Trump and Juncker have declared a trade ceasefire. Let’s see if it holds

Trade wars don't sound nice – and they aren't. So no wonder the stockmarkets rose when US president Donald Trump and European Commission president Jean-Claude Juncker declared peace in our time on trade this week and promised to work together to improve things. Of course, we wait to see whether the mercurial US president, who had declared before the meeting that "tariffs are great", will remain content to go along with talks that will drag out for some time. Consumers and businesses will hope that he will. And here's why.

Trade wars mean either higher prices for consumers or lower profits for businesses. Or generally both. Economists are – unusually – almost united in declaring that they hit economic growth.

Trade negotiations are surrounded with a PhD level of mumbo-jumbo and jargon. But the weapon of choice is usually tariffs

Politicians generally start trade wars to protect industries in their own country, by making it more difficult for importers to compete. Trump’s first move earlier this year was to try to protect the US steel and aluminium industries by putting tariffs on products coming from other countries, which would make, say, steel from Europe more expensive in the US market. The EU responded by putting tariffs on iconic items like bourbon, motorbikes such as Harley Davidson bikes and blue jeans.

These all remain in place after this week’s deal, though both sides have promised not to impose threatened further rounds of tariffs and to work to find a way to remove those already introduced. Let’s see how this works out.

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Mumbo-jumbo

Trade negotiations are surrounded with a PhD level of mumbo-jumbo and jargon. But the weapon of choice is usually tariffs. Best to think of them as special taxes that countries put on imports, usually as a percentage of the price of the product. The tax is levied when the goods are brought into the country, but what is important is who takes the hit. It can be the producer, the consumer, an importing company in the middle – or all three.

Take American whiskey, including bourbon, one of the products on which the EU imposed a tariff in retaliation for Trump’s move on steel and aluminium. A tariff of 25 per cent now applies. This is the additional price that must be paid on the price of imports into the EU market. When the consumer mark-up and taxes are taken into account, this would mean a big increase of €5 a bottle on a typical existing retail price of €35.

For the moment, this is not happening. “Most US suppliers are absorbing the increase in the short term in the hope that it won’t be around for long,” says Ally Alpine who runs the Celtic Whiskey Shop in Dublin. “ Some prices have gone up but not too many and we’ve not yet seen a knock-on effect to sales.” So the US suppliers have decided to take the “hit” – for the moment anyway.

Then there are Harley Davidson motorcycles, on which the EU increased tariffs from 6 per cent to 31 per cent. Harley said this would increase the cost of importing US manufactured bikes into the EU by an average of $2,200. It said it would not increase its prices and will move some production out of the US to other countries to help to achieve this, thus avoiding the tariff increase. Again, it remains to be seen whether buyers of the iconic US bikes will face price increases in the long term, if the tariffs stay in place.

Another list

Only a small amount of products are covered by the tariffs already announced – which also include items as diverse as cranberry and orange juice, some cosmetics and some cigarettes and cigars. But the threat had been that the “war” would spread. Trump had prepared another list of EU products in response to the move from Europe and the EU had threatened to respond in turn. We could have got to a situation a few months down the road when a significant amount of the products we import from the US were subject to tariffs, and where some of this inevitably started to be passed on to consumers.

Some Irish exporters could also have been in the firing line. The Irish whiskey industry, for example, had been highly concerned that Trump would retaliate for the tariffs on American products with tariffs of his own on EU exports. Approximately half of all Irish whiskey is sold in the United States, or 59 per cent of the value of Irish whiskey exports, according to the CSO. So this is a big deal for the Irish domestic industry, which will be hoping that the truce agreed this week in the trade war can hold. We could also have been vulnerable if tariffs were put on the billions of pharma exports from Irish plants to the US.

Greatest danger

Perhaps the greatest danger for Ireland from a trade war is the general impact it would have on international confidence and growth – and on investment. As a small exporting country we are hugely reliant on global growth and on inward investment, particularly from the US. For the moment, a ceasefire has been declared. Let’s hope that it holds – but there is still a long way to play out on this one.