LAST UPDATE | 21 Mar

A NEW PAPER published today by the Economic and Social Research Institute (ESRI) outlines the potential impacts of protectionist economic policies coming from the United States. 

With President Donald Trump threatening sweeping tariffs on goods imported from the European Union, the ESRI has said those levies would have a significant negative impact on the Irish economy. 

The Central Bank issued the same warning in its first bulletin of the year, and cautioned that the threat of tariffs “presents a very different landscape for the Irish economy” than has existed in recent years.

Trump has already imposed tariffs on US neighbours Canada and Mexico, as well as China. The US has also imposed a global 25% tariff on steel and aluminium. 

During Taoiseach Micheál Martin’s visit to the White House last week, Trump said he didn’t want to “hurt” Ireland but that he would be imposing tariffs on the EU, of which Ireland is a part. 

The ESRI paper focused on a number of different scenarios. 

The first is the possibility that the US imposes tariffs of between 10 and 25% but the EU does not respond. The second scenario assessed is one in which the US and EU engage in a tit-for-tat trade war. 

The tariff scenarios considered in the paper “could lead to the levels of Gross Domestic Product (GDP) and Modified Domestic Demand (MDD) falling by as much as 3.5% and 2% below the no-tariff baseline respectively over the next 5 to 7 years,” the ESRI said.

The third contingency is that the US could impose a 10% increase to the cost of imports through regulatory changes. 

The imposition of non-tariff barriers from the US to the rest of the world would also have “a significant negative impact on the Irish economy”, the ESRI said.

Those impacts could see the levels of GDP and MDD falling by as much as 3% and 1.5% respectively over the next 5 to 7 years, according to the paper. 

The report also suggests that the trade sector would be most at risk of sustaining damage due to US protectionism. 

“The results show that the level of production in the traded sector falls by as much as 4% from the no-protectionist policy baseline over the next 5 to 7 years. This is compared to a 2% fall in domestic sector production for the same scenario,” the paper warned. 

Those impacts would have wider negative implications for the Irish economy as a whole, the ESRI said.  

“Our research shows that protectionist policies have the potential to significantly impact the Irish economy, with the traded sector disproportionately affected,” said Dr Paul Egan, an author of the working paper and a research officer at the ESRI. 

“This, in turn, would lead to a significant impact on the labour market, consumption and the domestic economy as a whole,” he said. 

“Protectionist policies may also prompt multinationals to relocate to the US, posing further risks to the Irish economy and public finances.” 

Finally, the paper states that if US protectionist measures target specific sectors that are important to the Irish economy, “this could lead to a greater decline in the traded sector, and consequently, the economy as a whole”. 

“This would likely be even more severe than our scenario analysis suggests.”

A Department of Finance spokesperson today acknowledged that “trade policy uncertainty is exceptionally high” due to the prospect of tariffs .

The spokesperson noted that several scenarios are modelled in the ESRI report but added that the report does not account for changes to the “firm and sector-specific factors that have produced windfall corporation tax receipts in recent years”.

“As a result, the impact of an escalation in protectionism on the public finances may be higher than is estimated in the paper,” said the spokesperson.

Commenting on the report, Finance Minister Pascal Donohoe said there are “unprecedented levels of uncertainty regarding the global trade architecture” and the “possibility of tariffs”.

He described the ESRI report as “one piece of the analytical jig-saw needed to chart a way forward”. 

Donohoe said Ireland will “remain an outspoken advocate of free-trade policies” and that “government will continue to work to improve the enterprise climate in Ireland”.

“This includes ramping-up capital spending in key strategic areas, including energy, water, transport and housing,” said Donohoe.

“This is how we will remain competitive against a backdrop of heightened uncertainty.”