How worried should we be about Trump’s comments on Irish tax rates?

Attracting foreign investment to Ireland looks set to become more difficult

Many a true word is spoken in jest, as the old saying goes, and many a barb is dressed up as bonhomie. US president Donald Trump addressed the typical plámás at Taoiseach Leo Varadkar in his speech in Capitol Hill this week – there were exiting times ahead, it was an honour to have the Taoiseach there and so on. But while there has been a fuss about the Taoiseach's comments about wind farm planning in Doonbeg – and rightly so – the more important statement came from President Trump.

Turning to the Taoiseach, and in a light-hearted tone, he added: “Whenever there is a problem, you call. We’ll solve it. Except for trade. [Then facing the crowd.] They got those taxes so low. [And turning back to the Taoiseach.] You’re a tough one to compete with, with the taxes. But congratulations, great job.”

As we have found over the past year, it is difficult to disentangle Trump’s rhetoric from his likely action. The planned imposition of tariffs on steel and aluminium imports into the US – and threatened retaliation from the EU and others – has raised fears of a trade war. Is Trump’s latest tariff move sabre rattling ahead of the midterm US elections, or the start of something more serious? Who knows.

But as the commercial “aircraft carrier” used to house the European headquarters of many US companies, Ireland is in the front line here. Operating in a kind of pocket between the US and European Union economies has been central to Ireland’s economic model for years now. US companies employ more than 150,000 people in Ireland and are central players in our economy.


Economic nationalism

Why are things changing? Trump’s politics are based on a strange brand of “we win, you lose” economic nationalism. In this view of the world, Europe competes “unfairly” with the US and Ireland’s taxes have lured American jobs offshore. It is an odd theory in a world where big businesses are now embedded in international trade via sales and supply chains.

Ireland is at risk here if trade tensions spread. Irish goods exports to the US were €33 billion last year, more than a quarter of total goods sold overseas. Services exports to the US are also substantial, probably about €17-€18 billion last year, although final figures have not been published. Ireland is not threatened by the steel and aluminium move, but you could see how a trade war could quickly spread. The EU has already threatened to retaliate by slapping tariffs on bourbon, orange juice and peanut butter and perhaps even Levi’s jeans and Harley Davidson motorbikes. It is easy see how Trump would in turn react, setting off a cycle which would, sooner or later, draw in Irish companies exporting to the US.

Politically, China may be a more tempting target for Trump, so we will just have to see how this develops. But when you combine it with the Trump’s tax reform plan, which finally ends the rule which allowed US companies to avoid paying tax on international profits for as long as the cash was held outside the US, you see the backdrop for Ireland is changing.

So Trump has acted on tax – and is making moves on trade. Our St Patrick’s Day pass, which has meant the US has done little to damage Ireland economically for many years and much to help, may no longer be access all areas. At the same time, the big EU countries have pushed the European Commission to bring forward plans to impose a new tax on the sales of big US digital players in Europe, which threatens Irish corporate tax revenue.

Incendiary timing

A back-of-the-envelope calculation suggests this could cost us several hundred million euro out of corporate tax revenues of more than €8 billion. More importantly, it could also damage Ireland’s attraction as a location for FDI. The timing for this also, of course, could be incendiary, with trade tensions already bubbling and Trump sure to see this as an attack on US companies.

You could argue about the motivations for this which range from the ludicrously small amount of tax which these companies have paid, to a desire from the big EU players to boost their own tax coffers. But the politics of this are tricky for Ireland, with even the departing UK – traditionally an Irish ally in tax matters – making supportive noises about the tax.

Ireland’s recent economic success makes this all the more difficult for us diplomatically. It was one thing playing the tax card when the economy was catching up in terms of living standards. But now, even if GDP growth of 7.8 per cent overstates the reality in terms of people’s lives, it still grabs the headlines. Not only has this put us in Trump’s sights, the view in the big European capitals, in particular, is that we have had a good run and need to accept change.

Let’s hope that a Trump trade war, with all its potential damage can be avoided. But even if it can be there are two inevitable conclusions. One is that while the goal of attracting foreign direct investment to Ireland will continue, it looks set to become significantly more difficult. And the more transatlantic tensions grow – about tax and trade – the trickier this will be.

The second is that we are entering a period of major uncertainly. The ground is shifting under our feet, with unpredictable consequences. Add Brexit to a threatened trade war and new EU tax moves and you have a potent cocktail which, even as it works itself out, will affect investment decisions and take a toll. The rules of the game are about to change – we just aren’t quite sure what the new ones will be.