Shay Brennan: Certainty over tariffs needed; 10% likely floor

Dr. McConnell, you're very welcome. Thank you for that lengthy and detailed introduction. Sometimes that covers off all questions, but sometimes it raises a lot of questions. So hopefully, I have 10 minutes here, I'll try and get through a few of them, and perhaps we can come back then later on. One area do you want to focus on, and you say in your statement, I won't read it all, but just to point you in the right direction, research from Turek Network, of which the NERI as a member used the NIGEM model to estimate the impacts of, you know what I'm talking about here, to sum it up, essentially, you're saying that the state or block imposing the tariff will be hit, and to a lesser extent, the recipient of the tariff will be hit. So that would suggest policies not retaliating in that respect would make a bit of sense. Now, on top of that, also contributing to certainly short-term volatility, but a pause on investment and a pause on decisions is that we're in a state of uncertainty. And as deadlines keep getting extended and the U.S. administration keeps throwing out random numbers, there's no end to that uncertainty. So coming to some sort of agreement would certainly bring an end to that uncertainty. Both of those would draw a line under it at a level that we don't know yet. And I think the question I have for you here is, because you've done some research on, or pointed to research on what a 10% tariff would imply, but what percentage of a general tariff would be acceptable if we were to choose not to retaliate? I.e., could we pick a figure today and move on from this with a reasonable amount of confidence that this is the best-case outcome? Yeah. Thank you, Deputy. That's a good summation, I think, in terms of the points that you've made there. Yes, all the empirical research that I have seen, and there's surprisingly little of it, because there was an assumption amongst economists that tariffs by advanced economies was mostly of historical interest. But what is there? Much of it rushed out in the last year or so has been very clear that, yes, the bloc imposing the tariff, if it's a general tariff, will be the worst hit. And I suppose, if you think about it, the U.S. is imposing it on all countries, the EU is imposing it on one country. So it's, broadly speaking, affecting a smaller proportion of its imports. So the impact on prices is not as severe, and so forth. The second thing, of course, is that if you are imposing tariffs, you are effectively doing what they are doing, albeit to a smaller proportion of imports, and therefore you will be negatively hit in all of the ways described. So that means higher prices, although that will be competing against the lower economic growth, and lower economic growth tends to mean lower prices. So there is an offsetting effect there, albeit for a very bad reason. If there's less people working, there's less demand in the economy, and therefore prices might come down. And that will compete with the higher prices, and that's why there is some uncertainty as to what happens to prices. The other uncertainty is what happens to exchange rates. Normally, it's expected that a country that brings in the tariffs, they're importing less, so often their exchange rate will improve. But, of course, what happened in this case is that it didn't, the value of the dollar depreciated, because the policies were considered so eccentric, and it was such uncertainty that there was a loss of confidence in the U.S. economy. So people, hedge funds and so forth, and pension funds were taking their assets out of the U.S. altogether. And that's what ultimately precipitated his original climbdown, quite wise climbdown, actually. In terms of the state of uncertainty, you are correct. One of the four negative transmissions is uncertainty. So if you can arrive at a particular figure that you know it's going to be until the Trump administration is gone, and assuming there is no Trump administration, but even if the next administration brings it in, then businesses can actually make decisions. So at the moment, you can't make a decision. If you're bouncing up from 50% to 30% to 10%, then you don't know whether it makes sense to build a plant in Ireland or build a plant in the U.S. or Germany. So you will simply hold off. That means less jobs in construction in the short term, and it means lower productivity in the longer term. If you can bring certainty, then at least decisions can be made, even if they're not the decisions that they might have made six months ago. And that will lead to a resumption of investment. It might be pent-up investment, maybe not as much as there would have been before, but at least it will be there. So an agreement is good for the economy. It's very difficult to – so it would draw a line under to your point. What would be acceptable as a tariff, the lower the number, the better. There's no good number for a tariff. There are good reasons for a tariff, albeit, you know, for the type of reasons that South Korea and other countries would have done in the 20th century. They're not necessarily relevant for the United States in the 21st century unless they're trying to shut out particular sectors which they want to develop up over time. But, of course, they can simply just ban inputs altogether. There's all sorts of mechanisms that you can use. So that would mean that a sector-specific tariff might make sense for the United States for particular things, but a general tariff does not. So what would be acceptable? There's no right answer to that. I think it's not going to be lower than 10%. We're not going to get a better deal than the United Kingdom. So it would appear that 10% is the floor that's on offer, at least for the next two years. So the closer we can get to that, the better. Obviously, 30% would be devastatingly bad as an outcome. You reach a point eventually where trade simply ceases to become profitable at all. In that case, what might happen with the intra-company transfers and pharmaceuticals and the like is they might start selling the prices to their analogue in the US at a very, very low level. So it persists and the US continues to get it. And what would happen then is we would have lower corporation tax receipts. But that will depend very, very much on the specificities of the actual company, which are all very, very different from each other in terms of how they operate. So that would be the answer that I would give. The lower we can get it, the better. Yeah, thanks. And just on that number, whatever that number may be, I think I probably know the answer to this one and you definitely can't put a firm figure on it. But is 30% – and you gave a lot of statistics and potential economic impacts using concrete numbers around a 10% tariff. Is a 30% tariff three times as bad as a 10% or is it exponential? It's not three times as bad. It doesn't work exactly like that. In some cases, it's fall off a cliff. It simply just becomes unviable. We can't make a profit because unless, on your side, it is a necessity, in which case you just simply push all the prices onto U.S. consumers. So for pharmaceutical goods, if it's a medicine that people need to live, then they will pay any price. If, on the other hand, it's whiskey or butter, then they're not going to pay 30% extra, in which case it falls off a cliff. So it depends – it's the point I was making about whether goods are elastic or inelastic. And, in fact, that's what elastic and inelastic mean, in that sense, is how sensitive sales are to the actual price. So it depends on the good or the service. Could I ask you your opinion? You've outlined two potential ways forward, two strategies. One is to accept a tariff and move on. The other is to play hardball and take the more strategic approach and hope the other side folds first. Do you have a preference or an opinion as to which is best for Ireland in this situation? I think the problem here is it depends upon the whims of a very intemperate person. And, ideally, if you were dealing with a rational actor, you might think that the second option, play hardball, makes sense. Because a rational actor would pull back from that, would say, I don't want the U.S. economy to fall into recession because of this, which means they'll be destroyed in the congressional elections, presumably. That is the logical thing. But, with this current administration, their policies are so eccentric compared to norms, it's difficult for me to simply say that's what we ought to do because he could push it forward, regardless of what the U.S. financial markets think about him in terms of taco and all that. For the Irish economy, I think it's a different decision than it is for the EU economy. I think the EU economy, taken as a bloc, could very much play hardball. The EU economy is enormous and is as strong as the U.S. economy and is able to hit back. And if it sucks this up for a period of time and destroys tariffs as a policy for a generation, then maybe there is value in that. But if it does that, it has to make sure that it also puts in place the policies that would protect workers. So we treat this as a shock like COVID. We try and ride it out for a period of time. On the other hand, if you are Ireland, it is clearly better to not respond at all and to just go, OK, we just take this hit, we take the damage, and we minimise the damage to our economy because we're so exposed. If you end up at a 30% for dairy, for whiskey, for all of these things, you basically shut down the States as a market. So we're not in the same place as the other European countries. So our contrary position from a European perspective is completely irrational, in my view. Yeah. Thank you for going through that. Appreciate it.