Escalation in tariff wars could see Irish consumers going under

Most Irish consumers will likely have been unmoved by the concerns of US motorcycle maker Harley-Davidson for its European business or the prospects for sales of bourbon, as the man on the street refuses to swallow price increases.

Harley and Jack Daniels parent Brown Forman have been among the most vocal US voices on the impact of retaliatory sanctions by the European Union against the United States in one of a series of escalating trade disputes triggered by US president Donald Trump. But both are very much niche products in the Irish market.

However, the tariffs imposed late last week on a wide range of US goods are likely to affect Irish consumers in more ways than they know. In fact, the sanctions are likely to impact Irish consumers and Irish companies far more than the original US tariffs on European goods.

And, it’s not just big ticket items – like Harley-Davidson motorbikes – that will cost more unless both sides can find a way to resolve the current impasse. And that’s unlikely, as it stands. If anything, an escalation is more probable, with the White House currently reviewing its options.

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So how has it come to this? And what does it mean on the ground?

It’s worth taking a step back to explain the situation. The imposition by the EU of tariffs on goods coming from the US from last Friday is intended simply as a retaliatory measure. It is responding to the US president’s decision not to exempt the EU (along with Canada and Mexico) from punitive tariffs on steel (25 per cent) and aluminium (10 per cent) from the start of the month.

The goods that have been subjected to tariffs by the European Commission have been so selected to match the level of European goods that will become more expensive in the US.

Trump heartlands

The US tariffs target $7.2 billion (€6.2 billion) worth of EU imports and, based on 2016 figures, will yield additional duty of $1.6 billion (€1.3 billion) for the country.

The EU plans ultimately to levy duties on $7.1 billion (€6.1 billion) of imports from the US, yielding the same amount. However, it says it is playing strictly by the rules of the World Trade Organisation (WTO) – which oversees trade relations and disputes. As a result, it has only imposed additional tariffs on $3.2 billion (€2.7 billion) of imports to date, yielding $700 million (€604 million).

Europe says the goods it has targeted are not intended to attack Trump heartlands, but rather fairly deal with the situation started by the US president. That's not necessarily how other observers see it. Solid Republican states like Wisconsin (Harley-Davidson) and Kentucky (bourbon) – political homes to House speaker Paul Ryan and Senate majority leader Mitch McConnell respectively – see themselves as carefully selected targets.

And it is worth noting that, at least in Ireland, the original Trump sanctions had little direct impact. With the exception of the Aughinish Alumina facility in Limerick, we export no steel or aluminium to the US. Trump's action appeared to be an effort to impact German, French, Italian and Spanish aluminium and steel exporters.

But Irish business will feel the bite from Brussels' retaliatory action and consumers will be affected in the medium term. Among them is Progressive Distribution, an adventure sports equipment distributor based in Dublin.

It has had to cancel an order of two containers of canoes and kayaks from the US because the tariffs have "eliminated the commercial viability" of some of the products it imports, according to Shane Cronin, the company's managing director.

“The revenue we would have expected to generate in the short term is gone,” he said, noting that both containers would have had a total retail value of about €160,000.

Cronin says his company has effectively lost out as a result of the tariffs because this is peak season for canoe and kayak purchasing. It will take at least a month, he said, to replace the order that has been cancelled, by which time the season will be edging toward its end.

While Cronin’s example looks bad, both for business and the exchequer, the amount we import from the US that will be subjected to this first wave of tariffs is still relatively small. The concern is that this is a precursor to more worrying tariffs.

Consumers

Under Trump’s initial tariffs, only €15 million worth of Irish goods was affected. The EU’s response will see €59 million worth of US imports to Ireland taxed at a higher rate. For Ireland, based on the first round of sanctions, it’s clear that consumers, as opposed to exporters, will be the losers.

However, that €59 million figure is only 0.4 per cent of our total imports from the US and €37 million of that is steel that we import. While it’s unclear where this steel is going, one source suggests it’s being used in the medical technology sector where US companies in Ireland are simply keeping the same supplier relationship as they have in their home market.

More importantly for consumers here is the fact that €13.5 million worth of US imports subjected to the new tariff regime are food products. That includes items like maize, or corn. So, for example, corn imported from the US for use in the supply chain, like in sandwich making, could result in that good being branded as a premium product.

Additionally, popcorn sourced from the US is likely to become more expensive as a result of the imposition of a 25 per cent tariff.

While the tariffs could pose problems in particular sectors, the 0.4 per cent of our total US imports for which they account is below the EU average. Across the wider bloc, the impact is on about 1 per cent of US imports – though Malta is disproportionately affected as 21 per cent of the goods it imports from the US will be subjected to the new tariffs. The Maltese figure is distorted as a result of its tendency to import US, as opposed to European, yachts and boats. These will be subject to a 25 per cent tariff.

Again, that's an issue that won't bite particularly hard in the Republic. Gerry Salmon, the managing director of international yacht broker MGM boats, says US sailboats aren't particular popular here and failed to populate our coastline, even in boom times.

"Probably, for the moment, there are select groups of people that are very badly hit by this but, in the overall scheme of things, we won't see huge impacts in the wider economy," said Alison Wrynn, an economist with Ibec.

“Trump, most likely, will retaliate and if it becomes a tit-for-tat trade war, we could see more of our goods subject to tariffs. Any kind of slowdown in global trade will have a big effect on the wider economy.”

While the next moves are unclear, Ms Wrynn said the “evidence is that this is going to escalate and we will be dragged in”. The way in which this could happen is through any retaliatory US tariffs on whiskey imports.

That could have a devastating effect on the Irish industry. In the last 10 years, exports of Irish whiskey have increased 340 per cent, with two-thirds of that growth in the US. As a country, we export €560 million worth of whiskey products to the US.

For Simon McKeever, chief executive of the Irish Exporters’ Association, that is a cause for concern. “There is a worry that the US would go after whiskey and that would cause huge damage in the Irish industry. Because we’re a very small and open economy, it would have a disproportionate effect on Ireland over other economies,” he said.

Troubling

For exporters, that is clearly troubling. However, as things stand on both sides, the range of goods subjected to tariffs isn’t that wide.

"We need to temper the fears around this one," said Thomas Byrne, a director of Retail Ireland. "It is impactful in certain areas of retail and, if you sell those [items], you're likely to see a 25 per cent increase in sourcing costs."

Aside from corn and bourbon, the list of US goods that are being levied with higher tariffs includes cranberry juice, orange juice, tobacco, snuff and playing cards.

Down the line, there is concern in some sectors that white goods will be troubled by this trade war. American multinational Whirlpool will pay a higher price on steel imported to the US, for example. However, it has manufacturing facilities in Europe so it's unclear the extent to which any higher costs there will be passed on to consumers here.

Additionally, while tariffs on tobacco won’t ruffle too many feathers – considering that, in 2017, we imported just €45,000 of tobacco products from the US – fruit and vegetable imports is more significant, amounting to €17.2 million. But that’s still only a drop in the ocean when you look at our overall imports.

Where Ireland could find itself quite troubled is if the EU imposed further retaliatory tariffs on sectors like medicinal or pharmaceutical products and transport equipment. Those two categories of goods account for two-thirds of our US imports – exceeding €10.8 billion in value.

While these have been untouched as of yet, if the EU is to impose further tariffs, transport equipment in particular will be in the firing line. In its list submitted to the World Trade Organisation, the EU added on a secondary list – Annex II – of products that can be subject to tariffs after a WTO ruling that the US tariffs are incompatible with the organisation’s rules.

For Ireland’s aerospace industry in particular, it doesn’t make for welcome reading. A spate of aircraft parts, including flight data recorders will be affected, with proposed tariffs in the case of the recorders as high as 50 per cent. A range of motor vehicles, too, will be levied.

On the consumer side, US whiskey, clothes, footwear, dishwashers, lipstick, mopeds and sunbeds will all become more expensive in any second wave of EU action, in some cases with tariffs of 50 per cent.

Retail Ireland’s Byrne is clear that, when the tariffs come, they’re here to stay. “They’re easy to start but hard to unwind,” he said.

Although limited in their scope, he also wondered whether this presages what a hard Brexit could look like. That will clearly be on the back of the mind of both exporters and importers, especially manufacturers of discretionary or luxury, goods.

Few winners

The exchequer isn’t likely to gain significantly from this spat either. If the “annex II” list is implemented, we could see levies on some of our footwear imports. But we only imported €655,000 worth of footwear products from the US last year.

Some textiles would be subjected to a 10 per cent tariff but, again, that category isn’t terribly significant with only €30.2 million imported here in 2017. And not all of that will fall under the tariff regime.

So if the exchequer doesn’t win big, the consumer doesn’t win big and exporters don’t, who is the winner?

For Ireland, there really are few winners. The countermeasures, which focus particularly on taxing US steel and aluminium imports to Europe, will be most effective in central European countries like Germany, France, Italy and Spain – all currently among the top 10 importers of US steel. The UK is also likely to get a boost.

What is particularly troubling, as Ibec’s Wrynn pointed out, is that we might get dragged further into this spat. In stark contrast to recession times, Irish consumers could end up paying higher bills because of a dent, in particular, to German exports. It would appear that the auto industry is in Trump’s firing line. Such a shot would adversely affect Germany but car component manufacturers here could be troubled.

To date, Trump has not retaliated to the EU measures and whiskey exporters are carrying on as usual. But with the US president’s penchant for shotgun diplomacy, there’s no guarantee the status quo will remain for long.

Irish adventure sports firm forced to cancel US order

Progressive Distribution imports adventure sports equipment from the US. Shane Cronin, the company’s managing director, said that, among the items it brings in for sale here, are about 300 canoes and kayaks from the US every year.

Cronin has cancelled two container loads of canoes and kayaks in recent days because of the EU tariffs imposed at the end of last week. They would have caused price increases too significant to pass on to the consumer, and one which the company couldn’t soak up.

At €800 each, the boats are not casual purchases. And the near tenfold increase in duty under the tariffs would have meant a price increase of almost €180, bringing them within touching distance of €1,000.

The two container loads would have carried about 200 boats, with a total retail value of €160,000. In total, Cronin will now stop buying boats worth €240,000 annually from the US.

For him, this is particularly sad because the US company is one he’s been working with for 15 years. They had built up a good relationship. As a result of the tariffs, that has ended effectively overnight.

“Those lads are worried about their jobs now,” Cronin said, noting that his European counterparts have also begun to cancel orders from that particular company.

While clearly badly affecting the US business, Cronin’s own business will likely take a hit. This is the peak season for canoe and kayak buying, he says, and Ireland’s heatwave would originally have been expected to encourage more people to get involved in outdoor pursuits. This cancelled order will take at least a month, if not longer, to replace. By then, the season for buying these boats will be nearing its end.

Effectively, the Irish man will lose the kayak and canoe revenue that this summer would have produced, and will simply have to wait until next year to revive that particular segment of his business.

The Irish exchequer will also lose out. Cronin had paid a tariff of 2.7 per cent. Now, because he’ll source new kayaks and canoes from Europe, that tax revenue will be lost.

As Cronin noted, the 25 per cent tariff simply “eliminated the commercial viability” of the product.

Top 10 items by broad category affected by EU trade sanctions:

1. Steel

2. Food

3. Alcoholic beverages

4. Cosmetic

5. Clothing

6. Non-alcoholic beverages

7. Motorbikes and boats

8. Aluminium

9. Playing cards

10. Tobacco

10 unusual goods being subjected to EU tariffs:

1. Dried, shelled kidney beans

2. Water-pipe tobacco

3. Manicure or pedicure preparations

4. Playing cards

5. Stainless steel sinks or washbasins

6. Eye make-up preparations

7. Cotton bed linen

8. Broken rice

9. Sailboats and yachts

10. Men and women’s cotton shorts