Trade Policy with Ireland a Failure on Two Levels

http://blogs.reuters.com/great-debate-uk/2011/06/01/is-ireland-the-same-as-greece/

The above linked op-ed piece from Reuters notes that Ireland is on the dole from the IMF and asks whether Ireland will be the next Greece. 

Coincidentally, I’ve been in the process of updating my trade data for 2010, going through the nations alphabetically, and just finished Ireland.  If you’ve read Five Short Blasts or if you’ve followed this blog, then you’re among the few people who understand that our trade deficit in manufactured goods with Ireland, when expressed in per capita terms, is the largest by far – more than 25 times worse than our deficit with China.  What I’ve been finding as I’ve updated my data is that trade in general rebounded a bit in 2010, following a big recession-driven plunge in 2009.  Deficits tended to grow once again while surpluses – primarily with nations less densely populated than the U.S. – also grew.  So I was curious to see what happened with Ireland.  Here’s the chart, updated with 2010 data:

Ireland Trade

Our trade deficit in manufactured goods with Ireland exploded to a new record of  $24.6 billion, shattering the old record of $20.8 billion set in 2008, driven by imports of pharmaceuticals of $22.7 billion.  In per capita terms, that’s $5,930 per Irish citizen, almost 27 times worse than our trade deficit with China.  It accounts for 16% of Ireland’s per capita income. 

By the way, going off an a tangent for a moment, remember when there was a lot of pressure to allow the importation of drugs from Canada as a remedy for high drug costs?  Remember the response?  “We can’t assure the safety of our drugs if we import them from Canada!”  Oh, really?  I wonder how many people realized that most of our drugs are imported anyway, not from Canada but from Ireland?  And, even if we imported them from Canada, most of those drugs would still come from Ireland anyway, imported from Ireland into Canada and then re-exported to the U.S., where they’d have otherwise gone in the first place. 

But let’s get back on topic.  Ireland is a nation almost twice as densely populated as the U.S.  As such, it would qualify for the lowest level of import tariffs under the population density-indexed tariff plan that I proposed in Five Short Blasts, a tariff of 5%.  That alone would generate $1.25 billion in new federal revenue.  Enough to motivate our drug companies to shift their production back to the U.S.?  Probably not. 

So, while our trade policy is a failure because it doesn’t account for the disparity in population density, there’s something else at work here too.  Even I’d be the first to admit that the disparity in population density, relatively small in comparison to other nations like Japan, Germany and China, doesn’t explain our deficit with Ireland.  The bigger factor is the free tax ride Ireland gives to foreign investment, especially the drug companies.  Ireland is subsidizing its pharmaceutical industry – providing them an unfair trade advantage. 

And now we see that they’re paying the price.  Ireland’s broke and is being subsidized by the IMF – in other words, by the American taxpayer.  So, in addition to our foolish trade policy shipping away our pharmaceutical industry, its jobs, and a not-insignificant chunk of our domestic economy, we further erode our own economy by adding to our own debt with the funding of the IMF. 

Free traders would say that we need to compete better with Ireland.  But how?  Give the pharmaceutical industry a tax break?  They already get that from Ireland!  So that’s no incentive.  And what exactly has the tax break gotten for Ireland except a big deficit and bankruptcy?  No, the real answer is to impose tariffs on Irish imports – not just the 5% tariff called for by the disparity in population density but an additional tariff to compensate for the unfair tax advantage offered by Ireland, perhaps raising the total tariff to 20% or more, boosting our increase in revenue to $5 billion. 

Free traders would howl, “but this will ignite a trade war with Ireland and we’ll lose out on all the exports to that country!”  Maybe.  But even if trade with Ireland came to a screeching halt, the loss of our $6 billion in exports to Ireland would be offset by the elimination of $31 billion in imports.  We’d be five times better off! 

Our trade policy is an abysmal failure and there may be no better example than Ireland.  It’s resulted in the loss of a big part of our pharmaceutical industry, the loss of many thousands of high-paying jobs, has left Ireland in no better fiscal position and now requires more from our taxpayers to fund the IMF to support Ireland’s policy of subsidizing foreign investors.  Does any of this make any sense whatsoever? 

 

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