Seven years ago, the National Treasury Management Agency published a paper on Ireland’s economic exposure to the US. It looked at the State’s outsize reliance on US investment and trade for jobs, investment and tax. At a time when we were all worrying about Brexit, David Purdue, the agency’s chief economist wrote: “The withdrawal of US investment or a sharp slowdown in trade from protectionism could have profound impacts on the long-term growth of Ireland and could necessitate a shift in Ireland’s business model.”
At the time, we were seeing the first signs of the pull-back from the globalisation trend that had swept across the world since the 1980s. Now, it seems, this has reached its peak. Donald Trump has declared “economic independence” day – the sense of this is that the US is pulling away from the rest of the world in economic terms, much as it is in the security arena. To what extent the US president can reverse the globalisation of US business is another matter.
We are still trying to work out what Trump is actually up to – beyond running a kind of relentless reality TV show. Is Trump the dealmaker playing for concessions from other countries, or trying to remake the world and create a new stream of revenue for the US exchequer with tariffs paying for lower taxes elsewhere? Does he even know?
Either way, his administration has been hollowed out by recent personnel cuts, and lacks any serious strategy. He faces the real risk of this blowing up in his face, as the US economy and stock market tank.
We may hope that the pressure from a falling stock market, higher prices and job losses in the US force him to pull back and make him more willing to accept deals in return for lower tariffs. And it might. But one thing needs to be understood. While you can come up with a range of scenarios, there will be no going back to the way things were. April 2nd was a turning point. Trump’s policies are not an outlier, but a continuation of a protectionist trend in US politics stretching back to his first term – and evident to a greater or lesser extent elsewhere in the world. The US has changed, and this is important for a country such as Ireland, which has hitched its economic wagon to it. And the old world trade order is being upended, with the World Trade Organisation on the sidelines and Europe facing an influx of imports from Asia.
The Irish economy is now going to slow noticeably. Uncertainty has a cost, creating a kind of economic paralysis. Big investments from foreign and domestic businesses are already on hold, and this is trickling down through the economy. People are, entirely correctly, waiting and seeing. And they won’t get much clarity in the short term.
What we don’t know is whether, say, a year from now, Ireland will have taken a more serious hit from a big EU-US trade war or a serious dip in corporate tax revenues. These are all risks that needs to be prepared for. Early analysis from the ESRI, Ibec and Davy stockbrokers points to short-term costs from the tariffs imposed, but suggests a level of damage that, while very difficult for the sectors hit, could be contained, or at least manageable.
On the basis of what has happened so far – calculated by Ibec as 20 per cent tariffs on one quarter of the value of Irish exports to the US – this is probably the case.
But what no one can model is what comes next. In the short term Ireland will worry about the pharma sector being targeted as well, increasing the risks to jobs and corporate tax. There is the risk of a full-scale trade war, with all the unpredictable turns this could take. If this happens, you don’t have to look too far for things to worry about – Trump applying higher tariffs still as a trade war builds, or a big US recession , or the EU insisting that the activities of tech companies in the EU be targeted as part of the response to the US. The wider risk of a global slowdown and trade dislocation could even end up being a bigger threat to Ireland than the specifics of whatever Trump does next.
Government Ministers can put on their serious faces and call for EU restraint and negotiation with the US, but we may have little enough influence in the shape of EU reaction and even less sympathy from many other member states.
For now, expect things to slow. The Irish economy has been like a pressure cooker in recent years, with strong growth leading to shortages of housing and infrastructure, creating job shortages and pushing up house prices and rental demand. Some of this steam is now going to be released.
Nervousness in tech and pharma may well lead to asking prices falling at the top end of the housing market, which would be no harm given their ridiculous levels. The slowdown in investment will take a toll on economic growth – the IDA pipeline of potential projects may remain, but few will progress. No one is going to commit. This investment impact on the wider economy is likely to be greater than the hit to exports from what has been announced so far – but of course the export threat will build if pharma is pulled in, or a trade war starts.
This will be more than a speed bump in Ireland’s economic progress. Let’s not even mention the “soft landing”. But what we can’t call right now is the seriousness of the hit that is coming. Can the Irish economy avoid its traditional roller-coaster of going from boom to bust? Can we get through this with a few difficult years, but no big downturn?
Certainly the State starts in a strong budgetary position, with the exchequer in surplus, a large cash pile in reserve and something like full employment. Households are in a much stronger financial position than in 2008. What we don’t know, on the other side of the equation, is the scale of the trouble approaching.
As well as dealing with this short-term threat and uncertainty, Ireland needs to start thinking of the long-term. The NTMA was right back then to point to the risks of all the eggs in one basket, though the economy has had an amazing investment run in the meantime.
If, like an oilfield slowly running out, this large source of jobs and revenue to the exchequer is now under longer-term threat, Ireland needs to think about its future economic model and what it needs to do to get there. The US will still be an important part of this. So will building our competitiveness through actually delivering vital infrastructure. But just hoping that the tariff trouble will pass and we can go back to relying on the arrival of US tech and pharma investment year after year - and ever-rising corporate taxes - does not look like a credible strategy.
