Global reach of Minnesota companies muddies tariff picture

Hormel makes Spam in China and Denmark, Skippy peanut butter in China and the Netherlands, and Muscle Milk in Austria, Germany and Australia.

3M makes most of its sales outside the U.S. with 125 production facilities in 37 countries of Europe, Asia, Africa and North America.

Ecolab sells its products in 170 countries using 90 international manufacturing plants and 33 in America.

The international nature of these and other Minnesota multinational corporations shows how entwined in the global economy U.S. businesses have become.

And it shows how hard it would be for them to extract themselves as President Donald Trump seems to expect with his "America First" trade policy. In a trade war like the one brewing over Trump's protective tariffs and retaliation to them, where a product is made can add or subtract tens of millions of dollars from a company's bottom line.

Last week, the president criticized Harley-Davidson's decision to move some production outside the U.S. to avoid Trump's protective tariffs on imported steel and aluminum and possible European Union (E.U.) retaliatory tariffs on U.S.-made motorcycles. The president said Harley motorcycles should "never be built in another country." Harley said tariffs could add up to $65 million a year in production costs and prices.

While the situation gained headlines, thousands of other U.S. companies have for years baked foreign production and international supply chains into business plans that could hurt or help in a trade war.

The White House did not respond to a Star Tribune request for comment. Administration officials have said the tariffs are necessary to stop other countries' unfair trade practices and to bring good-paying manufacturing jobs back to the U.S. by making it more affordable to buy American.

In the case of the E.U.'s 28 countries, as well as Canada and Mexico, the administration justified steel and aluminum tariffs against some of the U.S.'s closest allies based on national security. Trump has also approved tariffs on $34 billion worth of Chinese imports and threatened to extend tariffs to $200 billion more products, citing intellectual property rights issues and China's technology exchange mandates.

Many trade specialists say protective tariffs and the reaction to them could hurt U.S. companies more than help because of the way the global economy operates.

George Ball worked for more than a decade in Minnesota's medical device sector before becoming a business professor at Indiana University. Medical devices, Ball said, are sourced locally and internationally.

"It's pretty rare for a medical device to be sourced only in the U.S.," he explained. "Especially those involving electronic components [such as integrated circuits and microelectronic parts], companies are going to go where they can buy them most cheaply. That would be Taiwan and the Far East."

Generally, pricing and proximity to markets drives most businesses to manufacture products and components outside the U.S.

More than 60 percent of 3M's revenue is generated outside the U.S. "To remain competitive, we stay close to our customers and serve them on a worldwide basis," a spokeswoman told the Star Tribune. She said "approximately half" of the company's manufacturing capacity remains in the U.S. and that 3M remains a net exporter while believing that "free and fair markets" allow for "growth and expanding opportunities."

For its foreign operations, 3M has "a local-for-local supply chain strategy," the spokeswoman explained. "For example, our manufacturing facilities in China serve customers in China."

An Ecolab spokesman said "recent government actions" have not affected how the company decides to manufacture outside the U.S. "Our strategy is to produce our products near where we sell them, helping to reduce transportation costs and carbon dioxide emissions."

Hormel offered a similar rationale. "We have produced many of our international products for several years as it is closer to the source of consumption in those markets," a company spokesman said.

But if China places a 25 percent retaliatory tariff on product categories that include Spam or Skippy peanut butter imported from the U.S., the fact that Hormel makes those products in China for consumption in China can keep sales and production costs steady.

Like Harley-Davidson, Minnesota-based Polaris Industries makes motorcycles. It also makes other vehicles that require plenty of steel and aluminum. Polaris declined to comment on its international operations, but the company has said the Trump administration's new 25 percent tariff on imported steel and 10 percent tariff on imported aluminum will increase production costs by $15 million annually. Like Harley, Polaris also faces a possible 25 percent retaliatory tariff on the price of motorcycles it sells in the E.U.

Impacts of tariffs on production costs can be buried deep in supply chains, said Indiana University's Bell. If a U.S. company buys foreign components subject to protective tariffs, its costs rise.

A company such as Abbott Laboratories, which acquired Minnesota-based St. Jude Medical in 2017, has a list of suppliers based in China, according to data assembled by Thomson Reuters. So a trade war against Chinese imports raises Abbott's costs and could ultimately affect its employees in Minnesota.

Even if a U.S. company buys components from another U.S. company, if that second U.S. company buys from a foreign supplier whose products are subject to tariffs, costs get pushed up the line.

For example, one of Best Buy's suppliers is Apple, a U.S. company. But Apple, Thomson Reuters data shows, buys from a number of Chinese companies whose products might be subject to the 25 percent tariffs Trump has threatened.

Tariffs that change the "global value chain ... break up the manufacturing process," explained trade specialist Tim Kehoe of the University of Minnesota. U.S. consumers will notice when they pay higher prices to make up for tariffs. "They'll go to buy a kitchen appliance," said Kehoe, "and it will cost a lot more."

That will take months to become reality.

Ultimately, the question of financial responsibility will shape company responses. Like Harley-Davidson, publicly traded companies such as 3M and Hormel have a legal obligation to shareholders to maximize profits, Kudrle noted.

If that means keeping production in other countries or moving it there to avoid tariffs, he said, that is what they are obliged to do.