What will be the gap between electoral rhetoric and reality? That is the key question for Ireland as we try to get to grips with what the Trump presidency will mean.
If Donald Trump implements the key economic policies he outlined in his election programme, it will mean sweeping changes in the environment for international business and trade, with significant implications for Ireland.
One of his key economic advisers said yesterday that if his tax changes were implemented it would attract a “flood” of US companies back from Ireland and other countries.
Trump’s policies – or what he put forward during the campaign – would mean big changes in the environment for foreign direct investment, an issue of vital interest to Ireland.
Trump has promised a big cut in the US corporation tax rate and other measures to make it less financially attractive for companies to hoard money offshore. And Trump’s trade policies threaten disruption, even if his remarks after he was elected were clearly trying to be more conciliatory and allay some of the fears of trade wars raised during the campaign.
Stephen Moore, one of Trump’s senior economic advisers, said on Thursday that his tax changes would dramatically change investment flows and attract a massive flow of investment back from Ireland and other European countries to the US. It is a sign of just how fundamental this could all be for Ireland.
"Ireland's model of economic development for the last 40 years has been based on inward FDI serving European markets," according to economist Frances Ruane, former director of the ESRI.
What Trump will actually do remains very uncertain, she says, but the policies outlined would threaten a slowdown in the flow of FDI in future, even if the companies already established here would be likely to remain, and could also disrupt international trade.
Feargal O 'Rourke, managing partner of PwC, sums up the potential impact on FDI – companies already here will likely stay, he says, but in future " US companies may now be in less of an immediate hurry to relocate activities abroad that they can now carry on at home".
Trump’s trade agenda, by threatening the global environment of free trade, would also pose threats to Ireland’s export model, Ruane says, even if the uncertainties of what he will actually do are even greater here.
And then there is the real wildcard issue. What will Trump mean for economic growth in the world’s biggest economy and what impact will this have on the world?
Economists have warned that Trump’s plan to slash taxes and increase spending risk pushing up the deficit and national debt – already at 75 per cent of GDP. This had led to forecasts of sharp falls in equity markets.
However, financial markets initially have taken a relaxed view and equities have risen. One market trend is interesting. Talk of a Trump-led reflation of the US economy has led to bond yields – the key measure of long-term interest rate expectations – rising strongly. Could we be seeing the gradual end of the era of super-low interest rates which have been in place since the financial crisis broke ? If so this will have implications for everything from households in debt to the cost of servicing our national debt.
It adds to the other big unknown – the move to Brexit. It threatens trade flows with a key trading partner, while Trump could have major implications for the flow of FDI.
This potentially toxic mix – maybe we could call it “Trexit” – provides challenges to Irish policymakers and businesses. It means the risks to Irish growth heading in to next year are very much on the downside of forecasts made to date.
What he has said: Trump has promised an aggressive move to cut personal and corporate taxes, including slashing income tax rates.
His plans on corporation tax are of most interest to Ireland. He has said he will cut the main federal tax on corporate profits from 35 per cent to 15 per cent. He has also promised moves to encourage companies to bring back large piles of cash held overseas, typically in tax havens like Bermuda and the Cayman Islands.
US multinationals have an estimated $2 trillion in cash held offshore, profits earned in markets outside the US which have not been returned to headquarters, as doing so would expose them to US corporation tax. Trump has proposed a special once-off tax rate of 10 per cent on such cash, to encourage companies to bring it home, and raise cash to fund his investment programme.
He has also promised to end the “deferral” system under which US companies can put off paying tax on profits earned abroad until it is returned to the US, subject to certain restrictions.
Will it happen?: "What we are going to see now is a tax debate between Republicans and Republicans in which the Democrats will be very much sidelined," says PwC's O'Rourke. "Given their control of the presidency, Senate and House of Representatives and the traditional Republican Party discipline, I fully expect tax reform to happen."
Frances Ruane cautions, however, that such promises of reform have stalled in the past. “Most US presidents promise to do a lot more on corporate tax than they actually achieve,” she said.
"No tax changes of substance have made their way past the Washington gridlock in eight years," says Brian Keegan, head of tax at Chartered Accountants Ireland. "However, a new president might make a difference."
Keegan also says that Europe will be watching the Trump administration’s attitude to moves to crack down on corporate tax avoidance, led by the OECD. Trump’s dislike of multilateral action could lead him to pull away from the OECD base erosion and profit shifting (BEPS) project, designed to thwart cross-border tax planning by multinationals.
What would it mean: "The election is potentially seismic in terms of the US approach to tax and trade," according to O'Rourke. "His tax plans are potentially radical and the centrepiece of a 15 per cent corporate tax rate goes beyond the framework of the debate that had been taking place between Republicans and Democrats in Congress. That debate had been around a rate with a '2' as the first number!"
What Trump’s plans mean, effectively, would be much less of an incentive for US companies to invest abroad for tax reasons. They will still do so for other reasons, of course, such as being close to markets, accessing skilled staff and so on. But the lure of lowering their corporate tax bill by locating offshore would be largely gone.
"Under Trump's stated corporate tax regime, US corporate tax would in future apply to a US-headquartered multinational corporations' worldwide income, with a credit given for taxes paid in other countries. This would end the current law's deferral of tax on these profits until repatriated," says Pádraig Cronin, vice-chairman and partner at Deloitte.
“From an Irish perspective, the concern is that large reductions in the US corporate tax rate and the repeal of deferral would reduce the incentive for companies to locate activities outside the US, including in Ireland,” he adds. “ In particular, business functions that do not need to be close to a key market location will now be more likely carried out in the US than elsewhere.”
O’Rourke of PwC agrees that Trump is trying to keep economic activity in the US. “At a 15 per cent rate – with probably no deferral – it will change the global tax landscape.
“I don’t see US companies based here upping sticks and heading home,” O’Rourke adds. “ Such companies are well embedded and many US companies need a regional presence in the likes of a Dublin or a Singapore. But US companies may now be in less of an immediate hurry to relocate activities abroad that they can now carry on at home. Certainly, the tax disadvantages of keeping operations in the US would disappear and advantages suddenly would appear.”
Cronin of Deloitte says Ireland now needs to look quickly at its FDI offering to compete in this new environment.
“As tax will no longer be one of the key drivers of decisions as to where to locate, the focus of US businesses in future will be more on political environment, economic stability, regulatory regime, labour availability, operating costs, market access and so on.
“Location is ultimately about real people and their families. Unless the housing, education and personal taxation ‘package’ is made fit for purpose, we are at risk of our FDI base eroding,” Cronin adds.
What he has said: Trump has rejected free trade and promised to protect US business, if necessary by imposing or increasing tariffs, or special import taxes, on products coming from countries not competing "fairly".
China has been a particular target of his rhetoric. He has rejected a new Pacific trade deal, involving the US , Australia, New Zealand and a number of Asian countries, though not China. He has also said he would “rip up” the North American Free Trade agreement involving the US, Canada and Mexico and withdraw from the World Trade Organisation, the body which oversees the rules governing international commerce.
Will it happen?: In terms of tax, Trump needs to bring Congress onside. But on the trade agenda, he has sweeping powers to act himself, if he so chooses, even if politically this might cause him problems. Congress has delegated significant powers to the US president in the area of trade. The House and the Senate must still pass any new trade deal. But,as president, Trump would have the power to tear up existing deals and, arguably, to increase tariffs without reverting to Congressional approval.
The Nafta agreement, for example, has provision for any side giving six-month notice to withdraw. US legal experts see no reason why Trump could not decide to send a letter to Canada and Mexico, if he chooses to do so. Likewise he could serve similar notice on the WTO. Trade experts also believe that existing US legislation gives the president leeway to impose or increase tariffs without Congressional approval.
This will be an area closely watched in the early days of the new administration next year. Frances Ruane notes that, in this area, Trump is diametrically opposed to the normal Republican support for free trade. A key issue will be whether he starts to move back to a more traditional party stance when in office, she says.
The Trump attitude to the trade talks with the EU – the Transatlantic Trade and Investment Partnership, or TTIP – is also unclear. Many assume that this deal – favoured by business but opposed by environmental and anti-globalisation lobbies – is now dead. However, as Ruane points out, Trump is not necessarily opposed to bilateral deals and so it is not clear what will happen.
What would it mean? The broad point is that slower growth in world trade and a reversal or the gradual international move to freer trade, under way now since the 1960s, would not be good for Ireland. We depend on rising exports and this would damage that goal.
“The president-elect is looking at renegotiating a swathe of trade agreements where he feels the US hasn’t gotten a good deal,” O’Rourke says. “ This will involve a lot of negotiation and potentially a slowdown in global trade which is not good for Ireland and not good for the rest of the world.”
Business representative bodies are also worried about a US move to more protectionist policies.
"The result is very disappointing from the perspective that president-elect Trump, in particular, espoused protectionist policies which if followed through will severely harm any ambitions the EU has of finalising the TTIP trade agreement," according to Ian Talbot, chief executive of Chambers Ireland.
“We continue to be of the view that a trade deal with the US, the largest such deal in history, would be good for Europe and would be particularly good for Ireland, due to our already strong cultural ties and industry inter-linkages.”
The chambers are particularly encouraged by proposed TTIP measures to help small business exporters, he says. “ This would be particularly useful in helping Irish SME exporters find additional markets to the UK post-Brexit. “
TTIP promised gains for a range of sectors, proposing the elimination of rules and regulations which hurt exports in areas such as pharma, medical devices and electronics, as well as tariff cuts which would have been a big win for the Irish food sector.
However, if Trump follows through on campaign promises to reject deals like TPP (the Pacific deal) and TTIP, then small open economies like Ireland are sure to suffer, Talbot says.
“That being said, TTIP wasn’t referenced in the campaign in the same way that President Obama’s Pacific trade deal was,” he adds, “ and therefore we would remain optimistic that president-elect Trump and his administration will keep an open mind once he takes office.”