COLUMN: A tale of three tariff wars

At its foundation in 1922, the Irish Free State had almost no manufacturing enterprises. The Census of Production in 1926 described an economy where about 60 percent of employment was agricultural and only about 7 percent was manufacturing. The remaining 33 percent was in public and private services. This was not a result of Irish lack of entrepreneurial talent. Rather it was typical of a colonised region dominated by the then global powerhouse of the British economy. As a consequence of historical restrictions on Irish businesses, turbulent politics and the Great Famine, Irish manufacturing had languished.

A British mandated era of free trade continued for the first decade of the Free State. Governments of that period were unwilling to deviate from a system that made it difficult for native manufacturing to grow. All changed with the 1932 election when a coalition of Fianna Fáil and Labour replaced the Cumann na nGaedheal administration. The new government imposed strict controls on foreign ownership of Irish enterprises and set high tariffs on imports of manufactured goods. The objective was to create protective barriers to permit native industries to set-up and prosper by sheltering them from superior competitiveness of advanced foreign firms.

This policy change was regarded as madness by the previous government. An invitation was issued to the famous British economist, John Maynard Keynes – a prominent supporter of free trade – to present the first Finlay lecture in UCD on April 19, 1933. It was expected that Keynes would denounce the shift to protective tariff barriers, but to the surprise of everyone, Keynes expressed warm, if heavily qualified, support for the government in a lecture entitled 'National Self Sufficiency' (see 'Keynes in Dublin', by Mark Nolan).

Global Depression

Clearly Keynes anticipated the lurch towards world war after the disastrous failure of the Treaty of Versailles and the global depression that started in 1929. Hitler had become German Chancellor three months earlier. Keynes realised that small states like Ireland needed to become more self-sufficient. A range of enterprises in areas such as clothing, footwear, furniture, food processing and car assembly set-up and serviced domestic demand for many decades. But the Achilles heel of tariff protection of infant industries is that few of them ever develop, attain international standards of competitiveness and break into export markets. Almost none of these industries survived into the post-1960 era of free trade, a notable local exception being the Westport based firm Portwest which made the transition from protection to a thriving Irish multi-national.

I played a tiny part of the second tariff war myself. Back in the late 1980s much of my ESRI work was concerned with preparations for the launch of the European Single Market. Under Jacques Delors, the Commission’s objective was to remove all tariff and non-tariff barriers between EU states, but the fear was that the weaker states (Portugal, Ireland, Greece and Spain) would be unable to compete with larger and more advanced states such as Germany, France and the UK.

To address this challenge, the Commission expanded regional development aid and launched Structural Fund programmes directing massive investment funds to weaker states to support infrastructure, education and training, and enhanced competitiveness. The beneficial results for Ireland were spectacular and long lasting, in contrast with the earlier protective tariff barriers whose initial benefits had not endured. The demolition of all tariff and non-tariff barriers combined with targetted development aid produced a transformation that accelerated the convergence of living standards throughout the EU.

Tariffs are back

A third tariff war recently erupted when the newly re-elected US President, Donald Trump, asserted that the rest of the world had been using tariffs and other anti-competitive support measures to compete unfairly against US firms. Unfairness was essentially defined as the trade surplus that foreign states ran with the US. Hence, if a foreign country ran a trade surplus with the US, it was deemed to be competing unfairly. The range of high US tariffs levied across all of its trading partners and the threat of retaliation risks sending the global economy into a downward tail spin. Ireland, with its many US multi-nationals, is particularly vulnerable.

An interesting comparison can be made between the EU move to a Single Market and the US embrace of globalisation and its NAFTA agreements with Mexico and Canada. The EU realised that there would be winners and losers and this would generate opposition to the Single Market. Potential losses to more vulnerable states (such as Ireland) were addressed by generous regional investment programmes designed to assist the development of weaker states. The US, on the other hand, ignored the fact that globalisation was likely to devastate certain communities who were dependent on enterprises that would shift abroad. The subsequent destruction of cities like Detroit – the home of the US car industry – showed what happens when regional equity is ignored.

Of course, the hostility of the Trump administration to the EU runs deeper than mere business and economic issues. The social democratic underpinnings of the EU are in stark contrast to the extreme autocratic, right wing basis of US society under President Trump. In the EU, the state (the European Commission as well as individual states) act both as facilitators of private sector innovation and as regulators of private sector behaviour. In the US, the current administration denies a leading role for the state and seeks to abolish its regulatory role. The inability of the Trump administration to learn anything from history is astonishing. The world may pay a price for such ignorance, especially the more vulnerable parts of it.