WASHINGTON – If President Donald Trump follows through on a proposal to slap a 20 percent tax on Mexican imports, it could lead to severe consequences for Minnesota's agriculture sector and some of its manufacturers.
A trade war with Mexico could slow the flow of goods from Minnesota south of the border, a revenue stream that brought $2.4 billion to the state in 2015.
"This could be the start of a major trade war," said University of Minnesota trade economist Tim Kehoe, who worked with Mexico on the North American Free Trade Agreement (NAFTA). "The Mexicans have said that if there is any border tax, they are going to do it right back. There would be big negative consequences for agriculture."
Trump's spokesman floated the plan Thursday as a way to pay for the administration's planned border wall but later said that at this point the tax is an "option."
The sting from the tax itself would be relatively limited in Minnesota, since last year $2 billion of the state's $28.6 billion in imports — roughly 7 percent — came from Mexico.
The risk would come if Mexico, which sends the majority of its exports to the United States and would be hard hit by the tax, retaliated and started taxing imports from the United States or buying fewer of them.
And Minnesota's agriculture sector has the most at stake: Mexico buys more Minnesota corn and soybeans than any other country.
"We've got a lot of members with dogs in the fight," said Kevin Paap, president of the Minnesota Farm Bureau. "And a lot of them supported Mr. Trump. This is a concern."
Paap, who grows corn and soybeans in Blue Earth County, added that "there is no excuse that we can't work together with our neighbors. Getting into a trade war from an AG perspective is very dangerous."
Harold Wolle, president of the Minnesota Corn Growers Association, was equally unsettled.
"I certainly don't have a crystal ball, so I don't know what the effects of Mr. Trump's actions are going to be, but I think they are cause for concern. The general attitude with the new administration has been to give them some time and see how this develops. We're only a very few days since the inauguration, but it appears as though things are moving rather quickly, so I think we've all been taken a little by surprise."
An import tax on Mexican products also could hit the electronics industry in Minnesota because the most valuable products the state currently imports from Mexico include electrical machinery, such as motors and generators.
Trump's 20 percent border tax appears to be a selective version of a House Republican tax plan that exempts all U.S. exports from taxes but places a 10 to 20 percent charge on all imports. Rolling it out as Trump has threatened, by singling out one country, seems to go against a World Trade Organization (WTO) ban on such levies and also violates "legal norms," said Robert Kudrle, professor of international trade and investment policy at the University of Minnesota.
Some products manufactured in Minnesota use parts made in Mexico. However the larger issue for state businesses, said Kudrle, may be a seemingly helter-skelter nature of Trump's foreign trade policy.
On Monday, the president pulled the U.S. out of the Trans-Pacific Partnership, a trade pact that most of Minnesota's top executives favored. Then he announced plans to renegotiate NAFTA with Canada and Mexico.
That move that sparked a letter from Minnesota companies Cargill, Land O'Lakes and CHS Inc., among 100 other companies and trade groups, to remind the president that agriculture and processed food exports from the United States have quadrupled since NAFTA passed in 1994.
Now Trump has threatened a collision course with Mexico's leaders by broaching the idea of a border tax to pay for a border wall.
"The biggest thing about all of this is that businesses hate uncertainty," Kudrle said. "From the standpoint of business planning, this is just crackers."