Car wars: Trade integration and tradedisruption in the worldwide car industryConsequences for output and consumers

Thierry MayerLisbon, July 2019

1

Outline of talk

Motivation: trade policy is not boring anymore

Estimating Frictions to Multinational Production

Policy counterfactuals

2

Motivation: trade policy is notboring anymore

Incredible times for trade economists

1. There are many mega-regional free trade agreementsbeing signed or discussed

2. Trump + Brexit are shaking what seemed like a steady pathto ever more trade integration.

3. The automobile industry is of central interest in thoseevents, with very rich data

3

Deep integration and trade disruption w/ MNCs

• Regional and mega-regional (TTIP, TPP, EU-Mercosur)integration agreements have major implications not just forgoods flows but also for multinational production (MP).1. Preferential tariff cuts increase the attractiveness of all member

states as production bases.2. Deliver deeper integration than just trade cost reductions:

• Investment and IPR measures protect investments, trademarks• Mutual recognition or harmonization of regulations• Free(r) movement (at least for professionals)

• Deeper integration shifts the focus towards re-allocationof production within multinationals.• Trade disruption... undo those effects. 4

TrumpWarnings to ... many firms

German newspaper Bild quoted Trump as saying:“I would tell BMW that if you are building a factory inMex-ico and plan to sell cars to the USA, without a 35 percenttax, then you can forget that.”

5

Is it credible? (Fajgelbaum et al. (2019)

6

When academic interest meets policy interest

Head and Mayer, “Brands in Motion, How Frictions ShapeMultinational Production”, forthcoming AER had evolvingmotivation over 5 year production process:

• 2014-2015: Rich data to estimate Frictions on Mult. Prod.• 2015–2016: Mega-regionals deals with Deep Integration• 2016–2018: Trade Disrupted (Brexit / Trumpit)• 2019: Trade wars looming with a focus on cars

7

Estimating Frictions toMultinational Production

The model in one graph

Draws:

Periods:

Decisions:

1 2 3

Productivity ϕb,# of models Mb,assembly sites Lb`,brand-entry fixed costs F d

bn

Opendealerships Dbn

Model-entry fixed costs F emn

Offermodels Imn

Model-locationproductivities zm`

Sourcing Sm`n,prices pmn,quantities qmn

• Four decisions to estimate• Three dimensions of frictions to recover• Two key substitution elasticities

1. Sourcing (cost minimization) ' 82. Consumer price elasticity (utility maximization) ' 4 8

Richness of the IHS data

• For each car model we know brand home, number of unitsby assembly location and destination.• We use passenger cars sales 2000-2016• Dimensions of the data (2016, after cuts)

• 50 different assembly countries (almost all world production)• 74 different markets (countries that record brand/origin)• 120 brands (Fiat) of 55 parents (FCA) from 20 HQ• 1406 sales nameplate (500)• 2128 models (Fiat 500 convertible “FF” program)

9

A (quantified) taxonomy of Multinational FrictionsHeadquarters

&%'$ Market

&%'$

Assembly location&%'$

i - n

@@@@@@@@@R

`

����������

δin(33%), δein(9.7%), δdin(26%)

γi` (31%

) τ `n(24%)

Variable and fixed marketing costs

HQ inputtransfers

Tradecosts

10

Fit of the solved model to data

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0.6 0.8 1.0 1.2 1.4 1.6

0.5

1.0

1.5

2.0

Estimate of log Pn

Equ

ilibr

ium

log

Pn

ARE

ARG

AUS

AUT

BEL

BGR

BHRBIHBLR

BRA

CAN

CHE

CHL

CHN

COL

CZE

DEU

DNK

DZA

EGY

ESP

ESTFIN

FRA

GBR

GRC HKGHRV

HUN

IDN

IND

IRL

IRN

ISLISR

ITA

JPN

KAZ

KOR

KWT

LTU

LUX

LVA

MAR

MEXMKD MYS

NLD

NOR

NZL

OMN

PERPHL

POL

PRT

QAT

ROM

RUS

SAUSGP

SRB

SVKSVNSWE

THA

TUR

TWNUKR

URY

USA

VNM

ZAF

Correlation: 0.98

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predicted flow (000s, log scale)

true

flow

(00

0s, l

og s

cale

)

0.01 1 10 100 1000

0.01

110

100

1000 Correlation: 0.63

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predicted flow (000s, log scale)

true

flow

(00

0s, l

og s

cale

)

0.01 1 10 100 1000 10000

0.01

110

100

1000

Correlation: 0.74

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true production (000s, log scale)

pred

icte

d pr

oduc

tion

(000

s, lo

g sc

ale)

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0.1 1 10 100 1000 10000

1010

010

0010

000

ARG

AUSAUT

BEL

BGR

BLR

BRACAN

CHN

COL

CZE

DEU

DZA

EGY

ESP

FIN

FRA

GBR

HUN

IDN

IND

IRNITA

JPN

KAZ

KOR

MAR

MEX

MYS

NLD

PHL

POLPRT

ROMRUS

SRB

SVK

SVN

SWE

THA

TUR

TWN

UKR

URY

USA

VNM

ZAF

Correlation no IRS: 0.93

Correlation IRS: 0.86

●

●

IRSno IRS

(a) Price indices (Pn) (b) Brand flows (qb`n) (c) Trade flows (q`n) (d) National Output (q`)

11

Cost advantage inferred from sourcing decisions

ARG

AUS

AUT

BEL

BGR

BLR

BRA

CAN

CHN

COL

CZE

DEU

DZA

EGY

ESP

FIN

FRA

GBR

HUN

IDN

IND

IRN

ITA

JPN

KAZ

KOR

MAR

MEX

MYS

NLD

PHL

POL

PRT

ROM

RUS

SRB

SVK

SVN

SWE

THA

TUR

TWN

UKR

URY

USA

VNM

ZAF

−40 −30 −20 −10 0 10

percent cost advantage with respect to the United States12

Policy counterfactuals

The policy experiments

1. US imposes 25% national security tariffs on US leaves NAFTA,imposes 25% tariffs on cars and parts from(a) Canada and Mexico, who retaliate, ending NAFTA (“Trumpit”)(b) the rest of world except NAFTA (“Section 232”)

2. UK exit from the European Union:(a) Soft Brexit: a shallow free trade agreement, UK loses EU FTAs(b) Hard Brexit: EU27 and UK impose 10% MFN duty.

3. Comprehensive Ec. Trade Agreement (CETA): CAN + EU28 ( + USA?)

4. Comp. and Progressive Transpacific Partnership (CPTPP), + USA?13

Section 232 applied to CA+MX (blue) or RoW (red)

Producers Consumers

−1500 −500 0 500 1000 1500

Output change (1000s of cars)

Canada

China

Germany

India

Japan

Korea

Mexico

Spain

UK

USA

Counterfactual:

232 on CAN & MEX 232 on Rest of World

−8 −6 −4 −2 0

Change in consumer surplus (in %)

Canada

China

Germany

India

Japan

Korea

Mexico

Spain

UK

USA

Counterfactual:

232 on CAN & MEX 232 on Rest of World

14

Insufficient Exemptions if 232 applied to ROW

●

●

●

●

●●

●●

●

●

● ●

●● ● ●

●

●

2000 2005 2010 2015

500

1000

1500

2000

2500

3000

Exp

orts

to U

SA

(10

00s

of c

ars)

Canada

Mexico

Section 232 Exemption

(2018 side−letter)

●

●

Section 232 Simulation

15

Brexit soft (blue) and hard (red)

Producers Consumers

−150 −100 −50 0 50 100 150

Output change (1000s of cars)

Austria

France

Germany

Japan

Korea

Mexico

Spain

Turkey

UK

USA

●

Counterfactual: Segments:

Soft Brexit Hard Brexit

noyes

−8 −6 −4 −2 0

Change in consumer surplus (in %)

Austria

France

Germany

Japan

Korea

Mexico

Spain

Turkey

UK

USA

●

Counterfactual: Segments:

Soft Brexit Hard Brexit

noyes

16

It is not that hard to relocate output

17

Brexit is happening

18

CETA (blue), CETA plus TTIP (red)

Producers Consumers

−200 0 200 400

Output change (1000s of cars)

Canada

France

Germany

Japan

Korea

Mexico

Poland

Spain

UK

USA

●

Counterfactual: Segments:

CETA CETA + TTIP

noyes

0.0 0.5 1.0 1.5 2.0

Change in consumer surplus (in %)

Canada

France

Germany

Japan

Korea

Mexico

Poland

Spain

UK

USA

●

Counterfactual: Segments:

CETA CETA + TTIP

noyes

19

Transpacific Partnership (blue), CPTPP (red)

Producers Consumers

−400 −200 0 200 400 600 800

Output change (1000s of cars)

Canada

China

Germany

Japan

Korea

Malaysia

Mexico

Thailand

USA

Vietnam

●

Counterfactual: Segments:

TPP CP−TPP

noyes

0 5 10 15 20 25 30

Change in consumer surplus (in %)

Canada

China

Germany

Japan

Korea

Malaysia

Mexico

Thailand

USA

Vietnam

●

Counterfactual: Segments:

TPP CP−TPP

noyes

20

In sum

1. Trumpit: Disastrous for Canada and Mexico (losses can goup to 1.5 m cars).

2. Section 232: Cuts production in Japan, Korea and Germanyby large amounts (combined losses around 2m cars.)

3. Brexit: Bad for both producer and consumer. Losses ofbetween 2/3 and 3/4 of 2016’s Swindon factory

4. CETA: Gains in production for Canada (56 ths. cars, 8%),followed by Germany (43 ths. cars) and Britain (25ths. cars).

5. TPP/CPTPP: Canada increases output by 33% under TPPand by 42% under CPTPP. 21

What about Portugal?

VW (“good”) plant sells about 100,000 cars a year.

1. Section 232: Increases the market share of VW in Europe, since BMWand Mercedes-Benz US factories are hurt by retaliation. Sourcingfavors Portugal. No sales in the US = no losses. Gain: nearly 5%.

2. Soft Brexit: On UK market, large exports of Mexican andSouth-African plants are cut. PRT benefits. Small gains in output.

3. Hard Brexit: Now 10% tariff also hurts EU plants, VW looses 20%market share in UK market. Losses dominate even for PRT plant:-1.2%.

22