For years we have heard warnings about Ireland’s exposure to foreign direct investment. They have often seemed a bit academic as jobs and the tax receipts just kept flowing. Through a mixture of strategy and luck, Ireland cashed in. Corporate tax revenues have been so strong that they became the definition of an embarrassment of riches. Ireland is the little country that has almost done too well in recent years, attracting international attention, branded a tax haven and now on the radar in Washington.
Now Ireland faces a strategic challenge, the shape of which is not yet entirely clear, but it is serious for sure. From the point of view of Washington, our success is part of the problem, because the United States has a huge deficit in goods trade with Ireland – in other words it imports a lot more from this State than it sells to us. And this is driven by what Donald Trump sees as a key strategic product – drugs. This puts Ireland at the centre of the action in talks between Washington and Brussels – Ireland is the European Union state with which the US now has the biggest trade deficit.
This, in Trumpland, is a signal that America is being exploited. As Ireland gets the investment, the jobs and the tax for a lot of pharma production here for the US market, this leaves us vulnerable. A key risk for Ireland now is that the US focuses on this country on its own as it works down the list of those with which it has a trade deficit, rather than focusing on the EU as whole. Under US calculations, Ireland is the country with which it has the fourth biggest trade deficit - a remarkable fact given the small size of our economy.
Trump’s comments on Thursday could not have been much worse from the Irish viewpoint. First, the EU might have hoped to escape the worst of the reciprocal tariffs – Trump’s promise to charge other countries the same as they charge the US. This is because tariffs are generally not much higher in Europe than in America. But Trump threw Europe’s VAT regime and regulations into the mix as factors hitting US exporters, providing a rationale – should he choose – to impose more significant tariffs on imports from EU countries. (The VAT point is not logical, as it is a sales tax applied generally, but logic does not seem an issue here).
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Second, he again promised future tariffs on pharmaceutical imports and his desire to get more key drugs produced in the US, meaning less produced in countries such as Ireland. And third, he also ranted about the regulation of big digital service companies in Europe and the fines imposed by EU and Irish regulators on the likes of Meta, with a reference to the Apple tax decision for good measure.
These are all seen in Dublin as worrying and serous signals. The central question is whether Trump is looking for quick wins, or is genuinely aiming to tear up the rules on which world trade is organised? The scope of what he announced on Thursday points more towards a fundamental shake-up. If this is the case, then the risk to future investment into Ireland is greater. If, on the other hand, the US can be bought off with some concessions from the EU, then there will be turbulence and uncertainty, but after a time things may settle, albeit not without some ongoing cost. A meeting of G20 foreign ministers in South Africa next weekend may be the first opportunity for Ireland to get more insight – though US secretary of state Marco Rubio is not due to go.
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Even Trump himself may not know his endgame, as his plan has huge internal contradictions – and that may yet cause it to collapse in on itself. Ongoing tariffs would push up the cost of goods entering the US, leading to inflation and hitting US consumers. This argues for tariffs not to stay in place for too long. Yet longer-term tariffs would be needed for another part of Trump’s strategy, which is that the revenue they generate would help pay for lower taxes elsewhere. It is quite likely also that the financial markets will at some stage take serious fright. Remember, the US has a huge debt and needs to keep investors onside.
But for now, with the president of the world’s biggest economy threatening to rewrite the rules on which world trade is based and seeking to attract investment back to the US from countries like Ireland, it is best to sit up and take notice. The wider backdrop of serious strain on relations between the EU and Washington due to Ukraine and defence is also relevant.
If Trump’s brand of economic nationalism is the future for the US, it has clear implications for the flow of future American investment here. Big multinationals will always want plants around the world to hedge their bets and serve different markets. And they will be driven completely by the interests of the shareholders. But if Trump changes the incentives – via tax, tariffs or whatever – then behaviour will change too.
Ireland will have to ride through the storm. The St Patrick’s Day green jersey armada is a chance to put the Irish case, but little more than that. The Government faces a delicate game of negotiations not only with Washington but also with Brussels. Ireland’s initial goal will be to try to do what it can to dial down tensions between the two sides, hoping to pull back the more bullish members of the EU from quick reactions and calling for negotiations. And then hoping for the best. The last thing Ireland needs, as a trading nation, is a big trade war between the two sides, which could seriously hit confidence and growth.
As well as dealing with an unpredictable Washington, Ireland has work to do in Brussels, where many other countries may now see us as transactional players who have done very well in recent years without offering much in return. Nonetheless, Ireland must stick hard to Brussels as its negotiator – even if Trump seeks to isolate us – and hope that EU unity can hold. The political rationale for the EU to hold together is strong enough, but economically different member states have different interests. And if push comes to shove Ireland’s recent economic success and huge tax revenues may get limited sympathy elsewhere.
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Europe – and Ireland – also need to plot their own long-term strategic approach here, too. With huge policy uncertainty now in the US, Europe – and Ireland – can offer a more predictable and stable home for business. Trump may seek to attract pharma investment back to the US – and some might go – but the sight of Robert F Kennedy as health secretary does not point to the kind of rationality and policy certainty these long-term investors look for.
The Irish Government has some financial leeway, with significant cash in hand and a strong budget position. It needs to underpin this over the next year and use investment cash to address the key infrastructure deficits. We may be heading towards an economic world that looks significantly different. It could get bumpy and the first job for Ireland is to defend as many of the gains of recent years as it can.
