Why Iowans are so nervous about Trump's proposed imports tax

Iowans' fears that President Donald Trump could incite an international trade war were heightened Thursday when the he floated a plan to pay for a proposed wall along the Mexican border with a 20 percent tax on imports.

Experts warn such a move could ripple through Iowa's economy, prompting Mexico and other countries hit with the tax to retaliate against local firms that export products internationally — a prospect that is particularly daunting for Iowa ag producers and manufacturers.

Next to Canada, Mexico is Iowa's second largest export market.

"There will be a tit-for-tat reaction," said Iowa State University Economist Peter Orazem. "Mexico is our second biggest customer, so I don’t think that’s good."

The news was particularly alarming coming just two days after Trump announced he was jettisoning the Trans-Pacific Partnership deal and renegotiate U.S. trade with Canada and Mexico. State leaders, including Republicans and Democrats, said that could lead to a trade war that could put Iowa in the cross-hairs.

Trump's proposal on an imports tax was vague: It's unclear whether the tax would apply only to Mexican-made goods or to other nations with which the United States runs a trade deficit.

And as news of the plan broke, officials seemed to walk back the proposal, saying it's just one of several options the president is considering to pay for his border wall, a cornerstone of his campaign.

Shortly after he revealed the proposal to reporters on Air Force One, White House Press Secretary Sean Spicer told a separate group of reporters in the West Wing that it was just one approach under consideration, USA TODAY reported.

"There are clearly a bunch of ways it can be done," Spicer said. "The point is American taxpayers are not going to fund it (the wall)."

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But increased tariffs on imports could lead to the opposite of their intended effect: Rather than make Mexico pay for the wall, economists say American consumers ultimately will pick up the tab with more expensive goods.

Iowa State University Economist Dave Swenson said Iowa consumers could expect to pay more for fruits, vegetables, cellphones and clothes with a 20 percent tax on goods from countries such as Mexico and China.

“What it will do immediately is increase the price of all goods and services that we buy from Mexico," he said. “One way or another, the American consumer will absorb the tax — or we will buy less."

Agriculture urges 'extreme caution'

Three economists interviewed by the Register on Thursday agreed that a new imports tax would be the first step toward an all-out trade war.

Iowa State University agricultural economist Chad Hart said such trade barriers would hurt Iowa farmers, who are already suffering through stubbornly low commodity prices. International markets have helped improve prices and move record crops of corn, soybeans and pork.

Mexico is Iowa’s top corn export market; China is its top soybean market.

“It’s not just ag that would face the brunt of retaliation,” Hart said. “Every state in the union would feel some impact."

After he officially killed TPP on Monday, Iowa ag and manufacturing leaders worried that Trump's trade policies could threaten the two bedrocks of the state's economy, because of Iowa's heavy dependency on exports.

In all, Iowa exported $13.2 billion in goods in 2015, with about 12 percent coming from farms, U.S. data shows. About 56 percent of Iowa goods were manufactured machinery, food and chemicals.

"Extreme caution needs to be taken," Craig Hill, president of the Iowa Farm Bureau Federation, the state's largest agriculture group, told the Register earlier in the week.

Likewise, Jay Byers, CEO of the Greater Des Moines Partnership, on Thursday urged caution when it comes to major changes to trade policy.

“The Partnership has been a long-time supporter of free trade and open markets, as are most economic development and chamber organizations," he said. "… Any changes to current trade policies need to be closely examined to evaluate their impact.”

'That can't be good'

Aside from the threat of retaliatory tariffs, Trump's move could rattle the complex supply chains of Iowa manufacturers, which rely on foreign parts and materials to build their products.

"It is unquestionably the case that if you’re putting parts together, you’re probably sourcing inputs from all over the world," ISU economist Orazem said. "This is going to affect that international supply chain. My assessment is that that can’t be good."

John Deere spokesman Ken Golden said the manufacturer was closely watching the policy debate. But it's too early to tell how Trump's proposal would affect the business, he said.

Roger Hargens, though, cheered on Trump's plans to shake up U.S. trade policy.

The CEO and president of fast-growing Accumold in Ankeny, Hargens said U.S. manufacturers often compete on an unfair playing field and could benefit from more favorable trade conditions. Accumold, which makes tiny parts for use in electronics and medical devices, exports more than half its product with buyers in Asia, Europe and Central America.

"I don’t think it's going to hurt to have another serious look," he said. "International trade is very important. But it needs to be fair trade for both. And I don’t know if it's as fair as it could be."

All signs (except trade) look up

Representatives from the offices of U.S. Sens. Joni Ernst and Chuck Grassley said it was too early to assess whether they would support an imports tax.

"Reforming our complicated tax code is important to improve U.S. global competitiveness ‎and help create and keep jobs here at home," Ernst's press secretary, Leigh Claffey, said. "As legislation is drafted in Congress, Sen. Ernst will examine it closely, talk with Iowa farmers and businesses about its impact, and see if it ultimately will help grow the economy."

Earlier in the day Thursday, business and state leaders pointed to trade fears as Iowa's only looming impediment to economic growth in 2017. The panel predicted proposals for tax cuts and deregulation would fly through the Republican-controlled Congress and White House, sparking business activity from coast to coast.

Debi Durham, director of the Iowa Economic Development Authority, said the state would be poised for "explosive growth," if it weren't for unanswered questions on trade policy.

"We are so dependent on trade in this state," she said at an economic forecast luncheon hosted by the Business Record.