Donald Trump’s move to impose tariffs on Canada, Mexico and China is likely to be the first shot in a wider global trade war, the precise shape of which is still not clear. And how this plays out has big implications for Ireland, threatening to disrupt bilateral trade with the US but also hit the flow of international trade and investment which is vital for this State.
What we have learned this weekend is that Trump is going to push ahead with the tariff agenda outlined during his election campaign, rather than holding it out as a threat to try to get his way in other areas. It was not all just bluster.
The tariffs, if sustained for any period, will hugely disrupt trade with Mexico and Canada and threaten to push both into recession. Both are responding with their own tariffs to the punishing 25 per cent charge Trump has put on their imports, and China will also retaliate.
Without outlining details, Trump has said that the EU is also on his hit list and that action here would be “very substantial”. This is now an imminent threat to Irish growth and employment — and down the line to corporate tax revenues.
Trump’s rationale is that the EU has taken advantage of the US, does not buy enough of its outputs and thus the US has a big trade deficit with the EU.
A significant contributor to the US deficit in trade with the EU is Ireland, mainly due to the large production here of pharma and chemical products for the US market.
Ireland’s exports to the US in the first 11 months of this year were more than €67 billion, compared with imports of just €20 billion. Some 80 per cent of these exports are pharmaceuticals and chemicals. For 2024 as a whole, Ireland’s trade surplus with the US is likely to be about €50 billion. The huge production of pharma for the US market in Ireland and the large tax payments of these companies here have already been highlighted by Trump himself and senior figures in his administration.
If there are tariffs on these Irish exports, it would hit the sales and profitability of the companies involved and — if sustained — this would have implications for jobs here. Potential US tax changes are another source of threat.
We don’t yet know what happens next. A North American trade war is kicking off, which — if it continues beyond a few days — will be hugely disruptive. A wider global trade war may follow as China respond and the EU does likewise to tariffs imposed on it.
Trump’s rationale is to demand better controls on migration and drugs — particularly fentanyl — by Mexico and Canada. He is also targeting China’s role in the fentanyl supply chain. This has allowed him to claim a national emergency and thus avoid getting Congressional approval for the tariffs, though he could still face court challenges.
The extent of presidential powers to impose tariffs without going to congress is likely to be a recurring issue, and Trump’s recent decision to seek reports on wider trade issues is likely designed to give him cover for wider moves in the months ahead on the EU and elsewhere.
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Trump’s senior advisers, including treasury secretary Scott Bessent, argue that tariffs can be imposed without pushing up US inflation. Common sense and mainstream economic thinking suggest otherwise — they do, after all, put a charge on imports much of which is likely to be passed on to the US consumer. So there will be pushback in the US from consumers and businesses. Moreover, Wall Street’s reaction will also be closely watched, with investors likely to take a negative view of the prospect of a trade war.
Ireland will seek to lobby and gather information on what may happen concerning the EU. Worryingly, in a press conference on Friday, as well as targeting the EU, Trump mentioned the pharma sector as one of his potential targets. Tariffs here could increase the price of drugs to the US government, and would be against WTO rules, but the president could see the prize as being the relocation of some production — and also of intellectual property assets tied to corporate tax payments — from other countries, including Ireland, to the US.
The fact that the US pharma sector exports back to America from Ireland — and that it arranges its affairs to pay tax in Ireland based on profits from research, much of it ultimately done in the US — creates an exposure for the State.
Now that we know that Trump’s tariff threats are not just bluster, a worrying period lies ahead for the new Government as it tries to navigate what could be very tricky waters.
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