The latest salvo in US President Donald Trump’s trade war is set to hit Ireland worst of all EU countries targeted – two weeks before a possible no-deal Brexit. 

If the tariff hike of 25 per cent announced by the White House this week is implemented on October 18 as threatened, the heavy dairy share in both Ireland’s export mix and in the US hit list of over 150 product categories means this country would suffer the heaviest impact.

The tariff increase is in retaliation for EU subsidies in favour of Airbus, which a WTO panel has found illegal. France, the UK, Germany and Spain, where the aircraft are manufactured, face specific countermeasures from Washington. Airplanes themselves are to be subjected to an additional 10 per cent duty. Some other old reliables feature on the list including French wines, Spanish olive oil and German industrial equipment.

Initial estimates from employers’ group Ibec show that the tariff would impact the average person in Ireland by more than $20, compared with a figure of less than $10 in all other countries affected.

It also combines with other events to create the perfect storm for Ireland’s dairy industry.

Three key Irish dairy exports are in the Trump administration’s crosshairs: butter and spreads, of which €160 million’s worth were shipped to the US last year; liqueurs, including Irish whiskey creams such as Bailey’s, worth €168 million in transatlantic exports; and cheese accounting for €37 million.

These three groups represent nearly all Irish dairy exports to the US. While cream liqueur may be the less price-sensitive, the US is a huge destination for this product. Butter and cheese would suffer a serious blow from the tariff threat.

 “86 per cent of all EU butter in the US comes from Ireland. Ireland is disproportionately hit by this tariff”

Alison Graham, Icos

Targeting EU butter exports to the US means targeting Ornua’s Kerrygold. According to Alison Graham, who represents the Irish co-ops body Icos in Brussels, “86 per cent of all EU butter in the US comes from Ireland. Ireland is disproportionately hit by this tariff, and the vast majority of this butter comes from Ornua, which is owned by Irish co-ops”.

The exporter reported 30 per cent volume growth in Kerrygold butter sales in the US in 2018, making it the second best-selling brand there. As prices soared, the value of Irish butter exports to the US nearly doubled last year, representing around 16 per cent of Kerrygold’s global €1 billion sales. 

Yet the brand would not be immune to a shock if the new tariff was slapped on top of the existing $1.541/kg duty. “That premium butter is already double the price of US branded butter,” said Graham, because of its pasture-fed claims and heavy marketing investment. A 25 per cent hike risks pushing it out of reach of many consumers. “It puts us at a serious competitive disadvantage,” she said.

In a statement to The Currency, an Ornua spokeswoman said that any new trade tariff was unwelcome and would have a significant cost impact on its business: “If this tariff cost cannot be recovered in the market, it will negatively impact our supply chain. In anticipation of the WTO’s decision, we have been preparing our business by having appropriate risk mitigation measures in place.”

The Currency understands exporters were expecting the US threat and have shipped extra volumes in advance.

“That said, we urge both parties to reconsider the impact of these tariffs and we renew calls for a settlement to be reached that does not impact on companies and brands who are not directly involved in any aspect of this dispute,” the Ornua spokeswoman added.

Cheese price risk

The price risk for Irish cheese is also very real, albeit at the other end of the scale. “The cheddar cheese we export to the US would be more competitive with US unbranded cheese,” Graham said, adding that existing tariffs were already making this difficult. “We also have that potential double threat of Brexit,” she added.

The UK absorbs half of Ireland’s cheese exports, chiefly cheddar, but this has been declining amid Brexit fears. Exporters have looked to the US as an alternative, and the value of shipments across the Atlantic increased by 20% last year. Irish speciality cheeses and ingredients such as pizza toppings are gaining market share in continental Europe too, but there is little demand there for orange or white cheddar – a product in which Irish processors have invested massively since the surge in milk volumes following the abolition of milk quotas in 2015.

Glanbia
Glanbia’s Truly Grass-Fed brand is now competing with Kerrygold in the US. Photo: Thomas Hubert

To complicate matters, Irish dairy exporters are divided as they face into the impending trade war with the US. While Irish co-ops have pooled their butter and cheddar exporting efforts under the Kerrygold brand since the An Bord Bainne days of the 1960s, Glanbia broke ranks last November when it launched its own Truly Grass Fed range of cheese and butter on US shelves. 

The presence of this new competitor within the Ornua boardroom is one of the issues that has agitated the super co-op’s corporate structures in recent months.

A precisely timed attack

While aided by the WTO’s green light on Wednesday, the timing of the US attack is not innocent. The EU, too, is divided – the Trump administration’s deadline to negotiate under the threat of the tariff hike falls on the day European heads of government are due to make a Brexit decision at their next Council meeting.

One theory heard in Brussels is that targeting the brunt of tariffs on Ireland, whose agri-food industry is already facing a potential Brexit cliff wall, may be a way of leveraging the weakest link in the EU.

The negotiating window also falls within the transition period between two European Commissions, with Trade Commissioner Phil Hogan confirmed by the European Parliament earlier this week but not assuming his position until November 1. Yet Alexander Anton, secretary general of the European Dairy Association, is confident that the Commission’s machine will be able to handle the US talks. “Phil Hogan is still on board and will be for the next five years, and current Trade Commissioner Cecilia Malmström is behind him,” he told The Currency.

The US negotiating position is that the additional 25 per cent tariffs are reasonable, considering the WTO decision authorised Washington to crank the dial up to 100 per cent. Yet US Trade Representative Robert Lighthizer also said that he would “continually re-evaluate these tariffs based on our discussions with the EU,” signalling that an accommodation was possible. What the Trump administration wants exactly from this battle remains unclear.

Anton urged negotiators to de-escalate the dispute and questioned the legality of the US decision to impose different tariffs on different EU member states under WTO rules.

Among the dairy industry representatives in Brussels this week was Conor Mulvihill, director of Dairy Industry Ireland, the Ibec lobby group. “The Americans are trying to pursue a strategy of divide and conquer,” he said, noting that differentiated tariffs would hit whiskies from the UK including Bushmills, but not those made in the Republic. 

Mulvihill and Anton expect the negotiations to be two-pronged, tackling both the merit of proposed US sanctions and the way they might be implemented.

If the US threat does come into force on October 18, could the 25 per cent duty incorporate existing tariffs? Will contracts already executed with goods on the way to the US by that date be exempt? 

Boeing’s illegal tax breaks

But also, more fundamentally – should the US and the EU really engage in a tit-for-tat trade war? In a dispute mirroring the Airbus case, the WTO has already ruled that Boeing received illegal tax breaks in the US, and is expected to authorise equivalent EU countermeasures. While the US won the right to impose $7.5 billion worth of tariff hikes, the EU has applied for $12 billion in return. It is not yet known how much will be approved by arbitrators.

Icos’s Alison Graham, too, hoped that sense would prevail in light of the balance in WTO rulings. However, she noted two advantages for the US side in this game: “We won’t get this WTO decision until early next year,” she said – potentially as late as March, when stockpiles made in advance of the US tariff hike are exhausted and Ireland’s next peak dairy exporting season begins. Graham added that  “US agri-food doesn’t feature highly on the EU list” of retaliatory measures announced in April.

This means Trump could engage in this new phase of his trade war without ruffling too many feathers among his farmer voters, who have been directly hit by the escalating dispute with China and received billions of dollars in federal compensation schemes.

This constituency will enjoy the US assault on Kerrygold, having lost a quirky protectionist battle against Irish butter two years ago. Industry bodies in the dairy stronghold of Wisconsin had then managed to have Kerrygold temporarily banned from the state, arguing that Irish-packed and graded butter did not comply with local regulations.

The shortage had resulted in brand fans exchanging tips on social media on how to smuggle Kerrygold into Wisconsin, until Ornua eventually settled the dispute with the authorities in November 2017.