U.S. Trade with Ireland: 25 Times Worse Than China

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:

trade-with-ireland

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.

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7 Responses to U.S. Trade with Ireland: 25 Times Worse Than China

  1. Pete Murphy says:

    Just as a matter of follow-up: I have learned from a contact within a major U.S. pharmaceutical factor that the big draw for manufacturing drugs in Ireland is favorable tax treatment.

  2. Clyde Bollinger says:

    At one time the drug manufacturers were all moving to Pureto Rico for favorable tax treatment. Is that not the major factor in the loss of jobs to foreign countries? Either punative here, favorable there or a combination of the two. Throw in environmental restrictions to complete the list. In addition, the surplus of available labor in some countries really puts the pressure on US companies to do what the pharmacutical companies have done. Trade balancing tariffs and tax reform could change things almost immediately.

    • Pete Murphy says:

      I think population density trumps tax treatment but, in some cases – and Ireland is one of them – tax treatment can be a big, big factor. If I were to include Ireland on the chart that I presented in my post on March 18th, https://petemurphy.wordpress.com/2009/03/18/population-density-vs-balance-of-trade/
      and if you were viewing the chart at eye level on your computer while in a seated position, the Ireland data point would be somewhere down around your feet.

      Obama promised to eliminate tax breaks that send jobs overseas. In situations where it’s our trading partners using tax breaks to have the same effect, there are only two remedies – cut taxes ourselves or impose tariffs. The first option would leave us with an even worse budget deficit. That leaves one choice.

  3. ClydeB says:

    Pete,
    You will certainly appreciate the irony of Paul Krugman’s column in the Post-Dispatch today where he decries the possibility that we, the USA, runs the risk of becoming like of all places, Ireland. I don’t know how long the link is active, but it was this morning.

    http://www.stltoday.com/stltoday/news/columnists.nsf/paulkrugman/story/889361773017C07B8625759E007E81E0?OpenDocument

    • Pete Murphy says:

      Interesting piece. It seems to me that the only way in which the U.S. is better off than Ireland is that our government debt is perceived as being safer than Ireland’s (for now). Otherwise, the conditions Krugman describes in Ireland sound no worse, and in some cases seem better, than our own economic problems. He says Ireland is faced with the necessity of raising taxes. Since some taxes in Ireland are already so low that our pharmaceutical manufacturers flock there, this doesn’t seem like it would be much of a burden. Imagine how bad Ireland’s problems would be if they had a trade deficit the size of ours (in terms of percent of their GDP). In fact, any country that did would be in a world of hurt.

  4. john says:

    I’d be surprised if tax was the major factor anymore for locating in ireland – there are so many other countries with low tax rates on offer both in the EU and further afield

  5. […] Balance of Trade Ireland chart – courtesy Five Short Blasts. […]

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