The world’s economic policymakers, Ireland’s included, are navigating a bewildering and exceptionally misguided change of course by their counterparts in Washington DC. The White House has opted for a set of over-reaching economic policy demarches that are likely to weaken its dominance in economic and financial spheres, as well as damaging the economies of its trading partners, including Ireland.
Thanks to the global, open, rules-based system that it has promoted and steered since the second World War, the US economy has been growing much more quickly than Europe’s (though distributing the benefits very unequally). But now Donald Trump’s administration has switched to a restrictive stance, relying on bilateral international negotiations backed up with threats.
This abrupt change of policy orientation is unlikely to be successful. For one thing, the United States is no longer the unchallenged hegemon of a unipolar system: its rivalry with China is incomparably more closely matched than a quarter century ago.
As a result of the barriers with which it is fragmenting the global trading system, the administration is discovering the vulnerabilities of an isolationist US economy as it scrambles to find substitutes for numerous inputs that it is not well-positioned to mine or manufacture at home quickly or at a reasonable cost. The challenges are becoming increasingly evident as container ships return half-empty across the Pacific.
Furthermore, growing corruption in circumvention of the prohibitive tariffs is inevitable.
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US dominance in finance is also being undermined. The global financial system has long been built around the dollar, giving the US government the “exorbitant privilege” (as former French president Valéry Giscard d’Estaing called it) of much cheaper financing for its persistent deficit, thanks to the dollar being seen as a safe haven. But the chaotic actions and pronouncements from the White House have shaken financial market confidence, leading now instead to a retreat from the dollar into other assets. Creditworthiness is built slowly, but lost quickly: if there is much more of this confusion, the reputation of US treasury securities may not fully recover, adding permanently to the cost of financing those large deficits. This could open financial opportunities for Europe, but more immediately likely is a period of exchange-rate turbulence. Already in just eight weeks in March and April, the market value of the euro rose from $1.02 to $1.15.
Other new dimensions of US policy are equally damaging to its economy. Large-scale deportation of immigrants, as threatened by the administration, will constrain US economic activity and increase prices. Undermining university autonomy and research programmes will weaken its academic leadership and hence the science-based innovation that has been an essential ingredient in the country’s economic advance. Further aspects – for example, the suspension of measures protecting biodiversity and combating climate change, as well as issues relating to military security and political governance more generally – are even more alarming for the whole world.
There will be no easy return to the status quo ante. If the policy flip-flopping is intended to generate uncertainty as a negotiating tactic, this is bought at the price of long-term heightened market suspicion. By violating long-standing norms, the White House is effectively giving the green light to further and different violations by future incumbents. An apparent fragility in the much-vaunted restraints provided by the US constitution’s separation of powers is thus revealed. Expectations and behaviour on all sides will inevitably respond. Even if the retreats from the worst of its excesses, much damage has been done, both to the US and to the economies of its trading partners.
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On a realistic assessment, many of the objectives declared by the US president (not least the annexation of Canada) are out of reach. Several are mutually inconsistent. It is therefore unclear where the kaleidoscopic path of current US policy is headed.
The bilateral economic negotiations are being accompanied by a sharp increase in the use of varying forms of coercion including linkages to unrelated areas. Military assistance to Ukraine requiring access to minerals; a tariff reprieve for Japan only if it promises to hold US bonds; unspecified trade restrictions against Denmark unless it cedes some control over Greenland. Such linking of issues weakens the hand of a small country negotiating with a powerful entity.
On its own, Ireland holds few cards in terms of economic weight: only through the EU can that be brought to bear in a collective way. Ireland does have some soft power, based on the historic connections. But the fact that Ireland has had such good friends in the United States over the years seems little protection now. Indeed, close allies have been among the countries most affected by the tariffs. Less so for Ireland, but only because the tariff regime for pharmaceuticals – by far Ireland’s biggest export to the United States – has not yet been finalised. Indeed, US pharma companies have accelerated their shipments from Ireland to get them delivered in advance of new tariffs (probably triggering a final boost to Irish corporation tax receipts from that sector).
Tariffs are not the only threat to Irish tax receipts, and in any case are a matter for the EU. There is the wider specific Irish vulnerability to changes in the US corporate tax regime – though these would have to be voted through Congress and are not fully controlled by the White House.
The centrality of the EU as the foundation of Ireland’s economic relations is brought into sharp relief. That is not to ignore the need for greater governmental vigour in improving the social and physical infrastructure for supporting national economic prosperity. And it does not mean turning our back on the US or on the US-based firms that have established here. But it does mean contributing wholeheartedly to the common stance that will be taken by the EU. This applies both in economic negotiations with the Trump administration and as the EU attempts – as it must – to fill the leadership gap created by the US retreat from climate, security and other global public challenges.
Patrick Honohan was governor of the Central Bank of Ireland from 2009 to 2015
