China has commenced an investigation into export subsidies on dairy products in several EU countries with the threat of reciprocal tariffs, responding to European import tariffs on electric cars from China.

Membership of the EU is widely seen as attractive for this country, a small open economy heavily reliant on access to export markets.

But it is not all one-way traffic, even though the threat from possible Chinese tariffs to Irish dairy companies is limited.

Ireland has been a net contributor to the EU budget since 2013 and the annual bill, already one of the bloc’s highest in per capita terms, continues to rise.

The Department of Finance expects the figure to reach €4.5 billion in 2027, and the European Commission’s appetite for revenue is expanding. High-income countries pay more, but EU membership entails exposures for Ireland additional to the direct budget payment.

Europe faces an increasingly protectionist world trading environment in its two key partners, the USA and China. This comes in the form of rising tariffs, including tit-for-tat retaliation.

The EU is a customs union as well as a single market. The single market ensures that most non-tariff barriers have been eliminated due to regulatory alignment since the 1990s.

Internal tariffs or quotas on trade within the bloc and with near neighbours were phased out even earlier.

Home producers

After several decades of gradual reductions in worldwide tariffs, the globalising trend has come to a halt, and both the USA and China have been adopting policies designed to favour home producers.

In the USA, both Democrats and Republicans have pivoted to protectionism and unilateral tariff policies. For the Republicans, this was a reversal under Trump of their traditional pro-market stance.

The Democratic party in the Clinton era veered towards global free trade too, concluding the North American Free Trade Agreement with Canada and Mexico, but have returned to their traditional pro-union constituency with tariffs under the Biden presidency.

The two parties will compete for blue-collar votes in this year’s elections via policies to inhibit imports.

China’s decision to scrutinise Europe’s subsidies to the dairy industry is a response to the EU’s tariffs on imports of electric cars from China which have been hurting the car industry, particularly in France but also in Germany and Italy.

Any negative impact on Irish dairy exports would be ‘taking one for the team’, defined to include only continental team-mates – there is no vehicle manufacturing in Ireland. Total Irish dairy exports to China in 2023 were a little over €400m, but the categories under scrutiny by the Chinese authorities on suspicion of unfair subsidies add up to just under €50m according to Ger Brady, an economist at IBEC.

The investigation could take a year or longer, and there is no certainty that retaliatory tariffs will result.

Reminder

The development, whatever way it plays out, is a reminder that EU membership for Ireland is a game of swings and roundabouts – recall the controversy over the infamous bank guarantee of October 2008 which saw the Irish Exchequer burdened with obligations of bust Irish banks to the benefit of lenders elsewhere in Europe.

The same pattern of potentially unequal treatment is built into the approach the EU has taken to reduction of carbon emissions. Free trade in agricultural produce yields, and is intended to yield, geographical specialisation reflecting endowments of soil and climate.

Bananas are not grown in Donegal, while the Munster and south Leinster areas are strongest in grass-fed production of dairy products. Ireland exports most of these, but Europe has chosen to measure carbon emissions by reference to production rather than consumption.

Imposing national targets on member states with this curious measurement system results in pressure on an export industry to curtail emissions in defiance of comparative advantage.

Ireland could end up seeking to constrain dairy production, the strongest sector of Irish farming, in the absence of any policies at EU level to discourage consumption.

It would be foolish to attribute Europe’s carbon emissions to the Middle Eastern countries where production costs are lowest.

If low cost locations are best for oil and gas, why should EU country-by-country targets penalise dairying in the southern part of Ireland, in Normandy and a few other locations favoured by soil and climate?

Would the system penalising these producers, intended beneficiaries of the single market, be equally indifferent should southern Europe’s producers of grapes and olives be disadvantaged relative to competitors in Finland?