From the point of view of the Irish economy, a win for Joe Biden in the US presidential election always looked better than a Donald Trump victory. Trump has pursued aggressive trade policies which have dangers for Ireland and sought to undermine bodies such as the World Trade Organisation. But central to Biden's policy is a strategy of bringing US investment back to America and thus securing vital supply chains in pharma, electronics and other areas. And he has detailed polices to seek to do this, even though being faced with a Republican-dominated Congress would make progress on some of these difficult. This goes beyond tax, however, to a whole range of policies. Let's look at what is involved and what it could mean for investment and jobs in Ireland.
1. The background
Bringing investment “back home” was a recurring theme of the Trump presidency. He referred on a number of occasions to Ireland’s position as a pharmaceutical manufacturer and the US’s resulting deficit in trade with the State.
While Trump did push through a major tax reform programme in 2017 – designed in part to shift the incentives in terms of where firms locate – his threat to bring production back to the US from countries such as China and the Republic was never really followed through. However Joe Biden’s campaign documents take up the same theme, promising to secure vital supply chains in the US, This is set partly in the context of the pandemic and the need to secure supplies of vital medicines and eventually vaccines for the US.
But he also sets it in a wider context, promising to “implement fundamental reforms that shift production of a range of critical products back to US soil, creating new jobs and protecting US supply chains against national security threats.”
The document adds that “the US needs to close supply chain vulnerabilities across a range of critical products on which the US is dangerously dependent on foreign suppliers.” The text makes clear that much of this is directed at China and Russia – but what would a policy of encouraging pharma back to the US mean for Ireland?
Biden promises a range of measures to encourage US firms to move back to America, including tax changes, favouring US-based firms in government purchases and the use of a range of existing legislation and programmes to try to tilt the balance both in terms of urgent Covid-19 supplies and longer-term security of products that are seen as vital.
2. Irish pharma
The pharma sector has build up here here over many years, starting with the landmark arrival of Pfizer in Cork in 1960 and moving from the manufacture of basic chemicals to drugs and complex biological medicines. The industry now accounts for more than 60 per cent of the value of goods exported and is estimated to support, directly and indirectly, 45,000 jobs, These companies form part of complex supply chains involving raw material inputs, domestic suppliers and exports across the world. The industry's case is that these supply chains function well, including during the pandemic. IPHA, a sectoral representation body, argues that the pandemic has shown the interdependence of supply chains which have been able to function well under pressure. For this reason, it says, barriers to trade should be avoided.
Exports of Irish pharma and chemicals to the US totalled €27.3 billion in the first eight months of this year, up from €22.5 billion in the same period last year and accounting for more than 80 per cent of the value of Irish goods sales in the US. These include a mix of finished drugs and active pharmaceutical ingredients – the key component in drugs manufacturing, In this way pharma is different from most other US companies in the Republic, who generally target markets outside America from their Irish operations.
This is what has caught attention in the US. US economist Brad Setser in a 2020 paper for the Council on Foreign Relations, an American think thank, called The Irish Shock to US Manufacturing, outlines how US manufacturing of pharma has declined since 2006, a trend which he says accelerated again after Trump's tax 2017 reform plan. He identifies some US changes in 2005/6 which accelerated the trend of offshoring manufacturing. US pharma imports have risen from $65 billion in 2006 to $151 billion last year.
Ireland has been one of the major beneficiaries and Setser argues that US firms have used offshore locations here and elsewhere to cut their global tax bills, largely through the use of intangible assets such as patents which can have a major impact on where profits are reported. Recent decisions of companies to set up high-value manufacturing operations in Ireland were directly driven by changes in the 2017 tax reform, he argued.
These ideas are referenced in Biden’s documents. Though Ireland is not directly highlighted, his campaign literature points out that a lot of drugs imported into the US are made in relatively high-wage countries and thus offer no price advantages for US consumers. Ireland’s case is that it provides a stable base for US companies – and sources here point out that it is US tax law and a desire to diversify production which has been at the heart of decisions by American firms to establish plants worldwide over many years.
3. The new world of economic interdependence
Academics will long argue over whether Trump ushered in an era of economic nationalism, or whether it would have happened anyway, driven by electorates who felt left behind by globalisation. Either way, Trump’s policies have shown a decisive move away from the era of international co-operation and free-wheeling globalisation to be replaced by sometimes aggressive protection of national interests via tariffs and other measures.
Irish political scientist Henry Farrell of Johns Hopkins University and colleague Abraham Newman have written extensively about the move away from old-style globalisation, which they say has been shown to leave key vulnerabilities as companies pushed ideas such as lean manufacturing and just-in-time delivery to the limit for their own advantage, leaving no slack to respond if something goes wrong. This has left nations vulnerable to unexpected shocks, The coronavirus crisis has underlined this, they say, leading to global scrambling for masks and ventilators, for example, and testing reagents, and national manoeuvring to book vaccine supplies.
Farrell and Newman argue we are now entering an era of “weaponised interdependence”. They wrote in a recent article in the journal Foreign Affairs for example that in the pandemic, “the outcome has been a shift in power dynamics among major world economies, with those that are well prepared to combat the new virus either hoarding resources for themselves or assisting those that are not – and expanding their influence on the global stage as a result.”
Globalisation has produced “global supply chains, giving rise to a tangled web of production networks that wove the world economy together,” they wrote, creating interdependencies between countries.“The pandemic is exposing the fragility of the globalised system.” In the midst of a global pandemic “just-in-time can easily become too late.”
This is the backdrop to the mood in the US to, in the words of Trump’s trade adviser Peter Navarro “bring home its manufacturing capabilities and supply chains for essential medicines.”
4. What would Biden do?
Biden’s campaign documents reflect a lot of this thinking about securing supply chains and using emergency legislation if required to get US companies to produce the necessary products to fight the pandemic and to have essential stockpiles of products in future and secure supply chains.
However, his promises go beyond this to look at new incentives at a federal and state level to get companies to manufacture in key areas – pharma, tech, energy and so on – in the US. He also promises to reform the US tax system again to remove the incentive for companies to manufacture abroad and actively incentivise them to produce in the US – though getting this through Congress would be a challenge based on the latest numbers.
His campaign document on supply chains also says that Biden "will work to ensure that the US leverages the fact that it is the largest purchaser of health care – between Medicare, Medicaid, the Department of Veterans Affairs, and other health programs as well as Federal procurement more generally – to encourage pharmaceutical companies to make key drugs, drug inputs, and medical devices in the United States while ensuring fair and transparent pricing." All federal agencies would be directed to purchase version of drugs that are made in the US.
How much of this agenda will get priority, how much Biden would be able to implement and what it would mean for investment here is all open to debate. But the Biden promise to bring manufacturing “home”, especially in pharma, is one to watch for Ireland.
