As economic research showed would happen, Brexit went on to inflict serious damage on the UK’s economy. However, given the time this saga has taken to play out, not everyone in Britain appreciates that their stuttering growth nine years on is a direct consequence of cutting themselves off from their biggest market, the European Union.
Likewise, all economic analysis suggests that the Trump trade war with the rest of the world will significantly harm the US economy. Amid all the showmanship that accompanied the tariff announcement, many Americans may be unaware of the real consequences coming down the tracks. If the scale of planned tariffs is reinstated after the announced 90-day pause, US consumers will have a very rude awakening when the cost of the weekly shop lifts off, and when staples such as bananas and coffee disappear from the shelves.
While it won’t be a great consolation to anyone set to lose their job in Europe, Asia or elsewhere, the reality is that in a trade war between the US and the rest of the world, the US will be hurt more than its trading partners.
China has already announced countermeasures, which provoked a further hike in US tariffs against China to reach 145 per cent. While the EU has announced its response to the earlier tariffs on coal, steel and cars, it wisely has waited to see how the 20 per cent tariff announcement would play out. A rapid response is more likely to provoke all-out war, rather than the temporary pause announced by Trump on Wednesday.
If the 20 per cent tariff rate is reinstated after the 90-day pause, the best course of action for the EU would be to wait until the consequences are felt in US consumers’ pockets. A sharp rise in inflation could trigger serious concerns in the currently supine Republican Party. This could dampen the enthusiasm in the US for further escalation in the tariff war. However, Trump does not take kindly to political pressure, but appears to be more sensitive to stock market reactions.
Large-scale tariffs will bring knock on problems for all economies, as trade is redirected from the US. In particular, Asian manufacturers could end up dumping surplus goods in the EU. With its other trading partners, the EU needs to work through how best these transitional issues can be dealt with to ensure that, in the long term, free trade continues in the world outside the US. Given the volatility and irrationality of US policy, the rest of the world needs to apply a rational, fair and rules-based trade approach to trade between non-US countries.
Ireland faces a number of serious challenges in this environment.
First, the EU is likely to impose charges on major US computer service suppliers operating in Ireland and selling into the EU, such as Google and Facebook. This will impact on their EU sales and profits, but would not necessarily persuade them to relocate back to the US.
Second, the largely US-owned pharmaceutical sector, which is hugely important in the Irish economy, has so far been exempted by Trump from tariffs on exports to the US. However, this is probably only a temporary reprieve. Tariffs on pharmaceuticals could incentivise relocation of production of drugs destined for the US market to the US. That would take a number of years.
New factories would have to be built and regulatory approval sought in the US before output could begin there. Given the Trump presidency is time-limited, the rationale for such relocation may be less strong. In any event, it may be sensible for pharmaceutical companies in Ireland to continue to make products destined for the European market here, particularly if there were to be counter-tariffs on imports of US-made medicines.
Third, Ireland’s tax take will take a hit as an indirect result of the heavy tariffs on exports from China to the US. Most of Apple’s phones sold in the US are manufactured in China. Because the Apple subsidiary responsible for this production is located in Ireland, much of this output of phones in China on contract for Apple is treated as Irish GDP. The profits on the sales of these phones are then booked in Ireland, and corporation tax paid here on the profits.
The 145 per cent tariff on China will be disastrous for Apple’s US sales and profits, with a knock-on effect on Ireland’s corporation tax revenue. Any reinstatement of the planned 46 per cent tariff on Vietnam’s exports to the US, insofar as that involves contract manufacturing done on behalf of Irish-domiciled US firms, will also hit our tax revenue.
Hold on to your hats.
