The United States and European Union have been trying to finalise a framework for a trade agreement, with reports suggesting that significant progress has been made.
The date for publication of any draft deal is unclear. There seems to have been haggling over late details while the attitude of Donald Trump to what is appearing on the table is not clear, though he has made some more soothing noises about the EU attitude in recent days.
The EU will want this sorted before Monday when EU reciprocal tariffs to those already applied by the US on steel and aluminium are due to come into force.
A key part of understanding the implications for Ireland is that the US president’s tariff plan is moving on two broad tracks.
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One is the so-called reciprocal tariffs, the threats to impose generalised tariffs in retaliation for alleged “unfair” treatment of the US. These were unveiled on “Liberation Day” in April, but then rowed back after a negative market reaction and replaced by a general 10 per cent charge on most imports into the US.
Trump has issued a stack of new threats in letters this week based on trade or other issues, such as the 50 per cent charges proposed for Brazil this week because of its treatment of its ex-president Jair Bolsonaro.
We should note, in passing, that the US president’s legal right to impose these general tariffs without recourse to Congressional approval is facing legal challenge – and the rationale for the Brazilian tariffs, in particular, would appear to go well beyond any presidential powers.
The second track – the one vital to pharmaceuticals, which are still tariff-free – is based on specific sectors, the so-called section 232 process. This is based on Section 232 of the US’s Trade Expansion Act of 1962 which grants the US president authority to impose import restrictions if an investigation by the Department of Commerce determines that such imports threaten US national security.
The report on the investigation into the pharma sector has been in the works now for months and US commerce secretary Howard Lutnick said it would be published in late July. Tariffs in this area appear more underpinned legally.
The EU/US talks are mainly concerned with the reciprocal tariffs, but will also touch on key areas of the section 232 tariffs, probably particularly the 25 per cent car tariffs already in place.
So what are the key points here for Ireland and the vital concerns to watch out for?
1. The good
The signing of a framework deal would head off – for now anyway – the risk of Trump imposing higher tariffs on a wide range of imports from the EU to try to get his way. For Ireland, as a big exporter to the US, this is the main positive.
Initially he threatened the EU with a 20 per cent tariff and has lately mentioned a figure as high as 50 per cent. While no one believes tariffs at the higher level would last for any period, the risk of not doing a deal now is significantly higher tariffs, inevitable reaction from the EU with tariffs of its own on US imports and a damaging trade war of uncertain duration.
As Ireland is the EU state most reliant on the US market, it would be severely hit in this scenario, which could even open up the risk of EU action aimed at US digital technology companies, many with their European bases here. This would pose an immediate threat to growth here. So the first thing to watch is whether a deal actually emerges.
Even if it does, it will be a framework for future negotiation – running to just a few pages – similar to the deal done with the UK. It will be far from a completed trade deal in the traditional sense and will not close off the risk of future US action either on general – the so-called reciprocal – tariffs, which apply to most products, or the special sectoral tariffs.
Sources suggest the emerging deal – if it can be got across the line – will copper-fasten the 10 per cent in tariffs already in place on most EU products entering the US and will contain some measures to reduce significantly the special 25 per cent tariffs applying to cars imported into the US, a big issue for the German car industry. This could fall significantly, or there could be quotas allowing a certain amount of product in at a lower cost.
Aviation and spirits may also get special treatment – which would also be good news for Ireland – as the US tries to ensure its exporters to the EU get a good deal as well.
It remains to be seen if anything is said about threatened special tariffs on pharma, though most likely these will not be dealt with substantially until later. Close attention will also be paid to how far Brussels goes to meet the demands from Washington to reduce the regulatory barriers faced by US exporters.
Given the deal will be a framework, trouble could still brew up in future as negotiators go further into the detail of different areas. Uncertainty will thus roll on in some form.
In turn, says Simon McKeever, chief executive of the Irish Exporters Association, this is damaging confidence and slowing investment among foreign investors and Irish businesses. The vital issue is to reduce the uncertainty caused by erratic US trade policy.
2. The bad
We wait to see if any Irish export sectors are particularly hit. Remember that a key part of the draft agreement looks set to be accepted by the EU that the 10 per cent tariffs put in place during spring will remain. This is already affecting Irish exporters in areas such as food, drink and medical technology products and it is a significant hit to their competitiveness.
One key example is worth looking at: butter, where Kerrygold has won a premium place in the US market, feeding back income to Ireland and Irish dairy farmers.
Before the initial Trump tariffs were imposed, butter imports into the US were already subject to a roughly 16 per cent tariff in the US market. The additional 10 per cent tariff imposed recently brings the total to 26 per cent.
And worryingly for Ireland, as part of the trade talks, the US administration has been looking for more. Apparently because the EU would not agree to remove regulatory restrictions on US food imports – in areas like chicken and beef, for example – Washington has been pushing for a higher tariff on EU food imports. Reports suggest that the US has been seeking a figure of 17 per cent – which, added to the 16 per cent rate in place, would bring the total butter tariff to 33 per cent – but EU negotiators were pushing back. This will be a key area to watch if the deal emerges.
Gerard Brady, chief economist at Ibec, says: “Even if there is a framework agreement there may be material challenges for sectors such as the food and drinks industries, where we have already witnessed significant disruption under the status quo and where some products have existing high tariffs and face the prospect of tariff stacking”, where new tariffs are added to those already in place.
While the value of exports in these sectors is dwarfed by massive pharma exports, they do have significant benefits for the domestic economy and for rural areas.
3. The (potentially) ugly:
Trump’s threat to impose 200 per cent tariffs on the imports of pharma products into the US in a year to 18 months’ time was part of a blizzard of pronouncements this week, many in time likely to be forgotten.
But for Ireland, while the detail may be debatable, there will be concern about the direction of travel.
The US president is determined to attract pharma investment back to the US and ensure that more product for the American market is made at home. More than 40 per cent of the value of exports from the pharma sector here goes to the US market, supporting 70,000 jobs and billions of euro in tax revenue.
There is an economic rationale for Trump’s strategy, of course, but also a security one. The US wants to set the rules for the supply chain for key pharma products, making what it can at home, but also controlling the ownership of what is made elsewhere and is particularly sensitive to Chinese involvement.
In the recent trade deal with the UK, commitments to give preferential treatment to the UK when the US introduces pharma tariffs was made clearly contingent on the UK giving the required promises on its supply chains.
What these would be were not spelt out, but the scope of US pharma concerns will soon become apparent when a major report on the issue drawn up by the administration under the section 232 process is published, probably in late July or early August.
In terms of the Irish pharma sector, this will be a key moment, as presumably the analysis of the issue will be met with some policy indications about what the administration plans to do.
Trump’s outburst this week appears to suggest a strategy of giving pharma companies time to relocate more production to the US, before being hit by higher tariffs. Whether tariffs at a lower level might be applied in the meantime is unclear.
These section-232 tariffs will have been discussed in the wider EU/US trade talks, as well as the general reciprocal tariffs.
The best that Ireland could hope for on pharma is something similar to the UK deal, which was a promise of (unspecified) preferential treatment in the pharma area, subject to security of supply conditions being met. And with pharma companies across the EU having a range of different supply chains, this could be a difficult area for the EU to give general reassurances.
So it remains to be seen if anything significant is said about pharma if a deal does emerge. It is also worth noting that as well as Ireland, other EU countries, including Germany, are big pharma and chemical exporters to the US.
Either way, the main action will come in the section 232 report on the sector which is believed to look in detail at the production and supply chains of the big pharma players and the scope to move production back to the US.
The industry has told the administration that this kind of relocation takes time – typically five to six years – and that shortages of skilled staff and existing spare capacity is a big issue. They have warned that high tariffs risk disrupting supplies and pushing up prices to US consumers – separately, Trump is also pushing for lower costs in the US market. This would likely mean higher prices elsewhere.
Many major firms have married these warnings with promises to invest heavily in the US – though it is difficult to gauge how much of this was planned anyway.
The reaction of Irish pharma firms to the tariff threat has been to ship vast amounts of high-value product – finished drugs and valuable active ingredients – to the US market to try to get in before any new charges. While exports fell back in April from a March record, sources believe they have remained high since, as uncertainty lingers on. In turn this uncertainty is limiting investment as US firms wait to see how this all plays out.
It is hard to see Ireland emerging unscathed here. In a best-case scenario, Ireland would be accepted as a trusted supplier to the US market and part of an accepted supply chain. Big pharma companies will have argued in their submissions to the section 232 report that Ireland was a vital cog in their supply arrangements, but it is unclear what attitude the administration will take to this.
As well as the threat to investment there to serve the US market in the long term, tariffs, or threats of tariffs, on pharma would encourage big companies to change their pricing practices. They would have an incentive to value goods entering the US at a lower level, cutting the price paid to the Irish operation and leading to less profit and corporate tax in Ireland. With the pharma sector one of the two big contributors – along with tech – to corporation tax, this is a key issue for Ireland and one over which question marks will hang for quite some time.
So even if an EU/US framework deal is done, uncertainty will linger on whether it can be turned into a wider negotiated plan – and on what emerges in the vital area of pharma, where the talking with Europe and the industry is set to continue for months.