Recent news headlines highlight the danger of trade wars accelerating. In an effort to “MAKE AMERICA GREAT AGAIN,” President Trump is eager to review all trade agreements to make sure American consumers and businesses are not getting disadvantaged in any way. Every organization, treaty or agreement–past, present, and future–is under ongoing scrutiny. Trade deals between countries and industries are being analyzed to determine whether the agreements are fair and economically viable. With the three largest trading blocs–EU, China, and the U.S.—involved, it is wise for investors to pay attention as the drama unfolds.
Is there a reason to boost commerce between countries or is protectionism the best way?
Economic models of absolute and comparative advantage prove that, all else being equal, it is best for countries to specialize in products for which it has cheaper costs and trade to obtain other products it needs. This sort of trade creates a very efficient use of available capital. Parties to reach a trade agreement could potentially offer some of the following unique resources: cheap labor, natural resources, location, climate, developed infrastructure, transportation, financing, technological and intellectual capital, and management expertise.
Over time, however, what was once drafted as a win-win for all countries involved can devolve into something quite different. As countries develop and resources change, inequities can begin to affect existing deals. For business deals and trading to take place, countries must consider the following:
- Human rights and labor conditions
- Environmental responsibilities as resources are utilized
- Political openness to business/trade
- Government subsidies of business costs
- Tax and Tariff impositions
- Dumping goods at below cost to maintain trade advantages
As time lapses, terms need to change to keep pace with what is best for both sides of the trading agreement. What compromises are necessary for trade to be not only free, but fair for all parties?
As trade agreements become a political hot button, markets and businesses will keep a close eye on impacts and plan accordingly. Every change made between trading partners creates an economic impact, which is why the stock market is continually assessing possible effects on businesses, sometimes creating significant volatility. Often, though one business sector may be helped by changes, another is hurt.
Two recent case studies are soybeans and steel. See the following chart.
Sadly, trade wars are a zero-sum game. Imports and exports seemingly move in tandem (Chart 1).
With technology giving us immediate feedback about winners and losers, as well as costs and benefits, it will not take long for this to become a political mess. Let’s hope that world leaders will see it for the zero-sum game it is before there are too many casualties.
