The ascendance to the White House this week of Joe Biden brought to an end four years of turbulence under his predecessor Donald Trump. The new US president promised at his inauguration to "restore the soul of America". But what might it mean for the US economy and Ireland's prospects?
Biden, whose ancestral links can be traced to Ballina in Co Mayo and Carlingford in Co Louth, is proud of his Irish roots and trades on them politically. Yet he is unlikely to trade on sentimentality when setting out his economic agenda, which could have far-reaching effects for this State, its businesses and the exchequer.
Here are five crucial economic and trade issues for Ireland where this nation’s fortunes depend upon what happens in the US and, in some cases, directly on the policies of the new Biden administration.
1 - Air access and tourism
Air connectivity between Ireland and the US has collapsed due to the pandemic, and it will not be easy to restore, which brings implications for tourism and trade. Although this issue is not directly under the charge of the new US government, the success or otherwise of its fight against the virus will have a bearing on how quickly aviation recovers and the ability of US tourists to travel.
Prior to the pandemic, Dublin was a hub for transatlantic travel and among the best-connected cities in Europe to the US. Dublin had 4.2 million transatlantic passengers in 2019. Although this number includes flights to Canada, the bulk were to the US. Dublin was fifth in Europe for transatlantic departures, behind only London Heathrow, Amsterdam, Paris and Frankfurt.
At the height of the season in 2019, Dublin had 189 flights per week to 18 US destinations. Even without the pandemic this number would have dropped in 2020 and 2021 due to the financial struggles of Norwegian and its transatlantic route cuts. Travel restrictions due to the virus have throttled Irish-US connectivity, leaving it hanging by a thread.
Aer Lingus still flies a handful of times each week to New York JFK airport, Boston and Chicago, while United Airlines flies Dublin to Newark. Yet aside from those flights, tumbleweeds may as well be rolling through the US pre-clearance facility in Dublin airport's Terminal 2.
It is hoped that more US-Irish connections will be added in the summer, virus conditions permitting. But Dublin will face stiff competition from every major city in Europe for any transatlantic capacity that US airlines look to restore, and long-haul routes are the hardest to win back because they require the largest investment.
Even our indigenous airline connections to the US can no longer be taken for granted. Aer Lingus’s recent decision to launch transatlantic services from Manchester could be perceived as a shot across the bows of the Government and its attitude to the travel sector.
The evisceration of the State’s air linkages with the US may have a negative bearing on general trade and foreign direct investment. But there is no doubting its direct impact on the tourism sector: pure disaster.
North Americans, the bulk of them from the US, accounted for almost a quarter of the near 10 million annual overseas visitors to Ireland in 2019, with a spend of €1.8 billion. US visitors stay longer and spend more while here than almost any other tourists.
The absence of US visitors to Ireland is not just an abstract notion, a gap in some bar chart or spreadsheet. It has a direct impact on small and medium businesses in our tourism sector. Noel Carroll, whose extended family operates the Carroll's Irish Gifts retail chain, left that business to set up tour operator Carroll's Tours in 2015. About 40 per cent of its trade came from the US before the pandemic. The business has not traded at all in more than 10 months.
“We would have brought US visitors in on package tours to the Rock of Cashel, Killarney and the Ring of Kerry, the Cliffs of Moher, Galway and elsewhere. We would look after everything on the ground for them. That business is all gone for the time being,” he said.
Carroll hopes for some return of European and UK tourists in the second half of the year, but he does not anticipate any real return of lucrative US tourists until 2022. “Last year many of our US tours between May and October postponed until 2021. But recently some of those have started cancelling again. I’m now very worried about US travel. Connectivity is vital. We have to keep those routes to the US open.”
As well as winning our own public health battle, Ireland needs Biden to get on top of the coronavirus outbreak as quickly possible.
2 - Corporate taxation
Each time the executive branch of US government changes there is trepidation here about what it means for the American corporate tax code and the knock-on effects for US multinationals operating here, which directly employ 160,000 people. Those businesses are the driving force behind a €7 billion unexpected windfall from surging Irish corporation tax receipts over the past six years.
When Trump assumed power in 2017, he pushed through tax reforms designed to pressure US multinationals to shift operations back home. The measures included a 10.5 per cent charge on global intangible low-taxed income, or the wonderfully-named Gilti tax, on excess profits earned abroad.
As suggested in a recent winter economic commentary by the ESRI, the Gilti profits tax may have been set too low and did not discourage US multinationals from shifting operations to low-tax countries, such as Ireland. “An increase in the Gilti tax rate may result in lower domestic corporation tax increases for the Irish exchequer in the future,” warned Kieran McQuinn of the ESRI.
Biden has proposed doubling the Gilti profits tax to 21 per cent, which could have a tangible impact on the willingness of US multinationals to maintain profitable operations in this country.
The new US administration’s attitude to the OECD’s Beps (base erosion and profits shifting) multilateral scheme for curbing corporate tax avoidance is also crucial. Even though Ireland has for years been a net beneficiary of multinational tax tourism, the State has acquiesced to the multilateral Beps initiative as it fears being isolated from the geopolitical pack on tax matters. The next phase of Beps is expected to put downward pressure on Irish corporation tax receipts, the ESRI says.
At a webinar this week hosted by the Dublin-based Institute of International and European Affairs (IIEA), OECD officials were asked by Irish economists if they hoped to engage the new Biden administration over Beps and if Biden might even be convinced to lend support to it. For Irish interests, given the links with US companies here, it might be better to have the new US president on board.
3 - Pharmaceuticals sector
No part of the Irish economy is more exposed to changes in US tax and corporate laws than the "pandemic-proof" pharmaceuticals sector, which employs more than 45,000 people here and includes US behemoths such as Pfizer and Eli Lilly. More than 50 per cent of Irish exports are pharma products, and along with Switzerland, Ireland is in the top two suppliers of drugs into the US, where medicines are expensive.
Over the past 15 years American pharma companies have shifted one-fifth of their output from the US to countries such and Ireland and Switzerland due to changes in tax and intellectual property laws. Pharma companies are among the most cutting edge and economically-productive in this State, and many in US politics and economics want to bring them back home, including some in Biden’s administration. With no benefit to the US from pharma offshoring in the form of cheaper drug prices for American citizens, it is expected that this issue will stay in focus.
There was unease in Irish quarters recently when president-elect Biden appointed a noted critic of the US pharma sector's links to Ireland, economist Brad Setser, to his pre-inauguration transition team. Setser has previously advocated, as a negotiating technique, limiting trade arrangements with countries that leach taxable activity away from the US in high-value sectors such as pharmaceuticals.
If this attitude became official thinking in the new administration and Biden raises it with the EU, it could lead to intolerable pressure being placed on Ireland’s tax-driven efforts to attract US pharmaceutical investment.
4 - Trade and tariffs
Pharmaceuticals aside, 20 per cent of all other Irish exports go to the US, including €1 billion worth of food and drink. This leaves Ireland vulnerable to the possible imposition of targeted tariffs as part a number of ongoing trade disputes between the US and Europe that has its roots in a row over European taxpayer subsidies to aircraft maker Airbus, which competes globally with Boeing.
Trump may be gone but the disputes remain, and Biden is not expected simply to fold as he owes his re-election in part to a promise to protect the interests of US industrial workers from unfair competition from overseas.
“The change in trade policy under the new administration could best be described as a change in tone and approach rather than a change in focus,” said Ibec in its most recent economic outlook.
Ireland’s burgeoning whiskey industry in particular was vulnerable in recent years to tit-for-tat tariffs on spirits between Europe and the US, although only distilleries from the North suffered when the charges were introduced in 2018. However, Kerrygold, one of Ireland’s most successful indigenous export stories and the second biggest butter brand in the US, is among the products to have fallen into the US tariffs net, along with Bailey’s liqueur and some pork products.
Biden made no promises on the campaign trail to end the tariffs, and the row is likely to drag on, especially as Europe continues to explore new trade arrangements with China
“Expecting a big bang on trade under Biden is unrealistic. Buy America will still be there. The tariffs will not just disappear. A success might be just no new conflict,” an EU official recently told the Reuters news agency.
5 - Regulation of big tech
Ireland is unique in Europe for the scale of its economic exposure to any Biden moves to crimp the power of huge technology companies such as Facebook, Google's owner Alphabet, Apple and Amazon. All have significant operations in Ireland which, with the first three, includes their European headquarters and a combined 20,000 workers. If those companies are made significantly weaker by fresh economic regulation in the US, so could their ability to continue to invest in their Irish operations.
A desire to rein in the influence of big tech is a bipartisan issue in the US. However, the recent political violence at the US Capitol, which was blamed in part on misinformation fomented on technology platforms, is said to have steeled the resolve of Biden's Democratic party to take action. The sacking of the Capitol was described as the 9/11 of social media by European commissioner Thierry Breton.
Martin Shanahan, the chief executive of inward investment agency IDA Ireland, was asked this week at the Institute of International and European Affairs' FDI webinar whether he was worried if Biden would seek to "break up" big tech. He acknowledged the threat of action but was sanguine about big tech's commitment to Ireland.
“I’m not sure that their break-up is inevitable. Increased regulation is more likely. But they will still need to service their clients from somewhere.”
