NAFTA v1.1

Please, it’s no longer NAFTA
Call it what you now hafta
It has a new name
Even if it’s kinda the same
And before feels a lot like afta.

From FTAlphaville, a (free) Financial Times blog. Citing a tweet from Karthik Sankaran @RajaKorman

We’re no longer focused on trade, but this limerick was too good not to repost. USMCA, the proposed treaty – it’s not a done deal until approved by the US Senate, Canada and Mexico, which is not a done deal – has few changes from NAFTA. Most of those that had any substance were part of the TPP treaty negotiated under Obama that Trump rejected in his first days in office. (We may yet see a version of TPP, because it was designed to include all of the Pacific except China.) New are higher minimum domestic content thresholds for the auto industry, but most vehicles already meet them, so … yawn. There’s also a minimum average pay test for auto workers, but if skilled workers are paid a high enough wage, there won’t be a need to bump the pay of workers at the bottom of the ladder. The other big item is dairy. PR focused on it, plus it matters in a few US and Canadian political districts. However, the amount of trade is very small, and it is irrelevant from an economy-wide perspective, or even for most dairy farmers.

One point that needs emphasis: steel and aluminum tariffs remain in place, despite USMCA. Will the President continue to take ad hoc actions that fall outside the treaties covering trade? If so, companies won’t view USMCA as providing a reliable framework for doing business with the US.

Scalpers

We widely deride scalpers, while ourselves turning to them when we can’t get tickets to a must-attend event. But during one Spring course in Detroit, the Red Wings were playing at home in a game for the Stanley Cup. Six students decided to go, and managed to score tickets for $100 plus change. Hockey’s in a small venue, though the puck is pretty small and the action fast. Isn’t scalping great? – you can’t get nosebleed seats to a Big 10 football game for that!

So how do markets for tickets to concerts or major sporting events operate? Now the question isn’t interesting if the number of seats available is greater than the zero-price quantity on the demand curve, that is, where “D” hits the horizontal axis. If it’s not obvious, draw!

So how do we model “S” supply in this case? Horizontal? Vertical? or not a straight line? And who wins? loses? – can we do a quick check of consumer surplus and producer surplus? Are there aspects of the market that CS and PS fail to capture?

Now think about the institutional details. For simplicity, assume an open-seating venue with all tickets identically priced. Will supply necessarily be equilibrated with demand? If QD and QS are not equal, or PD and PS are not equal, what gives?

In the old days, you had to line up at a box office window with cash in hand to purchase your tickets. If you were too far back in line, you waited in vain. Alternatively you could show up at the event with cash in hand. Almost always tickets were available – scalpers themselves might not have planned on attending, but if they couldn’t sell all of theirs, they’d head on in. So you had to show up a bit early to guarantee that you could get tickets…

Let’s push the analysis further. First, what sort of fan is likely both able and willing to buy a ticket at a price near where “D” hits the vertical axis? Are they likely to be the sort of person who, in the old days, would bring their sleeping bag and line up a day in advance of tickets going on sale? What sort of person would be willing and able to queue, and what price would they be willing to pay – or to scalp if the market price outside the venue was high? Does that change who “wins” and who “loses” from scalping?

Now another question is whether major events – the concert for a big-name rock group – routinely sell out. Or are tickets generally priced with likely demand in mind so that while there may be a few tickets left over, or a few fans left disappointed, tour organizers generally do a pretty good job of gauging the maximum price they can charge and still fill the seats. What would the average age then be at such concerts – Mick Jagger will surely be touring long after his blood has been replaced by embalming fluid, with muscles replaced by robotics! Would anyone not in their 50s or above have be able to afford a pair of tickets? Yet the YouTube video of their recent Dublin concert shows lots of 20-somethings…OK, maybe they’re closer to 30. How long does it take for tickets to sell out? Are the Stones no longer interested in money, or is there something else behind how they price tickets?

Today you probably don’t have to physically line up, but that hasn’t eliminated scalping. Yes, Ticketmaster seems to have a near-monopoly for many types of events, and as a broker their interests may diverge from those of the groups they handle. At the same time, aren’t they hurt by scalping? What do they gain or lose, as opposed to players and fans? The Canadian Broadcast Corporation recently sent an undercover reporter to a scalper convention. Guess who the sponsor was? – Ticketmaster! Read the accompanying CBC report, replete with screen shots of software and helpful how-to tutorials from the sponsors. They even uploaded the Ticketmaster “professional reseller handbook”!

Note I dislike the Stones’ music, and am uninterested them as a group. Now Deep Purple, or early Jethro Tull, or Daft Punk, or…the Bach Bb Minor Mass, for which I’ve twice had the opportunity to sing Bass II in the chorus. Now there’s music!

Demand, Supply and Tariffs

Here is an S&D Worksheet (pdf) to help with the post. What is the relevant “market” for different pieces of the argument? Does D or S shift? right or left? where’s the new “e”?

On March 8, 2018, President Trump issued Proclamations 9704 and 9705 on Adjusting Imports of Steel and Aluminum into the United States, under Section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), providing for additional import duties for steel mill and aluminum articles, effective March 23, 2018.

That’s a mouthful, if you have to read it out loud. The official notice also takes a while to get around to detailing the tariffs: 25% on steel, 10% on aluminum. So what? Now the aim of the Administration is to make imports more expensive, so that car companies and other users purchase more domestic steel, increasing jobs in US steel mills, many located in swing states. Let’s focus on the economics, though, and not the politics.

The average motor vehicle uses 2,400 lbs or just over 2 metric tons on steel. Ordinary steel is inexpensive, and cars use some, but to be crash-worthy and still light enough in weight to sip fuel frugally, a modern vehicle uses lots of specialty high-strength steel. So while automotive demand accounts for only about 15% of the market for steel, it’s by far the most profitable segment. So order of magnitude let’s assume an average cost of 50¢/lb. If half of that steel is currently imported, then direct impact of the tariffs is to add 2400 x 50¢ x 1/2 x 25% or $150 to the cost of LVs.note


First, steel is not homogeneous. That used in body panels is specific to each car company, with slightly different alloying compounds, rates of cooling, and hot and cold rolling processes. A different plant of a different company can’t precisely duplicate that, and so may not be useable. In addition, a “pour” of basic oxygen steel is near 300 tons. Once rolled into a 5 mm sheet, that’s enough to stamp out doors and fenders for a lot of cars. In other words, a car company sticks with the steel not just of a particular company, but of a particular mill. Now it’s generally possible to “tune” dies to modest variations in steel, to correct for it “springing” back differently and thus creating a panel not quite fitting the way it should. But car companies may stick with imported steel rather than try to tweak their factories in the middle of a model year. (Think of the problems Tesla is having, because they tried to rush production rather than taking the time up front to tune their dies.)

In addition, mills have a fixed capacity. With the domestic auto industry operating near capacity, domestic mills may not be able to fill additional orders for new types of steel in a timely manner. Anyway, we ought to expect steel imports to fall a bit.

Now we have an input to cars going up in price. A nice study from PIIE points out that the impact is not the same on all vehicles. Higher-volume vehicles – think the Honda CR-V, the Toyota Corolla, and the Ford Escape – tend to use more domestic parts and components for logistics reasons, and because they are made in Europe, the US and Asia, the number is high enough to allow specialty steel to be sourced from mills in each region rather than to be shipped around the world from one mill. That means low-volume producers (think Subaru in Indiana or Mercedes in Alabama) will be affected more than average.

New cars, even basic ones, are expensive. The median household income of purchasers of inexpensive LVs is $75,000. To put that in perspective, a two-fulltime-worker household where both earn $16 per hour, over double minimum wage, pull in $64,000 per year. Most households earn less, and can only afford to buy a used car. But a used car was made before the tariffs were imposed, and so cost less to make. So are the poor households who never buy a new car affected by the tariff?

Now this example focuses on the auto industry, but it’s not the only one to use steel – look at the old gym for an example of an industry that is a very large user of commodity steel! What other industries will be affected? For reference,
the steel industry employs about 80,000 workers (BLS NAICS data), automotive manufacturing employs 950,000 while construction employs over 7 million. While not all of the latter are in sectors that use steel – those in “stick” construction that relies upon wood 2x4s –it’s the biggest user of steel. What, if anything, would we expect to happen to employment in autos and construction? Walmart?

Finally, we export $10 billion of autos to China, principally of upscale models (including the BMW X-series that is only made in Spartanburg SC, and the Tesla Model S that is only made in Freemont CA). We also ship automotive components, including auto-dimming electrochromatic mirrors (made by Gentex and Magna’s Donnelly division, both located in Zeeland MI). Tariffs aggressively applied generate a reaction, and China has retaliated with its own 25% tariffs, affecting all automotive trade. Telling, neither US automakers nor US autoworker unions called for tariffs on imported cars and car parts, but that looks what we’ll get, with an impact that extends far beyond that of tariffs on steel.note 3

Notes

  1. The tariffs haven’t stopped at steel, with the White House is pushing for 25% tariffs on auto imports and 25% on all imports from China, including automotive components.
  2. We can’t say “car” because sedans comprise under 30% of the market. Because it’s tedious to always use “motor vehicle” I also use “cars” and “LVs” for “light vehicles”.
  3. PIIE estimates that 2% of auto industry jobs would be lost if tariffs are extended to imported parts. So far NAFTA is not included. Extending tariffs to Canada and Mexico would have a far larger impact.

“The Trump administration’s latest round of tariffs is throwing into sharp relief the dominance of Chinese suppliers in automotive supply chains. Among the $200 million in imports subject to 10% tariffs beginning next week are a $10 billion in auto components from more than 1,000 Chinese companies, including crankshafts, spark plugs and windshield-wiper blades” [Wall Street Journal]. “There are few immediate and affordable alternatives for many of those parts for U.S. manufacturers, and the levies—which rise to 25% next year—will reverberate through the supply chain, affecting prices of new and used cars. Chinese suppliers are beginning to see the impact, with some receiving fewer orders from U.S. customers. U.S. suppliers, facing higher costs and customers that won’t take nicely to price increases, are caught in the middle.”
from Naked Capitalism “water cooler” of 20 Sept

2018 Texts

All sections of Econ 100 use the Mankiw Principles text. We also have a common syllabus, with a few “floating” days where each of us can add or extend one or two topics.

My section will have 2 midterms and a final, as well as homework assignments and in-class discussion of blog posts I will make to this site. See the syllabus and schedule pages for details.