The Irish economy is “particularly susceptible” to US trade and tax policy changes that may be implemented by the incoming Trump administration, according to a new report from the Central Bank.
The loss of excess corporation tax (CT) as a result of potential policy decisions taken by the new administration “would result in the Irish General Government Balance swinging significantly into deficit from the surplus currently being recorded,” according to the Central Bank’s quarterly bulletin.
US President-elect Donald Trump said during his election campaign that he intended to increase tariffs on imports from major trading partners such as China and the EU, while his Commerce Secretary pick, Howard Lutnick recently voiced strong disapproval about the way in which Ireland achieves a trade surplus with the US, describing the situation as “nonsense”.
The US is Ireland’s largest single bi-lateral trading partner, with total trade values exceeding 50 per cent of Irish GDP. At the same time, the US accounts for over 20 per cent of Irish total exports and over 40 per cent of Ireland’s total imports.
The US is also largest source of Foreign Direct Investment in Ireland, with US companies accounting for 20 per cent of all foreign multinationals active in Ireland.
US companies account for almost 10 per cent of business employment in Ireland, and 35 per cent of all foreign multinational business employment, involving typically higher-paid jobs in sectors such as pharmaceuticals, medical technology and Information and Communications Technology (ICT).
“It is appropriate to consider how increased global trade tensions and possible changes to trade and tax arrangements in the US could influence the Irish economy, the bulletin states, adding that “of particular interest is the possible impact of higher tariffs on goods trade and a lower corporation tax rate in the US or other policy changes that incentivise relatively more capital investment and MNE corporate assets to reside in the US”.
” Ultimately, higher tariffs or changes in tax regimes that reduce the profitability of operations in Ireland could, to varying degrees, influence future investment decisions by US MNEs here, employment levels in their Irish operations, and the related tax receipts to the Irish exchequer from their activities in Ireland and globally,” it says.
A “key vulnerability” for the Irish public finances, according to the Central Bank, is the extent to which notable levels of corporation tax may be related to the residency of “intellectual property (IP) assets in Ireland that were ultimately generated in the US”.
“Changes in the US tax regime, whether that be the headline rate or incentives for capital investment or assets to be resident in the US, may change the incentives for US MNEs to retain such IP assets and the related profit in their Irish operation… absent other policy changes, the loss of excess CT would result in the Irish General Government Balance swinging significantly into deficit from the surplus currently being recorded,” it says.
A combination of US tariffs and/or changes in corporation tax regimes would also likely lead over time to lower levels of economic activity which could manifest as labour taxes and other key tax intakes such as VAT being negatively impacted.