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Trade Agreements/Trade Wars?

Sigma Investment Counselors

November 30, 2016

The election is over, but both candidates campaigned against trade agreements, such as the North American Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).  What is this all about and why is it important to consumers and investors?

Wikipedia defines a trade agreement as a wide ranging tax, tariff, and trade treaty that often includes investment guarantees.  The most common trade agreements are of the preferential and free trade types and are concluded in order to reduce (or eliminate) tariffs and other trade restrictions on items traded between the signatories.

NAFTA, which took effect on January 1, 1994, is a trade agreement between Mexico, Canada and the United States that removes taxes on products traded between the signatories.  It also protects copyright, patents and trademarks between those three countries.

TPP, is a yet to be implemented, trade agreement among twelve Pacific Rim countries, but, most significant, not including China.  TPP aims to promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in the signatories’ countries; and promote transparency, good governance, and enhanced labor and environmental protections.

Any agreement, almost by definition, entails a degree of compromise between the parties, with neither getting everything they, or other affected parties, want.  It is also highly likely that agreements tend to be the result of the parties recognizing that the known alternatives are probably going to be worse.

Groups that perceive adverse effects from existing and/or proposed trade agreements tend to see political campaigns as an opportunity to articulate grievances.  It is the duty of government to recognize both individual needs and the greater good.  Trade agreements have long been recognized by economists as a positive for economic growth, clearly a plus for investors.

Trade agreements also tend to benefit consumers.  We are all consumers, all 300 million plus of us.  On the other hand, those who object to specific trade agreements are relatively few in number and typically are seeking some form of protection from, or advantage over, international competitors, which inevitably leads to less choice and higher prices for consumers.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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