Business Irish

Sunday 26 May 2019

Dan O'Brien: Is the marked slide in Irish exports a blip or the start of a worrying trend?

Agrifood exports to China from Irish ports are expected to top €1bn for the first time (stock photo)
Agrifood exports to China from Irish ports are expected to top €1bn for the first time (stock photo)
Dan O'Brien

Dan O'Brien

'How are Irish exports doing?' I was asked this question by a foreign journalist recently. With lots of focus on many aspects of the domestic economy lately, which has resulted in reduced dependence on exports to drive growth, I realised I had not checked the export data in some time. As a small open economy whose prosperity ultimately depends on foreign trade, export performance is always important. The competitiveness imperative should never be lost sight of.

So how are Irish exports doing?

Let's deal here with the stuff that is physically shipped to other countries and leave for another day the huge traded services sector, not least because the latest figures on the later will be published next week.

In the first nine months of 2017 there was a year-on-year value increase in goods exports of 4pc. That was not stellar. More concerning was that this figure masks an inflection point in the spring. In the three years up to March of this year, exporters had been enjoying solid increases in earnings from foreign sales. Since April, Ireland Inc's month-on-month merchandise export receipts have been trending downwards quite markedly.

This decline was driven by the sector which has come to dominate Irish merchandise goods exports: chemicals and pharmaceuticals. In the first nine months of 2017, it accounted for more exports earnings than all other sectors combined, at 56pc of the total.

In the third quarter of 2017 the value of chemical and pharma exports fell by €1.8bn (-11pc) compared with the same period in 2016. The main reason was "organic chemicals" (these are usually the active ingredients in medicines) which fell by 36pc over the same period.

It's too early to tell whether this is a turning point or a blip - sales in the sector can be highly volatile - but there are reasons to be concerned. Real threats exist, notably from across the Atlantic.

Ireland has become the United States' single largest foreign source of pharma imports, overtaking countries such as Germany, Switzerland and the UK which have traditionally been world superpowers in medicine-making. On several occasions US president Donald Trump has expressed his dislike for these imports (as well as the "corporate inversions" that have seen US drug makers switch headquarters to Ireland for tax purposes). Indeed, the president has mentioned pharmaceuticals, alongside cars and steel as products, as things he wants made in America, rather than imported.

What his administration will do is less clear and it remains to be seen whether the new US tax laws, which is being finalised on Capitol Hill right now, will affect the operations of American companies based in Ireland.

But what is clear is that if Ireland-based US pharma companies were to repatriate a substantial proportion of their Irish production it would have big implications. Pharma is not only by far the biggest goods export sector in terms of earnings, it has been growing foreign sales at a faster rate than any other. Even during the financial crisis, when the domestic economy crashed and international demand was weak, foreign sales of pharmaceuticals continued to increase. Last year saw a record €66bn worth of chemical and pharmaceutical goods leaving Irish ports and airports - up by one third in just four years.

If the multinational-dominated pharmachem sector is vulnerable to political decisions in the US, another big export sector is threatened by political decisions in the UK. While agri-food exports - worth €10bn last year - are a fraction of foreign sales of medicines and chemicals, the sector is very important for jobs and indigenous businesses. The sector was hit hard by a Brexit-related fall in sterling, but a more stable British currency this year has helped the sector bounce back, with exports returning to growth over the first nine months.

The trade statistics provide valuable up-to-date information on all of Ireland's merchandise trading partners. In the first nine months of this year, the main market remained the EU26 (ie, excluding the UK) accounting for 38pc of total exports. The UK share was just 13.6pc and has been showing a long-term downward trend (the UK figure, it should be noted at a time when there is so much discussion of Border issues, was split between 11pc to Great Britain and 1.6pc to Northern Ireland). These facts are contrary to repeated claims made by Brexiteers that Britain is Ireland's biggest market.

If this still-important market is threatened by Brexit a better news story comes from the east. China has rightly been identified as an opportunity for Ireland-based exporters. Sales of goods to the emerging Asian superpower reached €4bn last year. This year, astonishingly, they have increased by 71pc. While agri-food exports to China look set to top €1bn mark in the near future, the bulk of this year's rise is down to "machinery and transport equipment" (that is most likely related to the activities of aircraft leasing companies which are ever more deeply connected to the fast growing Asian market).

A final matter worth highlighting concerns the phenomenon of contract manufacturing, whereby a company based in Ireland contracts a company in another country to make goods for it in order to supply a foreign market.

All the data cited above comes from the CSO's monthly trade figures, which includes only goods that physically come and go from Ireland. They exclude contract manufactured goods. By contrast, the GDP figures include the latter, as is standard international practice.

The difference between the two measures is stark and partly explains the inflation of economic growth figures in recent years. In the first two quarters of 2017 the total amount of exports in the trade data was €62.5bn. In the national accounts (trade data plus contract manufacturing) it was €92.8bn - a difference of €30bn. Unfortunately Ireland's export performance is not quite that spectacular.

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