US tariffs could cost Ireland more than €18 billion in lost trade while posing a long-term risk to public finances, the Economic and Social Research Institute (ESRI) has warned.
The institute calculated that if the US was to impose 25 per cent tariffs on all European Union exports, as US president Donald Trump has threatened to do, and the EU responds with reciprocal tariffs of its own, Irish gross domestic product (GDP) would be 3.7 per cent lower over the next five to seven years compared with a scenario with no tariffs.
Based on last year’s GDP figures, that equates to €18.4 billion, more than twice the State’s annual housing budget.
Ireland is among countries most vulnerable to changes in the global economy proposed by President Trump, with a significant proportion of employment, tax receipts and exports all directly dependent on trade with the US.
The ESRI warned that nearly all tariff scenarios would have a “significant negative impact” on the economy here.
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Given both the political and economic uncertainty around US trade policies, the ESRI considered a number of scenarios involving both unilateral tariffs (where the US imposes 10 per cent tariffs on the rest of the world and 25 per cent tariffs on the EU without retaliatory responses) and bilateral tariffs (where the rest of the world and the EU respond to the US tariffs with reciprocal measures of their own).
The imposition of 10 per cent tariffs by the US on imports from the rest of the world which are met with retaliatory tariffs could potentially cause Irish GDP and modified domestic demand (MDD – a more accurate measure of the domestic economy that removes the distortionary impact of multinationals) to fall by as much as 3.2 per cent and 1.7 per cent respectively.
The impact on the Irish economy of 25 per cent tariffs on EU exports (with the EU responding in kind) is broadly similar, with GDP and MDD falling from the baseline by 3.7 per cent and 1.8 per cent.
The study, co-authored and funded by the Department of Finance, also considered the impact of a 10 per cent increase in non-tariff barriers, such as changes in US regulatory requirements which could restrict market access, concluding they would reduce the levels of GDP and MDD here by 3 per cent and 1.5 per cent respectively.
The report warned that these protectionist policies would have a “disproportionate impact” on the traded sector here. This has the potential to further negatively impact the overall economy because those employed in the traded sector tend to be more educated and better paid, making them an important source of aggregate demand.
Protectionist policies were also likely to have an adverse impact on Ireland’s public finances, causing personal, indirect and corporation tax receipts to fall by as much as 1.6 per cent, 2.5 per cent and 3.2 per cent .
The report’s author, Paul Egan, said the impact of US tariffs would mainly be felt through a slowdown in demand for Irish exports. “This, in turn, would lead to a significant impact on the labour market, consumption and the domestic economy as a whole,” he said.
“Protectionist policies may also prompt multinationals to relocate to the US, posing further risks to the Irish economy and public finances,” Mr Egan said.
Another knock-on impact would be higher or more persistent levels of inflation, with higher import prices tending to lead to higher prices generally.
“Tariff-driven inflation across the euro zone could lead to a change in the path of ECB [European Central Bank] interest rates,” Mr Egan said.
