The impact of Donald Trump’s tariffs on Ireland – and the trade war that may well follow – will take some time to play out. But there is no doubt that the sweeping tariffs announced on Wednesday evening in the White House pose a significant economic threat to this State and particularly to investment, jobs and tax revenues. And their wider impact on the world economy is a negative too.
It was a landmark moment in the Trump presidency, declaring the US’s “economic independence” – which is bad news for a country like Ireland that relies on American trade and inward investment. Trump made it crystal clear that he wants production for the US market to come back to the US and there is more to play out here in terms of how his policy evolves.
What we now know is that most imports from the EU will face a tariff - or special import tax - of 20 per cent. This is roughly what was expected and at least Ireland was not picked out for special treatment due to its high trade surplus with the US. Importantly, pharma products will not be covered by this initial round of tariffs. This is some relief to Ireland, in the short term – pharma drugs and active ingredients make up the bulk of the wider total of Irish exports to the US in the pharma/chem sector. It is still not clear whether some of the other elements that make up that total could get hit.
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Pharma, however, still be hit by special tariffs in the coming weeks. These are tariffs which are separate from the reciprocal tariffs announced on Wednesday and aimed at key sectors. A tariff figure of 25 per cent has been mentioned. So it may be a temporary reprieve. The prospect of higher priced drugs in the US market, or even drug shortage, may have given Trump pause for thought in terms of how tariffs are imposed on this sector. How this plays out will be vital for Ireland as pharma companies are big employers and taxpayers.
Meanwhile, a 20 per cent tariff is still a significant barrier for other Irish exporters to the US – and so the main sectors involved, which are food and drink, are going to face significant challenges. From Kerrygold butter - the second biggest on the US market - to Irish whiskey and spirits this will cause problems. Companies in a range of other sectors exporting to the US will also be hit. This will cost jobs and investment, unless it can be quickly negotiated away in talks between the EU and the US. The immediate implementation of these tariffs - they will fully apply from April 9th and a 10 per cent change will apply from Saturday - will be disruptive.
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The companies involved have to decide whether they can pass on the tariff increase to consumers – or others on the supply chain – or can absorb it themselves through lower profits. Some may find it impossible to sell in the US at all for as long as high tariffs remain in place. The answer will be different from company to company but this will, in time, have a cost in terms of jobs and economic activity in Ireland. And, crucially, to investment levels.
And the risk is of all this getting worse, as the EU and other countries respond and a trade war takes off. Ireland will argue for restraint here, but other capitals will want to respond strongly. In turn, Trump has promised to respond back to any counter measures – so the EU has a decision to make. Does it try to talk first? And if so, what is Trump looking for?
Meanwhile, massive tariffs on China - over 50 per cent - and some other Asian countries where US companies locate production, such as Vietnam - could lead to output being diverted to EU markets, providing new competition for Irish producers at home and in other export destinations. The EU may try to stop this happening - EU commission president Ursula von der Leyen said as much on Thursday - but in some cases at least this may be easier said than done.
The nature of the EU response carries specific risks for Ireland, as well as the general one of starting a trade war, with all the uncertainty that involves. EU tariffs would increase the price of imports in the sectors covered, hitting consumers and businesses importing products. And the European Commission has also threatened to use powers which would allow it to disrupt the business of US tech giants in the EU, many of which have their European base in Ireland. Some EU retaliation looks inevitable but how this develops is unclear. Whatever happens now, the world economy is going to take a hit and international growth will be lower this year and that is bad for us.
An additional complication for Ireland is that the UK has got a lower 10 per cent tariff level for its exports to the US, compared to 20 per cent for the EU. This gives UK exporters a competitive advantage. But, perhaps more important considerations could emerge if the EU responds back with its own tariffs on US imports. This could create complications for the Windsor Framework rules governing the movement of goods into the Northern Irish market and for cross-border trade. Northern Ireland’s position in both the EU and UK single market for goods could be a knotty complication here.
For the Government here, a couple of shorter term issues are important. One is trying to influence the EU response. The second is trying to look at the implications for the public finances - this will take time to play out, but income tax cuts promised in the budget may have to be put on hold, for a start. And the third is whether, as Ibec, the employers’ body has asked for, short-term supports are to be put in place for the companies which are immediately hit.
Looking at the wider picture, one key question remains unanswered. Does Trump see the tariffs as a short-term negotiating tool or a long-term revenue raiser for the US exchequer? He may be trying to have it both ways. By setting a so-called baseline tariff of 10 per cent, is he suggesting that this is a level he wants to see in place in the long term? And how does the EU respond to this in negotiations and in its retaliation?
Dangerous times lie ahead before this happens. Trump’s upheaval of the rules and norms of the international trading system has consequences that will not be easily undone through negotiation. And Ireland is at particular risk if last night’s events are the first shots in a damaging global trade war.
