Economy

Which way Trump jumps on corporate tax is central to FDI

Cantillon: It is dollars that ultimately drive investment decisions

Taoiseach Enda Kenny at the Microsoft jobs announcement.

Fri Feb 17 2017 - 14:59

Do the big jobs announcements from jobs website Indeed and from Microsoft suggest the threat to foreign direct investment (FDI) from the election of Donald Trump as US president was overplayed? We will all hope they do, though we will have to wait and see. The risk still is that aspects of Trump's policies will hit FDI in the years ahead. Key decisions will be made in the weeks ahead which will tell a lot.

The big announcements by Indeed and Microsoft had no doubt been in planning for a prolonged period. It is encouraging that they went ahead, despite Trump’s rhetoric encouraging companies to invest at home. It is a reminder that in the normal course of their business, large companies invest in a range of markets for a whole host of reasons – to be close to customers, to access skills and so on. Tax changes by the Trump administration will have an impact – but this normal investment will continue.

Risks

But it would be a mistake to ignore the risks of major policy changes, too. Already it appears that some major investments planned for Ireland are on hold, notably in areas such as pharma where products manufactured here are often sold back in the US.

Goods manufactured overseas and intended for the US market have been a particular target of the rhetoric from the Trump administration. Some recruitment firms also say there has been a slowdown in hiring in some areas of the tech sector, despite this week’s announcements.

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President Trump has promised to announce shortly details of his plans for corporate taxation.

However, these will be subject to lengthy negotiations with the US Congress. Change is likely, but its shape remains unclear. In particular, we await to see whether the mooted new border tax will be introduced.

Until now, US firms have had clear financial incentives to invest overseas to service non-US markets. The border tax would replace this with a financial incentive to invest at home. There is no doubt that this would change at least some decisions on FDI.

For the next couple of months, all eyes will remain on the what tax policies actually emerge. Rhetoric is one thing, but it is dollars which will drive investment decisions in the years ahead.

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