Writing about current economic events is particularly challenging, as the ground rules for the world economy change daily.
Up to a year ago, the arrangements under which the EU traded with the rest of the world were based on agreements established decades ago. However, the US tore up that rulebook early in 2025. Last August, a new rather one-sided agreement was reached, in which the EU accepted 15 per cent tariffs on much of our exports to the US, while imposing no retaliatory tariffs on US imports. Separately, the UK reached its own deal, accepting a tariff of 10 per cent on its exports to the US.
Even before the EU-US deal had been formally adopted, the US threatened a week ago to tear it up over Greenland. While that threat was apparently lifted at Davos, there can be no certainty that fickle US decision-makers won’t renew these tariff threats. Clearly, any current agreement with the US is not worth the virtual paper it is written on.
If the US were to rip up last summer’s agreement, the EU would have to respond.
The EU has a list of US exports to be targeted with countervailing tariffs. The affected goods would include aircraft, pharmaceuticals and machinery. The tariffs would result in higher EU prices for such US goods, discouraging us from buying from the US.
Ryanair is a major customer for US-manufactured Boeing aircraft, which would be likely to be hit with any tariffs. However, it appears that the small print in Ryanair’s contracts with Boeing will insulate the Irish airline from paying the duty, so that it would be Boeing that would take a big hit from having to pay any tariffs, seriously affecting its profitability.
This potential threat will also encourage EU airlines to buy Airbus aircraft in future. There could also be knock on effects for Boeing elsewhere, especially in its Asian markets.
The EU has prepared what is called the Big Bazooka, which would target EU purchases of services from the US.
From an EU point of view, this makes sense. In 2024, the EU exported €540 billion worth of goods to the US, while it imported only €290 billion. However, this was substantially offset by imports of €475 billion in services from the US. The EU deficit on this services trade last year was €140 billion.
A tax by the EU on service imports from the US could prove very difficult for Ireland. It would target the likes of Google, Microsoft, and Apple, all of which have major operations in Ireland. Almost half of the EU imports of US services come through Ireland, so there is no way we could escape such an EU action.
Imposing penalties on services imports is much trickier than on goods imports, Customs officers don’t police the optical fibre connections with the US.
But the attraction of targeting US services is that it would threaten the profitability of some key US companies, affecting some very influential billionaires. They might be more likely to get Trump’s attention than targeting companies like Boeing, which are out of favour in Washington.
Any action against US services firms will aim to hit their profitability, as well as their ability to sell in the EU. In the absence of clear competitive substitutes for the offerings of the big tech companies, the first impact would be on profitability rather than markets. Reduced profits would sharply lower the tax they pay in Ireland, corporation tax on which our public finances have become overly-dependent.
Given their serious market power, these companies would eventually try and recoup losses from EU trade measures through higher prices in the EU.
The US leveraging of its dominant world position raises a longer-term question for the EU. Should the EU aim to develop alternative EU-based suppliers and impose restrictions on US services firms in Europe to encourage that? Such a strategy could take a decade or more to mature and would badly affect Ireland. It is the route that China chose to pursue, partly for economic security but also to enhance their ability to control their own citizens.
One of the expressed objectives of US tariff policy was to encourage investment in US-based manufacturing. However, the capriciousness of current trade rules makes investing in the US, or elsewhere, a risky game. Because of fickle US policy, few companies may invest this year in the US to manufacture substitutes for previous imports.
The absence of reliable trade rules, not to mention the risk of a tariff war, will damage the world economy, no matter what the outcome of the latest spat.
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