President-elect’s policies threaten our position in the transatlantic economy

If Trump governs as he campaigned, Irish jobs will be lost, tax revenues will fall and fears for debt sustainability could emerge, writes Dan O’Brien

DONALD Trump got fewer votes not only than Hillary Clinton in last week’s election, but fewer votes than Republican candidate Mitt Romney in 2012. Although he did better than I expected, or predicted, there was no surge in support for the president-elect, as much of the media narrative has suggested.

The reason he won, despite losing Republican votes on four years ago, is because the Democratic vote collapsed. Barack Obama garnered four million more votes in 2012 than Clinton did this year.

As is often the case in elections, turnout explains outcomes. With just over half of the eligible electorate going to the polls — the lowest in 16 years — it was the collapse in the Democratic vote that handed Trump the presidency, not a “redneck revolution”, as has been said so often since the results started coming in.

But despite losing the popular vote, Trump won the electoral college. Four years of President Trump loom. Both his stated policies and his personality pose real threats to Ireland.

Already the issue of corporation tax has received much attention in Ireland. There is good reason for the huge attention that is focused on this issue when anything that is perceived as a threat to it arises. Although some people don’t like to hear it, corporate American is the most dynamic, innovative and export-oriented part of this economy. It was the surge of US companies into Ireland in the 1990s that powered the explosive growth of the Celtic tiger.

There are tens of thousands of people employed by US companies in Ireland. Anything that threatens the continued presence of US multinationals here threatens the foundations of Irish prosperity.

The most important reason for those companies to be here is access to Europe’s single market of 500 million people — Ireland is a platform for pharmaceutical, technology and financial firms to sell to their European customers. But they also use Ireland as a base to sell into their own market. US companies here export huge quantities of goods and services back to their home country.

Protectionists such as Trump, and others besides, ask why American companies do not employ Americans to make stuff that is sold in America.

And there is a lot of stuff. Last year, goods worth €27bn were shipped from Ireland to the US, while Ireland bought just €10bn from the US (for the protectionist-minded, such a huge imbalance is a sure sign of “unfair” trade). The value of services sold from here to there stood at €8.5bn in 2014, the most recent year for which figures are available.

Although a detailed breakdown by the nationality of exporting firms is not available, many, if not most, of these exports are likely to be accounted for by US companies given that US companies dominate the Irish exporting sector.

Trump said repeatedly during the campaign that he wanted to bring jobs home. The jobs of people employed here in US companies to produce goods and services for Americans would appear to be most at risk of being targeted. And they are at risk not only as a result of things that the new US admin- istration could do to bring them back, but also from the danger of transatlantic trade disputes.

As a member of the EU, the terms of all of Ireland’s trade with non-EU countries is not determined nationally. That means, for instance, that import taxes on American goods coming into Ireland and restrictions on things such as genetically modified foods are decided in Brussels collectively. US imports come into Ireland on identical terms as they enter every other EU member country.

The arrangement is underpinned by EU and US membership of the World Trade Organisation. Last July, Trump threatened to withdraw the US from the WTO, which he called a “disaster”, if membership were to prevent him sanctioning US companies which invest abroad.

But even if that does not happen, the terms of transatlantic trade could be disrupted. There are already some serious EU-US disputes, most notably on — yet again — the taxing of US multinationals. These could widen and deepen. Retaliatory measures hindering transatlantic trade cannot be ruled out given the sort of anti-trade rhetoric Trump used repeatedly during the campaign, his temperament, his penchant for seeking revenge against those who cross him (read his Twitter feed) and the hard-ball nature of his negotiating style.

But it is not only transatlantic trade that is at risk. The logic of the calls to bring jobs home extends more widely.

Instead of servicing the European market from Europe, why don’t American companies do so from their home base?

There are lots of reasons — from avoiding existing tariffs to time zone issues — for US companies to be based in Europe. But one of them is the US corporate tax rate, which is the highest in the rich world. Because of this high rate, it makes more sense to book profits in lower-tax Europe, and very low tax Ireland, than in the US.

The chances of the tax rate falling sharply have risen following the outcomes of both the presidential and congressional elections (but it is by no means a done deal because Republicans are far short of the 60 seats in the senate which prevents the minority from blocking legislation).

If a big cut is agreed, it would certainly impact Ireland. The incentive for new firms to come here would be reduced, as would the incentive for firms already here to invest more. That alone is unlikely to lead to a “flood” of companies leaving Ireland, as one of Trump’s economic advisers told Newstalk radio on Friday. But it would change the dynamic in the future, and not in a good way, for Ireland.

But tax is not the only concern. If Trump wants or needs to be able to point to concrete evidence of how he is bringing jobs home, he may lean on companies — as the Obama admiration did earlier this year when it changed rules retroactively to block a (legal) tax manoeuvre by drugs company Pfizer to redomicile itself in Ireland.

It is also worth making the point that one of the many ways Trump is different from his recent predecessors is that he is not beholden to corporate interests. As he did not seek campaign contributions from business over the past 15 months, he doesn’t owe favours to donors — something that is often highly significant in executive decision-making and the formulation of legislation in the US.

Yet another impact of a change in the rate and rules around US corporation tax is how much revenue is raised here. Last year, the amount of profit tax paid to the Exchequer rose by 50pc, or €2.4bn in hard cash terms. This windfall, which almost certainly came from US corporates, was spent by the Government. That spending is now locked in to future spending commitments. If the €2.4bn were to disappear as fast as it appeared, a huge hole would open in the Government’s finances.

A final point. The jump in Irish GDP last year of 26pc — dubbed leprechaun economics — appears to have been caused by US multinationals making changes to the structure of their global balance sheets at the stroke of a pen.

While this had no real effect on economic activity, it did make Ireland’s mountainous public debt — the most closely watched indicator of a state’s indebtedness is the amount it owes relative to GDP — seem smaller.

If congress and the White House can agree on making the US tax system more similar to other developed countries, the moves that brought leprechaun economics about could easily be reversed. That would send Ireland’s debt ratios soaring back to previous highly elevated levels.

With the domestic economy slowing, the effects of Brexit being felt already via the exchange rate, and now the potential for multiple negative consequences arising out of a Trump presidency, the prospects of the Irish economy in the short, medium and longer terms have deteriorated.

The conditions for a perfect storm are all on the horizon.

‘If the €2.4bn of profit tax paid by American firms to the Exchequer in Ireland last year were to disappear just as fast, a huge hole would open in our public finances’