We’re about to be caught in the crossfire of a Trump trade war

Are we inching towards an international trade war? On Monday, President Trump extended an exemption from tariffs on steel and aluminium for "allies" including the EU, Canada and Mexico for 30 days. However, there was a warning from Washington that this was the " final" extension: in other words, tariffs would be imposed, if some deal cannot be struck over the next month.

The prospect of trade conflict is one aspect of a nasty cocktail of uncertainties that could hit Irish growth over the next couple of years. Brexit and international tax reform are the two other obvious dangers. There are always threats, of course, but these factors are well beyond the normal ebb and flow of international commerce.

The risk of widening trade tensions is real. It will not be easy for President Trump to reverse out of the cul de sac in which he finds himself. The EU cannot be seen to make any big concessions to Washington over the next month. Brussels has said it will not negotiate “under threat”, though some countries – notably Germany, whose car industry is a big focus for President Trump – seem to want to explore the options.

Can some formula be found to save face for both sides and avoid a US versus EU battle? Having made the initial move, Trump will find it politically difficult not to carry it through unless something is “given.” And we have seen with the US and China how quickly this can escalate.

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Tariffs and tensions

The Trump administration’s announcement of the steel and aluminium tariffs in March was quickly met by Chinese tariffs on US imports, Subsequently, tensions have ratcheted up again. The US announced tariffs on $50 billion of other US goods in a separate dispute over allegations from Washington that Beijing allows Chinese companies to pirate intellectual property from US firms. These tariffs have yet to be imposed but China has already outlined how it would respond and President Trump has threatened a further counter-strike.

The risks now is of a similar tit-fot-tat between the US and the EU over the summer. Brussels has published a list of US products on which it would impose tariffs if the US move on steel and aluminium goes ahead, ranging from blue jeans to bourbon. Trump might well respond in kind.

“Trade wars are good and easy to win,” Trump famously declared a couple of months ago. His action is based on the familiar accusation that other countries are taking advantage of the US, as shown by large trade deficits with the likes of China and the EU.

Productivity

Economics suggests otherwise, pointing out that nobody wins a trade war that reduces productivity, increases prices and hits economic growth. There are also fears that a 21st-century trade war could disrupt global production chains that have developed rapidly in recent years and hit the spread of technology.

Tariffs are special taxes on imports and thus reduce trade. As well as their direct impact on exports and imports, a trade war could also damage economic confidence and hit investment, at a time when there are already signs of some slowdown in the EU and the UK and fears that the US economic recovery cannot go on forever.

Trying to predict what Trump might do is well nigh impossible. But the danger, as with the Brexit talks, is that political showboating wins out over economic common sense.

Ironically, Ireland's only direct exposure to the steel and aluminium sectors is the Aughinish Alumina plant in Askeaton,Co.Limerick, which has been in the news because of separate US sanctions directed at Russian businessman, one of which is a major shareholder in the Shannon plant's parent.

The real danger for Ireland lies elsewhere. Conceivably, some sectors here could be caught up directly, were – for example – the US to impose a new round of trade sanctions on the EU. Some sectors may also get opportunities – for example pigmeat producers may replace US producers in the Chinese market. But the threats in these situations tend to be a lot more direct and wide-ranging than the opportunities.

Irish concern

As with Brexit, the risks are both sectoral and general. Perhaps the biggest Irish concern would be anything that undermined the overall growth in world trade and threatened the associated investment flows. As one of the world’s more open economies, Ireland’s economic model is based on free flows in both trade and FDI.

Trump’s economic nationalism fires off far and wide. Remember that Ireland was one country identified by the US as one with which it has a “chronic” deficit in goods trade – amounting to $38 billion last year – partly due to pharma products manufactured here and sold to the US. In services, the shoe is on the other foot, with a large US trade surplus with Ireland, but the Trump focus is on trade in goods and the impact on American factories in his heartland.

As a country reliant on the US for both trade and investment, we are exposed if trade tensions grow, particularly if you add the risks from US tax changes for future multinational investment. We must hope that Trump is prevailed upon to focus his trade fire elsewhere and that tensions with the EU do not bubble over into a trade war. The next couple of months will tell a lot.