Executive Summary

The US Bureau of Economic Analysis recently published its 2018 statistics on the value of new foreign direct investment (NFDI) in the US. New foreign direct investment refers to the amount invested by foreign companies in the US whether by acquisition, expansion, or green field during the year measured. NFDI should not be confused with the cumulative value of overall foreign direct investment (FDI) in the US for which the Bureau maintains separate statistics.

The European region continues to account for the largest amount of NFDI of any region. In 2018, Germany replaced the UK as the top source country for NFDI. The UK fell to sixth place, although it should be noted that the UK still accounts for the most value of existing FDI in the US. Across regions, manufacturing represents by far the single largest sector of NFDI.

Tariffs have quickly become the instrument of US diplomacy on economic issues and have clearly had a chilling effect on the cycle of Chinese investment in the US. We believe that notwithstanding the almost constant threat of trade war with Europe, the direct investment relationship between the US and Europe will remain stable over the next several quarters. A slowing down of the EU economy and uncertainty concerning the investment base of a post-Brexit UK should work in favor of sustaining a healthy level of European NFDI in 2019 and beyond. This is notwithstanding political milestones in the EU and the US over the next 12 months. US firms, still digesting the implications and opportunities of the Tax Cuts and Jobs Act (TCJA) with regard to their international sales and operations, will be more likely reorganizing their foreign operations in the next several quarters than making new investment abroad.

2018 – Increase in Total New FDI – Germany and Ireland Surging

NFDI increased by 8.7% to $296 billion compared to 2017. The European region continues to be the largest source of NFDI. Year to year, the amount of NFDI from Europe almost doubled, from $116 billion in 2017 to $221 billion in 2018. In contrast, NFDI from Asia and Latin America in 2018 fell compared to 2017. In 2018, the top three countries from which US investment derived, all regions, are Germany, Ireland and Canada. The next three countries in order of investment value are Switzerland, France and the UK. The UK went from first to sixth place compared to the 2017 NFDI figures. The 2018 NFDI statistics validate that the key European jurisdictions for generating NFDI are Germany, France, UK and Ireland. A key factor for the healthy increase in NFDI in 2018 is the TCJA, whose business-friendly provisions largely went into effect at the beginning of 2018. The TCJA should continue to drive European NFDI in 2019.

Sector Results – All NFDI

Manufacturing continued to lead sector categories in terms of NFDI value invested. In 2018, manufacturing accounted for a much larger proportion of NFDI (67%) than in 2017 (40%). The leading manufacturing subcategory for 2018 is chemicals, accounting for 70% of the manufacturing sector value. The leading sectors in 2018 after manufacturing, in order of NFDI value, are real estate (7%), information (publishing and telecommunication) (5%), retail trade (5%) and professional consulting services (3%).

State Level NFDI

The winners in 2018 at the state level for total NFDI include Missouri, New York, Texas and California. For greenfield investment, the leading states were Texas and New York. Interestingly New York has one of the highest state corporate income tax rates at 7% while Texas has no corporate income tax. State income tax burden is one of the location factors for NFDI. Some of the Specific state NFDI figures are suppressed in the Bureau’s statistics due to confidentiality agreements, but they are reflected in total NFDI results.

2019-20 Influences: New EU Leadership and US Presidential Election

European Parliamentary elections take place in June every 5 years, and shortly thereafter a new European Commission President is elected by the Parliament. Former German Defense Minister Ursula von der Leyen, as qualified as she may be for the post, can be described as a surprise candidate. She only emerged last minute during Council deliberations and became, by established procedure, the lead candidate. She had about a week to put together her formal political agenda, which is included in her presentation to European Parliament as the candidate for Commission President.

In the past 25 years, the European Commission Presidents have mostly come from smaller Member States and more often than not have served two 5- year terms. It has been 50 years since there was a German President of the European Commission. The US will likely turn more and more to Germany politically and economically as its key partner in the EU following the withdrawal of the UK. The simultaneous timing of the UK’s scheduled withdrawal from the EU on October 31 and the ascension of a German to European Commission President on the next day, November 1, will represent a meaningful shift in the EU-US dynamic. Drawing from our experience and networks in Europe, we will monitor what this shift means for our clients and their businesses against the backdrop of other international challenges faced in the economy today.

The 2020 US Presidential election will take place, almost one year to the day that von der Leyen takes office in the Berlaymont in Brussels. The change in leadership in the European Commission which occurs only every 5 years will put new life into the US-EU relationship. New Commissioners will step into their Commission roles on November 1. The mission statement that President von der Leyen delivers to each Commissioner before taking office will set that Commissioner’s priorities for their respective departments. The experience and political credentials each Commissioner brings to the job will influence the execution of those priorities. Because we are entering into a US election cycle, trade conflicts between the US and Europe may become more acute over the next 12 months as the Trump administration seeks to deliver more results before the end of the first term.

The generational gap between EU and US leadership continues to widen at Commission and national levels. It will likely become more evident in the European Commission when incoming President von der Leyen proposes her college of Commissioners, which includes one nominee from each Member State. It will be interesting to see how the policies of a younger generation of European leaders clash with those of the Trump administration, in particular on the key current friction points with the EU: trade, cybersecurity, antitrust and taxes. We will be following these developments and providing analysis on what they can mean for cross-border investment opportunities and risks.