Tariffs, trade and testing resilience

‘May you live in interesting times’ could have been the title of our latest Board Leadership Centre (BLC) event in Dublin, which took place less than 24 hours after US President Donald Trump dramatically paused the bulk of his planned tariffs for 90 days.

The focus of the event, with award-winning LBC radio broadcaster and author James O’Brien and economist and podcaster Chris Johns, was the UK-Ireland relationship, but events across the Atlantic and the implications for boards naturally dominated the discussion.

It was Johns, the Welsh-born former chief economist at Bank of Ireland, who pointed out that the ‘interesting times’ line is considered to be a curse, not a simple saying. A reminder that ‘interesting’ can be disruptive and uncomfortable, which certainly reflected the sentiment of the board members and business leaders in the room.

Ryan McCarthy, outgoing BLC Ireland Lead, who is taking up the role of Managing Partner of KPMG in Ireland on 1 May, cautioned there is no time for complacency, but said Irish businesses are up for the challenge.

“There’s really good muscle memory in the Irish business community, from things we’ve encountered in the recent past - the impact of the Ukraine war, Covid-19, even back to the global financial crisis,” he said. “We have good skills and competency and whilst it won’t always be easy, we’ll also need to draw on the best of Ireland’s agility and hunger, to retain what serves us well, while developing new strategies for success.”

Chaos kills confidence

The future is always uncertain but there is more uncertainty around than I can ever remember.

Johns, who has worked in economic analysis in the UK and Ireland since the 1980s, gave a frank assessment: “The future is always uncertain but there is more uncertainty around than I can ever remember,” he said. “We are moving into a very different economic world, as a result of the uncertainty and chaos.”

The issue is not tariffs, per sé; there have been other periods of tariffs, and a “one-and-done” round of tariffs could be digested, he said. The problem is the chaos coming from Washington, which didn’t end with the tariff postponement. “In fact, the chaos became worse,” Johns said.

In practical terms, sustained uncertainty causes consumers to defer spending decisions. Likewise, companies start to cut back on discretionary expenditure and investment. “If this chaos continues, it could well cause the recession that we’re worried about,” Johns said.

O’Brien likened recent events to a ‘magic eye’ illusion, where a 3D image emerges from a page of 2D squiggles. “I’ve often felt that complicated politics and economics is a bit like that, and I just need to stare at it for a bit longer and the picture will appear. A week ago, I still thought that; now it’s just squiggles, and nobody’s got any idea where any squiggle leads.”

For board members, it is extremely difficult to interpret events and plan accordingly. “You’re going to find out over the next while how resilient your businesses are, and you’re going to get tests of your resilience structures,” said Johns – echoing the pervasive theme of resilience that has been consistent in all BLC discussions over the past two years.

A new economic order

It would make an awful lot of sense for Keir Starmer to reach out and/or for the European Union to already have their arms open.

Events in the US could precipitate a new economic world order, akin to what the former UK Prime Minister Gordon Brown has described as an “economic coalition of the willing”, to counter the stresses in economic and geopolitical relations that has stood since 1945.

That approach could see the EU, Canada and Japan, for example, reducing interest rates in unison, creating an “alternative economy” to the one presided over by the US. “It would make an awful lot of sense for [the UK Prime Minister] Keir Starmer to reach out and/or for the European Union to already have their arms open,” said O’Brien.

Johns notes that just 15% of world trade involves America; the countries that account for the other 85% could coalesce to replace their lost US trade by doing more business with each other. As well as the prospect of the UK getting closer to the EU, that raises “hot button issues” like changing relations with China, and Asia in general.

“I suspect we are going to get closer to China because we have to, from a host of perspectives,” said Johns. “It means the UK may well end up doing a free trade deal with India, in a way we never thought possible.”

These second- and third-order effects of events in Washington could open up whole new markets for exporting businesses, creating both challenges and opportunities.

Ireland looks east

For Ireland, the old “closer to Boston than Berlin” dynamic is in the balance and new policy approaches appear inevitable. “Ireland has managed very successfully to ride those two horses, but I suspect the decision to choose one over the other is coming – and I hope it’s Berlin rather than Boston” Johns said.

That decision will be significant because most Irish businesses are used to looking west for customers, expansion and M&A opportunities. Looking more to Europe and the east brings the actions of Russian president, Vladimir Putin, into focus and raises questions about Irish neutrality, O’Brien noted. “There are going to be very profound questions asked of all of us. Our world is changing,” he said.

Meanwhile, President Trump’s willingness to do sector-based deals on tariffs leaves it difficult for businesses to take a united stand against policies that are damaging to them and, in some cases, to democracy, O’Brien said. “You are not going to want to say boo to that particular goose because you might be in there looking for a favour from him,” he said.

Brexit scars run deep

Things have changed since 2016 but a lot of the body politic, and Keir Starmer in particular, are behaving as if it’s still the day after the Brexit referendum.

Given the events in America, could – or should – Keir Starmer raise the prospect of the UK rejoining the EU? Noting that everything is in flux, O’Brien said the answer is ‘No’ – for now. “Not at the moment, but Starmer could be compelled to be interested in it,” he said.

Known for his view of Brexit as “an act of irredeemable idiocy”, O’Brien said the emotional arguments that drowned out intellectual viewpoints in the Brexit debate are still playing loudly. Starmer fears “a vivification of the Brexit wars”, where ‘Leave’ voices such as Nigel Farage featured vocally in sympathetic media and old tropes about Britannia came to the fore.

To Johns, Starmer appears “deeply scarred” by the Brexit wars. “If you were in the UK at the time, you would be aware just how deeply visceral those wars were, and they were never really successfully concluded,” he said. “Things have changed since 2016 but a lot of the body politic, and Keir Starmer in particular, are behaving as if it’s still the day after the Brexit referendum.”

Investing for growth

Economic growth today is yesterday’s investment, that’s just the way it works.

If Starmer’s timidity around Brexit is explainable, his approach to the UK economy is “a big strategic error”, according to Johns. “Brexit, lack of investment and other reasons mean that the UK economy hasn’t grown on any meaningful metric for at least a decade and a half,” he said.

Data on UK capital spending, by both the public and private sector, ranks it as one of the lowest countries in the world for investment. Johns cited examples of capital investments being held up or cancelled because of planning challenges and red tape, drawing nods of recognition from the Irish audience.

He also took issue with the UK fiscal rules, which apply spending and public debt limits, based on forecasts, out to 2030. As someone who has “tried to do economic forecasting for decades”, he is confident any forecasts will be wrong. “So, on the basis of numbers that we know are going to be wrong, they adjust spending and taxation policies today,” he said.

A better approach would be to borrow for capital spending, where the return on investment is greater than the cost – something that will be familiar to every board member involved in long-term planning. “Economic growth today is yesterday’s investment, that’s just the way it works,” said Johns. In what may be turbulent times ahead, business leaders will do well to hold onto that adage.

Seeing the social side

You’re not as vulnerable to it when things are going well, if you feel you’re in a country that is moving forward and progress is happening.

Economics is a social science and O’Brien, an astute social observer, noted that prosperity and social cohesion are inextricably linked. Both are also linked to a population’s susceptibility to “the engines of division”, notably social media and certain traditional media in the UK, he said.

“You’re not as vulnerable to it when things are going well, if you feel you’re in a country that is moving forward and progress is happening,” he said. “All of these things become much, much more dangerous when people are not happy with the size of their slice of the pie.”

He said that the British media played a large role in “persuading people to punch down” against minorities and people who are already vulnerable. In the US, it has manifested in the ‘they’re eating the cats, they’re eating the dogs’ narrative about migrants.

Johns highlighted differences between Ireland and the UK, which has an industrial working class that suffered from the closure of industries such as mining and steel, which never existed at scale in Ireland. “Ireland’s history, your amazingly redistributive taxation and welfare system, and other factors lead to a very cohesive society. That is not true in the UK,” he said.

Bond market muscle

The bond market globally, particularly in the United States, is the most important financial market there is. It dominates everything, and everybody really should pay a little bit more attention to it.

Bill Clinton’s former chief strategist, James Carville, once said that, rather than be reincarnated as the President, Pope or a star baseball player, he would like to come back as the bond market because it can intimidate everybody. The “good old boring bond market”, as Johns described it, was the arbiter of President Trump’s tariff plan, just as it was with the disastrous mini-budget proposed by the former UK Prime Minister Liz Truss in 2022, which ultimately cost her her job.

“It doesn’t attract much attention in business headlines but the bond market globally, particularly in the United States, is the most important financial market there is. It dominates everything, and everybody really should pay a little bit more attention to it,” Johns told the BLC audience.

He raised the prospect of significantly more uncertainty if one particular possibility comes to pass: foreign holders of US debt being forced to take a haircut, effectively constituting a default by the US. This could be targeted, particularly at China, which holds about $760 billion of US debt. “It sounds very esoteric but it’s not; it should be front and centre of your thinking.”

He also noted that the chair of Donald Trump’s Council of Economic Advisors, Stephen Miran, has written about a proposal to devalue the dollar, which is the world’s reserve currency.

“If they start doing this default talk and the dollar’s reserve status is threatened, then the last financial crisis will look like a walk in the park,” he said, – reflecting how a US sovereign debt default would be catastrophic for the US and the global economy.

Ireland starting from strength

We are all facing into this together and we are committed to supporting boards in whatever way we can.

Against the gloom, both O’Brien and Johns see Ireland facing the future from a position of strength. Exchequer returns are at record levels, there is virtually full employment in a young and growing population, and inflation is low – albeit that current developments are obviously posing risks to Ireland’s positive economic data.

“With the headwinds coming, you would much rather be Irish than British, from an economic perspective,” Johns said. “But I would urge you to consider the possibility that the headwinds are going to be very strong indeed. You are going to be tested.”

Ryan McCarthy backed Irish board members to ride the turmoil. “There’s a lot of complexity out there but the board community in Ireland is really vibrant, with a good healthy sense of challenge and common sense. We are all facing into this together, collectively we have the experience of dealing with major disruption and in KPMG we are committed to supporting boards in whatever way we can,” he said.

Wrapping up, the incoming head of the BLC in Ireland, KPMG Audit Partner, Eamon Dillon, said the insights should be valuable when board members go back to their businesses and attempt to navigate these ‘interesting’ times as well as seeking opportunities. “One of the key purposes of the BLC is to help board members to do their job in the most effective way and make the best decisions possible,” he concluded.

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