Tuesday, November 19, 2019

Ireland's record trade surplus of €107 billion in 2018 — an illusion?

The blue line includes phantom Irish exports such as exports of iPhones to China!

In 2017 Ireland supposedly exported €17bn worth of Apple iPhones/ materials to China even though there were no shipments! Ireland has no history of direct development of the iPhone, or supplying any related material to China. Last year IMF staff estimated in respect of Ireland, "that the contribution in value-added terms of iPhone exports...account(ed) for one-fourth of the country’s economic expansion in 2017." 

The fantasy exports (sometimes called contract manufacturing/ processing) materialised as Apple allocated intellectual capital (IP) in late 2014 to one of its Irish companies, Apple Operations Europe (AOE), which became tax resident in Ireland — all was needed were accounting entries at Apple's headquarters in California and in return for becoming a significant payer of corporation tax in Ireland, the Irish Government offered big tax breaks for IP transfers (even though phantom) and AOE got a guarantee of absolute secrecy as it doesn't have to publish accounts.

In 2017 the total value of fantasy merchandise exports was €65bn which added to custom-tracked exports of €123bn, brought the total goods exports to about €193bn (including other adjustments). In 2018 the fantasy exports total was €63bn and total merchandise exports were at €208bn. The related imports values were just €6bn and €9bn (see below for more detail). 

Rising trade balances/ net exports  

Ireland had a record total trade surplus in goods and services of €107bn in 2018, which accounted for 33% of the €324bn value of GDP (gross domestic product) and 54% of the value of Modified Gross National Income (GNI*) which strips some of the big multinational distortions from the national accounts (see below).

While the timing of the movement of tax avoidance balances impacts this data, annual national accounts reporting continues to be distorted by changes in net exports (exports minus imports) related to tax avoidance.

Irish Gross National Income (GNI) is modified by excluding the following:

  • retained earnings of firms that have re-domiciled to Ireland (typically US firms that become Irish for tax purposes and while the headquarters are located in Ireland, the firms' main operations and senior management continue to operate in the US);
  • the depreciation of foreign-owned intellectual property assets located in Ireland; and,
  • the depreciation of aircraft owned by aircraft-leasing companies.     

In 2007 the ratio of net exports at €16bn to GDP and GNI* was 10%; net exports of €34bn in 2013 were at 21% of GDP and 25% of GNI* and 33% and 54% in 2018 as stated above.

1) In 2018 exports grew by over 10% and the biggest rises were in the main profits shifting areas a) in Merchandise 'Chemicals and related products' (mainly US-owned drugs and medical devices firms) jumped 26% b) in Services 'Computer services' (where Google, Microsoft and Facebook book 33 to 50% of their global revenues) exports rose by 23%;

2) Custom-tracked exports were valued at €141bn in 2018 and imports were valued at €87bn resulting in a surplus of €54bn. Chemicals and related products (61% of exports value) provided a surplus of €66bn in 2018 compared with a surplus of €50bn in 2017. In 2018 there was a deficit of €12bn in the other 39% of custom-tracked exports value;

3) So-called of fantasy exports were valued at a net €54bn.

4) Here we have a €108bn total surplus (mainly profits shifting) from goods and with a total deficit of €10bn in services plus a merchanting adjustment in merchandise we get an overall surplus of €107bn.

In Services Royalties/Licences fell €3bn in respect of pharmaceuticals and rose €6bn in Information and communication.

Reality and fantasy in economic performance

In recent times there have been claims that Ireland has had a superlative performance in Europe since the 1990s despite the economic bust, based on dodgy data — for example, while Modified Gross National (GNI*) income per capita data are available from 1995, it's not inflation-adjusted. During the period 1995-2018 consumer inflation rose by 54%.

Besides, Ireland's adjusted disposable income per head based on purchasing power standards is below the EU average. 

In May 2018 the Economic and Social Research Institute (ESRI) said it had become “practically impossible” to gauge economic activity in Ireland or work out an estimate of sustainable growth with the current set of indicators.

While Modified Gross National (GNI*) is a start in producing more realistic indicators, the contract manufacturing fantasy provides balances that can be ostensibly retained in Ireland but in reality are in US banks, in US government Treasuries or funding investment elsewhere.

Balance of payments data show that US firms repatriated $777bn in 2018 but Trump had expected $4tn when he signed the Tax Cuts and Jobs Act (TCJA) in December 2017 which cut the headline US corporate rate from 35% to 21%.

Irish holdings of US Treasuries fell from just over $325bn in Nov 2017 to $250bn in Nov 2018.

US foreign affiliates sell most of their output in the markets in which they operate.

Data seem to show that Ireland is one of the top destinations for US foreign investment, but it's fake as is the claim that Irish investment in the US ranks in the the top 10 foreign countries.

The Central Statistics Office (CSO) says Irish exports grew by 10.4% in 2018, while imports dipped by 2.9%. "Fixed capital formation decreased 21.1% in 2018. This was largely driven by the decrease in R&D related IP imports."

In 2019 the CSO cut the 2017 surplus from €89bn to €65bn with imports mainly rising. There could be a similar correction of 2018 data. 

In the chart below the OECD data for Ireland at 1995-2018 inflation-adjusted GNI* would give a rise of 90% per head in the period 1995-2018. However, I have assumed an arbitrary cut (likely low) of €40bn to GDP and GNI* as an indicator of a more realistic result of economic performance. 

Striking data

In the period 1995-2018 Italy's GDP per capita only grew by 8% while the United States' GDP per capita rose at similar rate to the European Union, comprising 28 member countries.

Austria, the Netherlands, Norway, Switzerland, Denmark, Germany and Sweden are the richest countries in Europe.

Red flags in the OECD table above are estimates. 

Related

US FDI into Ireland and Irish investment in America — facts and myths — fact or fiction?  — Ireland has the 4th highest FDI investment from US firms? Irish firms in 2016 employed 856,000 people overseas? Ireland is among the top 10 FDI investors in the United States? Hint: All these claims are false!