Fear that President Donald Trump could incite an international trade war increased on Jan. 26 when he floated a plan to pay for a proposed wall along the Mexican border with a 20% tax on imports into the U.S. from Mexico. Experts warn that such a move could ripple through Iowa’s economy, causing Mexico and other countries hit with the tax to retaliate against U.S. firms that export products internationally. That prospect is particularly worrisome for Iowa farmers and ag product manufacturers.
“Next to Canada, Mexico is Iowa’s second-largest export market,” says Iowa State University economist Peter Orazem. “There will be a tit-for-tat reaction, and that would not be good.” The news was especially alarming coming only two days after Trump announced he was backing out of the Trans-Pacific Partnership trade pact, which involves 12 countries. The TPP is in the process of being approved by these countries, but now the U.S. is no longer involved.
Trump’s proposal for the import tax is vague. It’s unclear whether the tax would apply only to Mexican-made products or to other nations with which the U.S. has a trade deficit. Also, immediately after the import tax proposal was announced, Trump administration officials said it’s just one of several options the president is considering to pay for his border wall, which he promised to build as he campaigned for office.
However, increased tariffs on imports usually lead to the opposite of their intended effect. Rather than make Mexico pay for the wall, economists say U.S. consumers will ultimately pick up the tab with more expensive goods. Iowa consumers could expect to pay more for vegetables, fruit, cellphones, clothes and more with a 20% tax on goods from countries, such as Mexico and Canada. “What it will do is immediately increase the price of all goods and services we buy from Mexico,” says ISU economist Dave Swenson. “The American consumer will absorb the tax, or we will buy less.”
Ag especially vulnerable
This proposed import tax would be the first step toward an all-out trade war, say ag economists interviewed by Wallaces Farmer. ISU ag economist Chad Hart says such trade barriers would hurt Iowa farmers. Commodity prices are already low, and exports are the key to helping improve prices and move record supplies of corn, soybeans and pork.
Mexico is Iowa’s largest corn export market; China is Iowa’s top soybean market. “It’s not just agriculture and Iowa that would face retaliation. Every state in the union would feel some impact,” says Hart.
After Trump signed an executive order on Jan. 23 killing the TPP, Iowa farm officials and manufacturers of ag products and other products voiced concern that Trump’s trade policies could threaten the two main drivers of Iowa’s economy, because of the state’s heavy dependence on exports. In 2015 (latest figures available) Iowa exported $13.2 billion worth of goods, with about 12% coming from farms. About 56% of the Iowa exports were manufactured machinery, food and chemicals.
“Extreme caution needs to be taken when tinkering with trade agreements that are already in place,” cautions Craig Hill, president of the Iowa Farm Bureau Federation, “or when deciding to back out and not be involved in trade agreements that are being formulated.” Jay Byers, CEO of the Greater Des Moines Partnership, an economic development group, also urges caution when making major changes in trade policy. “Our organization has been a longtime supporter of free trade and open markets. Any changes to current trade policies need to be closely examined to evaluate their potential impact.”
What if you are making tractors or farm machinery in Iowa? You are sourcing parts from all over the world. An import tax will affect the international supply chain. John Deere spokesman Ken Golden says that company is closely watching the new trade policy developments.
Iowa’s U.S. Sens. Joni Ernst and Charles Grassley say it’s too early to determine whether they would support an import tax. Reforming our complicated tax code is important to improve U.S. global competitiveness and help create and keep jobs here at home. Ernst and Grassley say they will examine Trump’s import tax proposal closely and talk with Iowa farmers and businesses about its likely impact and see if it would ultimately help grow the economy.
TPP decision disappointing
Iowa ag leaders are disappointed that negotiations spanning years on the TPP agreement are being abandoned by the U.S. “We’ve worked a long time on that,” says Wayne Humphreys, a southeast Iowa farmer and member of the Iowa Corn Promotion Board. “We’ve spent a lot of American resources, taxpayer dollars, trying to make TPP happen.”
“Sixty percent of U.S. soybeans are exported. We are concerned about any change in our trade relationships,” says Kirk Leeds, CEO of the Iowa Soybean Association. “The uncertainty in the marketplace that could come with pulling back from trade agreements is troubling. We really don’t know where this could go.”
Iowa now sends 10% of its pork to Mexico. John Weber, a hog producer from Dysart who is president of the National Pork Producers Council, is concerned about efforts to reopen the North American Free Trade Agreement. “The U.S. exports about 25% of the pork we produce. NAFTA is 23 years old and has more than doubled U.S. ag exports to Mexico and Canada. Our goal is to stay away from anything that could spark a trade war, or lock out a country.”