Tuesday 19 March 2019

Ireland on the front line if Trump trade war escalates

The row over steel exports to the US could be a major threat to our open economy if lower trade hits worldwide growth, write Donal O'Donovan and Colm Kelpie

Scale flies off of a steel coil as it is unrolled on the line at the Novolipetsk Steel PAO steel mill in Farrell, Pennsylvania – US president Donald Trump, inset below, has said his tariffs will protect the US steel industry
Scale flies off of a steel coil as it is unrolled on the line at the Novolipetsk Steel PAO steel mill in Farrell, Pennsylvania – US president Donald Trump, inset below, has said his tariffs will protect the US steel industry

If America's erratic President Donald Trump has launched a global trade war Ireland will inevitably suffer - but quantifying the impact of a policy apparently being made up on the hoof is extraordinarily difficult, experts warn.

Last weekend, Trump raised the prospect of higher levies on European cars and Irish whiskey, telling supporters at a rally that the countries of the EU have banded together "to screw the US on trade".

Yesterday, EU Trade Commissioner Cecilia Malmstrom said the US may provide more information "very soon" on how getting an exclusion from Trump's tariffs on foreign steel and aluminium.

Malmstrom says she told US Trade Representative Robert Lighthizer in a meeting on Saturday in Brussels that the 28-nation EU was "very disappointed" by the levies, which the US has justified on national security grounds.

Malmstrom has rejected the security justification. She told the European Parliament in Strasbourg that Europe wants its goods excluded as a whole from any US tariff regime, and is threatening tit-for- tat levies on American goods, as well as a complaint to the World Trade Organisation should Europe fail to gain an exemption.

There's a fear in Europe that even if the US doesn't blockade goods produced here, cheap steel dumped on the world market will flood into the EU.

Trade barriers aren't new. In Europe, for example, the agriculture sector has long been protected by a range of measures.

But the situation between US and EU allies is extraordinarily volatile.

After Trump proposed the steel tariff, the EU warned it would slap a 25pc tariff of $3.5bn of American goods - targeting iconic brands produced in key Republican states on a range of consumer, agricultural and steel products. The strategically-chosen list includes motorcycles, jeans and bourbon whiskey.

For Ireland, most experts regard trade barriers as a particular danger, because the economy is extraordinarily reliant on cross-border trade.

"We have one of the most open economies on the planet," says Investec Ireland chief economist Philip O'Sullivan.

That means on the plus side that: "When the world economy hits fourth gear, Ireland hits fifth", he says.

But on the flip side, we'll suffer more if there's a tariff-driven downturn.

"If America sneezes, Europe catches a cold but Ireland probably gets pneumonia," O'Sullivan said.

Despite that, O'Sullivan remains relatively sanguine. Global growth running at its best pace in seven years means there's more than usual capacity to absorb shocks internationally.

Two years ago there was a real fear in Ireland that the election of Trump, combined with the UK Brexit vote would lead to a slowdown in investment, because that climate of uncertainty would make business much more cautious. In fact, 2017 proved to be a record year for new foreign direct investment (FDI) into Ireland, and the number of jobs at IDA-backed companies has never been higher.

The direct impact on Ireland of a steel tariffs will be slight, according to Martina Lawless, associate research professor at the Economic Research and Social Research Institute.

The danger here will come from escalation.

"The current proposals on steel and aluminium might include a risk of a trickle-through to prices for the likes of cars, but the fear for Ireland is of a broader acceleration," she said.

The global manufacturing market in particular has developed based around low and decreasing tariffs. In many cases manufactured goods pass through and are worked on in multiple countries during the production process that relies on open borders

"If the US starts down that road, and it accelerates, there's potentially a lot of disruption to global supply chains," Prof Lawless says. "Ireland is not a big steel trader, the bigger impact would come if there was a wider trade war."

At the margin, the current proposals on steel and aluminium could see a trickle-through to prices for the likes of cars, but the real fear for Ireland is of a broader acceleration.

However, she notes that Trump's earlier scheme for a border-adjustment tax, that was also aimed at making foreign goods more expensive in the US, ultimately fell because US business opposed it.

The acting chief economist at the Organisation for Economic Cooperation and Development (OECD), Álvaro Pereira, told the Irish Independent that a trade war would have an "immediate impact" on Ireland if it resulted in a reduction in global trade. Despite our tiny steel sector.

"The problem is not the steel issue. The problem is whether or not we have further escalation of trade tensions. The main engine of the [global] growth rate is trading and investment. If anything that effects trade is going to lead to lower trade growth around the world ... this will affect economies around the world," he said.

The Paris-based OECD is part of the institutional framework that has driven tariff reduction over the past five decades.

"Ireland being such an open economy will be certainly affected by a further escalation of the trade tensions. In Europe we see a lot of growth right now going on, we see trade doing very well. Ireland has been experiencing fantastic rates of growth and a really strong performance. The downside is certainly if world trade growth goes back to figures around 1pc or 2pc, this would have an immediate impact on the European economy, and certainly an immediate impact on Ireland."

The OECD recently launched a global forum on excess steel capacity, in a bid to de-escalate the current tensions.

"I think it's important to maintain cool heads. It is important to say and realise that dialogue is ongoing.

"The only long-term possibility and solution to this problem is through international dialogue," said Pereira.

Meanwhile, US Secretary of Commerce Wilbur Ross, familiar here as a successful Bank of Ireland investor, is due to meet EU representatives, but only to complain about trade barriers that protect European farmers - protections that are undoubtedly restrictive.

There is no US/EU free-trade area. On average, the EU applies a 3pc tariff on US products, while the average tariff applied by the US is 2.4pc, the European Commission said, adding that for the US to hone in on the higher duty on cars is "cherry-picking".

"We want free and open world trade because for consumers and for citizens this is the best situation," said acting German Finance Minister Peter Altmaier. "That's why, if possible, we want to avoid a trade war."

How a trade war would play out remains hard to pin down.

Based on Bloomberg Economics' estimates, if the US raises import costs by 10pc and the rest of the world retaliates, by raising tariffs on US exports, the cost by 2020 would be 0.5pc of global GDP.

To put that into perspective, that's about $470bn - roughly the size of Thailand's output.

What could make this episode more war than skirmish is Trump's invocation of national security to justify tariffs - which could open a Pandora's Box of similar claims by other nations - and his threat to further punish any country that reacts by imposing counter-duties.

Behind Trump's policy is a focus on the US trade deficit, which shows the country imports hundreds of billions of dollars more than it exports.

That's seen as a cost to Trump's base of voters in America's post-industrial Rust Belt.

But talk of a trade war is alarming to many US business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth if the US turns protectionist and other countries retaliate.

In the 1980s and 1990s, Ronald Reagan slapped tariffs on Japanese electronics and motorcycles, and forced Tokyo to accept quotas on cars and steel. Bill Clinton followed up in the early 1990s by threatening steep tariffs on Japanese cars and demanding that Japan rein in its current-account surplus.

But that all comes at a cost. When former US President George W Bush raised steel tariffs in 2002, US gross domestic product declined by $30.4m, according to the US International Trade Commission.

The US actually lost about 200,000 jobs, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush's tariffs cost about $400,000 for every steel-industry job saved.

The World Trade Organisation (WTO) also ruled that the Bush tariffs were illegal.

The big problem for the US is that many more people are employed in industries that buy steel to make products - including car-making and construction, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policymakers, who might feel the need to raise rates more aggressively than planned. On the other hand, if the tariffs result in job losses and the economy slows, the Fed might want to ease the pace of rate hikes.

In theory the WTO is the arbiter of international trade disputes, under a set of agreements struck by countries trying to reduce trade barriers.

If one government's complaint about another nation's trade barriers is seen as grounded, the WTO can recommend acceptable retaliation.

However, in the case of steel, Trump is invoking a seldom-used clause of a 1962 US law that gives him the authority to curb imports if they undermine national security, a get-out clause under WTO rules.

For many the big fear is where Trump will cast his eye next. Talking down, or manipulating lower the US currency is a big fear in Europe.

In January, markets were shaken, and the European Central Bank reacted with alarm when US Treasury Secretary Stephen Mnuchin suggested he was comfortable with a weak dollar, a move that appeared to breach a consensus among big trade blocs that competitive devaluation was off the table.

(Additional reporting Bloomberg)

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