The "Tech Wreck" and Ireland
The Irish economy is heavily geared to the U.S. tech and pharma sectors. That was a boon during the pandemic but may now be a liability.
The U.S. has been the best-performing major economy since the start of the pandemic, which is all the more remarkable considering the manifest failures of American public health officials. But one small country has done much better: real gross domestic product in the Republic of Ireland in 2022Q3 was 33% (!) higher than in 2019Q4 on a seasonally-and-calendar-adjusted basis.
At first glance, this would appear to be a remarkable accomplishment. But the massive GDP spike has not translated into higher living standards: Irish consumer spending in 2022Q3 was 2% lower than in 2019Q4 after accounting for inflation. The disconnect between Irish GDP and Irish living standards is not new, but it has widened considerably over the past few years.
The reason is that much of Ireland’s reported economic activity reflects the tax-optimization strategies of multinational technology and pharmaceutical companies, rather than anything actually involving Irish people in Ireland. When those companies do well, Ireland’s reported GDP soars.
But the Nasdaq 100 stock index has already lost a quarter of its value this year, while analysts are slashing their earnings projections for many of the major tech companies. What will happen now that the industries that had inflated Irish GDP are now entering a downturn?
Why Ireland Is So Sensitive to Tech Stocks
Companies sell most of their goods and services in places with relatively high corporate taxes, but they book much of their profits in the jurisdictions that have the lowest taxes.
While the specifics vary across companies and can change according to the specifics of the tax laws of the time, the basic trick is to place valuable intangible assets—patents, branding, and other intellectual property—in low-tax subsidiaries. Subsidiaries in the rest of the world pay licensing fees to the subsidiaries in the tax havens, allowing headquarters to move profits away from where products are produced and sold to the tax havens. Software and internet companies have the easiest time pulling this off, but even retailers such as Starbucks have gotten in on it.
The pharmaceutical industry actually goes to the trouble of manufacturing drugs in places with low taxes, such as Ireland, Switzerland, and Puerto Rico, and exporting the drugs from there to the rest of the world. Pharmaceuticals often cost billions of dollars to research and develop, but once that’s done, production itself is cheap. Most of the value is created by the scientists working all over the world—often in higher-tax jurisdictions such as France, Germany, Japan, the U.K., and the U.S.—but companies get to book the profits wherever the drugs are made.
Net exports of “medicinal and pharmaceutical products” from Ireland have consistently been worth more than 10% of Irish GDP over the past decade. In the 12 months through September (latest available data), these net exports were worth almost €70 billion. For perspective, the total amount of money paid to all workers in Ireland in the form of wages, salaries, and employee benefits over the same period was €121 billion.
But while the pharma sector is significant, it does not explain the bulk of what has happened to Irish GDP over the past few years, nor is it likely to be the main source of vulnerability in the current Nasdaq downturn. After all, Ireland’s overall trade surplus in goods in the 12 months through September was worth €192 billion, or 40% of GDP, while the trade surplus in “computer services” in 2021 was worth another €165 billion. Irish subsidiaries pay enormous sums to the rest of the world for “research and development” services and licenses to use intellectual property held elsewhere, but the overall trade surplus is massive and represents profit that is mostly untaxed.