Whether or not it is legal, President Donald Trump’s seeming command to U.S. businesses to sever ties with China is pushing Minnesota companies into a high-stakes financial guessing game.
The state’s major corporate players reflect the range of global entanglements that unnerved businesses across the country when Trump recently tweeted that “American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making products in the USA.”
Last week, Trump appeared to back off his declaration, saying he could enforce the order if he wanted to — citing the Emergency Economic Powers Act of 1977 — but for now he did not want to.
The contradictory talk leaves the business community unsure what to do. Enforcement of the order offers an even darker scenario, said Tim Kehoe, an international trade specialist at the University of Minnesota.
“If an abrupt policy change forced U.S. firms to shut down business in China, that would force a recession,” he said.
Marquee Minnesota companies have much at stake in China. Agricultural business giant Cargill has invested about $7.5 billion in the world’s second largest economy since the 1980s, including a $112 million expansion of a corn processing plant in April 2019.
The Minnetonka-based company employs 9,000 people in 50 locations in China.
Hormel owns 1.7 million square feet of production and distribution space in China where the Austin, Minn., food company manufactures Spam, Skippy Peanut Butter and other products to sell directly to the Chinese.
Minnesota-run Medtronic lists 20 China-based business units.
At the very least, mixed messages leave firms thinking twice about extending their investment in China, said Robert Kudrle, chair of international trade and investment at the U’s Humphrey School of Public Policy.
“Corporations worry about becoming collateral damage in the future,” he said.
In Minnesota, billions of dollars are at stake. The state exported $3 billion worth of goods to China in 2017, state records show.
Exports of goods and services to China exceeded $3.7 billion and supported 25,800 Minnesota jobs in 2016, according to the U.S.-China Business Council. China is the state’s second leading market for exported goods and the fourth leading market for exported services.
St. Paul-based Ecolab relies on an extensive manufacturing and sales presence in China to boost its bottom line.
The company’s Chinese operations include a research and development center, five manufacturing facilities, 40 sales offices and 3,000 employees.
Target buys a significant portion of the merchandise it sells from China.
Best Buy sells electronics made with Chinese components, and last week saw its stock price fall 8% when it warned investors that the trade war could affect consumer demand for its products.
The Minnesota Department of Employment and Economic Development (DEED) estimated that in 2018 Chinese countermeasures to U.S. tariffs on Chinese imports affected more than $2 billion worth of Minnesota exports.
New retaliatory tariffs on plates, sheets, film and adhesives costing Minnesota businesses $83 million were scheduled to take effect Sept. 1. So were $63 million in new levies on Minnesota soybeans and $33 million on swine offal, DEED said.
The open-ended nature of Trump’s divestiture order in the midst of this trade war has “frightened U.S. businesses up and down the food chain,” Kehoe said.
Ecolab offered an explanation that reflected the concern.
“Our business in China is built to serve the Chinese market versus serving as a product import-export hub,” an Ecolab spokesman said. “More than 90% of the products we sell in China are manufactured in the country. We do not want to dismantle a business that took more than 30 years to build. Doing so would, in fact, hurt U.S. jobs long term, as it would shrink our global footprint and the needed global support, which is largely based in the U.S.”
According to the Bureau of Economic Analysis of the U.S. Commerce Department, American businesses sold $375 billion worth of products and parts to China in 2017, the latest year for which figures are available.
For U.S. corporations heavily invested in Chinese infrastructure, the worst-case scenario from Trump’s divestiture order is not just lost sales to the Chinese and higher prices for U.S. customers, but a fire sale on stranded assets, Kudrle said.
Relocating supply chains out of China will take years for many U.S. companies and could hurt business, Russell Price, a senior economist at Ameriprise Financial, explained.
The damage to those companies will depend on the time frame a presidential edict gives them.
It will also depend on how much retaliatory pressure China puts on its people not to buy American products, Price noted.
Any Chinese divestiture translates into higher prices for U.S. consumers, according to Kehoe. And it denies U.S. businesses access to a market that contains one-fifth of the world’s population, a third of them middle class with money to spend.
Medtronic, for one, does not want to be shut out of that market.
“China is a critically important market for Medtronic, and our lifesaving technology is highly valued by Chinese physicians and patients,” the company said in a statement. “We continue to believe that our investments in China are paying off and allow our products to be closer to the Chinese customer.”
Price took Trump’s order as “a warning to companies that operate in China to move their operations.”
But he also sees the order as a tactic in the trade war. “The president wants to speed up companies divesting in China to get China back to the negotiating table,” he said.
Kehoe questions the leverage, if not the legality of this strategy.
“The Chinese,” he said, “know the president doesn’t want a recession as he starts his campaign for re-election.”