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Ireland is more exposed to Trump’s tariff war than any other European country

Without turning away from the United States, it is vital for Ireland to remain unambiguously and progressively engaged in collective action in support of Europe

Clearly there are specific risks to Ireland: it collects much of the corporate tax revenue that a more coherent US tax code would channel back across the Atlantic. Photograph: Agency Stock
Clearly there are specific risks to Ireland: it collects much of the corporate tax revenue that a more coherent US tax code would channel back across the Atlantic. Photograph: Agency Stock
Patrick Honohan
Sat Feb 08 2025 - 07:05

Ireland is certainly not the only country to find itself scrambling to react to an unparalleled stream of disruptive policy actions and coercive edicts emerging from the White House.

But, in terms of economic policy narrowly defined, no European country is more exposed. This is because of historic links through emigration, and because of an Irish industrial policy that has relied on tax measures that are uniquely attractive to US multinational corporations. With so much employment income and tax revenue at stake, it is a question not just of trying to fend off direct specific threats, but also of progressively repositioning Ireland for a future world lacking the predictably seamless trading and investment flows that have defined globalisation. After all, globalisation has been at the heart of Ireland’s economic transformation over the past few decades. In the future world we will, at least, still have the European single market.

Any hope that pre-election promises and threats would all prove evanescent, and that US trading relations with the rest of the world would remain normal, were dashed last weekend by the formal introduction of relatively heavy tariffs against the imports from Mexico, Canada and China, its largest trading partners.

Although the presidential executive order imposing the tariffs was suspended at the last moment for Mexico and Canada, it went into effect for China. So, far from retreating from campaign rhetoric, the White House has doubled down on policy measures likely to unsettle the globalised production and trading system that has characterised the past three decades, and that has seen a sustained overall expansion of the US economy and a spectacular success of large American tech companies (some of it spilling over into Ireland).

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To be sure, many American workers and families have been bypassed or hurt in the years of hyper-globalisation. But tariffs will scarcely help them. The technological forces that eliminated so many manufacturing jobs in past decades in most of the industrial countries will not be reversed; nor will the rise of China’s economy, which displaced some of the old manufacturing jobs.

Indeed, in the short run, tariffs are bound to disrupt the supply chains for vulnerable sectors such as auto assembly, in which components and sub-assemblies criss-cross the borders with Mexico and Canada. Think of something like Britain’s experience with Brexit writ large.

Blowhard US tariff advocates claim that they can reduce the international payments deficit of the United States. Yes, imports from the targeted countries will shrink, but the exchange rate and exports will also be affected (the dollar strengthening, exports shrinking) as the pattern of demand and production in the economy as a whole responds to the changing relative prices of imports and domestically produced goods. The overall deficit will not close.

Other enthusiasts, disliking progressive income taxes, see tariffs as a revenue generating substitute. But, when you do the sums, it quickly emerges that tariffs, no matter how high, cannot generate nearly enough revenue to replace income taxes.

Ireland collects much of the corporate tax revenue that a more coherent US tax code would channel back across the Atlantic. And Ireland could also be in the firing line as a major and growing contributor to the US trade deficit – now fourth in the world, at $80 billion in the first 11 months of 2024

Perhaps the tariffs are intended only as a bluff, or a negotiating ploy (after all, the stated excuse for using emergency tariff powers was the flow of migrants across the Mexican border and drug trafficking). But last week’s manoeuvre did not generate much return, given the speed with which the North American tariffs were suspended, with only minimal concessions made by the target countries.

Such stunts have damaging side-effects. The uncertainty generated by all of this chopping and changing will have a chilling effect on investment, delaying technologically driven improvements in productivity and living standards, not only for the US but across the world.

Where is all this leading? The announced policies cannot fail to damage the longer-term prospects for the power and standing of the US. There will still be some American winners. Over-reaching plutocrats-turned-henchmen are seizing the opportunities created for them by all of this turbulence. A further deepening of inequality is in prospect.

The overarching vision of the new dispensation is, it seems, a world in which the US builds a stronger fortress in its hemisphere, treating neighbouring countries almost as vassals, curtailing policies (including security and aid) seen as having been unduly beneficial to other countries, and generally limiting engagement with the rest of the world. A particular White House fear seems to be that free trade only makes it easier for China to advance technologically and militarily. Europe’s role as a bulwark against Russian expansionism is no longer seen as valuable. The global economy will increasingly become segmented into geographically vertical stripes.

In particular, Europe, too, is soon to be targeted with US tariffs, which will of course apply to Ireland. Clearly there are also specific risks: Ireland collects much of the corporate tax revenue that a more coherent US tax code would channel back across the Atlantic. And Ireland could also be in the firing line as a major and growing contributor to the US trade deficit – now fourth in the world, at $80 billion in the first 11 months of 2024.

The well-oiled diplomatic channels that have served Ireland over the years in Washington are no doubt on full alert to detect, analyse and try to deflect contemplated US corporate tax measures that would damage Irish interests.

Direct taxation is not a European Union responsibility, but trade policy is. EU retaliation to US tariffs is inevitable, even though the EU too will suffer from the retaliation. Here there may be some awkward moments for Ireland: it is not unlikely that US firms in Ireland could be disproportionately affected.

A detailed strategy for Ireland’s response to these challenges remains impossible to define, given the apparent lack of a fully coherent interpretation of the US administration’s objectives. But the likely growth of barriers to transatlantic trade and investment clearly points to an overarching principle for Ireland. Without turning away from the US, it is vital for Ireland to remain unambiguously and progressively engaged in collective action in support of Europe’s resilience in a fragmenting global economy, and its ability to fight climate change and inequality.

Patrick Honohan was governor of the Central Bank of Ireland from 2009 to 2015