Dairy markets and NAFTA

NYT reports that dairy tariffs are the major sticking point in the NAFTA negotiations between the US and Canada.  In the aftermath of last summer's G7 summit, President Trump slammed the Canadians for their 270% tariff on blended dairy powder.  U.S. negotiator Robert Lighthizer said this week that he viewed Canadian concessions on dairy as essential.

From an economic perspective, I find all of this puzzling for three reasons.  First, neither the US or Canada has anything resembling a free market in dairy.  Both countries overpay dairy farmers to produce too much and then they have to figure out what to do with the surplus.  Consumers and taxpayers are losers in both countries.  If political leaders wanted to help consumers, they would aim at dairy price supports, not NAFTA.

Second, the US runs a dairy surplus with Canada.  According to Bloomberg, Canada imports twice as much dairy to the US as it exports.  You might wonder how this can happen with 270% tariffs.  The answer: the 270% applies only when the US exports more than its allotted quota.  Otherwise the tariff is 7.5 percent.  

Third, dairy is small change in the overall pattern of trade activity between the US and Canada.  The US exported $340.7 billion to Canada in 2017, of which $470 million was dairy.  Blowing up NAFTA over such a tiny sliver of the overall market makes little economic sense.  For the sake of comparison, automotive exports are $52 billion.

Trade agreements depend on political as well as economic arguments.  Keep in mind that the Canadians have elections in 2019.  Dairy farmers in Quebec are an influential group, so no one in the Canadian government is going to do anything to ruffle their feathers.  It is less clear to me what the political arguments are for the US insistence that something must be done on the openness of the Canadian dairy market.  And that's all I will say.

What would happen if feds cap airline change fees?

Once upon a time you bought a plane ticket from point A to point B and it included a seat assignment (unless you were on Southwest), luggage (checked or on-board), and maybe even a snack or meal.  Now everything has been unbundled, with separate charges for seats, luggage, priority boarding and so much more.

Congress is considering an intervention by capping the amount airlines can charge for changing a flight reservation.  Currently American, Delta and United all charge $200 to change a reservation for a domestic flight.  According to WSJ, US airlines collected $2.9b in change fees last year.

What would happen if Congress put an upper limit of, say, $150 on change fees?  Standard economic analysis would interpret this as a price ceiling that would have unintended side-effects.  Airlines have already warned that they would raise fares and other fees in response, along with making fewer tickets changeable.  They also point out that customers who want more flexibility can pay for it when they buy their ticket by paying a higher fare.

But here's another thought.  The US domestic airline market is now very far from the competitive ideal of economics textbooks.  Price ceilings imposed on monopolists lead to lower prices AND increased output as long as the price provides a competitive rate of return.

My take: passengers and airlines have both benefitted from airline deregulation in the late 1970s.  Fares are much lower, more planes are flying and those planes are full.  What would really help customers is more competition.  What if we let foreign airlines provide domestic service?

What should we expect from Trump's new NAFTA?

President Trump declared a month ago that he had negotiated the key elements of a new NAFTA deal with Mexico.  US and Canadian negotiators continue to meet and have not yet come to terms.  Assuming that the Canadians do get on board, what should we expect in terms of economic impact?

Most of the attention in the press has focused on the provisions dealing with the automotive industry.  And here the news is not good for US consumers.  Right now cars imported by the US from Mexico must have 62.5 percent of the value of their components made in the US, Canada or Mexico.  The new deal ups the ante to 75 percent.  That means fewer components made in Asia and more made in North America which translates into higher costs.  

The deal also micromanages Mexican wage determination, requiring almost half of the value of a car imported from Mexico to be produced by workers making $16 an hour or more.  This will be a windfall for some Mexican workers, paid for by US consumers.  Gains for US auto workers are less likely as most of them make well above $16 per hour.  

Mexican imports are a key part of automotive supply chains, not just for GM, Ford and Fiat Chrysler but also for Toyota and Honda.  The auto companies will have to decide whether to accept higher costs on duty-free Mexican imports under NAFTA versus redirecting their supply chains to Asia and paying whatever tariff has to be paid.  

US consumers also will react; higher prices for cars made in North America will lead to increased demand for Kias and Volkswagens.  

NAFTA is 25 years old and certainly needs some updating.  WP reports the new NAFTA will address intellectual property, worker rights and environmental concerns.  Ironically the new NAFTA's provisions on these issues are very close to those in the Trans-Pacific Partnership, signed by Mexico and Canada, but rejected out of hand by both Trump and Hillary Clinton.  

It is still not clear whether Canada will sign on to the deal.  With or without Canada, any new deal will have to be approved by Congress.  The main economic consequence right now is increased uncertainty which is freezing investment decisions by companies who had counted on relatively open borders in North America.