Tuesday, February 16, 2021

Ireland to add 0.1% to 2020 US GDP

US MNCs causing distortions within Ireland’s national accounts is not unusual.  As a small economy it means the impact of these can be outsized (e.g. the 26 per cent GDP growth rate in 2015). 

It looks like something similar to happen to the US national accounts for 2020 – though the relative impact on the much larger US economy will be much smaller. Here we identify something that could add 0.1 per cent to US GDP.  This is small but non-trivial.

The issue in question is something we have looked at before: the changing nature of outbound royalties from Ireland.  The earlier post goes through more of the details but for our purposes here we note that there has been a very significant drop in outbound royalty payments from Ireland to The Netherlands and directly to Offshore Financial Centres.

Royalty Imports to EA and OFCs 2011-2020

It is easy to see that these collapsed in 2020.  Royalty payments to the Euro Area – almost all of which went to The Netherlands – plunged in Q1 2020, while the same happened for payments to Offshore Financial Centres – Bermuda, Cayman etc. – in Q3 2020.  This corresponds to announcements by companies such as Google and Facebook that they were unwinding their “double irish” (and “dutch sandwich”) structures.

Some companies have chosen to onshore their IP to Ireland thereby eliminating the royalties shown above.  On the other hand some companies have repatriated their IP to the US.  This means there are still outbound royalty payments from Ireland but now they are directed to the US which is where US GDP comes in.

Here are outbound royalty payments from Ireland to the US up to Q3 2020:

Royalty Imports to United States 2008-2020

Up, up and away!  For ten years up to 2019, these payments were little changed and typically were between €6 billion and €8 billion a year.  They surged to €9 billion in Q1 2020 alone, with the first three quarters of 2020 already totaling €28 billion.  If the Q4 figure is close to what was seen in Q3 then the annual figure will be something around €40 billion.

Previously these payments, for licenses to use technology developed in the US, went to the likes of Bermuda and the Cayman Islands, sometimes with a stopover in The Netherlands.

The profit accumulated in these jurisdictions did not contribute to US GDP but it did contribute to US GNP via factor flows in the balance of payments.  The profit is no longer being reported on small islands and the inbound factor flows to the US have been replaced by royalty income.

What are royalty imports in Ireland are royalty exports in the US.  The payments are now going to where the R&D that developed these platforms is undertaken.  Some payments would have gone from Bermuda and Cayman to the US to co-fund the R&D undertaken but the amount of these US exports would have been calculated as a share of the R&D cost. Now more of the value of the IP is flowing to the US.

So, in 2020, it looks like there be an additional €30 billion of royalties flowing from Ireland to the US.  There will be a partially offsetting reduction of around €10-15 billion in R&D exports from the US to Bermuda and the Cayman Islands etc.  So there could be a net increase in US GDP of €15-20 billion or so from these changes.

Of course, pretty much nothing will have changed in the US economy.  Just like little changed when Irish GDP recorded a 26 per cent increase.  Early estimates suggest that US GDP in 2020 was around €19 trillion, with 0.1 per cent of this being €19 billion. 

Balance of payments figures from the BEA do not seem to reflect the changes in royalty payments shown above in Ireland’s balance of payments data.  When this is incorporated it could could add something in the region of 0.1 per cent to GDP.

And, yes, the title here is a little bit disingenuous. There isn’t really anything that has happened in Ireland to change US GDP.  In overall terms the level of outbound royalties from Ireland is actually little changed.

Royalty Imports to All Countries 2008-2020

There is a reduction in the recent data and this is likely due to onshoring of some IP but outbound royalties from Ireland in 2020 are likely to have been around €70 billion, in line with the 2018 outturn. The dramatic changes of the earlier charts have to do with the destination of these royalties more than the quantum of them.

Now more of the payments are going to the US and making a larger contribution to US GDP. This better reflects the economic reality of these companies as the majority of the R&D behind their technology is undertaken in the US.

No comments:

Post a Comment

Printfriendly