ESRI warns transatlantic trade war could cost Irish economy billions
The ESRI report comes as finance minister Paschal Donohue admitted tariffs imposed by the Trump administration are likely to spark a rise in inflation and hit jobs growth. Picture: Sasko Lazarov/RollingNews.ie
A full-scale transatlantic trade war could wreak havoc on the Irish economy, costing billions in euro and prompting some US multinationals to move operations out of the country, a report published by the Economic and Social Research Institute (ESRI) has warned.
The report published on Friday was co-authored and funded by the department of finance and comes as finance minister Paschal Donohue admitted tariffs imposed by the Trump administration are likely to spark a rise in inflation and hit jobs growth. On Thursday, the EU said it would delay retaliatory tariffs until mid-April to allow for talks aimed at finding a compromise.
The paper, written by ESRI researcher Paul Egan and department of finance economist Fionn Roch, assessed the impact of protectionist policies on the Irish economy.
It warns that reciprocal ‘tit-for-tat’ tariffs could lead to the levels of Gross Domestic Product (GDP) falling by as much as 3.5% - more than €17bn - over the next five to seven years, particularly damaging the export sector.
“Our research shows that protectionist policies have the potential to significantly impact the Irish economy, with the traded sector disproportionately affected,” said Mr Egan.
“Protectionist policies may also prompt multinationals to relocate to the US, posing further risks to the Irish economy and public finances.”
The research paper envisaged a scenario where the US imposes tariffs of between 10% and 25% without an EU response, as well as a scenario where the EU and the rest of the world responds with reciprocal or ‘tit-for-tat' tariffs. It found that GDP could be 3.5% worse over the next five to seven years if tariffs come into effect. Modified Domestic Demand — a measure of the strength of the domestic industry, not including multinationals — could be negatively hit by 1.5% in the same period.
The “traded” sector which represents exporters would be disproportionately impacted by tariffs “due to its strong linkages with the global economy”, the researchers said. Traded sector production could fall as much as 4% over the next five to seven years. Domestic sector production could fall 2% in the same period.
“The disproportionate impact of these policies on the traded sector has the potential to further negatively impact the overall economy because those employed in the traded sector tend to be more educated and better paid than the overall workforce, making them an important source in driving aggregate demand and income tax revenues,” the paper noted.
Speaking at the European Council in Brussels on Thursday, Mr Donohoe admitted that the impact of tariffs on Ireland “is going to be bad”.
“Bad for jobs, bad for growth, and it could be bad for inflation,” Mr Donohoe said. “Moving into a phase in which tariffs are applied across the world will be harmful and will be difficult for economic growth.”
Reacting to the ESRI report, Mr Donohue said: “There is clearly unprecedented levels of uncertainty regarding the global trade architecture and we cannot rule out the possibility of tariffs on transatlantic trade being introduced.
“Government must, of course, plan for all eventualities, and the work being published today by my Department and the ESRI provides one piece of the analytical jig-saw needed to chart a way forward.
“Ireland has been a massive beneficiary of globalisation and we remain an outspoken advocate of free-trade policies. Ireland and the US enjoy a mutually beneficial, two-way economic relationship.
“Government will continue to work to improve the enterprise climate in Ireland, including by ramping-up capital spending in key strategic areas, including energy, water, transport and housing. This is how we will remain competitive against a backdrop of heightened uncertainty.”
European Central Bank president Christine Lagarde said that inflation is likely to hike in a trade war and euro zone growth will fall. Ms Lagarde said finding solutions to any trade war could mean further integration with other trading partners, which "could more than offset losses incurred from unilateral tariffs, including retaliation".
On Thursday, the EU delayed a proposed 50% tariff on American whiskey until mid-April, aligning the bloc with broader countermeasures against US steel and aluminum duties. The shift in the timing of the levy, originally set to take effect April 1, allows for more talks with US officials, a spokesperson for the European Commission said.
US president Donald Trump has threatened a 200% tariff on all alcoholic products imported from the EU. Irish distilleries exported €1bn in whiskey around the world last year, 40% of which went to the US.
