Trump's Tariff Tantrums and Ireland's FDI Model

So Donal Trump blinked.  After all the tariff threats to Mexico and Canada, he came up with a ‘deal’ that merely repackages the status quo.  And the alleged main purpose of the tariffs – to address the US trade deficits – didn’t get a mention.  Why did Trump retreat at the last-minute retreat:   consternation from the corporate world (the Wall Street Journal called it the ‘dumbest trade war in history”); the potential impact on US inflation; the speed at which Canada and Mexico announced retaliatory measures; lack of consensus even from within the White House?

Whatever the reason, the EU Commission and the Irish government are probably feeling a little more optimistic regarding US tariff threats.  That doesn’t mean it won’t happen.  Or that the price Trump will exact won’t be onerous and dangerous.  Watch out for demands to water down the EU’s Digital Services Act and / or prohibit individual EU countries from imposing digital taxes.  But a key lesson is that, regardless of the vehemence (and in some cases unhinged) rhetoric, Trump stood down.

There is also a key lesson for Ireland.  The Irish Government is right to step up lobbying initiatives in the US.  Ireland is particularly exposed in any US-EU trade war and, with little leverage of its own, will need to work within the EU for a forceful EU response – to frighten off any US move.

But just as importantly, this should provoke a fundamental re-evaluation of our current Foreign Direct Investment (FDI) model.  Even before Trump’s tariff tantrums, analysts were warning of the challenges to our current FDI model:  slowing global growth and trade, de-globalisation, climate change, competition from other low-tax jurisdictions, international tax competition, etc.

This has now been compounded by a reckless US Presidency that has threatened Canada, Mexico, Colombia, and, in the case of China enacted, tariffs; threatened to invade Greenland and Panama; threatening ethnic cleansing in Gaza.  And if people say, well, if we can just survive the next four years, we can hopefully get back to ‘normal’; well, that didn’t work out too well when the same thing was said eight years ago.  We cannot afford the luxury of treating Trumpism as an aberration. 

A good place to start this re-evaluation is to assess how much of our current FDI is fake or ‘phantom’.  Ireland is often feted as being a giant in the FDI stakes.  In 2022, FDI made up 254 percent of GDP – four times the average EU rate.  However, the CSO found that much of this is a ‘phantom’. 

“More than a third of foreign direct investment (FDI), equating to €312 billion, is so-called "phantom" capital, passing through the jurisdiction to finance operations elsewhere, according to the Central Statistics Office.”

It gets worse. 

“When pass-through [i.e. phantom] investment, reverse investment (involving subsidiaries making payments back to the parent company), intellectual property (IP) and aircraft-leasing assets are removed, the “remaining inward FDI” accounted for €212 billion or 24 per cent of total value of FDI in 2018.”

This suggests that 76 percent of FDI coming into Ireland had almost no impact on our domestic economy.

Further, another CSO report noted that more than two-thirds (68 percent) of FDI came from just 25 multinationals, mirroring our over-reliance on corporate tax receipts.  

We need to examine the concertation of FDI.  Using Eurostat’s more realistic measurement of multi-national investment – focussing on ‘tangible assets’ (i.e. physical assets such as building, machinery, equipment) - we find:

• Multinational investment in Ireland makes up approximately 8 percent of GNI*, compared to a little over 2 percent of GDP in the EU

However, there is considerable and potentially worrying concentration.

• In the EU, 18 percent of total multinational investment comes from the US
• In Ireland, US investment makes up 79 percent

And of this massive proportion of US investment, more than two-thirds goes into the Big Tech sector. 

* * *

All this should be subject to public debate.

First, a large part of our FDI could be phantom, or fake investment.  And nearly 75 percent of FDI may have no discernible impact on the domestic economy.

Second, Ireland still receives a high level of ‘tangible’ foreign investment.  But it is highly concentrated, with US investment making up 79 percent.  And within that US envelope, more than two-thirds go to Big Tech.

Given that the US is fast becoming a highly unreliable trading, investment and international partner, this is not a good place to be.  Disentangling ourselves from this concentration, however, will not be easy. It is the product of decades of past policy, deeply embedded in our industrial policy infrastructure, with a domestic sector unable to make up but a little of that slack. 

Ireland, like other advanced market economies, will continue to need a steady flow of inward investment.  But future FDI will need to be balanced and sustainable, avoiding over-reliance on one market.  Further, FDI will need to support crucial social objectives; in particular decarbonisation and a more democratic labour market.  And it will need to be capable of developing supply chain linkages with the domestic economy rather than acting as an ‘enclave’ as the IMF once described Ireland’s FDI model.

This debate should start now.  But a crucial first step is the development of a genuine measurement of ‘real’ FDI, a kind of FDI* similar to our GNI* which removes the distorting effects of multinational legal and accounting practices.

Otherwise, the debate will be informed and tainted by headline figures that are full of phantoms and spectres.

Comments

[Jerry Melinn]

Just a few observations. It would be difficult to disentangle ourselves from the US. Imagine allowing a Chinese company to set up operations here. The US would immediately put massive tariffs on Irish imports. Changing the FDI model in this way would also need EU backing and it's doubtful that would be forthcoming.