Saturday 19 August 2017

Dan O'Brien: How Ireland's economy has dodged two potential bullets - for now

President Trump. Photo: Reuters
President Trump. Photo: Reuters
Dan O'Brien

Dan O'Brien

One in four people employed in the private sector in this state owes their job to a foreign company which sells stuff to foreigners. The taxes those workers and companies pay fund a great deal of the public sector and the cost of providing public services.

All this is a very unusual state of affairs when compared to our peer countries. It has its origins in decisions taken in the 1950s, which, it should be remembered, were unusual by the standards of time – most governments then were obsessed with the national control of commerce and were less than welcoming to foreign companies.

In the decades that followed, most governments around the world shifted towards Ireland’s welcoming ways. Whether companies are owned nationally or by foreigners is now much less important in most countries. This change goes a long way to explaining why the world is now unrecognisably more interconnected than in the time of Seán Lemass.

In Ireland today, the 200,000 people who work in foreign-owned exporting companies, and the same number again who are employed in these companies’ supply chains, depend on our world remaining as it is: largely free of major barriers to trade and investment. In short, Ireland’s entire economic model depends on doing business with our European neighbours, the US and the rest of the world.

But this great globalising success story comes with its own downside.

If the world becomes less connected, and new barriers are put in place to hinder cross-border commerce, the Irish economy will suffer disproportionately. It is for exactly this reason that Brexit will be so damaging, and why so many people involved in running companies lie awake at night worrying about the effects on their businesses and their staff.

But the Brexit referendum was not an isolated event. There have been wider trends and developments recently which have threatened the way parts of the world economy work.

As always with something as big and complex, there are many perfectly valid issues and concerns about the functioning of the open global economy. But none of these lessen the threats to Ireland’s economic well-being if the world was to become more closed for business. Thankfully, not one but two big things have happened in recent days that have reduced the risks of that happening.

The first came yesterday with the announcement by US President Donald Trump that he would not seek to slap a tax on imports into the US. This idea had been on his party’s agenda for almost a year. It is vehemently opposed on this side of the Atlantic.

The European Commission, which runs trade affairs related to such taxes for the 28 members of the EU, had made it very clear that slapping the mooted “border adjustment tax” on European goods and services would be in breach of trade rules. Strong hints were made that retaliatory measures would be imposed on American goods and services coming into Europe if the US hit European trade going the other way. All of this raised the very real prospect of a transatlantic trade war. To see how bad such a clash would be for the Irish economy, one only has to consider the sheer scale of business between Ireland and the US. Currently, two-way trade in goods and services amounts to around €90bn annually.

Any new barriers to transatlantic trade would be very bad for the Irish economy

That mind-boggling figure is, by way of comparison, considerably more than the amount the Government spends each year on education, health, welfare, public pay, infrastructure and debt servicing combined. Ireland’s export dependence on the US (relative to economic size) is the highest in Europe. 

One does not have to know much about economics to see that any new barriers to transatlantic trade would be particularly bad for the Irish economy.

Yesterday’s dropping of the import tax by Mr Trump is therefore very good news from an Irish perspective.

And it gets better. By dropping the import tariff idea, the wider package of tax reforms announced yesterday would, if they were to be implemented, blow a hole in America’s public finances. As many congressmen and senators strongly oppose bigger deficits, they will vote against anything that pushes America further into the red. As such, the chances that the US tax status quo will remain unchanged have just gone up, something which would suit Ireland just fine.

With tens of thousands of jobs in Ireland safer today than on Tuesday thanks to Mr Trump’s decisions on tax, even more jobs are safer than a week ago thanks to the decision of the French electorate on Sunday.

Two of the four leading candidates in that country’s presidential election set out pathways to a French exit from the EU and the euro. If they had both topped the poll, they would have gone head to head in the run-off in 10 days. There would have been no pro-Europe candidate.

While the EU and its single market will likely survive the departure of Britain, the departure of France – the single most influential country in European affairs over a thousand years – would make it untenable. If the EU and its single market ceased to exist, the European headquartering of so many multinationals in Ireland would no longer make sense.

In the event, 42pc of French people who voted on Sunday backed the extreme candidates of the hard-right and hard-left who want out of Europe. But only one, Marine Le Pen, won enough votes to make it to the run-off. Although she could conceivably close the 20-point plus gap with Emmanuel Macron, it now looks very unlikely that the French will sink the bloc which they were so central in creating and sustaining for more than 60 years.

In five years’ time, the French might change their minds on Europe and Mr Trump’s stance on trade with Europe could change much sooner – over the past week he has moved to penalise steel imports from China and has targeted lumber imports from Canada.

But over the past week the risks to Ireland’s continued prosperity have declined considerably.

Fingers crossed things will stay that way.

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