A trade war between Europe and the United States is set to raise the cost of raw materials by nearly €30 million, Irish industry has warned.

The European Commission yesterday announced millions of euro worth of tariffs on US imports, in an escalating row over export tax breaks.

As a result Irish companies, particularly multinational subsidiaries that export much of their produce, can expect the cost of essential materials to increase by 5 per cent, the Irish Exporters' Association has claimed.

With raw materials accounting for 80 per cent of the estimated €7 billion worth of US goods that the Republic imports annually, manufacturers will bear the brunt of the row, said association chief executive Mr John Whelan.

Pharmaceuticals and IT companies, which are heavily reliant on bulk material imports, would be hardest hit, he said.

But the Department of Enterprise Trade and Employment said it was reasonably confident the Republic could ride out the dispute.

The shortlist of tariffed good was drawn up in consultation with EU states and the Government had done its best to ensure that raw materials important to Ireland had not been included, said a spokesman.

Officials on both sides of the Atlantic have played down talk of a trade war. EU industry, worried about a rise in the cost of imports, said the move was regrettable, but understood the decision by European Trade Commissioner Mr Pascal Lamy.

The sanctions are aimed at prodding the US Congress to replace the tax breaks with measures in line with World Trade Organisation (WTO) rules.

"Despite waiting for more than two years, the US has not brought its legislation in line with WTO rules. We are therefore left with no choice but to impose countermeasures," Mr Lamy, who negotiates trade for EU states, said in a statement.

"The name of the game is not retaliation but compliance: countermeasures will be lifted the day the FSC is repealed," he added.

The Foreign Sales Corporation (FSC) tax breaks system has aided firms such as Boeing and Microsoft.

They were judged an illegal subsidy by the WTO. It said the EU could respond by imposing up to €3 billion in sanctions a year on US goods. Mr Lamy has opted for a phasing in of sanctions.