Friday, August 10, 2012

10/8/2012: What's driving trade surpluses in Ireland?

Here's a question I asked myself recently: Given Irish exports are so heavily dominated by the MNCs, and given that the MNCs operating from Ireland are primarily concerned with transfer pricing and tax optimization (entering as negative factor to our overall trade), does our exports growth (positive contribution to our trade balance) really determine change in our trade balance?

It's a cheeky question. You see - Government policy in effect says "To hell with domestic enterprises, let's put all our bet for a recovery on exports". And furthermore, the policy also says that "Ireland will remain solvent as long as we can generate growth in our external surpluses". Of course both of these strategic choices imply state reliance on MNCs to increase our external balances surpluses, i.e. trade surplus.

So here are two charts (caveat to first chart - obviously estimated relationships are just illustrative, rather than conclusive, since we have few observations to consider as consistent data from CSO covers only 1997-2011 annually, but strangely enough the quarterly data - not suffering from same limitations - confirms annual data results):

The conclusions are rather interesting and worth much deeper exploration:

  • Imports growth explains more of the variation in trade surplus growth than exports expansion
  • Exports growth explains negligible amount of variation in trade surplus growth
  • Growth in profits repatriation by MNCs out of Ireland relates stronger (almost 27 times more) to  trade surplus growth than either imports or exports.

So more questions should be raised than answers given in the end...

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