Price Controls and the International Market

So, last night, Major League Baseball and the Player’s Association agreed to the terms of a five year Collective Bargaining Agreement, maintaining labor peace through at least the 2021 season. Despite it going down to the deadline, this felt like a deal that was always going to get made; there is just too much money in baseball for either side to risk a work stoppage right now. And at the end of the day, the two sides mostly just agreed to continue under the same rules as before.

There are changes, but they are tweaks more than overhauls. The luxury tax is going up, but only a little bit. Teams no longer have to surrender a first round pick to sign a player who received a qualifying offer; now they have to surrender either 2nd and 5th round picks or a 3rd round pick, depending on whether they are over the luxury tax threshold or not. The DL is being shortened from 15 days to 10 days. The All-Star Game no longer determines home field advantage in the World Series. The season will start mid-week, and more off days will be built into the schedule.

Like I said, tweaks. There’s no change to roster size, as was rumored earlier in the week. There are no big rules adjustments that impact the game on the field. For the most part, baseball is going to go on as it was before.

There is, however, one area where things are changing drastically. Maybe not as drastically as the owners would have liked, as the dream of an international draft died in negotiations, but the acquisition of players from other countries is reportedly changing in a big way. And it could lead to some huge shifts in how baseball teams operate off the field.

First, here’s what we know. Jayson Stark (and others) have reported that the new international signing system is going to be significantly reduced in terms of complexity. Instead of various-sized bonus pools based on your previous year’s record, every team is now going to get roughly the same amount to spend internationally — apparently around $5 million — and there will apparently be no mechanism for going over that amount. It is a hard cap of $5 million per team per year, effectively limiting the league’s annual expenditure on international acquisitions to about $150 million.

In the past, of course, teams strategically chose to blow past their bonus pool amounts, paying a 100% tax on the overage, in order to scoop up as much talent as possible in one fell swoop. For instance, last year the Padres reportedly gave Adrian Morejon $11 million, plus another $4 million to Luis Almanzar, $1.9 million to Gabriel Arias, $1.85 million to Jeisson Rosario, $1.5 million to Tirso Ornelas, $1.2 million to Justin Lopez, and $1 million to Jordy Barley. Despite having been assigned a bonus pool of just $3.3 million, the Padres spent $22.5 million on just those seven players, not even counting the rest of their class. The penalties associated with going over the bonus pools just weren’t strong enough to keep teams from blowing the system up, so now, MLB apparently has a new system in which teams simply aren’t allowed to do that anymore.

But here’s the rub; price controls generally don’t work. And this is nothing more than a price control, while doing nothing to change the value teams place on international free agents. We’ve already seen what the best young international players will command when teams are allowed to bid whatever they want; the Red Sox spent $63 million to acquire Yoan Moncada, plus took on restrictions related to signing international prospects for two years after that, putting his value to their franchise at something like $65 million. Under a new system, no team could pay him more than $5 million, so this price control sets the upper price limit at something less than 10% of the true market value of the best players on the international market.

Now, sure, Moncada was a special case; most guys don’t get that kind of deal. But there’s no question that teams value the best international talents at well more than $5 million, and those values are only going to go up as the price of acquiring wins in other ways get more expensive. With price control only on international spending, the gap between the value teams put on these players and the prices they pay to sign them is only going to grow.

And when there’s a dramatic gap between price and value, people look to exploit the system. I can guarantee you that there are plenty of people already thinking about how to get around these rules, and try to figure out how to land the top talents despite the fact that they can’t (legally) outbid their competitors anymore. Because we don’t know all the details of how the system will work yet, it’s too early to identify specific flaws that could be exploited, but it’s easy to speculate. Some teams may try the underhanded approach of just paying hidden bonuses, potentially through something like the package deals that have already occurred, though this time, the packages would have to involve spending multiple years worth of bonus money with the same buscone. There are plenty of other less-than-legal ways of trying to win a bidding war as well.

On the more up-and-up side of things, I’d bet that some teams will now look at the international market as an opportunity to act like a broker.

Let’s say you’re an organization that historically hasn’t done that well internationally, either because you don’t have the infrastructure of the scouts to compete with teams that have poured millions into their international efforts. Now, though, you could potentially extract a mint from those teams who do want to continue investing heavily in these markets, and you don’t really need to do much besides act as a middle-man.

Let’s keep using the Padres as our aggressive international team, for instance, since that was A.J. Preller’s area of expertise in Texas, and one of the main reasons the Padres brought him to San Diego. In the midst of a rebuild, it feels unlikely that Preller is going to want to back off the international market, and accept the fact that he can only sign a few players per year under the new rules. So, now, a team that isn’t setup to build the relationships internationally that let you land players when everyone is offering the same amount of money perhaps could set themselves up as a seller of international talent could go to Preller and say something like this.

“You can have our $5 million. We’ll sign whoever you tell us to sign. You come to agreements with their representatives, tell them to come to us, and we’ll sign them all. Then, in a few months, we’ll ship them all to San Diego, and all we want in exchange is, say, Austin Hedges and Tyson Ross.”

MLB could institute some kind of restriction on the trading of international prospects if they want to try and avoid this scenario, and they could argue that we haven’t really seen this play out with domestic draft picks, but there are structural differences internationally that don’t exist in the domestic draft, and depending on how the rules shake out, I think there’s a real chance we see some teams choose to serve as sellers of international signing bonus money rather than compete in a market where everyone is making the same offers.

But beyond even that issue, there’s another potential issue this price control might create, depending on the implementation of the rules; are players simply going to choose to play the early part of their careers in other leagues now? The most notable international player on the MLB radar is Japanese superstar Shohei Otani, who is both one of the best pitchers and one of the best hitters in NPB. Otani is 22 years old, and under the current system, he would have been exempt from the bonus pool system next year, able to sign a Major League contract for whatever amount the market would bear after his team posted him.

Now, though, that appears to perhaps be changing.

Hear that age limits on international players covered by caps in the new CBA is rising from 23 to 25. So, for example (cont)

— Joel Sherman (@Joelsherman1) December 1, 2016

Lourdes Gourriel waited until his 23d b'day in Sept to sign so there were no $ restrictions, now he would have to wait to turn 25

— Joel Sherman (@Joelsherman1) December 1, 2016

I have not gotten firm explanation on Otani who turns 23 in July. Not sure if a new deal with NPB would override the CBA

— Joel Sherman (@Joelsherman1) December 1, 2016

Putting all players 25 and under in the bonus pool system, if that’s really what is going to happen, would essentially ensure that Otani spends the next three years in Japan, assuming that there isn’t some exception carved out for NPB players. But there’s just no way an elite talent like Otani would choose to put himself in this new system, where his maximum bonus is $5 million, and then he’d be controlled by his new team for six years, two of which would be at the league minimum before he qualified for Super Two arbitration status.

Even with Super Two, he’d be looking at something like $40 to $50 million in arbitration payouts over his first six years in the big leagues, and combined with the $5 million bonus, he’d be essentially signing for something like 6/$55M in a best case scenario. If Otani is posted outside of the bonus pool system, and can negotiate a big league contract in an open market, he’ll get more than $200 million, and maybe push towards $300 million. It simply makes no sense for Otani, or any other elite young player, to subject themselves to a $5 million bonus and MLB’s pre-free agency pay scale.

Now, since these issues are easy to see from the outside, it’s pretty sure that MLB knows about them too. They probably don’t want a system that prevents the best players in the world from coming to the U.S if they want to, and perhaps when all the details are revealed, there will be ways around this issue. It’s impossible to pass judgment on the new international system with what we know now.

But we can say that it’s pretty clearly a price control system, and price control systems in every other area of life are rife with people figuring out how to get around the controls. It is very difficult to maintain order when the value and the price of an item diverge so greatly, and we’re about to see assets that teams covet heavily be priced at a tiny fraction of their actual value. What that will lead to remains to be seen, but I’m guessing the 30 teams aren’t just going to sit around and accept the new system without figuring out how to get around it.