Experts: Trump's latest tariffs put increased risk into an already uncertain Iowa economy

Danny Lawhon | The Des Moines Register

Show Caption Hide Caption New tariffs pinch construction companies dealing with flexing prices but a fixed budget. Neumann Bro. Construction has to meet a final cost for their projects but flexing material costs make it hard to do.

The latest signs of the U.S.' escalating global trade conflict are bound to leave their Iowa mark beyond just the agriculture business, multiple economic experts warn.

The Trump administration's decision in late May to halt tariff exemptions on trade partners in the European Union, Canada and Mexico will mean a 25 percent duty on steel and a 10 percent hike on aluminum.

Then, on Friday, Trump sent the largest global salvo yet by imposing a 25 percent tariff on $50 billion of more than 1,000 Chinese imported products. China’s Ministry of Commerce responded almost immediately, saying it would impose trade barriers of the "same scale and the same strength."

It is widely expected that the Chinese will be targeting Trump supporters in farm states such as Iowa and also the industrial Midwest.

The state's farmers could lose up to $624 million, depending on how long the tariffs are in place and the speed producers can find new markets for their soybeans, said Chad Hart, an Iowa State University economist.

Mexico has already struck back with tariffs on U.S. pork, costing Iowa producers $560 million. The EU says it will retaliate next month.

U.S. soybean prices have fallen about 12 percent since March, when the U.S.-China trade dispute began. Iowa is the nation's second-largest soybean grower, producing 562 million bushels last year worth $5.2 billion.

Trump's concept is based on protecting U.S. producers, said William Reinsch, a senior adviser in international business for the Washington, D.C.-based Center for Strategic and International Studies. The reality, he said, is widespread collateral damage.

"Protection is about putting domestic guys in a better position, wanting them to take advantage of it," said Reinsch, who had served for 15 years as president of the National Foreign Trade Council. "What that means is that everybody downstream is going to have a problem, whether you're buying imported steel or domestic steel, once the dust settles."

So what does that mean?

"In terms of a percentage, the impact is on the type of product more than an impact on the raw materials," said Sebastien Pouliot, an associate professor of economics at Iowa State University.

Trump issues warning on trade at end of G-7 Summit President Donald Trump delivered a stern warning on trade to foreign countries at the Group of Seven summit on Saturday, urging trading partners not to retaliate against U.S. tariffs on the imports of steel and aluminum. (June 9)

The effects of the tariff threats are already rippling through certain companies dependent on steel. Harley-Davidson motorcycles, for example, said in a statement that tariffs “will drive up costs for all products made with these raw materials, regardless of their origin.”

In April, Iowa Gov. Kim Reynolds said she received assurances that Trump administration officials are working on plans for federal help for Iowa farmers in a trade war.

U.S. Agriculture Secretary Sonny Perdue said Friday the federal government is assessing the tariffs' impact on farmers but that it is "way too early" to make final determinations.

"We’ll look and see what the market damage is from the trade disruptions. And then we’ll make a calculation and a determination in conjunction with the White House and Congress," Perdue said.

Jason Andringa, who oversees agriculture and construction equipment-maker Vermeer Corp., headquartered in Pella, told the Wall Street Journal in March that "cold water" was being thrown on a year of economic gains.

"It’s going to bring a dynamic of risk and volatility that we haven’t had to deal with in a while,” he told the Journal at the time.

Minnesota-based Polaris Industries owns the Indian Motorcycles brand, which manufactures its vehicles at a Spirit Lake, Iowa, plant.

Polaris spokesperson Jess Rogers said that around $15 million in costs will be added to the company in 2018.

Contingency and mitigation plans are ongoing, she said, but immediate alterations to manufacturing are not currently in play.

"Specific to Spirit Lake, we are committed to our production facility" there, Rogers wrote in an email. "… We do not anticipate an immediate impact to our Spirit Lake facility."

That decision may partly be related to a 9 percent increase in first-quarter motorcycle sales in 2018 over 2017, according to the company's earnings report.

Indian itself had a sales increase in the double-digit percentile range.

"While we must overcome significant commodity, freight and tariff headwinds throughout the remainder of the year, I am confident Polaris is taking the necessary steps towards becoming a customer-centric, highly efficient growth company,” Polaris chairman and CEO Scott Wine said in the report.

Iowa-based Winnebago Industries Inc. purchases all of its steel and aluminum domestically, company chief financial officer Bryan Hughes said on Winnebago's last earnings call.

Winnebago's strategy would first involve working with vendors to try and offset market increases.

"And then we would also pursue any pricing necessary to offset inflationary pressures around aluminum and steel in the marketplace," he told investors.

Products such as automobiles, whose prices are set more on a yearly basis, will not be able to pass on costs to consumers as quickly, Pouliot said.

Items purchased on a more day-to-day basis are not as immune to immediate price fluctuations, said Dimy Doresca, the director of the University of Iowa's Institute for International Business.

"If you shop at a Walmart, a department store, on a regular basis, if (this situation) goes on, you will feel the impacts," he said. "Because the retaliation is going to be terrible, and it will start to affect the items we use on a regular basis.

"… However you look at (the entire trade situation), Iowa is going to suffer. I don't see any way to look at this where Iowa will come out as a winner."

Trump says Russia should be allowed in G-7 President Donald Trump is calling for Russia to be reinstated to the leading group of industrialized nations, now known as the Group of Seven. (June 8)

When Trump announced his first round of steel tariffs three months ago, Sukup Manufacturing CFO Steve Sukup said he worried how a trade war could curb demand for his products.

Sukup employs 600 and uses a million pounds of steel weekly to make grain bins and dryers in rural Iowa.

"That’s what we do — we do welding and rolling of steel," he said. “All our products incorporate steel, so it hits at the heart of our base material.”

Research from the National Association of Manufacturers says Iowa is in the top 10 states in the U.S. for its proportion of the workforce employed in factories when compared with the gross state product derived from manufacturing.

The entire Iowa congressional delegation was against the steel and aluminum tariffs from start, pleading with Trump for relief in a March letter, saying "hardworking Iowans cannot afford a trade war."

But substantial tariffs are here, nonetheless, and the challenge for businesses is how they react.

"Polaris strongly believes in free and fair trade, and we will support positive modifications to trade agreements that promote growth and global competitiveness for all U.S. manufacturers," Rogers said.

In the meantime, Reinsch says, Iowans should expect companies to take potentially drastic and creative steps to survive — from cutting staff to going offshore to avoiding domestic steel use altogether — in response to Trump's high-risk, high-stakes gambit.

"The thing conventional wisdom gets — and this administration does not get — is that when you mess with a market, there are secondary and tertiary effects that you can no longer predict," he said. "Some companies can no longer do the economically rational thing, and when you leave them to cope with that, they may do things you don't expect."