Well at least we now know what round one of this trade war involves. After weeks of speculation, US president Donald Trump has unveiled his so-called reciprocal tariffs, applying to imports from all other countries.
While we tend to focus on Ireland, there is no doubt this is a high-risk attempt to remake the global trade system, which is going to cause chaos and disruption. We do not know how this will end up, but what is clear is that there will be no going back to the way things were before.
A Rubicon has been crossed – what we don’t know is whether this will lead to a full-scale, prolonged trade war or whether negotiations will undo some of the damage over time and remove some of the uncertainty which is now stopping investment in its tracks.
And while we focus on the impact of exports, this hit to investment will also be really significant economically, curbing growth and future job creation and ending a period when massive projects here from multinational businesses helped to drive the economy forward.
[ Five key tariff takeaways: From the pharma sector to uninhabited islandsOpens in new window ]
So how do we make sense of what has just happened and what is to come? What are the risks of what Minister for Finance Paschal Donohoe called the “dark and damaging scenarios” which he hoped could be avoided through negotiations with the US?
Let’s unpick the scenarios and see what they might mean for Irish businesses, households and the economy. But first, a health warning. In modern times we have never seen general tariffs at these levels – and so there is no experience to base forecasts off. We are heading, to a large extent, into the unknown.
1. The tariffs
The US has announced 20 per cent tariffs on EU exports. This covered most products, but pharmaceuticals – by far Ireland’s biggest export to the US – are excluded. For now anyway. So on the basis of what is announced so far, Ibec calculates that around 25 per cent of Irish exports to the US are hit by the 20 per cent tariff, which equates in cash terms to an annual figure of €3.6 billion. This creates significant problems for the food and drink sectors – Kerrygold and Irish whiskey and spirits in particular, and for a range of SMEs that have been helped by Enterprise Ireland to diversify into the US.
There were a string of warnings yesterday about the impact. The companies will have to calculate whether they can pass on the tariff to consumers or absorb it in their profit margins in order to stay in the US market. Typically, the cost might be spread along the supply chain, with the company, its distributors and consumers all taking a bit of a hit. Kerrygold survived 25 per cent tariffs imposed in late 2019 and lasting to mid-2021, though there was an initial hit to the volume of sales. However, consumer price sensititivy may now be higher.
[ Trump’s tariffs: what do they mean for Ireland and the economy here?Opens in new window ]
Initially, Ibec estimates a falling off in exports of between €4 billion and €6 billion due to the tariffs, out of total annual exports of goods of around €224 billion. Were the tariffs to be extended to pharma and thus cover all Irish exports to the US, the hit would rise to a more significant €16 billion to €23 billion.
Companies will also be trawling through the detail – as are senior Government officials. Carol Lynch, trade partner with BDO, points out that companies that import products from the US for further processing can deduct this from the base price on which the tariff is calculated, provided it accounts for 20 per cent or more of the total value. This may be relevant for sectors such as medtech- which appears to be included in the tariffs – and for pharma, if tariffs are extended to it, as the big US players typically import inputs from America.
In terms of the total economy, the Economic and Social Research Institute (ESRI) and the Department of Finance ran the numbers in a recent study. It had similar figures in terms of the hit from 20 per cent tariffs including pharma, estimating lost trade of around €18 billion.
In about four years, assuming the tariffs remained in place for a prolonged period, it said that employment in the economy could be about 50,000 to 80,000 lower than it would otherwise be – this would be a mix of jobs lost and other jobs not created.
After the announcement Dr Paul Egan of the ESRI, one of the report’s authors, said the high level of tariffs across the world included in the announcement could push the economic hit towards the higher end of their estimates, or even slightly above this. What he called a “very big shock” to the global trading system is now under way and a small trading country like Ireland will be caught up in this.
The length tariffs remain in place will be key. And the risk that they could go higher in a full-scale trade war remains a risk.
2. Pharma
Senior Ministers have said that they presume that pharma tariffs will follow before long. Previously, Trump has signalled that these could be applied at a rate of 25 per cent – the same applied on car imports.
Semiconductors, also excluded yesterday, may also be covered by special tariffs. While anticipating pharma will be covered, Tánaiste Simon Harris pointed out that there is now room for negotiation.
He has spoken to other countries with big pharma sectors and European Commission president Ursula von der Leyen is hosting a round table with big pharma companies with EU operations next Tuesday.
The EU will also see if the US is prepared to include this in its talks – and a string of the major companies have already announced big US investments in recent weeks, including a number with significant operations here.
For now, the big pharma players will watch and wait. Relocating production takes time and – while happy to pander to the US president with new announcements – they will do nothing major in a hurry.
Harry Harrison, international trade partner at PwC who specialises in the sector, said the expectation was still that pharma tariffs were coming and probably at a level of 20 to 25 per cent, though it said that the timing now remained unclear.
While reports say that big pharma companies have been pressing the Trump administration to phase tariffs in, rather than introduce them in one fell swoop, Harrison pointed out that despite similar lobbying from the auto sector, Trump still went for the big bang approach in this area.
There is a clear longer-term danger to activity and jobs in the pharma sector here. And as this plays out, we may also see the US pressing these companies to declare more profit in the US and less in countries like Ireland. This is not a straightforward exercise, but by accounting for different aspects of their product in different ways it could happen and the companies could even decide to relocate some of their intellectual property – key to their tax arrangements – back to the US from countries like Ireland.
Are the pharma companies in EU commission president Ursula von der Leyen’s sights when she conceded on Thursday that some companies were taking “unfair advantage” of the global trade system?
3. The wider impacts
We are understandably focusing on the impact on Ireland. But Trump’s tariffs cross the world, from major players like China to the uninhabited Heard Island and McDonald Islands in the Antarctic. But we should look in particular to Asia, with a US tariff of over 50 per cent on goods from China and mid to high 40 per cent on countries such as Cambodia and Vietnam, the latter in particular home to the overseas operations of many big US companies such as Nike.
Trade is going to be diverted across the globe and these Asian countries will be looking to the EU and elsewhere to substitute for sales lost in the US, creating new competition for EU producers. The European Commission is promising to act to stop a “flood” of goods entering the EU.
4. The EU reaction
The EU, according to reports yesterday, will leave around four weeks before responding to Trump’s reciprocal tariffs – though it remains to be seen if they will respond to earlier moves on steel, aluminium and cars in the meantime. The four-week window is to leave room for talks and to try to avoid the outbreak of a tit-for-tat trade war. Trump has said that he will respond to any retaliation against his tariffs – and the executive order he signed gives him scope to do this.
However, what concessions he might seek from the EU, or other countries, to reduce what has been announced is far from clear. The EU must judge whether Trump wants to talk now, or could only be dragged to the table with measures that seriously damage US companies selling to and operating in Europe. And there is politics at play here, too, with the EU not wanting to appear weak in the face of a bullying US president.
Ireland will be one of the EU countries urging that time be left for negotiation and exploration of whether tariffs could be suspended while these were under way.
Much may depend, too, on how the tariffs play in the US. Investment bank JP Morgan says they will add a hefty 1.5 percentage points to US inflation this year and the financial markets have taken fright. The White House – and Republicans in Congress – will be subject to massive lobbying from businesses and also, at a local level, from voters. The EU will hope this makes Trump more ready to compromise. But he has already warned of short-term cost and disruption in pursuit of a long-term goal, so it remains to be seen how this plays out.
[ Big Tech raised among European tariff response optionsOpens in new window ]
The darker scenarios pointed to by Donohoe would be those involving a full-scale and prolonged trade war. Barriers to imports into the US would rise further and EU tariffs would increase costs to consumers and hit supply chains. A particular worry to Ireland is that the EU could use measures agreed during the last Trump presidency – the so-called anti-coercion instrument – which could target the big US tech companies in Europe, many with their international bases in Ireland, through a range of possible policies which could be highly disruptive for them.
Meanwhile France has said the EU should introduce a special EU-wide digital services tax on these companies, which would enrage Trump and cost Ireland lost tax revenue, as some of the money currently paid here would go to other EU countries.
5. The Irish Government
Domestically the Government faces a range of short-term issues. Ibec’s chief executive Danny McCoy has been out arguing for short-term supports to businesses to help them keep employees on – much as happened during Covid-19. Finance Minister Donohoe did not rule this out, but said scope was limited and pointed out that the Government could simply not step in to compensate firms on an ongoing basis for lost markets in the US. Some compromise may be found here and much will depend on whether the EU and US look to be heading for negotiation – or for escalation.
Beyond that, the Government will be trying to figure out the wider economic impact – the Department of Finance and the ESRI are to update their predictions here, but they still face the same uncertainties as the rest of us in terms of how it will play out. By summer, at the latest, the Department of Finance will have to update its forecasts for the public finances.
Donohoe has already warned that income tax reductions planned in the budget could be at stake – but in a worst-case scenario bigger issues may be at risk in terms of future spending plans.
This is impossible to call and may take time to play out. But the risks are clear. Trump wants investment to return to the US and is willing to upend the world trade system to achieve this. As a key home for US investment in the EU, this is bad news in the longer term for Ireland. And the wider hit to the world economy also poses a significant threat.
It is impossible to put numbers on this, but the economic world has changed and Ireland has to adapt.
