By Paul Hannon
Almost a third of the eurozone’s goods trade surplus with the U.S. is accounted for by sales of products manufactured by the affiliates of American businesses, which also account for most of the eurozone’s deficit in the trade in services, the European Central Bank said Friday.
In its latest Economic Bulletin, economists at the central bank said that should the activities carried out by those affiliates be moved back to the U.S. in response to higher tariffs or changes to U.S. tax policy, the eurozone economy would be smaller, but the impact on employment and incomes would likely be limited.
“Over a longer period, productivity may suffer if the domestic economy is no longer gaining the positive spillovers,” the ECB’s economists wrote.
The ECB’s research highlights the complexity of trade and investment relations between the eurozone and the U.S., and the outsized role played by Ireland in the trans-Atlantic economy.
Many of the U.S. firms that contribute to the eurozone’s surplus in goods are based in Ireland, and manufacture pharmaceuticals. But they also import services from the U.S. such as the use of intellectual property, while sending large profits back to their American shareowners.
The ECB said that in 2024, the flows of goods, services and profits between the U.S. and the eurozone broadly evened out, even if the eurozone had a large surplus in the trade in goods.
“The euro area current account with the United States was nearly balanced in 2024, as the increasing surplus in goods trade was almost entirely offset by deficits in services trade and foreign direct investment income,” the ECB said.
The eurozone operations of U.S. multinational enterprises contributed “significantly” to those flows, the ECB said. Its economists estimated that 30% of the eurozone’s surplus in goods was due to the sales of U.S. businesses, while those same companies accounted for 90% of the eurozone’s services deficit.
“The widening goods trade surplus vis-à-vis the United States is driven mostly by a pronounced increase in exports of pharmaceutical products, which are mostly attributed to trade flows of Irish affiliates of U.S. MNEs,” the ECB said.
While Ireland can offer skilled workers familiar with U.S. regulatory requirements to the pharmaceuticals industry, it is also attractive as a way of lowering their tax bills.
President Trump has made it clear that he is unhappy that such a large share of pharmaceutical production for U.S. consumption is located overseas.
The ECB’s economists warned that higher tariffs on imports from the eurozone could lead U.S. businesses to move some of their production back home or to other locations.
However, while that would reduce the size of the eurozone economy, the ECB said it would have a much smaller impact on employment and incomes because those activities are highly capital intensive rather than job-rich, and most of the profits are sent back to the U.S.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
06-20-25 0425ET