Geo-Graphics

   

“I want to bring the steel industry back into our country,” declared President Trump last month. “Maybe [things] will cost a little bit more, but we’ll have jobs.” Tariff opponents in Congress and industry, however, have argued that what may be good for steel won’t be good for other industries. Asked why auto manufacturers are so opposed to tariffs if the impact on their costs is minimal, as the administration is arguing, newly elevated Trump trade adviser Peter Navarro was dismissive. “Look, they don’t like this. Of course they don’t,” he said. “What do they do? They spin. They put out fake news. They put all this hyperbole out.” Is Navarro right? To answer, we’ve analyzed historical data to estimate the impact of Trump’s proposed 25 percent steel tariffs on auto sales and employment. For the technically minded, you can follow the details of our calculations in the endnotes. We estimate that an average car requires roughly 1.2 tons of steel to build.[1] Given that tariffs tend to increase import prices (which determine domestic prices) by at least as much as the tariff, we calculate that a 25 percent steel tariff will increase the price of new passenger vehicles manufactured in the United States between 0.5 and 0.8 percent.[2] Now, based on calculations for the sensitivity of auto sales to price, we estimate that such price rises of American-made cars would translate into a decline of between 1.6 and 3.6 percent in global sales.[3] This we illustrate in the top left figure above, which shows our sales projections with and without the Trump tariffs. But what does this mean for American auto jobs? The historical relationship between U.S. auto sales and employment is tight, as shown below. Based on this relationship, we would expect declining sales to result in auto-industry job losses ranging from 18,000 to 40,000 by the end of 2019.[4] This we illustrate in the bottom left figure above. Given that employment in the U.S. auto industry is vastly higher than in the U.S. steel industry, such job losses would swamp any possible increase in steel employment. As we show in the right-hand figure above, the total amount of jobs at risk from Trump’s steel tariffs in the U.S. auto industry alone is equivalent to almost one-third of the entire U.S. steel industry workforce. In short, Navarro is wrong—deeply so. Employment in the U.S. auto industry will suffer from Trump’s tariffs to a vastly greater degree than it could possibly benefit in the U.S. steel industry. Footnotes ^ According to the World Steel Association, the amount of steel required to produce one ton of automobile or auto-part product ranges from 0.2 to 1.0 tons. For our calculations, we use a midpoint range of 0.5 to 0.7 to estimate that an average passenger vehicle of roughly two tons uses between 1.0 and 1.4 tons of steel. An earlier version of this post over-estimated average vehicle steel input and this has been corrected. ^ This estimate assumes that the auto industry will pass steel costs on to consumers and that steel prices in the United States will rise 25 percent due to tariffs. The latter assumption is conservatively based on recent findings that a 1 percent increase in tariff costs, alone, tends to raise import prices slightly more than 1 percent. ^ The boundaries of this range incorporate different methodologies for estimating automobile price sensitivities in recent research. ^ A portion of these laid-off workers who work in auto retail could conceivably be hired later by foreign auto companies exporting to the U.S. that gain market share over domestic producers.

“Houses are built to be inhabited,” scolded Chinese leader Xi Jinping at last October’s 19th Party Congress, and “not for speculation.” After a year’s worth of mortgage-rate hikes and new home sale restrictions backing his words, speculation does seem to have lost steam. Since autumn 2016, housing price growth has slowed nationally, hitting zero last year in Beijing and Shanghai—historically China’s frothiest markets. But might prices actually start falling soon?  And if they do, what would that mean for the economy broadly? Despite falling sales, Beijing and Shanghai continue to build at roughly the same pace we’ve seen since 2014—over 50 million square meters per year in total. The result is that the ratio of new construction starts to building sales has soared—as our main graphic above shows. Unless this reverses soon, the law of supply and demand would seem to dictate price falls. Of course, China famously “overbuilt” in the past, only to see massive influxes of rural migrants absorb the excess supply.  Couldn’t the same now happen in Beijing and Shanghai? We think not. Population growth in these two megacities has hovered near zero in recent years, following efforts to curb population growth in each. What might falling house prices mean for the broader Chinese economy? Home values affect consumer spending, and therefore GDP growth, by way of the so-called wealth effect—that is, consumers tend to change spending habits as their assets rise or fall in value. In the United States, according to one Federal Reserve study, for every $100 decline in housing-market net worth consumption tends to drop by $2.50-5.00. If this relationship were to hold for China, where homes represent a far greater portion of household income, we calculate that a modest 10 percent fall in Beijing and Shanghai home prices would knock over half a percent off GDP. The IMF expects Chinese growth to fall from 6.8 percent in 2017 to 6.4 percent in 2019, although house price declines do not appear to be part of their equation. Our analysis suggests that, all else being equal, something below six percent is more likely—with the drag persisting into 2020 and possibly beyond.