The economic impact of a Trump presidency on Ireland comes down to what he actually does, rather than what he said he would do. And there is considerable uncertainty about this.
We just don’t know how serious he is about implementing his campaign rhetoric and it could be well into next year before we find out. But there are clear dangers for Ireland.
Trump’s programme “brings with it considerable uncertainty on a number of fronts for the Irish economy”, says Kieran McQuinn, research professor at the Economic and Social Research Institute. “The obvious concern would be the implications for the traded performance of the Irish economy given a significant global trade war.
“This coupled with Trump’s stated intention of reducing corporation tax rates for manufacturing goods companies in the US from 21 per cent to 15 per cent could have implications for both the scale of activity in the multinational sector here and the corporation tax revenues generated for the Irish exchequer by the sector.”
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As the Irish general election is called, this has cast a shadow over party plans to woo the electorate with promises of tax cuts and spending increases.
The exchequer has leeway to absorb some shock, with the budget in surplus and the outgoing Government having decided to put money away into two funds designed in part to provide support to investment plans if tax revenue takes a hit.
In excess of €10 billion will be in these funds by the end of the year. So important buffers are in place. Whether they will be needed is the question.
1. Tariffs – what Trump could do
Donald Trump has threatened to impose tariffs of 60 per cent on imports from China and 10 per cent to 20 per cent on all other imports. If the republicans take control of the House of Representatives as well as the Senate and White House, the way will be clear to do this, though it would impose a hit on the US economy.
And whatever the balance in Congress, the US president does have powers to impose tariffs by executive order, though the extent of these in practice – particularly relating to blanker tariffs – is the subject of some debate.
And the first vital issue is whether this plan to impose general tariffs on all imports is carried through. It is possible that Trump will hold the threat in reserve as he seeks other advantages in trade or other areas. Or that he, initially at least, targets a smaller range of products – for example, he has pointed to German car manufacturers as a target.
And while Trump has indicated that tariffs might also be used to hit American companies producing abroad for the US market – to encourage them to produce at home – this too has a short-term cost. For example, if he targets the subsidiaries of US pharma companies in Ireland, this would risk increasing prices on the American market of vital medicines and healthcare products manufactured in Ireland.
The biopharma sector directly employs more than 50,000 people here and Central Statistics Office figures show that chemicals and related products made up almost two-thirds of the value of Irish goods exports in the first eight months of this year, with the US being by far the largest market.
It is difficult to see Trump sparing Ireland, if he does go ahead with tariffs. His focus has been on the trade deficit which the US has with various countries, and in the Irish case this is substantial in terms of goods trade – more than €30 billion.
2. Tariffs – how would Europe respond?
If the US does impose tariffs, the European Union (EU) – which sets trade policy for the bloc centrally – is likely to respond with its own tariffs on US products sold in Europe.
This would threaten a trade war of tit-for-tat retaliation. There were some trade tensions and tariffs during Trump’s first presidency, but if implemented the plans of a second Trump presidency would bring this to a whole new level. It is difficult to model this economically – as we don’t know what each side would do.
A study by the Danish industry confederation using an economic model developed by Oxford Economics saw Ireland as one of the biggest losers in the event of a trade war involving Trump tariffs on 10 per cent on EU imports, and 60 per cent on China and EU retaliation.
It predicts a loss of 4 per cent of Irish gross domestic product by 2027 and 30,000 jobs, with Ireland one of the most exposed European economies due to its links with the US.
It is best to see such forecasts as illustrative, rather than an actual prediction, but they do highlight Ireland’s exposure due to the high level of US investment here.
As well as pharma, other exporters in the area of food and drink – Irish whiskey for example – would also be in the firing line. But an economic hit on this scale to Ireland from a full-scale trade war would quickly wipe out the budget surplus and significantly change the economic outlook.
If the EU responded with tariffs on US imports, inflation would also rise and interest rates would stay higher than they would otherwise be.
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3. Tax – the rate cut promise
Trump has promised to cut the US corporation tax rate to 15 per cent, which would bring it into line with the rate Ireland imposes on big multinationals. This would remove one advantage for them from investing here.
The detail of this – and how profits coming from overseas are dealt with in the US tax system – would also be important.
Two issues will be key here, according to Paraic Burke, head of tax at PwC in Dublin. One is whether the republicans do finally win control of the House, thus making agreement on tax legislation much more straightforward.
The other is affordability and Trump’s desire to renew a whole raft of tax cuts he introduced in 2017. With high US national debt, affording this, while also cutting corporate tax, could be a stretch.
This has led to some speculation of a smaller cut in the corporate tax rate – perhaps to 19 or 20 per cent, says Burke. Tariffs could also raise some money to help pay for tax cuts, as Trump and his team have indicated.
Also, according to Peter Vale, international tax partner in Grant Thornton, “the US may look to further carrot-and-stick tax measures as a means to attract more activity to US soil” – for example, higher tax reliefs and thus a lower tax bill when goods are produced in the US. This would be a lot cheaper than a headline cut in the main corporate tax rate.
4. Tax again and other potential trouble spots
Another area to watch, says Burke, is the attitude taken by the Trump administration to the Organisation for Economic Co-operation and Development (OECD) corporate tax deal, to which Ireland has signed up.
This provides for a minimum 15 per cent corporate tax rate. While the US headline rate is already above this level – and under Trump would not fall any lower – the rate it charges on income related to intangible assets such as intellectual property repatriated to the US, the so-called GILTI (global intangible low-taxed income) rate, is lower at 10.5 per cent in most cases.
Unless this aligns with the 15 per cent rate and operates in a way approved by the OECD, US companies may in some cases owe top-up tax under the OECD rules, which would be paid in countries like Ireland where they are based overseas. This would be certain to cause frictions.
Meanwhile, if the US does not sign up to the other part of the OECD plan, obliging companies to pay some tax in countries where they make sales, then European countries could decide to go ahead and apply digital sales tax which would reduce tax paid here and also be likely to anger the USa.
Another option, an EU-wide plan on this issue, could also cost Ireland. There are lots of ifs and buts in this area.
5. The bottom line – what big international investors do
What will big multinationals do? For now, not a lot, bar scenario planning. Sources say they will wait and see what Trump actually does and major commitments of new investment are likely to be put on hold in many cases.
“Multinationals are likely to take a longer term perspective of the US tax landscape before making any decision, however difficult that might be,” says Vale.
As well as their physical investments here, what is vital is how firms manage their intellectual property (IP) – the movement of copyrights, licenses and trademarks related to international markets to Ireland in recent years has been central to the surge in corporate tax.
These IP assets may stay as moving is complex – and any move would take place over time.
“Receipts are unlikely to fall off a cliff; any drop is likely to be more gradual,” says Vale. But after a decade of multinational investment and tax receipts only heading one way – upwards – new uncertainties have entered the picture.
