Statement on Tarrifs by Minister for Finance Paschal Donohoe

Check against delivery

Ceann Comhairle, Deputies:

Thank you for this opportunity to address Dáil Éireann today on the issue of tariffs – an issue which is now dominating the economic landscape and the news headlines.

It is safe to say that a tit-for-tat trade-war is a major challenge for the global economy right now and casts a dark shadow over prospects for the Irish economy. Tariffs, to put it simply, are taxes on consumption and investment and are unambiguously negative for economic growth.

In terms of framing last week’s announcement, it marks the intensification of a dynamic that has been underway for some time. I’m referring to ‘de-globalisation’ and the observation – supported by mounting data and evidence – that global economic activity is becoming increasingly fragmented along political lines.

The government’s view is that the priority must be to de-escalate the current situation and to avoid increased trade disputes.

That said, this is not something the government, or even the European Union, can fully control. So it is important to take stock of where our economy is at, in order to evaluate how well we might absorb this policy-induced shock.

Ceann Comhairle, this trade shock comes on top of an unprecedented series of shocks to the Irish and global economies. Thankfully, our economy has proven remarkably resilient to the shocks of the past decade – Brexit, a global pandemic, the shift in the price level triggered by Russia’s invasion of Ukraine.

Unfortunately, this resilience looks set to be tested once again in the months ahead.

Nowhere is this resilience more evident than in the labour market, where the employment rate has never been higher and the unemployment rate has never been lower. To put it another way, we’ve never had so many people in employment – over 2.8 million – and so few in unemployment. To all-intents-and-purposes, the economy is at ‘full employment’ and I think we can take at least some comfort in this.

In addition, the inflationary shock has passed and, unlike previous episodes, the macroeconomic cost of disinflation – in terms of lost jobs – has been relatively low. The most recent data show that inflation stood at just 1.8 per cent in March.

Having said that, I am conscious that the price level remains higher than before the pandemic and the impact this is having on businesses and households. Government has responded – striking the right balance between supporting vulnerable households and businesses while not adding to inflation.

The relative strength of our Irish economy is reflected in the public finances. Last week, Minister Chambers and I published the first quarter exchequer returns: the data show year-on-year growth in all the main tax headings and an underlying exchequer balance of nearly €1 billion.

This, of course, underlines the government’s approach of running budgetary surpluses in ‘good’ times – so that we can respond in a counter-cyclical manner in ‘bad’ times.

While we face into the current challenges from a position of strength, it goes almost without saying that we will not become complacent. It is no exaggeration to say that the world is changing. Fragmentation will likely interact with other structural changes – ageing populations, weak productivity on this side of the Atlantic, high levels of public debt, climate change and biodiversity loss, digitisation and the roll-out of artificial intelligence.

Against this backdrop, it is essential that we maintain a balanced and sustainable approach to budgetary policy.

Ceann Comhairle, I will now turn to recent tariff announcements made by the US administration, with the 20 per cent tariff on US imports from the EU taking effect from today.

The situation is clearly fluid. Additional tariffs of 50 per cent on Chinese imports have been announced – taking the total tariff to over 100 per cent. To state the obvious: this means the tax on the import is now higher than the price of the imported Chinese good.

Overnight the President has also outlined his intention to introduce tariffs on pharmaceuticals – this sector is extremely important to the Irish economy and we will monitor the situation closely.

The increase in tariffs will affect the global economy in both direct and indirect ways. Firstly, it will reduce trade between the US and other countries, limiting those countries’ ability to increase living standards via mutually beneficial trade. Secondly, it will increase prices for people in the US, lowering real incomes. And, finally, the reduction in purchasing power across different countries will inhibit their ability to trade with third countries, indirectly impacting non-US trade.

Overall, the impact will be lower trade, lower living standards and lower growth.

Tariffs and global economic fragmentation will reduce future economic growth – this means future income streams are increasingly uncertain. As investors re-evaluate future prospects, they have been pulling back from equity markets around the world; this is the source of financial market turbulence we’ve seen over the past few days.

Ceann Comhairle, these moves are deeply regrettable. Tariffs are economically destructive for all involved – they trigger lose-lose outcomes.

They do this by putting upward pressure on prices both directly and indirectly, the latter by pushing up input prices. Tariffs, and even the threat of tariffs, also create uncertainty which prompts businesses to hold back investment and households to increase precautionary saving.

The current uncertainty means that tariffs were probably already having a detrimental impact on economic activity around the world, even before the latest announcements from the White House.

I want to be clear in saying that the EU stands ready to negotiate with the US administration with regards to tariffs, and we firmly believe that dialogue and de-escalation is the best path forward at this point.

We all hope that negotiations bear fruit and that a more normal trading relationship between the EU and the US can be restored. However, there is no guarantee of that and notwithstanding the outcome of such negotiations, it is likely that there will be no return to the pre existing rules of trade.

International relationships and trading patterns have been fundamentally changed and European countries, including Ireland, must adapt.

Furthermore, we must do so at a time when there are significant pre-existing structural challenges across Europe. A rapidly ageing population, weak investment and low productivity growth already present headwinds for the European economy.

As the Letta and Draghi reports very comprehensively outlined, Europe needs to significantly enhance its competitiveness. We now must do so at a time of great uncertainty.

However, this also presents opportunities for Europe. I believe that these challenges can be overcome if we maintain the commitment to multilateralism that has helped us achieve so much since we joined the European Community five decades ago.

The Irish, European and global economies thrive on cooperation. Mutual respect, trade and a rules-based economic order is the path to improved living standards across the globe. The world economy — and the European economy in particular — can absorb this shock, we can adapt, we can adjust, and we can prevail with our fundamental values intact and our economies in a strong position.

I have talked about the wider global economic impacts of tariffs. I will now turn to the potential impacts on the Irish economy.

Recent analysis jointly published by my department and the ESRI gives a first glimpse into the potential impacts of tariffs under a range of scenarios. Depending on the scenario, as well as future countermeasures, Modified Domestic Demand, which is the best measure of economic growth, would be between 1-2 per cent below a non-tariff baseline level over the medium term.

The slowdown in growth would be accompanied by lower-than-assumed employment growth, which is expected to be around 2 to 3 per cent lower compared to a no-tariff baseline. In other words, employment levels could be around 55,000 to 85,000 lower.

In summary, this is an important piece of analytical work – Government must be able to understand the likely channels and possible economic impact in order to respond as best we can. This work is an important piece – though not the only piece – of the jigsaw.

Let me now turn to the policy response.

As I said at the outset, Ireland has been a significant beneficiary of free and open trade and foreign direct investment via high paid jobs, tax revenues and positive spillovers to our domestic economy.

With this in mind, recent announcements by the US administration will undoubtedly now lead to slower growth in investment and jobs in the medium term.

However, notwithstanding current uncertainty in the trading environment, these companies have deep roots here and have benefited from the highly skilled workforce and pro-enterprise environment we offer, making us a highly competitive prospect for investment.

We must now focus on how we can best protect ourselves against current uncertainty, exploring how we could potentially diversify our trading relationship. We must also continue to support the largest employers in the State - the small and medium-sized indigenous enterprises up and down the country. We must focus on the factors that are within our control and influence.

That means continuing to invest in human capital – in education, skills, training. We will also continue to invest in key strategic infrastructure – energy, water, sewage, housing, transport – to boost Ireland’s competitiveness further.

Specifically, the Infrastructure, Climate and Nature Fund will allow us to continue to support capital expenditure in the event of a downturn. Revenues from the proceeds of the CJEU ruling will be used to invest in deficits in areas of water, energy, transport and housing allowing for real and tangible improvements in these areas.

Finally, we must also continue to build up safety in our public finances. The Future Ireland Fund will help to fund the known structural challenges we face into the future on issues such as ageing, climate and digitisation.

We are, of course, in a deeply uncertain period for the international economy, and the implications for Ireland in the coming years are not fully clear.

The policy decision announced last week marks the end of the many mutually beneficial decades of free trade enjoyed by the US and the EU. Indeed, the global economy benefitted enormously from free trade, with hundreds of millions of people in the least developed economies lifted out of absolute poverty owing to the opportunities created by deeper integration into the global economy.

Ireland is one such country that has seen its living standards grow significantly from its active participation in the rules-based trading system.

At an EU level, two-way trade amounts to just over €4 billion per day, highlighting the importance of the EU-US economic relationship. We will continue to make the case for free trade and the benefits it brings for all sides.

Government is determined to protect our economy, support and protect jobs, and keep our public finances safe.

We will evaluate what steps are necessary to do this but we need to avoid doing anything that has such a cost that it in turn could create other difficulties down the line. In other words, the policy response needs to be sustainable over the medium-term.

We will also continue to engage extensively with all stakeholders caught in the middle of these tariff measures, building on what has made our economy resilient to recent shocks, while investing to further boost our competitiveness for the next wave of foreign and domestic investment.

Despite the storm clouds overhead, I want to emphasise to the House, that we are approaching the current challenge from a position of economic strength, and we must use this to our advantage in the period ahead.

We have weathered many storms in recent years, we have done this by working with our EU partners, by managing our public finances in a sensible and sustainable way and by having an open and stable economy. In an very changing world, these elements will continue.