MINNEAPOLIS -- President Donald Trump has raised the specter of a trade war with Mexico, by proposing a 20 percent tax on products from that nation, as a means of financing the wall the president has promised to build on the Mexican border.
Such a battle would surely reverberate into Minnesota farm country, which accounts for a large portion of Minnesota's $2.4 billion in sales every year to Mexico, the state's second largest trading partner.
"Minnesota farmers produce a big part of products, e specially soy beans, corn and wheat that goes to Mexico," Tim Kehoe, a University of Minnesota economist and longtime adviser to the Federal Reserve Bank of Minneapolis, told KARE.
"The kind of rhetoric we’ve seen in the last week, Mexicans are already starting to look around for other suppliers. If they don’t think of us a trustworthy or dependable trade partner, they’re going to start looking to countries like Brazil for those products."
Minnesota companies also sell a sizable quantity of high tech products to customers in Mexico, including engines, electronic controllers and medical devices
Tariffs, taxes and other trade barriers work to the advantage of the country imposing them as long as they're unilateral, according to Kehoe. But they virtually always prompt a response, that ends up harming all the nations involved.
"It becomes a war when other countries retaliate and then both countries, or whole group of countries, will raise their trade barriers, and trade overall will just plummet," Kehoe explained.
"This is the kind of thing that happened world wide during the Great Depression in the 1930s."
And Mexican President Enrique Peña Nieto would be under pressure inside his own country to retaliate with some type of tariff or tax on U.S. good headed there.
"There’s a been a commitment by the Mexican government, given some of the recent rhetoric coming out of Washington, they have committed that they will retaliate," Kehoe said.
And while it would seem that a border tax on Mexico was generating revenue to pay for the wall, Kehoe said American consumers and companies would actually end up picking up the tab in the form of higher prices for Mexican goods.
Even the term "trade war" seems at times like a vestige of a bygone era. Every president since the 1930's has espoused free flow of goods across borders and multilateral trade agreements.
"We thought we’d made the world a better place," Kehoe remarked. "We thought we’d made the world more compatible with our capitalist system. It was a way of exporting US values."
There has always been a streak of protectionist rhetoric in the United States, especially as cheaper imported goods have driven down the price of American made products, and as companies based here have moved or outsourced manufacturing and assembly overseas.
And there have been moves in Congress to impose taxes on imports from all other nations, with the aim of protecting U.S. manufacturing jobs or forcing American companies to make their products in this country.
But, by and large, the people who've occupied the White House have promoted free trade.
And the World Trade Organization, an outgrowth of the movement away from trade wars, has actually outlawed bilateral trade barriers.
Editor's note: While Dr. Kehoe advises the Federal Reserve Bank of Minneapolis, his statements and opinions are his own. He was not speaking on behalf of the Federal Reserve Bank or the Federal Reserve System.
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