How President-elect Trump's proposed tariffs could affect Minnesota's economy and your finances

[MUSIC PLAYING] NINA MOINI: Our top story this afternoon on Minnesota Now, President-elect Donald Trump says, on day one in office, he will impose sweeping new tariffs of 25% on Canada and Mexico and another 10% tariff on China. Trump says, the Mexico-Canada tariff is to crack down on illegal immigration and drugs. If implemented, it could dramatically raise prices and impact businesses here in Minnesota.

In 2022, Minnesota traded a total of $6.2 billion with Mexico. With our neighbors to the north in Canada, Minnesota traded more than $21 billion. Joining me now to explain the impact this tariff proposal could have on your wallets is Professor Tim Kehoe, distinguished McKnight University professor in the Department of Economics at the University of Minnesota. Professor, thank you for being here with us.

TIMOTHY KEHOE: Well, thank you very much.

NINA MOINI: I'm so grateful to you and all of our professors-- and we've had a lot of professors on in recent weeks after the election-- breaking things down. And you all do such a great job. For anyone who may not know exactly what a tariff is at the basic level, can you explain, what is a tariff?

TIMOTHY KEHOE: Yes. Well, a tariff is a sales tax on foreign firm selling in the United States.

NINA MOINI: OK, so who--

TIMOTHY KEHOE: Nothing more, nothing less.

NINA MOINI: OK. So who ultimately pays for tariffs?

TIMOTHY KEHOE: Now, that is a fascinating question. And just as it is with sales taxes within the United States-- and economists, in the case of sales of imports, call that passthroughs. And we have had lots of economic studies on what the economic passthrough has been with the trade war that President Trump started with China. And the Biden administration has continued it up to now.

And the findings have been that somewhere between 90% and 100%-- the number gets bigger over time-- of the tariff revenue comes from US firms or consumers. That is, we pay more for the imports. The Chinese firms have very often suffered. It's not that they're receiving less revenues when they sell. They've kept the prices up.

But sometimes the US buyer drops the Chinese supply altogether and switches to a supplier sometimes from the United States. But during the trade war with China up to this point, it's been mostly switching to suppliers from countries like Vietnam and Mexico. So the trade war has real effects. But the tariff revenue is paid by US citizens or firms.

NINA MOINI: Consumers, yes. So Minnesota imports more than $14 billion from Canada annually. A majority is energy. How do you foresee this impacting businesses doing business with Canada?

TIMOTHY KEHOE: Well, it's going to make energy-- gasoline prices, for example-- be higher.

NINA MOINI: Yeah. Can you explain just some of industries that you feel like could be impacted. We mentioned energy. Where does it end? Or is it this all-encompassing impact?

TIMOTHY KEHOE: No, it is going to have a huge, all-encompassing impact. But let's think of two different sources of where the pain is going to come from. One is that American and Minnesotan households and firms are going to face higher prices for the goods that they want to buy and they have bought from. And we are talking about our three largest trading partners by far, Canada, Mexico and China. They're going to have to pay higher prices.

But we should not think that that's where it's going to end. Because when we put these higher prices in the form of taxes or tariffs on Canada, Mexico, and China, they are firms. The governments in those countries are going to retaliate. And we already know that the Chinese have retaliated.

And one thing they buy less of are goods from Minnesota farmers. They buy less soybeans. They buy less pork bellies. There's all kinds of goods that Minnesota farmers produce that the Chinese don't buy now.

But in the case of Canada and Mexico, they are our primary export destinations. Now, in the case of Minnesota, we have a lot of big firms, Honeywell, 3M, medical suppliers, and so forth. They export to Europe, as well.

But our two biggest customers are Canada and Mexico. And Claudia Sheinbaum, the new president of Mexico, just announced this morning that they're going to retaliate.

NINA MOINI: We did just hear that.

TIMOTHY KEHOE: So that's going to hurt the firms in Minnesota that export.

NINA MOINI: Yeah, we did just hear that from National Public Radio. And you mentioned, we have a huge amount of headquarters here-- farmers, soybean producers still reeling from the trade war that began in President-elect Trump's first term. People may not be--

TIMOTHY KEHOE: And they've never really recuperated their customers. They've gotten through that because the US government gave the farmers financial bailouts when they suffered from declining trade with China. But that's not a long-term solution.

NINA MOINI: And when we think about North America and interdependent economies that are all working together-- people may be familiar with NAFTA or free trade agreement with Canada and Mexico. Would this tariff proposal violate that? And does that really matter?

TIMOTHY KEHOE: Yes. I hate to give you the answer in such blunt terms.

NINA MOINI: Please do.

TIMOTHY KEHOE: Yes, it would violate the NAFTA-- or the new form of NAFTA, the USMCA II, the United States, Canada, Mexico trade agreement negotiated under President Trump. It would violate that agreement. But no, it doesn't matter.

NINA MOINI: Like, there's no consequence really for that?

TIMOTHY KEHOE: Yeah. Because the trade war that President Trump initiated in his first term in office did violate NAFTA. And especially the trade war with China, violated the rules of the WTO. And we're signatories to trade agreements through that not to do this.

But there's always an exception that people use of saying, it's national security. And there's lots of debates about whether that's justified or not. The use of the national security exception is at an all-time high. But other countries can use that, too. So it just means the treaties that we've signed might not mean much anymore.

NINA MOINI: And just to remind folks, again, President-elect Trump saying that he's doing this because of illegal immigration and an influx of fentanyl into the US border. Before I let you go, Professor, I think people are just overwhelmed sometimes by all of this talk about trade agreements, and tariffs, and wondering, when might they see an impact on groceries, gas?

People are wondering, how will this actually impact me and when? Do you have any words of advice around that? Or can you foresee that?

TIMOTHY KEHOE: The members of the incoming Trump administration are already talking about exemptions to the tariffs, that, for certain goods from certain locations or purchases by certain American firms, they would get an exemption from paying the tariffs. Now, I have to admit, as someone who studied the economies of Latin America over the years, I've seen policies like this of exemptions granted to certain firms, certain groups of consumers, and so forth in the past. And that does not lead to an efficient economy. But I cannot believe that we're going to up the ante and are already running a trade war with China with 10% tariffs and just across the board tariffs of 25% on our biggest trading partners and not have a widespread impact pretty soon in the new year.

If President Trump gets inaugurated-- well, I mean, he is going to be inaugurated on January 20-- and the new administration come into place, I would think, in February, we'd already be feeling impacts.

NINA MOINI: Wow.

TIMOTHY KEHOE: And businesses planning ahead-- once it locks in that this is going to happen, they're going to start reacting immediately. And that might start before the inauguration.

NINA MOINI: OK. All right, Professor, we really appreciate you coming on. And as all of this unfolds, we certainly hope that you'll come back. Thank you for your time.

TIMOTHY KEHOE: Yes. Well, thank you. You, too.

NINA MOINI: That's University of Minnesota economics Professor Tim Kehoe.