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Economy, Finance and Trade Ireland: Twin Challenges of Brexit and Trump

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Euromonitor International’s Ireland Economy, Finance and Trade Country Briefing, focuses on one of the world’s most attractive investment destinations, offering an extremely favourable tax regime. This makes Ireland very appealing to foreign firms, resulting in extremely large FDI inflows, particularly from the US and UK. According to IBM’s 2016 Global Locations Trend’s report, Ireland continued to lead the world in alluring high-value foreign direct investment (FDI) projects in 2015. Although Ireland’s real GDP growth moderated in 2016, it still stood as one of the highest in the EU, indicating that the Irish economy continues to perform well, driven by solid exports and favourable domestic conditions. However, Trump’s surprising victory in the US elections, coupled with the UK’s unexpected decision to leave the EU, Brexit, signals higher risks hovering over Ireland, given the nation’s close trade and investment links with the two countries. Thus, Brexit and Trump’s extreme protectionist policies will have far reaching consequences for the Irish economy through disruptions in trade as well as investment profile.

Apart from the adverse impact of Brexit, Ireland now faces external risks from Trump’s policies:

  • The biggest risk to the Irish economy is the UK’s decision to leave to the EU (Brexit), which is creating uncertainty across the economic bloc and will be particularly pertinent to Ireland’s financial sector, given its close links with its larger neighbour. Nevertheless, if unfavourable trading terms are imposed on the UK, Ireland could also be a beneficiary of businesses relocating there;
  • Ireland has a relatively well-diversified imports base, although it receives large imports ofindustrial inputs to use in its relatively sizeable manufacturing sector, raising its susceptibility to global cyclical supply conditions. Furthermore, with around two thirds of its total goods imports coming from the EU, Ireland is highly vulnerable to supply disruptions in member countries, especially the UK;
  • As a member of the EU, Ireland is privy to the economic bloc’s free trade agreements (FTAs). The EU is presently negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the US, which could form the biggest FTA in the world. However, negative comments from some EU members lately, such as France and Germany, coupled with Donald Trump’s protectionist stance are jeopardising the success of this FTA;
  • With Chemicals accounting for over half of total goods exports in 2015, Ireland’s exports base is not well diversified and highly exposed to global demand variations. Given that over half of its total goods exports were destined for the EU in 2015, uncertainty caused by Brexit could weigh heavily on demand from the economic bloc in the medium term and negatively affect Ireland’s open economy. However, demands for its pharmaceutical exports are strong globally;
  • Ireland’s stable political environment; favourable regulatory landscape facilitating businesses; its closeness to continental Europe; and solid relations with the US are attractive for firms. However, given large emigration from the country to more lucrative areas of the EU, Ireland suffers from skills shortages, whilst Brexit risks could also weigh on the investment climate going forward.

Brexit and Trump’s Policies will Adversely Impact Ireland’s Trade as well as Investment Profile

In 2016, Ireland exported 25.9% and 12.6% of its total goods to the US and UK, respectively, and 30.7% of Ireland’s total imports came from the UK and 12.9% from the US, highlighting a large trade dependence on both nations. As the UK prepares itself for Brexit, Euromonitor International’s baseline scenario expects the UK to trigger article 50 and negotiate a free trade agreement (FTA) with the EU, to reduce all tariff barriers to trade. However, there is a chance that disagreements between the two, owing to their different stance on immigration, will not result in the signing of any deals. Hence, the outcome of the UK’s negotiations with the EU will have a notable impact on Ireland’s trade profile. The harder the post-Brexit linked negotiations with the EU, the more it will hurt Ireland via higher trade related costs and reduced investment.

Along similar lines, living up to his anti-free trade stance, in January 2017, Trump withdrew the US from the Trans-Pacific Partnership (TPP) deal. This clearly signals a threat to the Transatlantic Tradeand Investment Partnership (TTIP), a sequence of trade pacts between the EU and the US that has been under negotiation since 2013, shattering Ireland’s expectations of profiting greatly from the deal.

Furthermore, Ireland has been successful in maintaining a low tax, highly skilled workforce and friendly business environment, luring numerous US conglomerates to set up their European headquarters in the country. This provides jobs to the locals as well as boosting public revenues. However, with Trump coming into power, Ireland fears losing out on large investments, particularly if Trump sticks to his promise of slashing the US corporate tax rate from 35.0% (at present) to only 15.0%, very close to Ireland’s 12.5%. Such a move could attract a bulk of US firms operating globally (including Ireland) back into the US, causing a blow to the Irish economy via lower employment opportunities, investment and public revenue. In addition, Trump’s plan for a tax pardon for multinational offshore earnings will jeopardise Ireland’s commercial strategy of drawing businesses seeking a low-tax entrance into the single market, EU.

On the other hand, Ireland can seek to benefit from Brexit, especially in financial services, as post Brexit negotiations bring uncertainty for businesses in London. However, this will not be enough to offset the higher negative effects from external risks. Hence, Ireland needs to brace itself for impacts of the troubled external economic and political scenario in the US and UK, especially with regards to trade and investment.

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