Trump’s trade war is as big a threat to us as Brexit
SHOOTING wars are destructive. Trade wars are too. Though the latter may not involve bombs and bloodshed, when governments starting blocking cross-border commerce, lives and livelihoods are ruined. In the 1930s, Ireland’s ‘economic war’ with Britain, then the country’s largest trading partner, did just that.
Although not widely known, Ireland’s largest national trading partner today is the US. Worryingly, we are on the brink of a trade war with that country. This is as big a threat to the economy as Brexit, and if the slide to war continues at its current pace, its impact will be felt much sooner than the effects of Britain’s departure from the EU.
Today, the Taoiseach will go to the White House to meet the man responsible for bringing about this utterly unnecessary state of affairs. Leo Varadkar has been making the point in Washington this week that both Europeans and Americans will lose out if the EU and the US descend into a tit-for-tat series of tariff impositions on each others’ goods and services. He will need the legendary luck of the Irish, and much else besides, if he is to stop the slide towards transatlantic commercial conflict.
US President Donald Trump has a long record of spouting economically illiterate nonsense about international commerce. As far back as the 1980s, he was railing against Japan because its companies sold more stuff to Americans than the Japanese bought from US ones. He continues to obsess about countries who sell more to the US than they buy from it.
An economy’s trade balance – the difference between the value of exports and imports – with individual countries is of little importance. As long as an economy is not spending much more on imports from ALL countries combined than it earns from exports, it has little to worry about economically. The US has nothing to worry about in that regard because it can easily afford to run the smallish international payments deficits it has been running with the rest of the world in recent years.
Despite this, Trump suddenly announced last week that the US would hit foreign steel and aluminium imports with hefty additional taxes with a view to bolstering American metal producers. As with much else, the measures were announced on the hoof and there is much that is uncertain about how, where and when they will be implemented.
As Ireland doesn’t have a steel industry, there is no direct and immediate threat from the first measure, but 450 people work at the country’s sole aluminium plant in Limerick. The Russian-owned company was not returning calls yesterday, but any disruption in the sector globally cannot be good.
Other European countries will be affected more if the steel and aluminium tariffs are imposed. As international trade policy is conducted by Brussels on behalf of all EU member countries, Europe will respond collectively.
As it happens, the EU embassy in Washington DC was prepared for Trump’s protectionism. It keeps a close eye on the big employers in American politicians’ electoral districts so they can ensure maximum leverage over congressmen and senators if the US tries to impose protectionist measures against European producers.
With this information to hand, Brussels immediately signalled that it would hit high-profile American products, including bourbon whiskey and Harley Davidson motorbikes, with retaliatory tariffs.
Trump reacted by saying that he would take further measures if Europe didn’t accept his tariffs and do nothing in return. He has also said that trade wars are “good” and “easy to win”.
He might have to learn the hard way that neither assertion is correct.
The EU may not have the military or political clout of the US, but economically they are well matched – the combined GDP of the 28 member countries slightly exceeds that of the US. Both have huge economic interests in each others’ economies. American companies also sell billions of dollars of goods and services into Europe and millions of jobs depend on that trade. The same is true of Europe.
All this is put at risk by a trade war.
Trump has fired the first shot and the EU will respond, as World Trade Organisation rules permit. If he insists on having the last word, as well as the first, it will inevitably lead to a tit-for-tat cycle of measures which will reduce trade across the Atlantic.
Given that two-way trade in goods and services between the EU and the US is worth around €1tn each year, a substantial reduction in transatlantic commerce has the potential to kill off economic growth in both economies.
It has the potential to do much worse to Ireland. Last year, €33bn in goods were shipped to the US and the value of services exports stood at €15bn in 2016 (the most up-todate figure). Put another way, annual exports to the US equal more than €10,000 for every man, woman and child in the country. You don’t need to be an economist to see that a big reduction in that trade would badly affect every man, woman and child.
YESTERDAY’S employment figures suggest that more people than ever before are at work in the Irish economy, with the prerecession peak having likely been surpassed in the first months of this year. This most welcome news shows that there is plenty of momentum in the economy, a good position to be in with a trade war looming.
But if Trump persists on his current path, that momentum could be extinguished and a deep recession may ensue. With Brexit already threatening a trade whammy to the Irish economy, the risks to the economy are rising.