Iowa State economist on Trump tariff policies: ‘We’re all going to be poorer’

While U.S. stocks have yo-yoed in reaction to President Donald Trump’s imposition of tariffs and then a stunning reversal on most of the country’s trading partners, fears remain that his trade war will lead to a global recession — and harm Iowa farmers and the state’s economy along with it.

Trump on Wednesday abruptly backed down on his tariffs on most nations for 90 days, but raised his tax rate on Chinese imports to 145 percent. China also increased its retaliatory tariffs against the United States to 84 percent. That’s on top of the tariffs Beijing placed on roughly $21 billion worth of agricultural goods in early March.

While the country-specific tariffs Trump announced April 2 are on pause, baseline tariffs of 10 percent on nearly all global imports remain in place.

The tariffs aim to renegotiate trade agreements bilaterally, which could take years, affecting farmers and the state's economy, said Iowa State University economic professor Peter Orazem.

Trump, in post on Truth Social, said that “more than 75 Countries” have called U.S. officials seeking to strike new trade deals.

The tariffs, though, could lead to a downward pressure on commodity prices, potentially causing another agricultural recession similar to the early 1980s, Orazem warned.

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The tariffs also may strain U.S. alliances, particularly with Asian countries, while businesses — including industrial and agriculture equipment manufacturers like John Deere and Vermeer Corporation — face the prospect of higher manufacturing costs due to disrupted global supply chains and 25 percent tariffs on steel and aluminum the Trump administration imposed in March that are still in place.

The Gazette spoke last Monday with the ISU economist ahead of Trump’s abrupt but potentially temporary reversal, to discuss the potential impact of the president’s tariff policies on the state. The following is a transcription of a portion of that conversation, edited for brevity and clarity.

Q: What do you see as the goal? What is President Trump trying to accomplish with this tariffs, and how successful will he be?

A: Well, I mean, they've had some uncertainty as to what the ultimate goal is, but I think the one that seems to be the most common one now … is to set the ground for negotiations on different terms of trade on a bilateral basis. So rather than looking at multilateral trade agreements like the World Trade Organization, we're now going to have deals with every single country, and maybe even commodity by commodity.

Q: What are the implications of that for specifically Iowa and Iowa farmers?

A: Well, the problem with doing negotiations country by country and commodity by commodity is that could take a long time. … You know, it may be years before we have all those agreements in place. But you know, Iowa farmers did not benefit from the first round of tariffs under the first Trump administration, and the Biden administration basically kept those in place.

(U. S. agricultural exports fell by more than $27 billion during Trump’s first term amid a trade war with China, prompting the U.S. Department of Agriculture to send $23 billion to farmers to help offset losses. Iowa and U.S. soybean farmers were among the largest casualties of the 2018 trade war. Of the $27 billion loss, soybeans represented 71 percent of the drop.)

And so now it looks like we're going to have retaliatory tariffs that are going to target agricultural commodities that we produce in the Midwest yet again. And so short term anyway, that does not bode well for prices of the things that we produce in Iowa — not just soybeans, but corn, hogs, poultry and so on.

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Q: What do you see will be the economic fallout? What do you think that'll look like for Iowa?

A: It’s not good for agricultural commodities, and for the people who produce for the agricultural production market, like John Deere or Vermeer or some of the other large manufacturing in Iowa that tend to be related to the agricultural markets. … So a disproportionate share of agricultural products that are produced in Iowa are produced for sale internationally. And if we're losing a lot of our international market, if we have to dump all that product into the U.S. market, that's going to have a dramatic downward effect on commodity prices. And that's going to be true to differing extent, depending on which commodity you're looking at and how heavily it was reliant on international trade.

Q: How soon will prices rise as a result of these tariff policies?

A: Well, I mean, some could rise immediately. For example, if I'm selling an automobile, even if that automobile is currently sitting on my lot. All of a sudden, I'm seeing a surge in buyer demand for that automobile because people are trying to get in before the tariffs hit, which means you're going to start seeing prices rise in anticipation of the tariffs hitting. And so you're going to start seeing prices rising immediately.

Q: How is this going to be beneficial, I guess, for maybe addressing some of those trade barriers or trade imbalances (with other countries)?

A: Well, I guess it all depends on how successful those negotiations are going to be. And, I mean, there are a lot of sort of concerns. I mean, there's not a lot of credibility in the types of numbers that the Trump administration laid out (to calculate his “reciprocal” tariff plan, resulting in inflated tariff rates for countries).

… They seem to be ignoring the fact that we have trade surpluses in services. I mean, that's what the U.S. is atypically good at. You know, we provide financial services and health services and education services on an international market. And that's where we make most of our money. And not only that, that's where most of our economy is based. So to focus exclusively on goods and not services immediately means that you're starting the negotiations on faulty numbers.

But there's no trade theory that would argue that those were the right ways to compute sort of nontariff barriers in the first place. And so how do you start a negotiation based on numbers that the other party is not going to agree to? I see this as very protracted and not particularly fruitful negotiations, but, you know, I hope I'm wrong.

Q: How would the tariffs affect America's long term economic alliances, and what would that mean for market access to Iowa farmers to sell their products overseas?

A: Well, we're all going to be poorer. The whole definition of trade is both parties benefit. But there seems to be a sense that trade is a zero-sum game. So if the other person loses, you must be winning. But in fact, a reduction in trade means both parties lose. So unless we have a quick resumption of trade, you're going to see a protracted loss of wealth in the United States.

And Iowa is not going to be the only place that suffers from that loss of wealth. And if you look at the drop in the stock market, I mean, that's just one sector of the U.S. economy, but every sector in the U.S. economy that's exposed to international trade is going to be poorer and that's just the way it goes. We benefited as a country tremendously with economic relationships with trading partners over many, many years. And, apparently, we're now going to try to focus more on producing just for the U.S. market. And I think that means that we're going to have some substantial loss of income and profitability in the U.S. economy.

Q: How likely will these tariffs tip the U.S. into a recession? And what would that look like here in Iowa?

A: If you look at ag recessions, I mean, the 1980-81 recession was much worse in Iowa than it was nationally. And that's because our ag markets got hit very badly. And we had a lot of farms that were caught in sort of a death spiral, and farm foreclosures and bank failures and so on. And that had a dramatic effect on the Iowa economy for several years. … But this one looks like it's going to be another ag recession. And if it's another ag recession like the early 80s, that hit Iowa atypically badly. And I think unless we reverse some of these tariff effects on the farm economy, I suspect we'll see something similar.

Comments: (319) 398-8499; tom.barton@thegazette.com