Since 1983, I have taught applied economics at the University of Minnesota, including a course on trade policy. Among the themes I stress are, first, that for Minnesota, export markets are an important engine of growth, and anything that hampers trade will negatively affect Minnesota and its economy.
Second, I emphasize that tariffs (a tax on imports at the border), if imposed on trading partners, will almost always bring retaliation, making both the tariff-imposing and tariff-affected countries worse off.
Third, I note that tariffs are most effective and least likely to backfire when larger, stronger countries impose them on smaller, weaker countries.
Consider each of these points in light of the environment for business and finance in Minnesota:
Export markets are critical for the Minnesota economy, both in the rural sector, for agriculture and small business, and in the metro sectors of the Twin Cities and Duluth. International trade supports more than 788,000 Minnesota jobs, or more than one job in five, according to the national Business Roundtable. Most of these (87 percent) are in companies with fewer than 500 workers. These trade-related jobs grew 4.3 times faster than total employment from 2004-14.
The American Farm Bureau Federation, the largest organization of U.S. farmers and a reliable Republican source of political support, released a statement in mid-September sounding the alarm on tariffs. It noted that in 2017, the U.S. exported more than $19.6 billion worth of agricultural products to China, making that country the second-largest export market for American farmers and ranchers. The Chinese market, the Farm Bureau continued, has increased exponentially for U.S. farm and ranch goods since 2000, becoming especially critical for soybean growers, who sent nearly 60 percent of their 2017 crop there.
China has now imposed hefty tariffs on more than 90 percent of U.S. agricultural exports. As a result, it is expected to drop from being the second-largest market for U.S. agricultural goods to the fifth-largest in 2019. That’s right: from second to fifth in one year. With Chinese demand for U.S. soybeans hit with a retaliatory 25 percent tariff, the U.S. Department of Agriculture in August projected the average soybean price would range from $7.65 to $10.15 per bushel, down from a month earlier, when the projected average price was $8 to $10.50 per bushel. Right again: In one month, the price of soybeans declined 3 to 4 percent. A tariff of 25 percent on U.S. corn is projected to have an even more negative effect in percentage terms.
Livestock producers are even more grievously hurt. U.S. pork exports by volume to China are 58 percent lower than they were at this time in 2017 and 80 percent lower than at this point in 2016.
Although few new products are likely to be added to China’s retaliatory list, “the impact on American farmers and ranchers, and associated businesses in processing, transportation, finance and retailing must be considered when pursuing trade actions,” the Farm Bureau emphasized.
Next are small businesses in outstate Minnesota. They include small- engine assemblers like Toro manufacturing, Christmas lights plants outstate and other light manufacturers. Walmart sent a letter three weeks ago to the Trump White House and the U.S. trade representative listing 31 products it sold that could rise in price to U.S. consumers because of tariffs.
Finally, in Duluth and on the Iron Range, tariffs that retard demand and supply of iron ore and its products, such as the Trump tariffs on steel and aluminum, are important. Duluth, as an inland port, is particularly sensitive to volumes of international cargoes from or to Rotterdam, in the Netherlands, and the Baltic ports. Any diminution in these hauls will be harmful to Duluth’s economy.
The second theme I stress in my course is that trading partners don’t sit still when unilateral tariffs are imposed by the U.S. Tariffs are a kind of challenge to national sovereignty and honor and are unlikely to be accepted without reaction, except by the weakest and most supine of countries. The history of tit-for-tat tariff (or subsidy) wars in the 1930s — above all the Republican-backed Smoot-Hawley Tariff of the early 1930s — illustrates the point. In that case, U.S. tariffs on European manufactures, intended to restore failing businesses and save jobs in the early stages of the Great Depression — had the opposite effect. Global demand shrank and worsened the worldwide slump as European countries responded with trade barriers of their own. Most economists agree that these tariff exchanges profoundly deepened the Great Depression.
In more recent history, the agricultural subsidy wars of the 1980s with the European Community drove agricultural commodity prices to the basement — affecting the Minnesota farm crisis and forcing the Uruguay Round of trade negotiations to include agriculture as part of these negotiations for the first time.
The overall point is that tariffs, as well as subsidies, are provocations that nearly always lead to retaliation, in the interest of no one.
Finally, if you want to be a trade bully and impose tariffs, it is wise to pick on those who are smaller. The recent (although still largely unanalyzed) agreement for a post-NAFTA U.S.-Mexico-Canada (USMCA) trade agreement illustrates this point well.
Our NAFTA (now USMCA) partners, Canada and Mexico, are, for obvious reasons, owing to proximity, vital trading friends toward whom hostility has no purpose.
Mexico and Canada are America’s largest trading partners after China. The most recent figures put China’s trade with the U.S. at $636 billion, Canada’s at $582 billion and Mexico’s at $557 billion.
But the Canadian and Mexican economies are smaller than the U.S. economy. Proportionately, Canada and Mexico rely on U.S. trade far more than China does. Therefore, both Canada and Mexico could more easily be brought to heel in negotiations than China could be.
After the U.S., China is the second-largest trading economy in the world. It is a major importer (or at least has been) of U.S. agricultural exports.
It is the greater reliance of Canada and Mexico on U.S. markets relative to China that explains their willingness to settle on a revised NAFTA treaty. And all this suggests the far more difficult path ahead with China.
Carlisle Ford Runge is distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota. The views expressed are his own and not those of the University of Minnesota.