Minnesota manufacturers, farmers brace for tariff fallout

Washington, D.C. – On their farm near Mapleton, Minn., Kristin Duncanson and her husband are waiting for the other shoe to drop.

As she enters her 32nd growing season, Duncanson fears that President Donald Trump's tariffs on imported steel and aluminum will haunt sales of the corn, soybeans and hogs she and her husband, Pat, raise.

Trump's tariffs are meant to revive the U.S. steel and aluminum industries. They are cause for celebration for Minnesota miners on the Iron Range, as well as their communities. There, facilities shuttered by a glut of steel and aluminum on the world market are expected to reopen and add hundreds of jobs.

But Duncanson has seen the impact of U.S. tariffs on unrelated products before. Tariffs on foreign-made tires once led to restrictions on U.S. exports of poultry. Agriculture, Duncanson said, "is the quick pick for retaliation" in a trade war.

Trump's tariffs take effect in less than two weeks. Farmers, meanwhile, have no quick fix to blunt any resulting economic attacks.

"We have already committed to how much to plant," she explained. "It's not like we have time to change. It's not a light-switch situation."

Other Minnesota industries echo her concern.

In St. Cloud, Chris Rice runs Rice Companies, a third-generation family construction business.

Rice, whose commercial buildings include plenty of steel and aluminum, has gotten warning letters from steel suppliers telling him to keep price escalation clauses in his contracts. "One of our customers was told that the cost of steel from his supplier was going up 35 percent," said Rice. "We're waiting and seeing."

The state Chamber of Commerce just hosted a meeting of 70 Minnesota manufacturers. Precision machine shops, including some that supply the auto industry, were on hand, said Bill Blazar, vice president of the chamber.

"Steel and aluminum are a major input in their product costs," Blazar said. "Their customers have choices where they get their work done, and it doesn't have to be in the U.S."

This is why Blazar wishes the president had chosen a vehicle other than tariffs to try to boost American-made steel and aluminum. The rest of Minnesota's business community wants the state's steel industry to be strong, he said. "But they also want to be competitive."

Minneapolis-based Graco makes systems that handle fluids. Half of its sales are outside the U.S., and analysts expect the company to post a nearly 25 percent increase in profits this year. In its most recent annual report, the company warned that tariffs "could adversely impact our sales volume, rate of growth or profitability."

Scott Wine, CEO of Polaris, which makes all-terrain vehicles, snowmobiles and other outdoor products, is concerned about the tariffs' effect on more than $300 million the company spends annually on steel and aluminum. Wine thinks he can manage "inevitable price increases" from his suppliers, but is more concerned with the overall economy and jobs.

"Many of our customers are among the more than 6 million people who work in companies, like Polaris, that are consumers of steel and aluminum, and many more work in agriculture and export businesses that could face retaliatory actions," he said in a statement to the Star Tribune.

The White House says the tariffs — 25 percent on imported steel and 10 percent on imported aluminum — are necessary to ensure there are domestic supplies of steel and aluminum for national security reasons. Mexico and Canada have been temporarily spared from the levies as renegotiation of the North American Free Trade Agreement continues. Countries with "national security relationships" can try to discuss alternatives to the tariffs so long as they correct what the White House says are improper subsidies of steel and aluminum by foreign governments.

Meanwhile, an administration spokesman said permanently sparing Mexico and Canada from the tariffs may require a higher levy on other countries. Still, he promised the tariffs will have no inflationary effects, no negative job impacts and no consumer price increases.

Minnesota economists say the risks to state industries other than mining are real. A January 2018 state jobs report showed only 6,100 of the state's roughly 2.9 million nonfarm employees work in mining. Farming employs another 96,333 people. Many of those nearly 3 million non-mining workers could be at risk in a trade war, economists say.

Major U.S. steel suppliers and trading partners such as Brazil, South Korea and Japan will consider retaliation that makes it harder for U.S. businesses to sell abroad, said Robert Kudrle, an international trade specialist at the University of Minnesota. If Canada and Mexico eventually get swept into the mix, two of Minnesota's top export destinations will be hurt.

Sales to foreign buyers by Minnesota companies are significant. State businesses exported $21 billion worth of products in 2017, an 8 percent jump from the previous year, the Minnesota Department of Employment and Economic Development reported Tuesday. State exports in industry sectors that use steel and/or aluminum in their production processes included optic/medical instruments ($3.8 billion), machinery ($3.3 billion), electrical machinery ($2.8 billion), vehicles ($1.4 billion) and aircraft/spacecraft ($604 million).

Agriculture is by far Minnesota's most robust exporting sector. The state ranked fourth in the country with $7.1 billion in agricultural exports in 2016, according to the state's Department of Agriculture. China, Canada, Mexico and Japan are the top importers of Minnesota agricultural goods.

By comparison, the state's ore, slag and ash industry exported about $344 million in 2017. "The tariffs hurt everyone a little and help a few people a lot," Kudrle noted.

Su Ye, an economist with the Minnesota Department of Agriculture, said any retaliatory moves against state-produced soybeans, corn or pork will hurt. China, which the Trump administration has punished for steel dumping, provides just 2 percent of U.S. steel imports, but purchases more than half Minnesota's soybean exports.

Chinese officials may be reluctant to interrupt those imports with tariffs, said Ye, because the country relies on U.S. soybeans as a dietary mainstay and would have to shut down some of its own soybean crushing plants if supplies run short.

Chinese restrictions on "pork variety meat" are more likely, said Iowa State University agricultural economist Dermot Hayes. "And they will also look at corn and sorghum."

Any of it can hurt, Hayes said, because with all commodities, "a 10 percent duty is life-changing."

"Other countries will step in to fill the void," he said. "In the commodity business, pennies matter."

Jim Spencer • 202-662-7432