Now that we’ve finished examing trade in manufactured goods between the U.S. and our largest trading partners, I was curious to see what has happened to trade with Ireland since publishing my book in 2007. If you’ve read Five Short Blasts, then you know that, in 2006, our per capita trade deficit in manufactured goods with Ireland was by far the worst in the world, 25 times as bad as our per capita deficit in manufactured goods with China. Recently, I’ve watched news stories of the demise of the “Celtic Tiger.” If you can believe what you hear, the boom has gone bust in Ireland.
But there’s certainly no indication of that in our balance of trade. Here’s a graph depicting that balance, broken into several major categories:
As you can see, our deficit in manufactured goods with Ireland has only grown worse, soaring from $17.9 billion in 2006 to $20.8 billion in 2008. This translates into a per capita trade deficit in manufactured goods of $5,010 per person in Ireland, boosting their already very high per capita purchasing power parity to $47,800, about the same as Americans. In spite of the fact that the per capita trade deficit in manufactured goods with China has soared to $206 per person, the growth in the deficit with Ireland has kept pace and remains nearly 25 times worse.
Because Ireland is almost twice as densely populated as the U.S., my theory correctly predicts that the U.S. would have a trade deficit with Ireland in manufactured goods, but nothing on the order of what we actually have. Interestingly, nearly all of this deficit is due to imports of pharmaceuticals. It seems that Ireland is America’s drug manufacturer of choice. Why? I can’t say for sure but suspect a combination of factors: a well-educated work force, a strategic location in the middle of the air and sea routes between North America and Europe, a mild climate and, just perhaps, Ireland’s expertise in brewing beer and distilling whiskey. After all, the fermentation process used to make some drugs isn’t terribly different than that used in brewing. In addition, if you were an executive with a drug company and had to travel to some foreign land to check up on your drug factory, what better place to visit than Ireland? What I can’t figure, though, is what benefit American drug companies derive from manufacturing in Ireland. Obviously, wages there aren’t much lower than in America. If anyone can shed light on this, I’d love to hear from you.
Ireland is a good example of why blaming our trade deficit on Chinese trade tactics is misguided. When China’s relative size is factored into the equation by translating the trade deficit into per capita terms, it becomes clear that the deficit with China is no worse than our deficit with other densely populated nations, of which Ireland is the most egregious example. The population density-indexed tariff structure I proposed in Five Short Blasts would impose a rather small tariff of about 5% on Irish imports. That might be all the motivation needed for American drug makers to repatriate their manufacturing operations, especially as profit margins for drugs are trimmed, making a big difference in our balance of trade with Ireland.