Vice President Mike Pence is visiting Minnesota on Thursday. According to the Associated Press, Pence will “talk with farmers and steelworkers about the status of a trade deal with Mexico and Canada.” He will extol the benefits of marginal changes to the 25-year-old North American Free Trade Agreement (NAFTA) for Minnesota’s dairy farmers and steel producers.
What the vice president will not address is the true impact of the Trump Administration’s trade policies: higher costs for Minnesota’s imports from abroad, lower prices for Minnesota’s exports, and a redistribution of income via tariffs.
Aggregate effects of tariffs
A tariff is a tax on imported goods. Like any other tax, there is a difference between who is responsible for collecting the tax and sending the proceeds to the federal government and who ultimately pays the tax.
The president touts the billions of dollars flowing into the Treasury from tariffs as revenue we are collecting from Chinese producers. This ignores the fact that Chinese companies raise their prices as much as they can to cover the cost of the tax. Most of the revenue ultimately comes from Americans who buy imported products, either consumers buying final goods or producers purchasing intermediate goods.
For example, a recent economic analysis concluded American consumers and producers bore virtually the entire burden of the tariffs enacted since 2017. Foreign producers passed through the entire cost of the tariff through price increases and retaliatory tariffs on American exports. The net effect was to reduce U.S. GDP by between 0.04 and 0.37 percent over the past two years.
That sounds like a small effect, and it is in the aggregate. That’s why we need to look carefully at the distributional consequences — that is, who gains and who loses from tariffs.
Redistribution via tariffs
According to the same paper, “The Great Lakes region of the Midwest and the industrial areas of the Northeast received higher tariff protection, while rural regions of the Midwestern plains and Mountain West received higher tariff retaliation.” This means that in Minnesota, the iron mining industry and steel producers gained from the tariffs by increasing the price of imported steel and making domestic products more competitive.
On the other hand, farmers were hurt by Mexican, Canadian and especially Chinese tariff retaliation. The price of soybeans, for instance, dropped 20 percent since last August as exports to China disappeared. Thus, the gains to iron mining and steel production are coming directly and indirectly out of the pockets of soybean farmers and export-oriented agriculture, in general.
Mr. Pence comes to Minnesota
It’s interesting that Mr. Pence is not visiting any manufacturers who use imported steel. That’s not surprising as they are another group that bears the burden of the tariffs. For instance, Scott Wine, the CEO and Chairman of Polaris, told CNBC that the Administration’s proposed increase in tariffs on Chinese imports will be “downright catastrophic in terms of impact on the company and employees,” and that “ultimately if this [trade dispute] was not resolved, we would have no choice but to move production to Mexico.”
The bottom line is that industries such as iron mining and steel production are being subsidized by directly and indirectly taxing everyone else in the American economy. The burden is especially heavy for farmers and others who rely on exports and manufacturers who used imported inputs.
What the vice president should during his visit is this: “My fellow Americans, I come to praise our administration’s policy of increasing taxes on one group of our citizens to subsidize another. Through our trade policies, we are redistributing income away from agriculture and manufacturing firms that rely on imported components and sending it towards mining industries and manufacturers that rely on domestic resources.” It’s not an applause-worthy statement, but it is the truth.
