Next Wednesday, April 2nd, is D-Day – when the Trump administration announces the plans for wide-scale tariffs.
Amid contradictory indicators, however, the details are far from clear. And in something as complex as trade, it is the details that matter.
In particular, we do not know whether the United States administration sees tariffs – or the threat of them – primarily as a short-term vehicle to wring concessions from other countries or a long-term revenue raiser for the US exchequer.
Nor we do we know what tariff levels might apply to Irish exports to the US, though the European Union expects blanket levies of around 20 per cent and there may be special changes on pharma products.
Regardless of what happens, it is worth looking at the key areas that may be affected in relation to Irish households, businesses and the State.
1. Butter and booze
If – as now seems likely – the US imposes some kind of blanket tariff on goods it imports from Ireland, the Irish food sector will be in the front-line.
The Irish Farmers’ Association (IFA) calculates that €1.9 billion in annual agri-food exports could be affected. Dairy accounts for some €830 million – of which around €500 million is Kerrygold Butter. Alcohol – predominantly whiskey but also other spirits and cream liqueur – accounts for around €900 million.
As with all tariffs, the key is their scale and duration. Food products are generally already subject to a small tariff, but a further 20 per cent would be a sizeable hit.
Ornua, which exports Kerrygold, said at the end of last year that it was already stockpiling some products in the US to give some leeway if tariffs hit.
With a food product, however, this can only provide limited protection. Kerrygold sales did survive the 25 per cent tariffs imposed by Trump in his last term in office in mid-2019, which were lifted in March 2021.
Volumes of Irish butter sales in the US did fall immediately after the imposition of these tariffs. A Covid-19 boost to supermarket demand, however, seemed to help and volumes recovered, before surging over the past couple of years.
Meanwhile, the spirits industry – Irish whiskey, cream liqueurs and gins – were shook by threats from Trump of a 200 per cent tariff in retaliation for EU threats of a tariff on bourbon. In turn, this was in response to Trump tariffs on steel and aluminium imports.
The EU has delayed the imposition of these tariffs until mid-April and is reconsidering what products to include, so it remains unclear how this will play out. For a big capital intensive sector like whiskey, however, which relies on the US for 40 per cent of sales, this is a serious threat.
The gin industry sells about a third of its exports to the US, which also takes more than half Irish cream liqueur exports and significant amounts of Irish beer.
And all these will presumably be covered by the general blanket or reciprocal tariffs – around 20 per cent on EU expectations – due to be announced next week.
The IFA has pointed to downstream threats to farmers in terms of the price on offer for milk and grain. And any wider hit to exports from indigenous business could also have a downstream impact on jobs and spending.
The impact on export sales of Irish products to the US will be determined in large part by how price sensitive they are. In other words, will consumers pay a higher price or does the manufacturer or distributor have to absorb it?
In the case of massive tariffs – like the threatened 200 per cent on spirits – this is not an issue as the product would just be priced out of the market completely for as long as the tariff was in place. With tariffs of 20 per cent, however, price sensitivity and the extent of existing profit margins would be key issues.
2. Drugs and pharma
Around 40 per cent of exports from pharma companies in Ireland go to the US – close to €60 billion last year. To date, vital drugs and their ingredients have exempted from tariffs under a World Trade Organisation Agreement.
There are a few things to watch here. First, if Trump announces blanket tariffs on the EU, does this include pharma products?
Second, Trump has promised separate special 25 per cent tariffs on pharma products – to which he referred again on Wednesday evening – though the timing of these is unclear, as is whether they would apply in addition to blanket tariff levels.
All of this creates uncertainties for the massive production of drugs and pharma products in Ireland for the US market.
How this pharma story will play out is vital, but a “quick fix” to what the US is looking for – a relocation of production back to the US – is not clear.
Heavy tariffs could indeed persuade pharma companies to move some production back to the US, if – and it is a big if – they believed they were permanent.
But unless companies have capacity in the US for the same product they are producing overseas, even relocating production to an existing plant in the US making other products could take 18 months or more, while a new plant could take four or five years to build and commission.
In the meantime, tariffs could push up costs to US consumers and upend supply chains.
Changes in corporate tax rules in the US could encourage companies to report more profits in the US and less in Ireland – or even to relocate production over time – though, so far, Trump’s rhetoric has been all about tariffs.A r a specific targeting of pharma remains a risk for Ireland, however.
If production is shifted to the US, this will have a direct cost in terms of corporate tax revenue and jobs here.
As the Economic and Social Research Institute (ESRI) pointed out, jobs in this sector tend to be high paid and, so, their loss has a significant knock-on impact on spending and income tax payments and on employment elsewhere in the economy.
If US pharma companies change the way they pay tax – perhaps as part of a quid pro quo on tariffs with Trump – this would have an impact on Irish gross domestic product and on corporate tax payments. It is potentially quite a serious one if they relocate intellectual property over time to the US.
This is a big-ticket item for Ireland but there are a lot of moving parts.
3. Households
Irish households could feel the pain if jobs are lost – directly or indirectly. What about prices?
If there is a full-scale trade war between the EU and the US, the union will impose tariffs on a wide range of American imports and this will lead to some rise in prices.
It will also increase costs to businesses who import inputs from the US – things like metals and plastics – and, in turn, this will lead to higher prices for their products.
Prospects of a trade war increased after last night’s imposition of heavy 25 per cent tariffs on car imports into the US, which will hit producers in Germany, in particular, and also some other EU countries.
[ Trump sets sights on pharma as he puts 25% tariffs on auto imports to USOpens in new window ]
An ESRI study this week saw a relatively modest rise in overall prices from a tariff war, but modelling this is difficult and disposable income would take some hit.
The bigger impact could be on jobs, with calculations that, in four years time, total job numbers could be 50,000 or so lower than they would otherwise be – or more in a worst-case scenario.
Here, a vital unknown is how long tariffs would last and how the tariff war spreads – if the US tech sector in the EU was drawn in to retaliations measures, for example, this would be bad news for Ireland.
Households could also be affected in other ways. Minister for Finance, Paschal Donohoe has said that the Government would consider postponing planned income tax cuts if the public finances tightened. This would mean that measures to adjust tax credits and bands for inflation would not happen, leading to a creeping higher in the income tax take.
A big hit to corporate tax revenue could lead to more painful budgetary adjustments.
4. The exchequer
The State could face a hit to the public finance in two ways. One is a cut to tax revenues, including corporation tax and income tax. The former is an obvious point of vulnerability but calibrating the likely impact is very difficult. US commerce secretary Howard Lutnik obviously has his eye on this money.
The second is that state spending could also come under pressure if the Government steps in to support businesses or households from an economic hit.
The initial indications are that it will be slow to do so, at least on a major scale, but short-term business supports may emerge, depending on what happens.
5. The longer term
Caught in the uncertainty and the possible short-term impact, it can be difficult to look to the longer-term.
The ESRI study has pointed to the threat of a more protectionist world in terms of attracting investment, however, and also giving Irish companies the opportunity to build scale by targeting international markets.
It is, of course, hard to see how this pans out – US companies will still want to target the EU by locating operations here and if Ireland is seen as a “friendly” country, it could still do well.
[ Donald Trump considers two-step tariff regime on April 2ndOpens in new window ]
Trump’s key goal – in so far as we can understand it – is to get US companies to produce at home for the American market and also to control key production in areas like semiconductors and pharma.
The world may be changing – in other words, challenging key parts of the Irish economic model – but it will be some time before the clouds clear and we see what changes are permanent.
In the meantime, crippling uncertainty will, in itself, have an economic cost.
