Tariffs and tax policy remains a burning issue for US-Irish trade

Mar 30, 2020
Originally published on Business Post, 15 March 2020

At an Ireland Funds fundraising dinner in Washington last week, Taoiseach Leo Varadkar pointed out that while much of the time, words don't matter, the words of Nancy Pelosi, the US House of Representatives Speaker, typically do. It was a good line, but it's not just who says things, it is what is said that matters.

The House Speaker’s words cited by the Taoiseach were significant because they signalled to the British that any trade deal that disrupted the Good Friday Agreement would not be a runner in the US. Less than 12 hours later, Varadkar himself was in the business of words that matter when he announced the social distancing measures taking effect this weekend to counter the spread of the coronavirus.

His announcement acknowledged the disruption to working patterns and to the economy, but the threat of Covid-19 has already been having those effects for several weeks. Even the enormous PR machine of Irish/US business relations was rattled long before the Taoiseach announced that Ireland was to change gear, and before US president Donald Trump announced his nation’s clampdown on international travel.

Coronavirus did not knock Brexit off as the hot topic on the Ireland/US business agenda for the week, because Brexit was not the hot topic to begin with. The burning issues for Irish trade with the US at the moment are tariffs and tax.

On the tariffs front, Irish problems derive from the World Trade Organisation ruling that France had provided trade subsidies to Airbus. That in turn prompted retaliation from the US which put additional tariffs on goods of many descriptions, like butter and cream liqueurs. That's hardly fair to an exporting country like Ireland, but we are in the EU and it is the US and EU that are in dispute.

Rewriting the tax rulebook

The other big challenge is the old perennial of tax policy. Much is made in Ireland of the enormous lift in corporation tax receipts, triggered by the relocation of intellectual property assets – patents, knowhow and the like – into the country. This phenomenon has been flagged domestically as a problem if we become too reliant on corporation tax to fund day-to-day spending. It is no harm to be reminded that the exporters of such intellectual property, notably the US, are not delighted by the bonus tax receipts in Ireland either.

Ultimately, largely thanks to the US Tax Cuts and Jobs Act of 2017, Uncle Sam is better off if the intellectual property is located here rather than in one of the traditional warm and sunny island tax havens. Yet the US remains deeply suspicious of the continuing European attempts, driven by the OECD, to re-write the tax rulebook for multinationals, particularly those in the high-tech sector.

All of this creates an unwelcome drag on transatlantic trade and investment, particularly as Irish/US investment is a two-way street. State agencies in the US compete for Irish investment just as the IDA competes for US investment here.

The effects of coronavirus on the Ireland/US business narrative taking place in New York and Washington last week may be short lived compared to these tax challenges. Instead its main effect could well be to change the increasingly fractious negotiating narrative on Brexit between Britain and the EU. Here's why.

Expensive and cumbersome

Much of the Brexit discussion so far has had to do with trade in goods rather than trade in services. It's easy to predict the impact of Brexit on the trade in goods, because tariffs are known and quantifiable and business reactions to their imposition are predictable. Tariffs do what they are designed to do, which is to make imports more expensive and exporting more cumbersome. We know what happens when tariff and quota patterns depart from the norm, because we see real-world examples. These can be major, like the US/China trade dispute, or something apparently trivial like a work-to-rule by French customs officers. In both cases, disruption of the existing norms can be measured and quantified.

Compared to the trade in goods, there have been relatively few instances where trade in services becomes shifted from the norm, at least up to now. Services are provided by people and, thanks to coronavirus, people are now subject to social distancing. That disrupts the capacity of businesses to provide services both domestically and internationally with a consequent disruption to the economy as the Taoiseach acknowledged.

Courtesy of the scourge of the coronavirus the Brexit negotiators are being presented with unprecedented evidence of the consequences of failing to get agreement on cross border trade in services. The next few weeks will show what happens in practice when countries restrict free movement of people, when they limit recognition of qualifications, and when they deny licences to provide services like financial services in different markets.

Ireland’s trade surplus with Britain is dependent on services, not goods. We deal more with Britain than with the US. The Brexit negotiators need to get it right. As the Taoiseach pointed out, words do matter and Nancy Pelosi’s words will shape the future trade deal. The bitter experience of coronavirus should shape it as well.

Dr Brian Keegan is Director of Public Policy with Chartered Accountants Ireland.