Donald Trump has dubbed Wednesday as “Liberation Day” for the US economy, when he will announce a range of tariffs on imports from other countries. It is worth looking at what will happen and what it might mean.
What will Trump announce?
We are promised an event in the Rose Garden in the White House – due at at 9pm Irish time (it had originally been scheduled for 8pm) – when he will outline a package of tariffs on countries selling their exports into the US. The White House said on Tuesday that the tariffs would come into effect on Thursday, April 3rd, though this remains to be confirmed.
These tariffs are special taxes which would be paid as goods enter the US market. Trump says other countries have been taking advantage of the US for years and this is his way of trying to rebalance world trade.
He talks at length about the trade deficit in goods which the US has with other countries – meaning that the US imports more than it exports – and believes tariffs can change this.
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Who pays a tariff?
It is paid by the company importing the product into the US. However, typically a lot of it is passed on to consumers, so prices will increase in the US.
Tariffs will also make it difficult for companies exporting to the US. If all the cost cannot be passed on to consumers, they have to accept lower profit margins. In some cases selling to the US may not make economic sense any more.
What tariff do we expect on the EU?
Last week the European Commission said it expected a tariff of roughly 20 per cent on European Union (EU) exports into the US market. So on every sale into the US market of $100 (€92), a $20 tariff, or special tax, would apply.
This would be a high tariff level unprecedented in modern times and significantly disruptive to trade. Exactly what will be announced is still unclear – and there have been contradictory indications from the White House. But the EU is certainly a target of Wednesday’s announcement.
Indications from the US on Monday suggested that Trump’s team may now be planning tariffs of around 20 per cent on imports from pretty much all other countries into the US. But as the announcement approaches some reports suggested that tariffs would vary between 10 and 20 per cent depending on countries and different products. We will have to wait and see but if the administration wants to introduce the tariffs quickly, then the formula will need to be pretty simple.
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What about Ireland?
The Government believes that Ireland will be covered by the general EU tariff, rather than Trump trying to impose different tariffs on different EU countries.
There had been earlier suggestions of Trump identifying 10 or 15 countries – those with which the US had the biggest trade deficit, of which Ireland is one – for high tariff levels.
The indications in recent days, however, have veered more towards a simpler system. A 20 per cent tariff on all Irish exports to the US would be costly, hitting the food, drink and pharma sectors particularly. If specific sectors are picked out for higher tariffs, these could bring further trouble, depending on what levels are set.
A host of studies have shown that – because of its close investment and trading relationship with the US – Ireland is the most exposed country in the EU to Trump’s tariffs.
And what about the pharma sector?
Pharma is the biggest Irish export to the US- by a distance. It is likely that the general tariffs announced on Wednesday will apply to pharma and Trump has also threatened special tariffs on pharma as well, mentioning a figure of 25 per cent.
These special tariffs were not expected to be announced on Wednesday and it is not clear whether they will apply cumulatively, in addition to the general tariffs. Whether this changes if there is a move to pick out different sectors we will just have to wait and see.
Ireland is exposed here because of the large amount of jobs in the pharma sector and the exports from US multinationals based here back to the American market. Trump says this production should take place in the US and wants the companies to move back.
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A movement of pharma investment and jobs back to the US is a danger for Ireland – though new plants take years to build. In some cases companies may have spare capacity in existing US plants to which they can move production from Ireland.
The other danger for Ireland is that because of the tariffs, or possible US tax changes, the big companies arrange their affairs so they pay more tax in the US and less in Ireland. As big pharma is a major contributor to Irish corporate tax this is potentially costly to the exchequer.
What will the EU do?
The EU is sending two signals to Trump – one that it wants to negotiate to see can a deal be reached to remove the tariffs. And the second that it is prepared to retaliate with tariffs of its own on US imports.
Ireland will try and press for restraint and negotiation. This is because we are most exposed if a full-scale trade war breaks out, in which the EU responds to Trump – and then Trump responds back by hiking the tariffs he has already introduced.
This could lead to a hugely disruptive period where tariffs and threats of tariffs come and go. One additional danger for Ireland is that the EU could target US digital tech investment in Europe as part of its retaliatory measures and, as Ireland is the European home for many of these firms, this could be another hit to Irish jobs and taxes.
How will the Irish Government respond?
It will try to influence the EU reaction and also make its case in Washington, though the European Commission will do any actual negotiations for the entire bloc.
Ministers are already warning about threats to jobs and tax revenue and the Government will have to redo its budget sums. Promised income tax cuts in the budget are likely to be the first thing to go. More fundamental changes may be needed in the years ahead if corporate tax takes a big hit.
A key issue which no one can answer is how long the tariffs will last or whether they will be in place in the longer term.
If they stay for a few years, work by the Economic and Social Research Institute (ESRI) and Department of Finance showed there would be 50,000 to 80,000 fewer jobs in the economy in a few years time than there are now. Supports could be put in place to protect businesses and their employees for a period.
Either way, the trading relationship with a key partner is changing fundamentally and this will make it much more difficult for the Industrial Development Authority (IDA) to attract future investment. As this plays out, the future of a key part of Ireland’s economic model is likely to come into question.
