Falling tide of the dollar set to take further toll on Irish competitiveness

As the US currency sinks to its lowest level against the euro, Paul Tanseylooks at the implications

The dollar fell to its lowest ever level against the euro yesterday, closing at $1.4462 in Dublin. As a result, the euro has strengthened by 57 per cent against the US currency since the beginning of the decade. The average value of the US currency against the euro in 2000 was $0.9236. Thus, in the space of seven years, the value of the euro in terms of US dollars has risen by more than $0.52.

Trends in the dollar's value against the euro since 2000 are shown in Table 1.

The wilting external value of the dollar explains the growing annual exodus of Christmas shoppers from the Republic to the United States. In terms of purchasing power, a euro now stretches far further in Boston than in Ballina.

But while a declining dollar makes US goods and services cheaper for Irish buyers, it also makes Irish exports more expensive for US consumers. As a result, a debilitated dollar undermines the price competitiveness of Irish goods and services on US markets.

This is important because the US is the Republic's largest single foreign market, accounting for 18.3 per cent of all Irish merchandise exports in 2006. Last year, the Republic exported goods valued at €16.2 billion to the US. In 2006, merchandise imports from the US amounted to €6.8 billion. Thus, the Republic generated a surplus of €9.4 billion on its merchandise trade with the US last year. This represented one-third of the Republic's total merchandise trade surplus of €28.3 billion in 2006.

The Republic's goods trade with the US is dominated by chemicals. As can be seen from Table 2, chemicals accounted for two-thirds of all exports from the Republic to the US in the three months ending August 2007. This reflects the size, scale and tax-efficient behaviour of the cluster of US multinational chemicals companies located in the Republic.

While much of the trade in chemicals between the Republic and the US may consist of intra-firm transactions, other Irish exports are exposed to greater competitive risks by a falling dollar. The merchandise exports most at hazard include indigenous manufactured goods and Irish food and drink products.

Exports of Irish manufactured goods and articles to the US in the three months ended August 2007 were worth €623 million and comprised 16.6 per cent of all Irish exports to the US during this quarter. During the same period, exports of food, beverages, alcoholic drink and tobacco to the US were surprisingly low, amounting to only €112 million or just 3 per cent of all US-bound goods exports.

Nor are the Irish enterprises threatened by a falling dollar confined to the goods sector. In the internationally traded services arena, the combined effects of high domestic prices and a dipping dollar pose particular threats to the Irish tourism industry.

The USA remains a key source of business for Irish tourism. During 2006, overseas visitors to Ireland numbered 7.7 million - of which 1.1 million, or 14 per cent, were North American residents. Overall, overseas visitors to the Republic during 2006 spent €3.8 billion, excluding air and sea fares. Visitors from the US and Canada contributed €803 million or 21 per cent to this expenditure total.

Thus, North American visitors lived up to their reputation as high-spending tourists. While they comprised 14 per cent of all overseas visitors, they accounted for 21 per cent of all overseas visitor spending.

The weakening dollar is adding to the Republic's already acute problems on the competitiveness front. The scale of those problems was thrown into high relief yesterday with the publication of the Global Competitiveness Index compiled by the World Economic Forum. The Republic languished in 22nd place in the 2007/2008 world competitiveness index. More worrying, the Republic ranked only 10th most competitive economy in the European Union. As recently as 2000, the Republic was ranked fourth in the world.