A win for Joe Biden would change the tone of US economic policy – and its substance in some key areas – but it would not herald a return to how things were before Donald Trump took office. This same message comes in different forms from a range of experts talking about the economic impact of who wins next week's US election and what it might mean for the European Union and for Ireland.
Biden promises a high spend/higher tax agenda at home, a change of direction from Trump. He would also be more conciliatory in international economic relations and threats of damaging trade wars – where Ireland could find itself stuck in the middle – would recede.
However US politics has changed and polarised and this sets the backdrop for whoever takes office.
Biden, if he won, might be less hawkish in areas such as trade and international tax, but the drumbeat of returning – or onshoring – investment to America runs through the Democratic candidate’s election literature. In the wake of Covid-19 and the attempts to rebuild economies worldwide, this is one to watch with key implications for Ireland.
Covid-19
As with everything, the election is framed by Covid-19. At the start of the year, Trump could have hoped for a relatively fair economic wind. The steady economic growth he had inherited from Barack Obama was continuing at a rate of about 2.5 per cent a year, unemployment at 3.7 per cent was at a 50-year low and the stock market was strong.
It was not the economic revolution he had promised – and picking rows with China has had economic costs, even if they have been politically popular – but it would have made an election platform.
Covid-19 has exploded this, sending the US economy into a tailspin. Trump can point to recovery in the third quarter – about half of the jobs lost at the start of the crisis have been regained. But his dreadful handling of the pandemic threatens further upheaval and now has the stock market nervous again as case numbers rise. It will present an unprecedented rebuilding challenge to whoever takes office. How exactly it will play in the election will be key.
The latest figures show a record quarterly 7.4 per cent rebound in the third quarter – offering something for Trump to shout about. However as with other economies, a resurgence of the virus in the US now threatens slower growth in the fourth quarter. The economy remains almost 3 per cent back from the end of 2019 and so far there is no agreement on a new stimulus package.
"The old adage 'It's the economy, stupid!' still rings true," says economist Megan Greene, senior fellow at the Harvard Kennedy School. "According to the latest Pew Research survey, the economy is the number one issue influencing voters in this election. By comparison, the coronavirus is only number four."
Confronted by the economic challenges which await as countries deal with the Covid-19 fallout, Trump, if re-elected, is likely to double down on the kind of confrontational economic approach threatened from the start. Domestically he has promised more tax cuts , but without much by way of specifics.
In reality, whoever is in the White House will likely have to find new revenues. Internationally, a Trump victory would bring danger and unpredictability of the international economic outlook.
Discontent
If Trump wins, “we can expect his policies of the last four years again, but on steroids”, according to David O’Sullivan, former EU ambassador to the US. The president has tapped into a feeling among much of the electorate that the US has been taken advantage of by its allies and trading partners alike, says O’Sullivan. “His agenda is one of discontent, divisiveness and disruption.”
If Biden wins, “ there will be an immediate change of tone and style” , O’Sullivan wrote in a recent post for the European Policy Centre. “However, it would also be naive to expect a return to the America of the last century.”
Trump’s economic agenda is unpredictable in part, O’Sullivan says, because it is often contradictory.
“Tax breaks for the rich do little for the unemployed. His trade wars have hurt farmers and US manufacturing. The trade deficit has never been higher, despite his promises to rebalance it. The fiscal deficit has ballooned, in flagrant breach of Republican fiscal orthodoxy.”
Biden’s economic platform is more old-style Democrat. He promises $7 trillion (€6tn) in extra spending over the next 10 years, funded by $4 trillion in higher taxes on companies and the rich; changes he will struggle to implement if the Democratic Party does not gain control of the Senate in the election.
And much of the extra spending would go on climate change. In this area, Greene says voters face a “binary choice” between Trump’s climate change denial stance and Biden’s support for more regulation, his commitment to rejoin the Paris Agreement and his plans for a massive green infrastructure programme.
The dangers for Ireland of the Trump policy “on steroids” approach are obvious. Already there are trade tensions bubbling between the EU and the US, for example in the long-running dispute over government supports for aircraft-makers Boeing and Airbus. It is just one of the issues which could spark a damaging outbreak of wider tariffs, or import duties, between the US and EU, with Ireland potentially caught in the middle.
A Biden presidency is likely to take a more measured approach to such disputes and would dial down the rhetoric. However tensions would remain and, O’Sullivan argues, the EU side would need to realise that work and some concessions are likely to be needed in rebuilding a new transatlantic relationship with a Biden administration.
America first
"The tone might be different from a Biden administration," says Ibec chief economist Gerard Brady, "but it remains to be seen how far the policy stance would shift from America first."
The US has changed and this is driving its politics. A paper by Bruegel, the Brussels-based think tank, points to three key trends as determinants of future economic policy: deteriorating relations with China, the rise in income inequality intensifying the polarisation of politics and, of course, the enormous hit from Covid-19.
Relations between the EU and US may reset under a Biden presidency, but the Bruegel paper points out that, initially at least, domestic problems are likely to take priority.
“There is less water between Trump and Biden on trade policy and policy towards China than many in Europe expect,” says Greene. “After all, protectionism is traditionally a Democrat, not a Republican, policy.”
For Ireland, a Trump defeat would lessen the threat of a developing tit-for-tat trade war. But you don’t have to look too far into Biden’s campaign literature to see that, like Trump, one of his key appeals to blue-collar workers is that he will bring investment back to the US , including vital supply chains in areas like pharmaceuticals.
Biden, whose campaign slogan is “Build Back Better”, is promising to change the tax code “to eliminate the incentive for pharmaceutical and other companies to invest overseas” and incentivise them to invest in the US.
He proposes to reverse part of the massive Trump cut in corporation tax. The president’s 2017 reform plan cut the rate from 35 per cent to 21 per cent, but Biden promises to push it back up to 28 per cent.
That 2017 tax reform followed some 20 years of debate, according to Feargal O’Rourke, managing partner of PwC. So it remains to be seen how successful Biden would be in pushing change in this area. Much would depend on whether the Democrats control the Senate after the election. Together with their existing majority in the House of Representatives, this would give a two-year window to push through reform, he says.
Intangible assets
As well as promising to increase the corporate tax rate, Biden has also promised to increase the take on intangible assets held abroad by US companies – many of now housed in Ireland. Ibec’s Brady says that, for Ireland, these two effects might offset each other but it was clear that US multinationals would end up paying more tax.
O’Rourke identifies the promises to bring investment back to America, notably in the pharma sector, as something Ireland will be watching closely.
The State has quietly established a major pharma sector, built largely on the European or international headquarters of US multinationals. The sector exported nearly €50 billion last year of which more than €21 billion went back to the US market. This selling back to the US is the politically controversial point. The sector now accounts for almost two-thirds of goods exports and is a key contributor to the Irish exchequer.
“The crisis has shone a spotlight on the attraction of Ireland for US pharma companies” and their place in supply chains back to the US, according to O’Rourke. And so talk of attracting them back to the US is a concern.
However, O’Rourke feels that the deeply embedded nature of investment here, and existing supply chains, provides significant protection. Remember Trump has already threatened to do the same.
In an interview in March he said :“It’s not only China, you take a look at Ireland. They make our drugs. Everybody makes our drugs except us. We’re bringing that whole supply chain back.”
This underlying theme of economic nationalism is a clear danger to a small trading country relying on inward investment from the US. But big multinationals have spread their investments across the globe for a whole range of reasons – tax, security, closeness to markets, availability of skilled workforces, diversification and so on. Unravelling this is no easy job.
The Biden tax plan “would see a carrot and stick approach to US firms investing abroad or offshoring jobs – by offering lower tax rates for those who onshore production to the US and increasing rates for those who offshore” according to Brady.
“In this area the tone of a Biden administration might be more conciliatory, but the policy approach would still be very much based on putting US interests first.”
As a small open economy, it is in Ireland’s interest to have the US more engaged in international institutions such as the World Trade Organisation. Ireland also favours the US being party to an international tax agreement the OECD is trying to broker. This has been been one of the few areas where the Trump administration has continued to constructively engage with other countries, according to Brady.
A big push will now come from the OECD to try to complete a deal in the early months of 2021, but, Brady says, like the past two administrations, a Biden White House would not sign a deal seen to unfairly target big US companies.
While the State would lose some tax revenue from any deal, the threat of a no deal and countries acting on their own, or at EU level, is seen to be greater.
In terms of the early impact of the next US administration, this will be top of the list for Ireland. But with a huge reliance on US investment and the American market, the wider direction set by the next president is a vital national interest for Ireland.
