Posts tagged ‘TPP’
Don’t Fear the Free Trade Boogeyman
Are you having trouble falling asleep because of a ghostly nightmare? Donald Trump, along with a wide range of pundits and investors have been afraid of globalization and the free trade boogeyman. Donald Trump may or may not win the presidential election, but regardless, his inflammatory rhetoric regarding trade is way off base.
Free trade has been demonized as a job destroyer, however history paints a different picture. I have written on the subject before (see also Invisible Benefits of Free Trade), but with Americans digesting the current debates and the election only a month away, let me make a couple of key points.
Standard of Living Benefits: For centuries, the advantages of free trade and globalization have lifted the standards of living for billions of people. There is a reason the World Trade Organization (WTO) has united more than 160 countries without one country exiting since the global trade group began in 1948. Trade did not suddenly stop working when the Donald began lashing out against NAFTA, TPP and Oreo cookies. Trump rails against trade despite Trump ties being made in China.
Job losses are easy to identify (like the Oreo jobs moved to Mexico from Chicago), but most trade benefits are often invisible to the untrained eye. As Dan Ikenson of the Cato Institute explains, if low-wage labor was not used offshore to manufacture products sold to Americans, many amazing and spectacular products and services would become unaffordable for the U.S. mass markets. Thanks to cheaper foreign imports, not only can a wider population buy iPhones and use services like Uber and Airbnb, but consumers will have extra discretionary income resources that can be redeployed into savings. Alternatively, the extra savings could be spent on other goods and services to help spur U.S. economic growth in various sectors of our nation.
It doesn’t make for a nice, quick political soundbite, but Ikenson highlights,
“The benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and new incentives for innovation.”
Strong Companies Hire and Grow: Plain and simply, profitable businesses hire employees, and money-losing companies fire employees. Business success boils down to competitiveness. If your product is not better and/or cheaper than competitors, then you will lose money and be forced into stagnation, or worse, be forced to fire employees or shut down your business. Free trade affords businesses the opportunity to improve the cost or quality of a product. Take Apple Inc. (AAPL) for example, the company’s ability to build a global supply chain has allowed the company to offer products and services to more than 1 billion users. If Apple was forced to manufacture exclusively in the U.S., the company’s sales and profits would be lower, and so too would the number of U.S. Apple employees.
Fortunately, no matter who gets elected president, if the rhetoric against free trade reaches a feverish pitch, investors can rest assured that the president’s powers to implement widespread tariffs and rip up longstanding trade deals is limited. He/she will still be forced to follow the authority of Congress, which still controls the nuts and bolts of our economy’s trade policies. In other words, there is nothing to fear…even not the free trade boogeyman.
Other Trade Related Articles on Investing Caffeine:
Jumping on the Globalization Train
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and AAPL, MDLZ, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
The Invisible Benefits of Trade
Before the Brexit, 28 countries joined the European Union since its inception in 1957, without a single country leaving. The story is similar if you look at the World Trade Organization (WTO), which has witnessed more than 160 countries unite, without one country exiting since it began in 1948. Are the leaders of these countries idiots and blind to the benefits of trade and globalization? I think not.
For centuries, the advantages of free trade and globalization have lifted the standards of living for billions of people. However, pinpointing the timing or attributing the precise actions leading to these tremendous economic advantages is difficult to do because most trade benefits are often invisible to the naked eye.
Today, populist sentiment on both sides of the political aisle has demonized trade, whether referring to TPP (Trans-Pacific Partnership), NAFTA (North America Free Trade Agreement), trade with China, or announcements by corporations to manufacture goods internationally.
Although it would be naïve to adopt a stance that there are no negative consequences to globalization (e.g., lost American jobs due to offshoring), myopically focusing on job displacement is only half the equation.
While I can attempt to articulate the economic costs and benefits of free trade, and I’ve tried (see Productivity & Trade), Dan Ikenson of the Cato Institute explains it much better than I can. Here is a more eloquent synopsis of free trade (hat-tip: Scott Grannis):
“The case for free trade is not obvious. The benefits of trade are dispersed and accrue over time, while the adjustment costs tend to be concentrated and immediate. To synthesize Schumpeter and Bastiat, the “destruction” caused by trade is “seen,” while the “creation” of its benefits goes “unseen.” We note and lament the effects of the clothing factory that shutters because it couldn’t compete with lower-priced imports. The lost factory jobs, the nearby businesses on Main Street that fail, and the blighted landscape are all obvious. What is not so easily noticed is the increased spending power of the divorced mother who has to feed and clothe her three children. Not only can she buy cheaper clothing, but she has more resources to save or spend on other goods and services, which undergirds growth elsewhere in the economy.
Consider Apple. By availing itself of lowskilled, low-wage labor in China to produce small plastic components and to assemble its products, Apple may have deprived U.S. workers of the opportunity to perform that low-end function in the supply chain. But at the same time, that decision enabled iPods and then iPhones and then iPads to be priced within the budgets of a large swath of consumers. Had all of the components been produced and all of the assembly performed in the United States — as President Obama once requested of Steve Jobs — the higher prices would have prevented those devices from becoming quite so ubiquitous, and the incentives for the emergence of spin-off industries, such as apps, accessories, Uber, and AirBnb, would have been muted or absent.
But these kinds of examples don’t lend themselves to the political stump, especially when the campaigns put a premium on simple messages. This is the burden of free traders: Making the unseen seen. It is this asymmetry that explains much of the popular skepticism about trade, as well as the persistence of often repeated fallacies.
The benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and new incentives for innovation. Arguably, opening foreign markets should be an aim of trade policy because larger markets allow for greater specialization and economies of scale, but real free trade requires liberalization at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — our purchasing power or the so-called terms of trade. Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports.
Protectionism benefits producers over consumers; it favors big business over small business because the cost of protectionism is relatively small to a bigger company; and, it hurts lower-income more than higher-income Americans because the former spend a higher proportion of their resources on imported goods.
…Even if there were a President Trump or President Sanders, rest assured that the Congress still has authority over the nuts and bolts of trade policy. The scope for presidential mischief, such as unilaterally raising tariffs, or suspending or amending the terms of trade agreements, is limited. But it would be more reassuring still if the intellectual consensus for free trade were also the popular consensus.”
Fortunately, Ikenson supports the case I’ve made repeatedly. The power of presidential politics is limited by the Congress (see Politics and Your Money). Frustration with politics has never been higher, but in many cases, gridlock is a good thing.
The destructive impacts of protectionist, anti-trade policies is unambiguous – just consider what happened from the implementation of Smoot-Hawley tariffs in 1930 around the time of the Great Depression. U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931 and bottomed out at $55.6 billion in 1933.
It’s important to remember, any harmful downside to trade is overwhelmed by the upside of growth. Greg Ip of the WSJ used Doug Irwin, a trade historian at Dartmouth College, to make this pro-growth point:
“If two million American workers lose $15,000 in annual income forever—an extreme estimate of the impact of trade with China—while 320 million American consumers gain just $100 from trade, the benefits to all of society still exceed the costs.”
The benefits of free trade may be invisible in the short run, but over the long-run, the growth advantages of free trade are perfectly visible, despite protectionist, anti-trade rhetoric and propaganda dominating the presidential election conversation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), and AAPL, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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