Agriculture hardest hit by Trump tariffs

Ireland’s agricultural sector has always been a huge value driver for the economy, as the products it exports are almost entirely produced on the island.

This means that every euro of agri-food exports has a significantly larger effect on the economy than a euro of other types of product exported.

In an information session held in the wake of the announcement of Trump’s 20% trade tariffs, employer body Ibec said that €1 of agri-food exports is worth €1.55 to the Irish economy. This is great news when exports are growing, but it also means that every time exports fall, the effect on the rural communities which rely on the sector is magnified.

In the hours following Trump’s announcement, we have heard from the Irish Farmers' Assocaition, Ornua, the European Dairy Association and other trade bodies all warning of the specific risks to agricultural exports from the tariffs.

While it will be difficult to calculate the effects of the fresh tariffs on exports to the US and the knock-on effects on Irish production, a couple of things are immediately clear.

The first - that Irish butter and drinks sold in the US will be more expensive - is obvious. However, what effect that will have on demand in the US is not clear at all.

We saw a jump in dairy exports to the US in the first couple of months of this year, some of which presumably was driven by customers ordering extra stock ahead of the imposition of tariffs.

Drop off in demand

Now that those tariffs are in place, we will likely see a short-term drop off in customer demand, as those stocks are run down before new orders are placed.

The longer-term effect will depend on a few things – how much of the tariffs' price is passed on to consumers (we estimate it would be around an extra 10% on the retail price), how long the tariffs remain in place and, critically, how the US economy performs under the new tariffs.

If, as we saw in 2019, the tariffs are short term in nature, then the hit could end up being fairly minor. If retailers in the US swallow some of the increase in the wholesale price, then again this would serve to reduce the hit.

Finally, if the US economy continues to grow, then consumer spending would remain strong, which is a critical factor for the sales of Irish agri-food products in the US, where those products generally are sold at the premium end of the market.

That is a lot that needs to go right in order for Trump’s decision not to cause difficulties for Irish dairy

Taken together, that is a lot that needs to go right in order for Trump’s decision not to cause difficulties for Irish dairy and drinks exports.

The different levels of tariffs on both sides of the border may also have an effect. Companies, where possible, will try to manufacture their agri-food products for the US market in Northern Ireland.

For some, such as Baileys which already has production in Belfast, this would be a relatively easy way to reduce their tariff cost. For others, such as Ornua, with Kerrygold production in Co Cork, this would be a much more difficult feat to achieve.

Rules of origin in international trade and the Windsor framework mean that exporting finished product to Northern Ireland and then shipping on to the US would not succeed as a workaround for the tariffs.

There would be a cost to the Irish economy from increased manufacturing in Northern Ireland, as that would reduce the multiplier effect from exports from the Republic to far below the €1.55 level cited by Ibec.

Negotiations

Movements in production locations would only happen if it were to become clear that the import duties are set to be in place for the long term.

It is too early to tell yet how possible negotiations between the EU and the US on trade will progress. The hope is that talks will lead to a reduction, as was seen in the previous Trump administration.

Perhaps the biggest threat to Irish agri-food exporters on both sides of the border is the performance of the US economy.

The reaction from global financial markets since the announcement suggest increased fears about a downturn in the US economy. Were that to happen, Irish exports could see a drop in consumer demand, as people are less able to afford the premium products this country sells to the US.

A weakening US economy also has the effect of weakening the US dollar against other currencies including the euro. Since Trump made his speech on Wednesday, the dollar has dropped in value by almost 3% against the euro, which, all other things being equal, makes exports to the US 3% more expensive.

Overall, there are short-term and longer-term effects from Trump’s announcement, all of which will increase the headwinds facing Irish agri-food exports to the US.

The 11% of Irish agri-food exports that go to the US might seem small, but it falls unevenly on Irish farmers, with dairy by far the most exposed.

If, as seems likely, that headwinds turn into a drop in the value of exports to that country, then the effect will be felt across rural Ireland.