Killing Nafta: Making Japan, Germany (and Korea) Great Again…

From Head and Mayer, “Brands in motion: How frictions shape multinational production”, an examination of how the auto industry fares if Nafta is terminated:

In the end-of-NAFTA scenario, depicted in orange in Figure 7, all three members reduce [auto] production.

The gain in US production for its home market is now dominated by the
lost sales to Canada and Mexico, resulting in an overall fall of 0.9%. This is much smaller than the drops in the two partners’ production, with Canada losing 24%, and Mexico 17% due to the loss of their favored status in the US market. This joint loss represents nearly one percent of world production, roughly equally shared between Canada and Mexico, whereas a similar total decrease is entirely borne by Mexico in the Trumpit [35% tariff on Mexico plus retaliation] scenario.

The Canadian and Mexican outcomes further worsen due to increases in delivered
costs of tangible and intangible … inputs suffered by US-owned plants. The two partners concede sales in the US market, in their respective domestic markets, and most importantly, in ROW markets. As a consequence, production in Korea, Japan, Germany, and Belgium rise not only because of higher sales in NAFTA, but also because of higher
market shares in ROW markets.

Losses in production, consumer surplus, shown below:

As a consequence of ending Nafta, “…production in Korea, Japan, Germany, and Belgium rise not only because of higher sales in NAFTA, but also because of higher market shares in ROW markets.”

Notice that under “Trumpit” US production does increase, but in both scenarios — Trumpit and end-of-Nafta — US consumer surplus declines. If consumer welfare is important, then these estimates suggest ending Nafta (or imposing 35% tariffs) would be contra-indicated. And ending Nafta reduces US auto production…(Of course, if policy is driven by an atavistic desire to “make Mexico pay” in a generic sense, then then either accomplishes the objective.)

(h/t Alan Spearot for bringing my attention to this paper.)

30 thoughts on “Killing Nafta: Making Japan, Germany (and Korea) Great Again…

  1. PeakTrader

    Trump won the election winning Rust Belt states, where many Americans lost high paying manufacturing jobs to Mexico and ended up with low paying service jobs. The flood of low skilled immigration, both legal and illegal, didn’t help raise wages.

    Most Democrats were against factories moving to low wage countries, because their communities would be destroyed. Trump is following what many Democrats believe.

    Reply
    1. PeakTrader

      Ross Perot – 1992 election debate

      “We have got to stop sending jobs overseas. It’s pretty simple: If you’re paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor,…have no health care—that’s the most expensive single element in making a car— have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south.
      …when [Mexico’s] jobs come up from a dollar an hour to six dollars an hour, and ours go down to six dollars an hour, and then it’s leveled again. But in the meantime, you’ve wrecked the country with these kinds of deals.”

      Reply
    2. baffling

      peak, a lot of those rust belt jobs left for the south-but not south of the border. they moved to southern states first.
      “Many of our trading partners have little or no labor, safety, or environmental standards, don’t provide workers health care or retirement, manipulate their currencies, subsidize firms, have trade barriers, have lower taxes, and less other regulations. ”

      why is it bad when those “trading partners” are south of the border, but not when they happen to be north of the border. this was a common occurrence during the 1980’s. you could move to a southern state for a job, but at half the wage, no pension, little safety standards, no union, etc. steel mills in texas and alabama benefited greatly from this migration.

      you have this view of free market ideology which has a lack of consistency. you decide to choose winner and loser scenarios based on your preferred outcome, rather than whether a firm can turn a better profit. when somebody else determines those winners and losers, you call it socialism. but when peak trader determines those winners and losers, it is capitalism. odd.

      Reply
      1. PeakTrader

        Even Keynes believed the bulk of decision making should be made in the free market and didn’t believe in socialism.

        I don’t determine winners and losers. The free market does. Government has a (limited) role to correct market failures.

        I believe people should have the freedom to choose.

        You want central planners to take away choice, because you, like 2slugbaits, believe people are too stupid.

        Reply
        1. baffling

          “I don’t determine winners and losers. The free market does. ”

          and yet you feel it is perfectly acceptable for trump to berate companies publicly to do his bidding, even if it produces a lower bottom line in the true free market economy. united technologies loses money by bringing their work back across the border. but it is ok for trump to threaten their government contracts to get them to act in a certain way.

          you support a central planner (although i am hesitant to call anything trump does planned). you would be up in arms if obama had done this. of course you believe in freedom to choose, as long as they choose what you want. you do understand how absurd your positions are? you have a very warped understanding of free markets and capitalism.

          Reply
          1. PeakTrader

            Baffling, why do you assume I “feel” that way and make things up about what I believe?

            I merely pointed out there are competitive disadvantages in international trade, there are benefits to the free market, and government has a role to correct market failures.

            Playing politics doesn’t support your case.

          2. baffling

            peak, you stated previously you were happy that trump went after united technologies. it is fair to say that you “feel” that way.

          3. baffling

            peak, during a discussion about carrier and united technologies YOU stated:
            “Governments manage economies, and Trump managed to keep Carrier jobs in the U.S.. That’s not crony-capitalism.”

            my interpretation of that conversation was you were happy that trump went after united technologies in order to get the outcome he wanted, in contradiction to what united thought was best through the free market.

            i accept your apology for accusing me of lying.

          4. PeakTrader

            Baffling, why don’t you post the entire link?

            It shows I was just correcting your false definition of crony capitalism.

            And, it shows I gave no opinion whether I agreed or disagreed with Trump.

            You really believe people are stupid.

          5. baffling

            peak, you were defending trumps action against carrier and united technologies. trump was giving preferential treatment toward carrier. that was crony capitalism. trump was not doing the same for carrier competitors.

            peak, quit digging the hole deeper. those were your words, live with it.

  2. Joseph

    Funny, but all of Trump’s grifter products — Trump apparel: suits, ties, dress shirts, eyeglasses — Trump home: chandeliers, mirrors, bedding, table lamps, cabinets, sofas, barstools, cocktail tables — Trump vodka, were all manufactured overseas.

    And for his construction projects he has used Chinese steel and aluminum.

    Trump doesn’t give a damn about the rust states. He only cares about what is good for Trump.

    Reply
    1. PeakTrader

      So, if you buy goods made in a foreign country, you don’t care about the Rust Belt and only care about yourself.

      Lots of people underestimate Trump. Afterall, he won the election against powerful forces.

      The U.S. has a huge competitive disadvantage in international trade. Many of our trading partners have little or no labor, safety, or environmental standards, don’t provide workers health care or retirement, manipulate their currencies, subsidize firms, have trade barriers, have lower taxes, and less other regulations. Trump has already begun to “level the playing field” and I’m sure he’ll do much more.

      Reply
      1. 2slugbaits

        PeakTrader To the extent that Rust Belt workers are at a competitive disadvantage, you don’t address that problem by hiring a Secretary of Labor who is virulently anti-worker. You don’t hire a Secretary of Education whose only qualification is the amount of her campaign contributions alongside a naïve and misplaced faith in charter schools. You don’t hire a Secretary of HHS who wants to further chain workers to a dysfunctional employer based healthcare system. You don’t hire an EPA head who doesn’t seem to believe in the connection between worker health and productivity. You at least think twice about nominating for SCOTUS someone whose mother famously said that lead did not present a health risk for kids. And you don’t prey on ignorant and desperate coal miners by lying to them about how their jobs will come back under a Trump administration. You don’t make the economy more “competitive” by racing to the bottom. That’s how an unimaginative zero-sum thinker might operate, but it’s not how a President should view the world. For starters, a smart ADD-free President might start with learning the difference between absolute advantage and comparative advantage. An ADD-free President would take the time to understand why his trade policies are likely to cut off American workers’ noses in order to spite Mexican worker’s faces.

        Reply
        1. PeakTrader

          2slugbaits, there’s a huge disparity between U.S. standards, for example, and many of our trading partners. China’s “growth at any cost” policy, for example, has exploited workers and created negative externalities that should be accounted for. So, the U.S. is at a competitive disadvantage, particularly given excess regulations and high taxes. People like you, who support excessive and expensive wasteful and counterproductive policies, is a major reason why U.S. real wages declined.

          Reply
        2. PeakTrader

          For example, you favor socialized health care. Government created the problem of making health care a luxury good through excessive regulations. So, you want government to solve the problem it created by taking over the industry. Government will lower prices. However, it’ll lead to rationing and lower quality.

          We should instead allow the free market to work, which will lead to lower prices and higher quality. Then, there will be more money available to pay for a stronger safety net, e.g. catastrophic health care and preexisting conditions.

          Reply
          1. 2slugbaits

            PeakTrader You should listen to yourself. You’re spouting college freshman ideology and pretending that it’s economics. As Trump would say: SAD! You once said that you studied economics. I see no evidence of that.

            The issue you initially raised was about Rust Belt workers. Joseph and I have provided more than enough prima facie evidence based on Trump’s Cabinet picks that he doesn’t give a fig about Rust Belt workers. His entire life has been about finding ways to cheat and con desperate people out of their money. And last year he cheated and conned desperate people out of their votes. It’s what he does. He can’t help himself. Once a predator always a predator.

            BTW, perhaps you should have ended your post with a claim that free markets would provide every child with a pony.

  3. Erik Poole

    PeakTrader: I have no idea how you can claim that the USA is not competitive internationally.

    As for labour and environmental protections, that is the advantage of modern freer trade agreements, they all have labour and environmental protection clauses.

    Scrapping the TPP and threats to scrap NAFTA will not help.

    Mind you, despite all the freer trade, the USA still heavily subsidizes agricultural and aerospace products to name two examples. I guess that as American socialists, those are the choices you make.

    Reply
    1. PeakTrader

      Erik, I’m sure you have no idea. I guess, you don’t mind exploited foreign workers and huge foreign negative externalities, like air, land, and water pollution. And, you have no idea that too many regulations and too much taxes can stunt growth. Ultimately, workers pay for regulations and taxes, one way or another, e.g. lower wages or fewer jobs. And, many countries don’t have the same high U.S. standards. Poor countries can’t afford it. Moreover, unlike the U.S., China, for example, has many state owned enterprises.

      Reply
      1. 2slugbaits

        How many times can you contradict yourself in one afternoon? Let us count the ways.

        You start out claiming that the US is at a competitive disadvantage because other countries (you cited China) don’t regulate and produce “…negative externalities, like air, land, and water pollution.” So here you seem to be saying that ignoring externalities is the key to growth because it provides a “competitive advantage.” So free and unregulated markets give countries greater growth, but also negative externalities. But a few posts earlier you assured us that getting rid of regulations would give us lower prices, higher quality and more money for a stronger safety net. Huh??? So apparently unregulated free markets in China give the Chinese a living hell shot through with serious negative externalities; but unregulated free markets in the US gives us economic Eden (along with a pony for every kid). You are very confused. SAD!

        Suggestion. You might want to try reading some papers or books on economic growth theory. And quit sounding like some Club for Growth cheerleader.

        Reply
        1. PeakTrader

          2slugbaits, there are no contradictions in my statements. You created statements I didn’t make to create contradictions.

          Reply
  4. Joseph

    PeakTrader: “The U.S. has a huge competitive disadvantage in international trade. Many of our trading partners have little or no labor, safety, or environmental standards, don’t provide workers health care or retirement, manipulate their currencies, subsidize firms, have trade barriers, have lower taxes, and less other regulations. Trump has already begun to “level the playing field” and I’m sure he’ll do much more.”

    Yes, he will level the playing field by reducing U.S. labor to third world standards — no safety or environmental standards, eliminating their healthcare and retirement, reduce education, lower taxes and eliminating all regulations protecting the public.

    As 2slugbaits pointed out, look at who he has selected as secretaries for Labor, Education, EPA, and Treasury.

    Trump doesn’t give a damn about the Rust Belt or any other working class people. He never has in his past business practices and never will in the future.

    Reply
    1. PeakTrader

      That’s ridiculous. And, U.S. regulations alone costs over $2 trillion a year. I think, we can get rid of lots of regulations and still have high standards, along with much stronger growth. So, we can afford more regulations.

      Reply
      1. baffling

        PEAK: “I think, we can get rid of lots of regulations and still have high standards, along with much stronger growth. ”

        trump says he can get rid of obamacare because it is too expensive to cover everybody, and replace it with something greater that gives even better coverage to even more people.

        peak and trump are great at stating what they want, with no real path to get there. both are either clueless on working with limited resources (neither of you seem interested in such constraints) or are intentionally lying about what it is you want your final product to look like.

        peak addresses regulation like paul ryan addresses the budget and revenue-with a magic asterisk. peak, as far as regulations go, i know peak likes to harass dodd-frank. go read the latest in the FT by Ben McLannahan . It may be surprising to know those regulations have not produced the negative outcomes you have relied upon in all of your posts on this blog. in fact, removing those regulations will end up with banks being permitted to loan to more of the folks you claim the banks were “forced” to lend to in the financial crisis.

        Reply
        1. PeakTrader

          Obamacare and Dodd-Frank go a long way to explain the anemic “recovery” from the severe recession.

          And, many other changes are needed to finally get out of this depression.

          Reply
        2. PeakTrader

          I read lots of articles, actually looked at how the law impacts the economy, and the benefits and consequences of the law.

          What’s “FT” (Financial Times?) and who is the author? Provide link.

          There are a couple of good policies in Dodd-Frank, but it has stunted the “recovery.”

          Reply
  5. Joseph

    Now Trump is pushing the lie that he would have won New Hampshire except for the thousands of people from Boston who were bused in and voted illegally.

    What kind of president obsesses over trivial bruises to his ego like losing in the state of New Hampshire? And then makes up ridiculous lies that are obvious to any sentient human being.

    The man is mentally unsound.

    Reply
  6. Joseph

    Uh oh. It looks like Trump will have to find a new 3 AM “economic” adviser. Michael Flynn has resigned for lying about his discussing sanctions with the Russians after the election.

    Oops, sorry. Turns out he didn’t lie. He “inadvertently briefed” the administration about his discussions.

    So now, once again, it comes down to what did the president know and when did he know it.

    Reply

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