Tariffs mean Trump is shrinking the pie while demanding a larger slice

While plants will not leave Ireland overnight, our corporation tax receipts could drop significantly, writes Brian Lucey 

The Johnson & Johnson manufacturing plant in Ringaskiddy, Co Cork: Ireland's public finances are heavily reliant on corporation tax receipts from a remarkably small number of multinationals, many of US origin. Picture: David Creedon

There’s a reason economics is often called "political economy". The phrase reminds us that economic decisions, especially on the grand scale of international trade and finance, are never just about dry numbers. They are deeply intertwined with power, politics, and the perceived interests of the state. Political economy is about the golden rule — them as have the gold make the rules. 

Discussions around new US tariffs give us a stark example: this looks less like a sophisticated economic strategy and more like a return to old-fashioned mercantilism, prioritising state power over complex realities. 

Trump’s administration has expressed a desire to bring back to the USA as many jobs as possible, and to cut taxes. Part of this is to be achieved by tariffs, taxes on imported goods that will, it is felt, encourage companies to either not move to offshore locations or to indeed bring back to the US existing overseas operations. 

Doing so will then allow products to be produced in the USA, avoiding taxes. All sounds good, yeah? No, not really. This is in essence an old, thoroughly debunked model of the economy called mercantilism.

Mercantilism viewed global wealth as fixed, its proponents urging nations to export as much as possible and import as little as possible, thus to hoard gold and power. Trade wasn't seen as mutually beneficial, but as a zero-sum game. 

President Donald Trump speaks during an event to announce new tariffs in the Rose Garden at the White House on Wednesday. Picture: AP/Mark Schiefelbein

The simplistic approach is apparently favoured by Trump, who prefers brevity over complex briefs, and his nativist protectionist policies channel this archaic view. It has become clear the US government has used a bizarrely crude formula for calculating potential "reciprocal" tariffs: determine a country's trade surplus with the US, divide it by total US imports from that country, halve the result, and — snap — a tariff rate is born. 

Although like a trade Oprah, there is a 10% tariff for every import, regardless. This simplistic approach, of course, ignores supply chains, consumer costs, the nuances of different industries, and the actual reasons why trade imbalances exist.

This drive for simplicity leads not to clarity, but to baffling inconsistency. Consider the details: pharmaceuticals, a major US import sector, might be exempt from the calculation . Yet, territories with negligible trade, even uninhabited islands, face hefty tariffs. Simultaneously, countries like Russia or Belarus escape the net altogether, in a move that surprises exactly nobody. 

This caprice exposes the policy not as a coherent economic plan, but as political theatre, an area in which Trump excels. It signals tariffs are being imposed not based on rigorous analysis, but on whim, slights, and domestic political signalling. This isn't statecraft; it's statecraft-as-performance-art.

Of course, tariffs can be a legitimate instrument in a government's fiscal toolkit. They can protect infant industries, respond to unfair trade practices, and raise revenue. However, the logic underpinning the current proposals appears self-defeating. One goal is to reduce the trade deficit — meaning fewer net imports. Yet, this runs afoul of another aim, to raise government revenue through these import taxes and then cut other taxes, especially income tax. 

Contradiction is glaring

The contradiction is glaring: if you succeed in significantly reducing imports through tariffs, the revenue generated from those will necessarily fall, undermining any budget-balancing aspirations. You can't simultaneously shrink a pie and demand a larger slice.

For Ireland, the direct threat might not be immediate, widespread job losses, particularly in sectors like pharmaceuticals. These industries are capital-intensive, built on massive long-term investments and decade-long planning cycles. Plants won't vanish overnight. 

The deeper danger lies in revenue vulnerability. Ireland's public finances are heavily reliant on corporation tax receipts from a remarkably small number of multinationals, many of US origin. 

While these companies have deep roots here, significant shifts in US trade policy, the ensuing global economic uncertainty, or impacts on their overall profitability could dramatically affect the flow of corporate taxes into Irish coffers. A fiscal model reliant on a few key players is inherently exposed to shocks.

Ultimately, the launch of a global tariff war signals a dangerous departure from nuanced economic management. It prioritises blunt state power over the complex, messy interconnected reality of global trade. 

While the domestic political appeal of 'getting tough' might resonate, the economic fallout — domestically through higher prices and internationally through instability and retaliatory measures — will surely negate any perceived benefits. 

For countries like Ireland, caught in the chop, the focus must be on European solidarity and an urgent broadening of the tax base. Dare we hope?

• Brian Lucey is a professor of economics at Trinity College Dublin