Are exports about to drop?
Ireland’s exports – so long a growth engine – face heightened risks and this could have profound implications for tax revenue, our debt-to-GDP ratio and our return to sovereign debt markets
QUESTIONING Ireland’s economic performance during the Celtic Tiger era was often met with accusations of “talking down the economy” and worse. The curtailment of debate on the sustainability of the boom led, among other things, to a collective sense of invulnerability and blindness to the many flashing warning lights.
Today, it appears obvious that, during the pre-2008 period, observers succumbed to “groupthink” – the phenomenon where consensus views go unchallenged. A greater willingness to challenge consensus robustly and relentlessly may be among the most important lessons to be learnt from the crash.
One consensus view to emerge in the post-crash era is that the export sector of the economy has performed very strongly. This is certainly not incorrect.
Exports have been the only source of growth since 2008. And they have grown from an already high level – the Irish economy is among a handful in the world where exports exceed GDP.
But when measured by what is arguably the most important indicator for a small trade-dependent economy – share of the world market – the picture is much less positive.
According to World Trade Organisation data, Ireland’s share of the global goods and services exports has fallen by more than one quarter since it peaked in 2002 (see panel, bottom).
If gains have been made in restoring competitiveness lost during the bubble era, there is still some considerable distance to travel.
Of greater concern than insufficiently strong rates of export growth is the risk that exports will start to shrink.
Part of the consensus on exports is that as most competitiveness indicators are moving in the right direction, the foundations of the sector are becoming stronger, and that this will allow for further growth in the future.
There is no doubt that some of the competitiveness previously lost has been regained, but many other factors determine how much is earned from exports. There are a number of identifiable threats to export earnings in the future.
How vulnerable are pharmaceutical exports – currently worth one-third of GDP and by far the largest single category – to the major patent-related changes in the industry globally?
To what extent are exports – and services exports in particular – artificially inflated by multinationals’ tax-minimising accounting practices and how could they be affected by changes in the Irish and/or US tax regimes?
Finally, if a significant fall in export earnings were to take place, what impact would this have on the real economy and public debt sustainability?
If most manufacturing sectors have lost world market share over the past decade, the pharmaceutical industry has been a spectacular exception. By last year, a quite astonishing 7.2 per cent of the world’s cross-border spending on medicines was booked in Ireland.
The accompanying chart shows that, by the widest measure, the pharmaceutical and chemicals sector generated export earnings of €56 billion last year. This represented a 40 per cent increase in just five years. No other goods exporting sector has come near a rate of growth of this kind.
But not only is it unlikely that such rates of growth will continue, they may well be reversed, and in a relatively short time frame. The reason is the expiration of patents on many of the big-selling drugs made in Ireland.
There is no doubt that global sales of these drugs will fall sharply in value as generic manufacturers offer their own versions at a fraction of the cost. What is in question is what the holders of expired patent decide to do in response.
Chris Van Egeraat, an academic specialising in the sector at NUI Maynooth, believes the choice for “big pharma” is either to continue production and slash prices to compete with new entrants to the market or to exit the market altogether.
If major firms plump for the first option, overall export earnings will fall sharply; if some halt Irish production altogether, earnings will fall even more precipitously and some of the 30,000 people employed in the sector will face the grim prospect of redundancy.
The experience of the IT hardware sector over the past decade is a salutary reminder of how global market conditions in a given sector can change a great deal in a relatively short period.
During the 1990s, Ireland became a global centre of computer manufacturing.
By 2001, the broad export sector which includes IT hardware was Ireland’s largest foreign trade earner, with the value of goods shipped abroad reaching €38 billion.
By last year, that figure had crashed to €10 billion as the industry either moved offshore or succumbed to competition from east Asia where much of the world’s IT hardware is now manufactured.
If the pharmaceutical sector were to experience a similar scale of decline, €40 billion would be taken off the headline total export figure.
A second broad threat to the export sector comes from possible changes in the Irish and/or US corporation tax regimes.
It has long been known that multinational corporations, which account for 90 per cent of Irish exports, book as much profit as possible in Ireland to take advantage of its relatively low 12.5 per cent corporation tax.