The uncertain outlook for the world economy, exacerbated by Donald Trump’s threats of a tariff war, means the new Irish government could face an early reversal of fortunes.

There has been no firm announcement at the time of writing about possible tariff rates on imports from EU countries but Canada and Mexico are facing tariffs at 25% This matters greatly for both economies, currently members of a free trade agreement with the USA, so tariffs have been zero.

The 10% tariff for China sounds more lenient but comes on top of current impositions from the Biden administration.

China sends only 15% of its exports to the USA but the figure is about 80% for both Canada and Mexico. Canada has retaliated with an immediate 25% tariff on imports from the USA and Mexico may well do the same. China sends only 15% of its exports to the USA but the figure is about 80% for both Canada and Mexico.

The unilateral action by the US president has serious implications even if it gets to be modified.

Free Trade Area

The North American Free Trade Area (NAFTA), is effectively no more, and it is difficult to imagine that the USA will be seen as a viable counterparty for new trade agreements with anyone else.

China has reported the US action to the World Trade Organisation. The USA was a founding member of the WTO’s precursor the General Agreement on Tariffs and Trade (GATT) in 1947 and it is possible that the USA will be sanctioned or expelled. A key rule of the WTO is the so-called most-favoured-nation clause which precludes members from imposing unfavourable tariffs on trade partners arbitrarily.

US protectionism is not new, but has never been a political obsession of the Republican party.

Historically the Democrats were more protectionist, but Trump has shifted the political centre of gravity in America.

If his tariff initiatives persist, there could be further realignments – for example the trade union movement, long aligned with the Democrats, is splitting in unexpected ways.

The Trump narrative that tariffs will help Americans recover lost jobs in traditional manufacturing does not wash with leaders of the United Steel Workers, concerned about disruption to supply chains to the car industry involving both Canada and Mexico.

“They put big taxes on American goods in Europe,” he pronounced in a TV interview, citing VAT specifically.

“We will make America great again and it will all be worth the price that must be paid,” according to the president in a Sunday social media post.

Almost all economists in the USA disagree including a long list of Nobel prize-winners.

The few who have welcomed the tariff announcements include a member of his economics team during his first term who regards Europe’s value added tax (VAT), levied on all sales domestic and imported, as equivalent to a tariff. “They put big taxes on American goods in Europe,” he pronounced in a TV interview, citing VAT specifically.

This gets you a fail in Leaving Cert economics. The persistent balance of payments deficit means that the US imports capital from the rest of the world – the domestic savings rate has been low for decades – but Trump has concluded that the shortfall is instead due to nefarious trading practices by everyone else.

Trade arrangements

The European Union members negotiate trade arrangements with the USA jointly and most tariffs on goods are nowadays quite low, the fruit of GATT and WTO trade rounds over the decades, dismantling the protectionist legacy of World War II. The EU has no internal tariffs and there are none with the United Kingdom either.

The USA is the biggest single destination for Irish merchandise exports, accounting for around 30% of the total, and Trump has indicated that he will impose a tariff, without specifying the level, on the EU, which he believes has been “taking advantage of America”.

His comments about the UK were milder and he seems to envisage a lower tariff. It would be a mess to have a higher tariff for the EU than for the UK given that they have zero tariffs against one another, but he is not bothered with real world details.

Corporation Tax

A tariff for the EU will affect Ireland more than other EU members given the high export share, but may not be the end of the damage. The US corporations based here are big exporters back to the USA but also big taxpayers, since US corporation tax rules do not aggregate worldwide profits to be taxed at home, the country of tax residence. This is the ultimate source of the revenue boom in Ireland in recent years and US legislators can unilaterally change the rules.

World stock markets weakened already on Monday. Unless the big players somehow pause the protectionist race, there will be an all-out resort to retaliation following the example of Canada.

As the EU responds in kind to a unilateral US tariff, the major trading countries are forming a circular firing squad to send the world economy into a nosedive.