Donald Trump is heading for the White House again and there are some big risks ahead for the Irish economy.
Calculating how serious these are is complicated by trying to judge what Trump might actually do – as opposed to what he said he would do. And what he might be able to do, given the constraints posed by the US Congress, though if the Republicans get control of the House of Representatives as well as the Senate this will give him a good deal more leeway.
A period of speculation and uncertainty will now follow as Trump takes office next year and for now the big US companies are likely to put decisions on hold and watch and wait.
The key areas to watch are tariffs – special taxes on imports that Trump threatens to impose – and US policy on corporate tax. Wider considerations are the health of the US economy, which is also important to Ireland, and Trump’s broader talk of economic nationalism, which are not welcome for a country that relies on international investment and trade.
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The backdrop is Ireland’s heavy reliance on investment from US multinationals, which are big employers here and even bigger taxpayers. Three big US companies account for close to half of all corporate tax revenue and about one euro in every eight of total tax paid. And the employees of big American companies pay significant amounts of income tax.
Trump’s stated policy is to bring investment back to the US from overseas and, in particular, penalise US companies producing overseas for the US market. Senior members of his team have specifically mentioned the amount of tax paid by US firms here, which result from complex tax arrangements involving their Irish operations. The question is what they will do about this.
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A key Trump policy to address this issue is tariffs, amounting – he has said – to 60 per cent on imports coming from China and 10 to 20 per cent on goods coming from elsewhere, including, presumably, Ireland. The spin is that this will protect industry operating in the US – the reality is that it would hurt the American economy and push up inflation. US tariffs on European exports would quickly be met with an EU retaliation - a trade war would cost jobs and tax revenue here, were it to persist for any length of time.
The US is a big trading partner for Ireland and a key exposure here is the huge exports of US pharma companies from Irish subsidiaries back to the American market. Were these to be subject to tariffs, it would hit these companies and could limit further investment here. So it will be important whether Trump delivers on his tariff threats and if he does what the details are. Does he, for example, include goods coming from US companies abroad in the tariff net? There will obviously be huge lobbying from US businesses to minimise threats, so we will have to wait and see.
The second exposure for Ireland is in corporation tax. Trump has promised to cut the US corporation tax rate from 21 per cent to 15 per cent, equivalent to the new Irish rate on big firms here. Whether he could afford to do this is unclear, given the need to renew a big package of cuts he introduced as president in 2017 and the strained state of the US public finances. If he did, it would wipe out Ireland’s tax advantage in terms of the headline rate.
Control of Congress will be a vital factor in whether and how Trump can progress his tax agenda. The US president has some leeway in terms of implementing tariffs without Congressional assent – just how much is unclear – but issues like corporation tax come down to budget agreements hammered out with Congress. Unless republicans control both the House and the Senate, there will be long negotiations and compromises. However, having grabbed back control of the Senate, it is possible that the Republicans will also win the House, giving Trump more scope in the tax arena. The markets will remain a constraint.
Trump has also hinted at a more favourable tax regime for companies producing in the US - thus penalising those producing overseas. This appears to be possible to reviving an old part of the US tax code which fell out of use .Presidential rhetoric will also be a factor - Trump would be likely to “call out” various players to try to get them to invest more at home. Tax rows with Europe are also possible, as parts of the OECD corporate tax deal would be likely to fall and Ireland could be caught in the middle of a wider trade and tax tussle.
Central to the big tax payments by US firms here has been the movement of what is called intellectual property (IP) to Ireland – the copyrights, licenses and trademarks underlying the international sales of products like the iPhone or big-selling pharma drugs. This allows the firms to move significant amounts of international revenue through Ireland, on which this country gets a slice of tax.
The nightmare scenario for Ireland would be that Trump’s policies meant this IP gradually relocates to the US, sharply cutting tax payments here over a period of years. This would not happen overnight - if it happens at all - but a gradual drift away from Ireland would be the risk.
Senior Irish sources are divided on the extent of this risk. “We have been here before and the sky did not fall in,” said one, referring back to the fears when Trump was first elected president. Others express more concern about the tax risks and the longer-term implications in terms of attracting investment here.
Either way, Trump as president will champion nationalism and aggressive use of economic advantage – already a trend internationally as the long move to globalisation takes a backward step.
As a small country which has benefited hugely from the internationalisation of business supply lines and trade, this is bad news for Ireland. However, how serious the Trump threat will be this time around will take some time to emerge.
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