As a result of the US election, the world economy faces a particularly uncertain future over the next four years.
Trade arrangements between the US and all other countries are likely to be torn up. The latest pronouncement from the incoming president promises that next year the US will unilaterally break the trade agreement between the US, Mexico and Canada, imposing tariffs on imports from both these neighbours.
While Donald Trump also plans punitive tariffs on trade with all other countries, especially China, he has a track record of unpredictability. Thus things might turn out less disruptive than one may fear today, but it is best to be prepared.
The largest US excesses of imports over exports are with China, the EU and Vietnam. Along with China, Europe is likely to be first in the firing line for tariffs, while the incoming US administration has taken particular note that Germany, Ireland and Italy have big trade surpluses with the US. This could see Irish exports being targeted in a trade war.
However, while Ireland exports much more goods (especially pharmaceuticals) to the US than we import, this is almost balanced by the US trade surplus with us in services. The new US administration is taking an illogical approach to international trade, concentrating on goods while ignoring the trade balance on services.
While the EU could choose to take US tariffs on the chin, that might appear wimpish to a macho Trump, and a signal to encourage further predatory behaviour
Ireland is particularly vulnerable to tariffs on pharmaceutical exports, which would be designed to force the companies involved to switch to producing the relevant drugs in the US, at the very least for the US market. Because of the way drug companies specialise production lines, in quite a number of cases the world supply of particular drugs is produced in Ireland. For example, the world supply of Botox is manufactured in Westport. Relocating production to the US will take a number of years, not least because US regulatory approval for a new plant will take time. Thus the loss of production in Ireland would not be instantaneous.
In any event, the possibility of retaliatory tariffs on imports of pharmaceuticals from the US may ensure that the supplies of the relevant drugs for the rest of the world will continue to be made in Ireland. Nonetheless, the next few years could be nerve-racking for Ireland until a new pattern of world trade is established.
Given a scenario where the US imposes tariffs on a range of exports from the EU, from Irish pharmaceuticals to German cars, retaliatory tariffs may be imposed by Europe. That would be done by the European Commission, which has already signalled that there would be a measured response to any arbitrary action by the US on tariffs. While the EU could choose to take it on the chin, that might appear wimpish to a macho Trump, and a signal to encourage further predatory behaviour.
If the EU opts to retaliate, one of the most effective tariffs it could impose would be on US exports of aircraft (mainly Boeing). Last year the US exported more than €33 billion worth of aircraft, of which €13 billion was to the EU. By contrast the EU, primarily Airbus, exported €43 billion of aircraft, only €5 billion of which went to the US. Given the balance of trade, the effect of a 20 per cent tariff on imports of aircraft would have a much bigger long-term effect on Boeing than Airbus.
Because both Boeing and Airbus have full order books until 2030, it might not have an immediate effect on sales. However trade tariffs would seriously discourage Europe, and possibly other countries, from continuing to rely on Boeing in the longer term.
In the short term the issue of who would pay the tariffs would depend on the nature of the contracts. If Ryanair, a big buyer of Boeing aircraft, had contracted for delivery of the aircraft in Europe at a fixed price, then Boeing would have to pay the tariffs. If that was not the case, big Boeing customers, such as Ryanair, would, of course, seek a better price to cover the cost of a US-initiated trade war.
Extensive economic research shows that imposing tariffs on a swathe of imports to the US will be bad for the US economy, and also bad for most of the rest of the world. The US itself would suffer more than other countries from the resulting rise in import prices, the disruption to supply chains and the losses from retaliatory higher-tariff barriers on US exports. Other countries will also be damaged. The outcome from such a trade war will be a lose-lose situation.
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