Minnesota companies, entrepreneurs brace for potential Trump tariffs

President-elect Donald Trump calls himself “Tariff Man.” He repeatedly said during his successful campaign for the White House that he would like to impose a blanket tariff of 10 percent to 20 percent on all imports, and 60 percent tariffs on China.

Simply put, a tariff is a tax on imported goods. And the prospect of tariff rates at levels like these could put upward pressure on prices for consumers and businesses, worries Amalia Moreno-Damgaard. A Guatemalan native based in the Twin Cities, she is a chef, entrepreneur and award-winning author. Earlier in her career she was an international banker.

“For immigrant entrepreneurs like me, especially in the food industry, tariffs could create significant challenge for all of us,” she said. “A tariff on Mexican imports, for example, could affect staples like avocados and certain spices, it can make them more expensive, forcing us to either absorb the cost or pass them on to our customers.”

Immigrant businesses have opened throughout Minnesota in recent decades, most notably restaurants, ethnic markets and food supply companies. Many of these family-owned small businesses exist on thin cash flow margins. Every dollar counts when it comes to staying in business.  

“We are already strained with high inflation, high food prices locally,” said Moreno-Damgaard. “And imposing tariffs on top of this is going to make not only food items that are important more expensive, but materials, restaurant equipment, things that are imported, that are crucial for a business, food business survival.”

Many economists share her concerns about prices. Louis Johnston, professor of economics at the College of Saint Benedict and Saint John’s University, is among those that see the risk of higher pressures if the new administration follows through on its stated tariff ambitions. He riffed on one possible scenario.

“Prices are higher in the United States, costs are higher in the United States, and people on both sides of the transaction are worse off in order to benefit just a small group of people in the U.S. who might be able to sell their goods at a higher price,” he said.

Let’s back up. Tariffs were popular early in U.S. history. The tariff tax contributed a significant portion of the federal government’s revenue until the advent of the federal income tax in 1913. Tariffs have long been credited with helping the U.S. become a leading manufacturing nation in the 19th and early 20th centuries, although economic historians increasingly question that judgement. For example, in the mid-1880s tariff rates sometimes exceeded 40 percent.

But since the end of the Second World War the trend has been toward lowering trade barriers, including tariffs. Rates on all imported goods average somewhat less than 2 percent currently, according to the Tax Foundation. There are notable exceptions, such as steep tariffs on many imported goods from China.

President-elect Trump has offered several reasons for his attraction to tariffs. For one thing, higher rates will raise revenue for the federal government. For another, tariffs would shelter American companies from foreign competition, while pushing foreign companies to set up operations in the U.S. Trump has said the impact won’t show up in higher prices, but in stronger economic growth and more American jobs. The basic idea is to “encourage the production of goods that you previously imported by making it expensive to bring them in the country,” said professor Johnston.

Many economists aren’t convinced.

Look at it this way. Many iconic Minnesota-based companies are deeply embedded in global trade flows. Companies like 3M, Cargill and Ecolab manage worldwide operations and global supply chains. If other countries retaliate by raising their tariff rates on imports from the U.S., a tariff war could drag on their businesses.

Trump continues to bring up tariffs. For example, he recently said that one of his first executive orders would be to impose a 25 percent tax on all products entering the country from Canada and Mexico. Goods from China would get an additional 10 percent tariff. If a group of emerging market nations continue with plans to move away from the dollar, President-elect Trump has said he’ll hit them with 100 percent tariffs.

That said, the key question is this: Is Trump’s plan a negotiating tactic or a real decision?

“I think that everybody now is thinking about whether the president is basically talking about tariffs in order to get other people to do something he wants them to do, or whether he really wants to have the tariffs,” said Robert Kudrle, professor emeritus in economics at the University of Minnesota and a leading authority on international trade. “It's never been clear. It wasn't clear during the period of his first presidency, and it isn't clear now.”

There is much uncertainty about how the Trump administration is going to play the tariff game. There is also nuance to the design of tariff policy. In addition, the potential negative impact of higher tariffs could be muted, say, if the dollar strengthens or the Federal Reserve Board leans heavily against any emerging inflationary pressures.   

That said, if Trump and his economic team do pursue an aggressive broad-based global tariff regime starting next year, the tariff tax could prove costly for many Minnesota companies and consumers.

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