrinsic benefits, such as higher wages – but because it diversifies the industry base. Just as diversification is a foundational principle in investment, so it should be considered vital to a nation’s adaptability and ability to survive.

Australia’s size makes economies of scale hard to achieve, a big difference from the American economy. That points to a need for the active participation of governments in providing initial funding or development capital. Not in order to develop export markets, which are becoming increasingly fraught, but to serve Australian needs.

An industry base by Australians, for Australians. Not in order to make Australia “great again”, but to make Australia produce again, and become resilient to global threats of economic blackmail.

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Republished with thanks to News Weekly. Image courtesy of Wikimedia Commons.