The New US Administration and The Irish Economy

The new American administration seems to be intent on dismantling the post second world war order and structures that have served so well for nearly a century and its increasingly clear organisations are going to be stressed in ways not previously imagined. The very existence of NATO the umbrella of security that kept the USSR in check and has kept Russian expansion ambitions in check since the end of the cold war is now gravely threatened. Its existence is threatened by the US, by neoconservatives who patently don’t understand the forces they are playing with. Trump promised to be a dictator from day 1 so unfortunately its not like we weren’t warned. What was not so apparent in the run up to Trump assuming power was just how much some members of his cabinet hate Europe in general and the EU in particular, the exceptions being Greenland which they covet and Hungary where they seem to be copying Orban’s playbook. For the moment the judiciary in the US is managing to resist the wilder extremes of Trumps policies, long may that continue.

Tariffs

Trump and his cohort have obviously never read about the Law of Comparative Advantage and the importance of specialisation in international trade. They have started a “Tariff War” on the completely spurious premise of stopping fentanyl coming across the borders. Maybe some social programs and investment to address why people’s live are so empty that they use opioids would be a better way to address this but that is a sidebar argument. The Trump administration does not seem to appreciate that tariffs are effectively a tax on the consumer and will drive inflation up. Canadian aluminium goes to Mexico to be made into cars and other products, the US consumer could be hit three times with tariffs on a single item.  Posting about the Fed needing to reduce interest rates in the echo chamber that is Truth Social wont impact on the real world where Tariffs will inevitably increase inflation and consequently US interest rates.  That is Economics 101, there is a causal relationship between inflation and interest rates that any first year undergraduate economics student understands.  Trumps actions and threats towards Canada have soured relations to their worst point since 1812 when Canadian troops (under a British flag) invaded the US and burned Washington to the ground. It’s worth remembering that this president is the genius who decided that NAFTA was not fit for purpose in his first term, Trump now as then chose to ignore Balance of Trade surplus in Services when campaigning about trade imbalances in traded Goods.

The US also didn’t seem to realise that reciprocal tariffs would come into play. How dare other countries react to unwarranted and unjustified threats? Unfortunately for the US sovereign countries have their own agendas and they recognise bullshit for what it is. The prevailing wisdom seems to be the US can prise Russia away from China and out of China’s sphere of influence. This understanding of geopolitics is juvenile in the extreme and ignores all the investment made in roads and pipelines. Russia knows its future is in the East. It has replaced European consumers with Chinese and Indian ones. The Silk Road was once the key artery of international trade, and it looks like it may come again. This lurch to embrace Russia over long-standing European allies has resulted in a strange whirring sound in Appleton, Wisconsin. This noise has since been identified as Joseph McCarthy spinning in his grave.

To quote the one and only Bruce Springsteen

“They’re closing down the textile mill, across the railroad tracks. Foreman says, “These jobs are going, boys, and they ain’t coming back”

Consumers in the US enjoy a standard of living higher than the vast majority of the rest of the world. They enjoy this because they consume goods produced in low-cost economies which are shipped to the US for a fraction of what they would cost to produce in the US. There is no reality where the imposition of tariffs will force manufacturing jobs to be repatriated. US workers will not work for the wages necessary to produce goods at prices US consumers will buy those products at.  Did anyone explain to the blue collar MAGA supporters that the only way the end game results in manufacturing jobs coming back to America is a twenty-fold reduction in their salaries? I’m asking for a friend…..

The odd corporate toad will cosy up to Trump and company for the headlines. Ireland needs to look at verticals like Pharmaceuticals where it is significantly exposed. The return on investment horizon on a plant is 25-30 years. Would Wyeth’s shareholders approve if they just wrote off their investment in Grangecstle simply because Trump wants them to? He is completely deluded if he thinks this is realistic. It appears he assumes that the shareholders of these American companies are all red blooded  Republican voting ‘Mericans. Most of these large firms are globally traded stocks with significant institutional investors so that assumption is a complete and utter fallacy, ignoring the fact investors first and foremost want a return on their investment.

Any Global Pharma company daft enough to think that walking away from significant investment overseas would do well to remember that it has consumers and revenues outside the US too. Tesla has lost roughly half its value so far this year. What plays well in the narrow court of opinion on Fox News plays very badly globally and consumer activism is one thing they can’t control. Trump’s recent declaration that anyone protesting outside a Telsa showroom was a domestic terrorist is ludicrous, but it shows just how far towards authoritarianism the US has lurched.

What does this all mean for the Irish Economy

Significant uncertainties, around exports, around market access, around jobs around the future. Investment abhors uncertainty. The US is behaving like a schoolyard bully, grabbing where it can. That is fine in the short term as long its not grabbing your property, however with a delusional narcissist in charge policy could turn 180 degrees over the course of the morning. There is no predicting Trump, other than Trump will act in his own selfish best interest. The phrase conflict of interest is a joke when you have the president of America behaving like a medieval robber baron talking about annexing independent countries like Canada who are longstanding allies of the US or openly advocating ethnic cleansing in the case of Gaza where Donald and friends can recreate Florida on the Med if they could only get rid of those pesky Palestinians who live there.

This does absolutely nothing for investor confidence. We have been the most US leaning country in Europe, with a huge reliance on the US Multinational’s for jobs in the services sector. That is a huge risk. Trump – or more likely someone smarter around him – will sooner or later realise that the Manufacturing element is never coming back, it is 40 years since Springsteen wrote those words and they remain as true today as they did then. The Services roles are different, they are easier to move and the true risk for Ireland is a US pivot to using the Balance of Services rather than the Balance of Trade as the number to argue about at the EU level. If this happens there will be costs in Ireland in terms of jobs lost, significant numbers of jobs unfortunately. Ireland will ultimately be forced to move away from its ambiguous position of being halfway between the US and Europe into a much more European stance. That decision to remain in Europe means that the morally vacuous US administration won’t be inviting the Irish leadership to Washington again any time soon. They’ll stick with their MMA pals.

The Old Chinese Curse- May you live in interesting times

Throw in the disruptive challenge AI represents and the prospect of an all-out and damaging trade war between the US and the rest of the world is becoming very likely. US Corporate responses from real world companies to the disruption will be key. We have already seen the servile forelock tipping from so called Tech Leaders. The damaging and quite frankly reckless policies currently being pursued will very likely have unforeseen consequences.

One of the most worrying things is that the rate of interest on US debt has been creeping up, doubling since the beginning of 2022. The size of the US debt is truly staggering, the US will pay interest payments of $952 billion in 2025 just to service its debt. The rate is currently 3.3% and the potential for a significant downside shock is very real and growing. The global economy is very interconnected but threaten other countries enough and retaliatory actions such as declining to buy US debt or in extreme cases dumping US debt will be exercised. Japan is the largest foreign holder of U.S. debt, with over $1 trillion, followed by China $759 billion and the United Kingdom $723 billion. The Chinese for instance could decline to buy or dump US debt as part of a strategy to pressurise the US to walk away from Taiwan. At the end of the day bullies only understand one thing. Any development like this leading to a crisis on the sale or refinancing of US debt and the financial world examining US solvency seriously could have truly catastrophic global consequences.

Its going to be a very bumpy ride.