Implications for Ireland of the new Trump Regime

There’s a lot of wrong-headed analysis doing the rounds on the implications of the proposals of the new US Administration for Ireland.  Will US companies “be enticed home” by a dramatic cut in the US corporate tax rate? Companies don’t primarily come to Europe for tax reasons. They come for market access. Ireland captures a disproportionate share of these inflows, to a large extent because our rate is low RELATIVE TO OTHER European rates. In fact, given the US tax-credit system, US MNCs in Europe would not be able to recoup upon repatriating their profits the difference between high European rates and a potential new low US rate; this would work in Ireland’s favour (to the disadvantage of high-rate European economies).

Lower rates outside the US encourage US MNCs to keep their profits offshore (though a huge proportion of these can actually be, and are, held in US bonds and banks). If fewer profits are held offshore this WILL reduce overseas RE-investments, as these are currently financed out of offshore profits.

A dramatic reduction in the US rate would reduce the inventive for re-domiciling, though, as John FitzGerald and Mary Everett (of the Central Bank) have both shown, re-domiciling into Ireland probably does us more harm than good. In any case large, rich, central (as opposed to peripheral) economies tend to have higher corporate tax rates for revenue-maximising reasons.

US protectionism would trigger retaliation which would in turn trigger vastly more tariff-jumping FDI into Europe and elsewhere. Nor would a retreat of US corporations to the US mean that their external sales would be replaced by US exports; a substantial proportion would be captured by foreign competitor companies. And a huge proportion of current US exports go as inputs to their own subsidiaries abroad. The US State Department would also not be happy with a reduction in US FDI: think of the “soft power” this overseas investment grants the US. So the proposed very low US rate is unlikely to be in America’s interests. This might well impact on the chances of getting the proposals through Congress, even if President-elect Trump decides to run with them.

40 thoughts on “Implications for Ireland of the new Trump Regime”

  1. What is the positive impact of FDI to the economy? When TSHTF in 2010 there was no support . Just sayin’.
    Trump is Potemkin macro. Money is pouring into financial and healthare. Rent seeking. Momentum will keep it going for a while. Unless demand is supported the dynamic is pro crash. How will Ireland be fixed the day after?
    The other thing is higher rates. Say he pulls it off. Squeaky bum time at NTMA.

    And the old chestnut. How do you model this?

    1. I agree with your point regarding FDI. It has become the sole target of growth and progress, everybody is obsessed with it…. As if we still live in a mercantilist era, bizarre.

      Would point out that you are wrong about higher rates; though the market panics in the short term and pushes Euro denominated yields higher, ultimately they will retract to match the expected ECB rate (and I say this having traded government bonds for years). The Euro (and thus European governments) can maintain a much lower yield curve than the USA *if they want to* (as Japan has shown for a couple of decades). The actual impact of a much lower yield curve would be seen in a weaker Euro, as carry trade flows support sustained EUR/USD selling. Of course a weaker Euro then has its own impact, generally positive for this monetary union that is completely obsessed with exports.

  2. I would personally never vote for Donald Trump. He has a deeply-flawed character and temperament. However, the more I see the liberal elites and media luvvies weeping and wailing over his election, the more I revel in it.

    As for the economic effect on Ireland, it should be positive, although the Irish media, now discredited as much as the American media, will try to portray it as a disaster. There is a good chance that, with a more business-friendly government, U.S. growth will increase from the mediocre level that persisted throughout the Obama years. That will mean higher global growth as well. And hopefully some of the international agreements to cut carbon emissions will be rescinded or modified, resulting in much lower fines for transgressing them. That will help a high-growth country like Ireland. On the threat to the attractiveness of Ireland’s CT level, it is very unlikely that Congress will allow CT to be reduced to 15%. America already has a large deficit and Trump is going to increase infrastructural spending hugely. Reducing CT to 15% would put a massive hole in their budget. The reduction in CT will probably be much less and spread over many years. But, even if they did reduce it to 15% quickly, Ireland can reduce business taxes too. Its fiscal position is currently much better than that of the U.S. or U.K. It can easily beat off competition if it comes to a business tax-cutting war. But, Ireland needs to be alert to the dangers as well. If the U.S. and U.K. are moving to a more pro-business environment economically and reducing red tape, environmental restrictions on business and so forth, Ireland needs to move in the same direction.

    To take full advantage of the Trump presidency, Ireland needs to exploit its historic links with the U.S. Great to see (I didn’t know until yesterday) that the new vice-president’s grandfather is from Sligo. It was also good to see that Enda Kenny had a phone call with the new president before any other European leader, but he should apologise for calling Trump a racist last year. He may or may not be (I doubt that he is), but it wasn’t Enda Kenny’s place to say so, any more than its Donald Trump’s business to comment on the Eighth Amendment in Ireland. One man who comes out of this well is Michael Noonan, who was of course roundly attacked by the Dublin 4 liberal elites for the effusive welcome he gave Donald Trump at Shannon airport. That doesn’t look so dumb now.

    The Irish government now needs to boost links with Irish-America. I read an article yesterday that said it was the ‘male catholic’ vote that swung it for Trump. The Irish vote is a major component of that vote. If Trump wants to run for a second term, he’ll want to curry favour with that vote. The relationship between the Irish government and Irish America has become strained in recent years as Ireland has veered off in a loopy-liberal direction, while Irish America has remained stubbornly conservative.

    Attempts to portray the result of this election (and Brexit also) from a left-wing point of view that sees the vote as one for greater equality by the downtrodden masses are far off the mark. That was part of it, but it was much more also. I was in New York from Friday to Wednesday. During my visit I booked a tour of Niagara Falls. Our guide, a well-educated history graduate, informed us that he was voting for Trump, even though in his own words he said the choice was between a ‘crazy man and a crook’. I asked him why and he rhymed off a list of reasons, but they could all be summed up as opposition to the extreme social liberal agenda that the Democrats have pushed in recent years. Out there in the sticks lots of people have had it up to here with the metropolitan liberal elites, the phoney ‘social justice warriors’, gender nazis, and equality junkies trying to remake society and overthrow traditions that been established for generations and which have served society well. They are tired of their religion being mocked, of being forbidden to erect Christmas trees in public squares and so on. And they are tired of decent hard-working people being threatened with jail if they don’t want to bake a cake with some political slogan they disagree with embedded on it, or they don’t want their teenage daughter to have to share a rest-room with some mentally-ill man who thinks he’s a woman. The same is true in Ireland and one day the Dublin 4 liberal elites will be on the receiving end of the same kind of kicking that the New York and California liberal elites have just received. Roll on that day.

    1. And yet it’s actually possible that Hilary lost rather than Donald winning. And if Hilary lost it’s possible that it was because she wasn’t socially radical enough and didn’t energize the base out to vote.

      Anyway, with anti trade leadership in the USA and UK already and the possibility of the same in France next year, Ireland is vulnerable. We need to be a loud voice articulating some of the benefits of globalization (and understating the negatives) .

    2. Bravo John!

      Can I barge with a small request please? I’m putting together a show on Behavioural Economics and I need a cleverclogs libertarian who will rail against the paternalistic/nudge policies of governments. The contributors and readers here are bound to know someone.

      Off now to read the rest of the comments….

  3. Obviously, it’s impossible to predict how this will play out, but the Trump transition team has a clear intent to repartriate at least some of these US MNC tax billions being kept offshore. The advanced economies are in a liquidity trap – and have been there since the end of the Great Recession. The deadweight costs of economic rent-seeking by those exercising power and influence in these economies are retarding efforts to escape this liquidity trap – and the excessive and unnecessary burden of these costs on ordinary households has contributed massively to his popular support. The US economy on its own will not be able to free the global economy from this liquidity trap, but it can do the heavy lifting. That is what President-Elect Trump is proposing to do with tax cuts and massive public expenditure – and there is more than a hint of some badly necessary old-style Teddy Roosevelt trust-busting to tackle the pervasive and oppressive rent-seeking. Let’s wait and see if the GOP will do the right thing or split and force Pres. Trump to rely on support from across the aisle.

    1. What is the point of tax cuts and another $10 tn in debt when there is already $20 tn doing nothing ? Trump will not address income inequality

  4. @Frank Barry

    Sound analysis.

    Note that US Corporates are as good as the President Elect at paying little if any tax in the US …. and the so called off-shore ~1.5 Trillion is, as you note, actually beavering away within the US Financial System. Bit like trying to bring one’s granny home while she is already sitting in the corner … at home.

    @JohnTheOptimist

    I hear that endangered species are one of your new interests …. here are the stats.

    http://www.nytimes.com/2016/11/11/opinion/campaign-stops/the-rage-of-white-christian-america.html?_r=1

    1. The article you link to, with its seething contempt for white Christian America, goes a long way to explaining why Trump won.

  5. I don’t think Trump is invested politically in tightening up on US EU trade. Nafta and China were what he latched onto. Clinton & Greenspan made a big mistake (not for equity valuations) in failing to not attach conditions on workers’ rights and social safety net equivalence when opening up trade. It was obvious at the time, and has finally become appreciated by the Rust-Belters whose manufacturing jobs went somewhere cheaper. Bill’s alleged sell-out of American labour to free trade ideology has, rather ironically, cost Hillary the Presidency.

    Meanwhile, back at the ranch…Junker’s latest.

    Rather than just read the text I would suggest watching the relevant part of the video to get the vibe of how this is likely to be appreciated in the US.

    “His comments contrasted with the more diplomatic reactions of European leaders who have said they look forward to working with the next Republican president.

    Juncker warned against the “pernicious” consequences of Trump’s statements on security policy. He also recalled a Trump statement in which he seemed to think that Belgium, the country that hosts the headquarters of the EU and Nato, was a city.

    “We will need to teach the president-elect what Europe is and how it works,” Juncker said, adding that Americans usually had no interest in Europe.

    “I think we will waste two years before Mr Trump tours the world he does not know,” said Juncker, who on Thursday had raised doubts about Trump’s views on global trade, climate policy and western security.”

    https://www.theguardian.com/world/2016/nov/11/donald-trump-risks-upsetting-eu-us-relations-jean-claude-juncker

  6. Grumpy, the FT is floundering this week. 3 weeks ago John Authers told readers Trump himself knew he wouldn’t get elected. Last week the editorial told us the US had a solid economy. This week Mr Barber has 7 reasons for Trump n no mention of the Phillips curve. Trump is now talking inflation but we are still waiting for the monetary kick Stanley Fischer and Draghi have been promising. Because QE delivers inflation as the dogs on the street know.

    Most balancesheets are mark to Groupthink which is growth. If the road forks to inflation balancesheets need to change. But no monetaristocrat has done it. All they know is following yields down.
    Option 3 is deflation. Another balancesheet required. Gosh.
    And the UK lead by Theresa and her f###me shoes with that deficit and those productivity shoes.
    This is senior hurling for the ages.

  7. Any implications for Ireland must also take in the response from the EU hegemon – Germany.

    ‘… the German chancellor wanted to call the new US president-elect as quickly as possible on Wednesday. The only problem was that no one in the German government had a number to call.’

    http://www.spiegel.de/international/europe/trump-spells-trouble-for-berlin-and-brussels-a-1120905.html

    The ghost of Patricia-the-Irish Sovereign_in_exile is standing on a three legged stool [UK, US, EU] … on the heavenly gallows! A collapse in any one of the three legs is potentially near fatal …..

    …. The EU leg [setting aside the economic nonsense of the ordoliberals] is, imho, politically the most dangerous for Irish Citizenry unless there is a fundamental change in policy direction at EU level ….. and I don’t see any such change …..

  8. Frank’s reference to the ‘soft power’ function of US MNCs raises an important, if frequently underestimated, issue. The notion implicit in the Presidential campaign rhetoric that the U.S. can somehow revert to its pre-WWII isolationist mentality is misplaced. American ‘soft power’, and its 21st century incarnation through the ‘sticky’ power of its MNCs, is embedded in its foreign policy. ‘Hard’ and ‘soft’ power are interrelated in respect of both their exercise and consequence, as Joseph Nye, and the increasing host of other International Relations analysts that have followed him, have long since pointed out.

    The ‘soft power’ impact of the products of popular culture industries of Hollywood film, TV drama, popular music and lifestyle trends is self-evident for almost a century. The US international ‘brand’ image has particularly relied on the influence and diffusion of emblems of American culture and communication of the expression of its democratic values to blunt the edges of its exercise of ‘hard power’, whether through guns or blackmail, since the early days of the Cold War era. In the 21st century it is augmented in the so-called ‘sticky’ power of MNCs, both in the IT merchandise which operates as an extension to the lifestyles and sense of identity of whole generations of people around the world and through investment in, and harnessing of local creativity, in existing centres of FDI.

    So the argument goes that such forms of American ‘soft power’ serve to maintain US credibility and ‘faith’ in its overall democratic values, even in those situations where the exercise of its foreign policy – such as the 2003 Iraq invasion – provokes mass international protest and is fiercely opposed. Nobody, anywhere, then or since, has suggested building a pyre of the national stock of US-brand phones or other IT products; cultural boycotts of US films, TV series, or music CDs, or that we must all stop eating out at McDonalds.

    Presumably the President Elect will be educated as to the finer nuances of US foreign policy and of the importance of manifestations of ‘soft power’ to its global IR strategy in the weeks and months ahead? And of how much of US future trading wealth and the overall symbolism of US credibility may also rest on the continued presence and FDI strategy of its MNCs abroad?

    1. Veronica, no disrespect here, but you really do need to stand in the shoes of the so-called Middle American to have some minimal appreciation (a full appreciation is not possible) of their demonic, patriotic fervour. Think; The United States Marine Corps – on performance enhancing substances. I attended the Viet Nam veterans memorial at The Wall last Friday. The nationalistic rhetoric and fervour is more intense and prolongued than I have witnessed in a long time. Folk over here better watch out.

      The US does not do ‘soft power’. That’s for Liberals and sissies.

      1. I didn’t suggest they ‘do’ soft power; just that they have it via cultural products and latterly, through IT-based MNCs.. The Marshall Plan was a vital constituent of Pax Americana, alliedi with a determined communications effort to spread American values throughout the Cold War era. Trade globalisation followed. it was all largely successful. That successive US presidential liberal regimes failed their own home base is to do with domestic, not foreign, policy. The risk now is that the Trumpist rhetoric place the foreign policy benefit at risk, whilst offering no real solution to the domestic problem.

        1. 2000 years later – and the Romans are back. Funny that both Rome and Washington had/have an Eagle on their standard. Success? Well as Einstein said – “It’s Relative” – innit? Foreign Policy is domestic and Domestic Policy is foreign. One coin: two heads. It might be useful to dust off Orwell. Donald is now the Apprentice – will he fire himself, or will others do it for him? By his deeds we will know him.

  9. It is interesting to note both in relation to Brexit and the arrival of Trump how little attention is being paid to the identifiable immediate impact on Ireland as a result of the fall in the value of sterling and the jump in bond spreads in response to market fears of inflation should Trump increase the US deficit. Instead, the concentration appears to be wider issues, laudable in itself but not immediately politically pertinent. The focus must, however, inevitably shift as these developments are reflected in the economic performance of the domestic sector, a fall in government revenue and an increase in the cost of borrowing.

  10. Yes, the sky is not going to fall but along with Brexit and the evolution of new international business tax rules, changes in the US will add to the risks.

    In 2004 a tax amnesty of a special rate of 5.25% gave US companies an opportunity to use virtual overseas cash. Dividends were hiked and Pfizer, one of the big beneficiaries, soon announced US job cuts.

    This time is going to be different: Trump will have a chill on outward investment and will surely be eager to reassure supporters in the Rust Belt that he is halting the “shipping” of US jobs overseas.

    We don’t know what the extent of corporate tax reform will be – his advisers may push for a territorial system and a minimum tax on foreign operations to prevent companies from still availing of no or low tax jurisdictions. It should not be a surprise that there would be a focus on preventing more avoidance following an amnesty.

    Why would the US authorities continue to countenance R&D facilities transferred overseas to take advantage of low single digit corporate tax applying to so-called patent box regimes?

  11. 5 of the 6 countries with the largest Jewish populations have turned illiberal recently. Israel, UK, US, Russia, France.
    Ireland is still running dúthracht .
    Why not invite Jews to live in Ireland until the madness is over ? It would also be good for business , beyond just doing the decent thing .

      1. It’s not a religious state any longer and is far more tolerant than the UK. Could do with some insightful businesspeople…..

      2. ” Ireland is regarded as hostile by many Jews …”

        The problem is with the Israeli military activity in the occupied territories. Its simply illegal by all standards – except …. So, if one disagrees strongly with that policy, one is what? An anit-Semite? Hardly? But you will be ‘branded’ as one anyway.

    1. I doubt if Jews are worried by the shift to the right in western countries. Most anti-Jewish rhetoric these days comes from the left. e.g. Corbyn’s Labour Party. To the extent that Jews feel themselves in physical danger, its far more likely because of the growth in the Muslim population in these countries.

      Meantime, on the subject of Donald Trump, I defy anyone to watch this Aodhan O’Riordan video and not collapse with laughter. No wonder the Labour Party is at 3% in the polls.

      http://www.irishexaminer.com/breakingnews/ireland/aodhan-oriordain-embarrassed-by-irish-governments-reaction-to-trumps-election-763636.html

  12. Irish economy expenditures by FDI amount to about €20bn per annum, and induce a multiple of that in domestic economic activity. I don’t expect US tax reform to have a big impact on the Irish FDI sector, but if it did the immediate impact on Irish economic activity could be catastrophic – comparable to or worse than the impact of cutting off €50bn a year in net foreign borrowings by Irish banks circa 2008 (much of which had been diverted into overseas investment and never went into domestic circulation).

  13. so in the last 12h Trump has appointed an ant-semitic white nationalist to the WH, and has restored his pledge to bar muslims from the USA. Predicting what he will or won’t do is folly. We should assume the worst, locally and geopolitically and take steps. If anything in between happens, great.
    http://www.huffingtonpost.com/entry/steve-bannon-chief-strategist_us_5828e1d4e4b0c4b63b0d33d7?ncid=engmodushpmg00000003
    and
    http://uk.businessinsider.com/trump-muslim-ban-removed-from-website-2016-11?r=US&IR=T

  14. Palin would be more coherent than Trump. The US has been tangoed. A key feature of now is the impossibility of serving workers while fellating the rich. Loads of zero sum games. The GOP’S big idea this year was hatred.What is the multiplier on Antisemitism.? Bannon is chief of strategy.
    Watch out for Charles Manson as education secretary.

  15. Funny that after wrong calls on Brexit and Trump the media immediately launch into the effects on Ireland of a Trump Presidency. What’s wrong with saying we have no real idea of what might transpire, because a lot of what is said in a campaign is just that- campaign rhetoric- and just because Congress has a Republican majority does not mean that any fiscal proposals from the White House will pass into law. Obama had a democratic majority in both houses over the first two years of his presidency.

    1. “and just because Congress has a Republican majority does not mean that any fiscal proposals from the White House will pass into law.”

      The House of Representatives originates all ‘money bills’ – its then the turn of the Senate to assent or refuse. The President can either sign or amend or veto. Its not simplistic. The Republicans do have a controlling majority in the House, but only a small majority in the Senate, which gives the Democrats the ability to filibuster bills out of time. Interesting times ahead.

      1. The republicans have filly-bustered all over all in recent years. But with only 51, and not the 60 required to run totally riot, interesting times in the Senate. The president-elect’s personality would suggest quite a few ‘executive unilateral decisions’ with these numbers …. the supreme court is another matter ….

        The Corporates, and certain powerful interest groups, continue to control congress ….. as they have for quite some time … I don’t expect this to change:

  16. Whatever about US ‘soft power’, as Veronica noted above, one hopes that the Cheneyite neo-con ‘hard’ power strategy advocated in Rich_ard’s 1998 strategy doc will be viewed as a disaster by the incoming admin …. over 8 years the Obama admin failed to dislodge them from the State Department: Afghanistan, Pakistan, Iraq, Syria, Mali, Somalia, Gaza, Ukraine, Yemen, etc resource wars … and the refugees seeking basic safety in Europe … rise of anti-islamic rhetoric and parties in EU etc … and the attempt to partition Syria so that Gulf gas can be piped to EU as an economic attack on Russia … a propagandized creation of an Other to the benefit of US military industrial complex and the 1% … and unconscionable misery and death to millions of ordinary muslims, christians, and others in the process …

    Are any of these people better off following these neo-con interventions?

    One could ask members of the Irish Navy ….

    … and why do we not have an embassy in Iran after Gilmore’s ‘stupid’ error of judgment in following the US neo-con line here … which actually placed Irish peacekeeping troops, who have always been respected in Southern Lebanon, at risk? Iran was helpful back in another time in getting Irish hostages back home safely …

    As China’s Xi put it in a call to the President-elect – cooperation is a better bet …

    …. must surely be a few too long sidelined American Pragmatists available for the Secretary of State Post ….

    @Peter King

    Nice one!

    1. Obama was hopeless. J Alfred Prufrock. He was afraid. Watch jamming the news with Jimmy Fallon. 14m crap jobs.

  17. BCT above has correctly cited annual expenditure by FDI firms in the Irish economy of €20 billion and what is striking is that it’s at the same level by locally-owned exporters.

    The OECD has highlighted the low level of R&D by both sectors – the majority of FDI firms spend nothing on R&D and just over 100 account for about 90% of the foreign firm funding while patenting overall is low.

    In 1922 we began with one-third of industrial output on the island and while manufacturing remains the main driver of innovation in economies (consuming a lot of services) Ireland and Luxembourg have the lowest number of industrial firms and that also has an impact on indigenous export capacity.

    The genesis of the successful low tax strategy was 60 years ago this month but the indigenous exporting sector has been persistent underperformer. It’s time for policy makers to give attention to it.

  18. David Brooks said something very wise in the NYT. Populist reactions like Brexit and Trump are signs of deep system incoherence. And you have to understand why. We are slap bang in the middle of utter chaos. Neoliberalism is insane Balance sheets are not fit for purpose. BAU is dead. Go ndéana Dia trócaire air.

  19. Gideon Rachman ‏@gideonrachman 5 h

    With Bannon in White House reaching out to Le Pen, Afd etc, the US govt moves from supporting democracy in Europe to actively undermining it

  20. Re: that Examiner piece:

    “In her [Merkel] statement she said: “Germany and America are connected by values of democracy, freedom and respect for the law and dignity of man.

    “Independent of origin, skin-colour, religion, gender, sexual orientation or political views. I offer the next president of the United States close cooperation on the basis of these values.”

    John – in case you may have ‘missed it’ America [aka.USA] is the Land of the Unfree and the Home of the Afraid. The USA is not a democracy – its a Constitutional Republic which deliberately erodes the values of democracy; restricts individuals’ freedoms (in direct contravention of the 1st, 2nd, 4th and 6th Amendments to The Constitution); the Rule of Law has been replaced by the Rule of the Rich [see Supreme Court decisions], and as for the Dignity of Man – my comment on this would not get past our censors.

    No disrespect as they say – but maybe you should pay a visit to SpecSavers. It would also be appropriate to wait at least 100 days to see what the new US administration puts in place. Things political could go sour very quick.

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