One of the dominant themes in global politics over the past couple of years has been a growing sense of nationalism and a move towards isolationist economic policies. Nowhere has this trend been more obvious than in the UK decision to walk away from its free trade relationship with an EU market of 440 million people and the world’s third most populous area after China and India, and the election success and subsequent antics of Donald Trump. A key part of Trump’s pre-election appeal was his assertion that free trade deals have cost US jobs and are not good for the US economy. He promised to re-negotiate the then titled North American Free Trade Agreement (NAFTA), which he has done, and also to pressurize the Chinese on the trade front, which he is also doing. While the Chinese situation is ongoing and is justifiably a source of deep concern, he is now starting to up the ante with the EU.

In marked contrast to these UK and US behaviours, the EU is continuing to plough ahead with the negotiation of trade deals. Japan and Canada are some of the most significant ones agreed by the EU in recent times, but the deal agreed with the four founding member countries of the Common Market of the South, also known as Mercosur – Brazil, Argentina, Uruguay and Paraguay – is proving very controversial and will undoubtedly face many hurdles before it eventually sees the light of day.

The EU already has trade deals with most of the other countries in Latin America, so this is arguably a natural progression for free-trade driven EU. The four Mercosur countries offer a market of 260 million people and the EU already exports €45 billion of goods and €23 billion in services to the four. However, there are significant barriers to trade in the shape of high import duties, burdensome procedures and different technical and regulatory standards. The removal of these could have a very marked impact on trade flows.

Under the Mercosur deal, the EU is allegedly insisting that it will not undermine EU food safety and animal and plant health legislation; that it will protect the rights of the EU to regulate food safety, including genetically modified organisms (GMOs); and the ability of the EU to set maximum levels of residues for pesticides, veterinary medicines and contaminants. In a nutshell, the EU side is arguing that EU rules will apply to all products sold in the EU and that the EU will retain its right to regulate food safety in the interests of EU citizens health. It is also argued that the EU and Mercosur will commit to implementing the United Nations Framework Convention on Climate Change and the Paris agreement on climate change.

The reaction to Mercosur has been generally positive from those who believe in the virtues and benefits of free trade, but the beef sector in the EU in general and Ireland in particular are not buying this and have thus far reacted in a very negative way. The EU side is arguing that it is protecting sensitive agricultural sectors by setting quantitative limits on the importation of products such as pork, beef, ethanol, honey, sugar and poultry. For example, beef imports are being limited to 99,000 tonnes, but there is a total lack of clarity about where the various beef cuts such as steak fit in to these overall limits. This is an important issue for Irish beef farmers who are currently facing a perfect storm from issues such as consumer behavior, over supply of beef produced from the dairy herd, environmental issues around beef production, reduced payments from the EU CAP budget, and intense competition from much cheaper meat products such as chicken and pork. Of course overriding all of this is that big elephant in the beef shed, Brexit.

Beef representatives are arguing with some justification that they are forced to adhere to very expensive and very stringent environmental standards, and are now being faced with unjustified competition from beef producers who currently operate under very lax environmental standards, to put it mildly.

Mercosur is far from a done deal and we can be certain that various lobby groups will become very vocal and possibly militant and at a political level, the just-agreed trade deal has many high hurdles to overcome. Meanwhile outside of the EU, other big trading blocks will continue to push the protectionist agenda.



By Jim Power
As we move into the second half of the year, it is possible to look back on the first six months with a certain degree of positivity. On the whole, the Irish economy continued to make progress and thankfully the relatively negative prognostications for the global economy at the beginning of the year have not really materialized. The global economy has actually maintained a pretty stable state; albeit that state is somewhat softer than policy makers or indeed we here in the small open Irish economy would aspire to and hope for.

Based on the statistical evidence we have to date, the Irish economy is likely to be experiencing real annual growth, not the distorted version, of around 3.5 per cent at the moment. Within this there are some very positive trends, but equally we are starting to see some warning signs that should be taken quite seriously.

On the positive side, the export sector continues to be the stand out performer and issues such as Brexit are not having much of a visible impact, while the Exchequer finances are still showing quite a degree of economic buoyancy.

In the first four months of the year merchandise exports were 12.7 per cent ahead of the same period a year earlier. Exports to the EU, which accounted for 49 per cent of the total, expanded by 11.4 per cent. Within that, sales to the UK expanded by 9.3 per cent, but the UK in total accounted for just 10.8 per cent of our total export sales. I suspect this is the lowest market share in our history, but of course for the indigenous export sector the exposure to the UK is still dangerously high. Almost 36 per cent of exports of food and live animals were sold into Great Britain. This is the real area of concern in the context of Brexit.

Consumer spending on goods, as captured by the monthly retail sales series, increased by just 2.9 per cent in volume terms and by 2.1 per cent in value terms in the first five months of the year. Within this, new car registrations declined by 7.4 per cent in the first six months, with used imports increasing by another 2.4 per cent. Anecdotally and statistically, it is clear that for consumer facing businesses, it remains quite a challenging environment and margin pressures remain the order of the day.

On a somewhat cautionary note, and I stress the term somewhat cautionary, tourism is starting to show some strains and manufacturing activity is under some pressure.

While overall overseas visitors to the country increased by 3.7 per cent in the first five months of the year, there was a year-on-year decline of 0.4 per cent in May, with the UK market down by 4.4 per cent. This is not a situation of crisis by any stretch of the imagination, but it does highlight the cost competitiveness of the Irish tourism product and does in my view cast some doubt on the decision to increase the VAT rate in Budget 2019.

On the manufacturing side, the monthly index of manufacturing activity as measured by AIB Bank, fell marginally below 50 in June, which is an indicator of contraction. Not surprisingly, Brexit is the key factor here.

The unemployed total increased by 300 in June and the unemployment rate remained unchanged at 4.5 per cent. This is no cause for concern in an economy approaching full employment, but it does probably suggest some employer caution as the Brexit clouds continue to darken. Having said that, the labour market has come so far, so fast, the downward momentum was always likely to be arrested at some point.

On the Exchequer finance front, the returns for the first six months of the year show that although total tax revenues are running a modest €128 million behind target, they are still €1.7 billion ahead of last year. There is no greater indicator of what is happening in an economy than tax revenues; after all we tax everything that moves in this country.

So all in all, the report card for the first half of the year is a positive one, but the looming Brexit deadline of October 31st is hanging over Ireland like the Sword of Damocles. Interestingly, a UK group called the Alternative Arrangements Commission is about to publish a report called Alternative Arrangements for the Irish Border, which although very technical and complicated in nature, does suggest some interesting ways of getting the Irish government out of its backstop bind. Watch this space.