KYRAN FITZGERALD: A retreating world narrows Ireland's trade horizons

As the US and Britain consider pushing up barriers to trade, smaller players like Ireland will need to use their brains as never before, writes Kyran Fitzgerald.

Mohamed El Erian has carved out a considerable reputation having served for many years as chief economist at the leading US fund manager Pimco. Today he is the chief economic advisor of its parent Allianz.

Mr El Erian is not, it has to be said, the most cheery of souls.

These days, he is particularly gloomy, obsessed by what he views as the retreat of advanced economies from the global economy, as well as Britain, which is quitting regional trading arrangements.

Ireland has, rather like a small bird perched on the back of a large mammal, managed to do rather well out of globalisation.

Now, the fear is that this process will go into reverse as international trading arrangements are threatened, perhaps sundered.

Small open economies like Ireland could find themselves in the eye of a storm over which they have little control.

Mr El Erian’s core argument is that the traditional advanced western economies will end up shooting themselves in the foot if they embark on a retreat from global commitments particularly in the area of trade.

But he goes further in warning that small trading nations with little clout could lose out should the world break up into competing, perhaps hostile, regional or national entities.

Renationalisation spells deep trouble for countries with open economies.

As Mr El Erian points out, enormous privileges have been conferred on advanced nations, and on the US, in particular, under the deal forged at Bretton Woods in 1944.

By virtue of its status as the issuer of a reserve currency, the US has been able to finance large deficits at favourable rates.

The IMF and World Bank have been largely dominated by western nations, its leadership drawn in large part from the US, Britain, France and Australia.

While China’s president Xi Jinping, presents himself as a defender of globalisation, his country is developing a parallel strategy, building up bilateral ties with nations such as Pakistan.

The breakdown in relations between the US and longtime partners such as its neighbour Mexico looks set to serve the interests of China, assuming its economy does not itself implode as some have been forecasting — for some years now.

China’s creation, the Asian Infrastructure Investment Bank, looks set to rival the World Bank in terms of influence, having attracted several allies of the US into its ranks.

China, of course, faces its own acute challenges. The country is clamping down on capital outflows as it tries to cope with the consequences of a debt-financed boom. The country is, however, a big beast which should be well equipped to survive in a jungle like new order.

But for smaller trading nations, the future will be challenging, to say the least, with established trading relationships under a set of dark clouds.

In recent weeks, the TCD professor Alan Matthews has written in some detail about the likely consequences of Brexit - the renationalisation process on our doorstep — for the Irish food industry.

Much ink has been spilled on this subject, but Matthews is particularly well informed.

Last Spring, Teagasc researchers Trevor Donnellan and Kevin Hanrahan produced a study containing estimates of the likely impact of Brexit on the food sector, one that is especially exposed to a break down in free flows of trade between this country and Britain.

They concluded that a reduction in exports was all but certain and could range anywhere from €150m to €800m.

Professor Matthews pays due respect to the report but goes on to suggest the above predictions are “gross underestimates” of the adverse impact of a British departure from the customs union, an event which he now considers to be highly likely.

He warns that a substantial fall in both the volume of Irish food exports and in their profitability is on the cards in a situation where further downward pressure on prices, in euro terms, achieved in the British market appears on the cards.

Irish food and drink exports rose by over 40% in value between 2010 and 2016 - a jump which benefited many communities which had borne the brunt of the downturn.

But this performance is now under threat as a result of the increased likelihood of a painful divorce between Britain and the rest of the EU.

Professor Matthews points out that producers of fresh vegetables, chocolate, meat and fish preparations and animal feed-stuffs are particularly dependent on the UK market which last year accounted for 43% of Irish food and drink exports in total.

Suppliers of fish, cereal preparations, infant formula, beverages and spirits would be much less hard hit.

Some €833n out of €1.82bn of dairy exports went to Britain last year, whereas the UK accounted for €460m out of €1.92bn in exports in the cereal category.

Ireland would be particularly hard hit if the UK and the rest of the EU cannot negotiate a free trade agreement, though if Britain opts for low levels of tariff protection, this would become less important.

The other great fear is that Britain could enter into trade agreements with competing agri-exporters including the US, Brazil and Australia.

The Tory government appears keen to complete a bilateral deal with the US, in particular, though this won’t be possible until the exit negotiations have been completed, a process likely to be fraught with danger, given EU demands for outstanding payments amounting to in excess of €50bn.

Prime minister Theresa May acknowledged Irish concerns while making soothing noises about the strength of our two countries’ relationships. Similar soothing noises have emanated from the EU’s top negotiator, Michel Barnier.

The Trump administration has to date not bothered too much with the diplomatic niceties.

Already, countries as diverse as Mexico, China and Germany have felt the lash of president Trump’s lip as old fashioned 1930s-style mercantilism is dusted off, threatening supply chains and trading arrangements.

In such a febrile environment, where bigger countries bump up against each other like hard lads in a concrete school play ground, smaller players like Ireland will need to use their brains as never before.



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