Trade war risks increased prices, slower growth and jobs impact, minister warns

An intense trade dispute between the US and the EU would risk increased prices, fewer new jobs and slower growth in the economy, Ireland’s finance minister has said.

Paschal Donohoe said that the growing uncertainty and risks to the economy mean it is “correct” to rule out a bumper package of cost-of-living supports which have featured in recent Irish budgets.

He was speaking following the publication of a report on the potential impact of tariffs from the Department of Finance and Ireland’s Economic and Social Research Institute (ESRI).

The analysis shows that modified domestic demand (MDD), which the Government regards as the most meaningful measurement for the Irish economy, would be between 1-2% below its no-tariff baseline level after five years – depending on the extent of bilateral tariffs.

The traded sector, which includes technology and pharmaceutical firms, would be disproportionately impacted – at 3-5% below a no-tariff baseline, the analysis suggests.

The shock to MDD would be accompanied by 2-3% lower employment growth, it added.

The report only deals with projections on tariffs and does not account for other variables such as impacts to foreign direct investment.

The impact of escalated protectionism on the public finances may be higher than estimated in the paper as it does not account for changes relating to the sectors which produced windfall corporation tax receipts in recent years.

“Thankfully, we are approaching that with the foundations of our economy currently strong, with lots of people at work, where our public finance is in good condition, but the risks here could indeed have an effect on the performance of our economy.”

Asked if certain sectors would see job losses, Mr Donohoe said that “could well be the case” but added that the strength in the economy overall would mean that other jobs would be available in other areas.

Ireland’s deputy premier, Simon Harris, has argued that it “makes sense” for the European Union to review the rationale between items on its proposed countermeasures.

The Government regards the threat of US tariffs on alcoholic drinks from the EU as a “very serious issue”, as the Irish drinks sector could be massively impacted by an escalation in Europe’s tit-for-tat trade dispute with US President Donald Trump.

Mr Donohoe said the Irish Government is engaging with the EU and the US to avoid the imposition of tariffs.

He said: “Unfortunately, because of the scale of trade dispute that could be created by the decision that has been made to apply tariffs in the first place – the goods that are coming out of Europe – it does mean that many different sectors in many different economies are going to be hurt, and we’re trying to mitigate that hurt and avoid it happening.”

Asked if Ireland had argued for the delay in the imposition of the EU countermeasures, he said the Government had said that it would be preferable to get to the position that tariffs are unnecessary and allow for further negotiation and engagement.

Mr Donohoe said he hoped that the level of certainty on the global economic picture would be clearer ahead of budget preparations later in the year.

“We have to be very clear that as we move through the rest of this year – and probably the years to come – that the keeping of jobs, the protecting of the competitiveness of our economy, will be our number one priority,” he said.

“And it is correct, therefore, to say at this point in time that we can’t repeat those kind of measures again and we will need to make sure that we have the enhanced strength in our economy and in our public finances to deal with the kind of risks that we’re outlining today.”

Sinn Fein TD Pearse Doherty called for the EU to express to the US administration that a reciprocal trade war would be detrimental to citizens in both jurisdictions.

He said: “The only way to win a trade war is not to be involved in the first instance.”

He added: “I think that Europe needs to take a breath and and not react knee-jerk in relation to anything that may come down the line from the American administration.

“I think the paper also probably highlights what we have been seeing in Sinn Fein for quite some while, that we need to also build up the capacity in terms of our own domestic sector, our infrastructure, housing, obviously being a major issue that many companies, both multinational and national, mentioned to us.

“And the need to invest in our infrastructure to make sure that we remain competitive in light of any international events, some that are outside of our control.”