How Changes to Free Trade Agreements Impact Global Stocks

Strategies for International Investors to Deal With Globalization

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Free trade agreements have been a cornerstone of capitalism since Adam Smith published The Wealth of Nations in 1776. Most economists agree that the removal of tariffs, quotas, or other impediments to free trade enables nations to specialize in specific goods and services to achieve higher real incomes for everyone involved. Despite these benefits, economic turmoil and other factors can prompt protectionist agendas.

In this article, we will take a look at how changes to free trade agreements can impact international investors.

Most Popular Free Trade Agreements

There are hundreds of unilateral, bilateral, and multilateral free trade agreements around the world. In North America, the most popular free trade agreements are the North American Free Trade Agreement (NAFTA) with Canada and Mexico, the U.S.-E.U. Free Trade Agreement (TTIP), and the Central American Free Trade Agreement (DR-CAFTA) with much of Central America, but it also has individual agreements with at least 12 other countries.

In Europe, there are four different multilateral free trade agreements that cover most of the European and Asian continents. The Eurozone is the largest free trade area by economic size, but free trade extends into other regions through agreements like the European Free Trade Association (EFTA) and the Central European Free Trade Agreement (CEFTA).

These agreements have helped the Eurozone achieve significant growth since it was founded.

In Asia, the Asia-Pacific Free Trade Agreement (APFTA) is the most prominent agreement between seven countries including China and India. The United States had urged the APFTA to merge into the Trans-Pacific Partnership (TPP) prior to 2017, but the TPP appears unlikely to pass into law under the Trump Administration.

Notably, the TPP would have excluded China from a trade agreement with much of the rest of Asia.

Economic Impact of Free Trade Agreements

The impact of free trade agreements is a hotly debated topic. Most economists agree that these agreements benefit all parties involved with 87.5 percent agreeing that the U.S. should reduce or eliminate remaining tariffs or barriers to trade and 90.1 percent disagreeing with the suggestion that the U.S. should restrict employers from outsourcing work to other countries. This suggests that most experts see a lot of value in these kinds of agreements.

According to the U.S. government, nearly half of U.S. goods exports worth more than $700 billion went to countries with free trade agreements in 2015. Many advocates of protectionism argue that these agreements have hurt domestic manufacturing activity, but in reality, the U.S. has enjoyed a $12 billion trade surplus with its free trade agreement partners. This is evidence that these kinds of agreements can help boost growth for everyone involved.

Critics of free trade agreements argue that the deals do not increase the economic freedom of the poor or working class and frequently makes them poorer. Others argue that poorer countries don’t realize as much of a benefit since they aren’t as efficient as advanced economies that have more technology to wield.

Many populist politicians have embraced this kind of rhetoric to exit free trade agreements and pursue protectionist agendas.

Effects on International Investors

Free trade agreements have widespread effects on a country’s economy. While the aggregate effect may be positive for economic growth, certain industries may be more affected than others when these agreements are created or removed. For example, Mexico’s automotive parts industry could suffer if the U.S. withdraws from NAFTA and encourages domestic automakers to source parts from U.S. automotive parts makers.

International investors should be cognizant of protectionist regimes and their potential to withdraw from free trade agreements. If an agreement is at risk of collapsing, investors may want to consider moving out of industries that could suffer and into industries that could be poised to benefit.

Industrials tend to be the largest beneficiary of protectionism, while industries that rely on globalism (such as technology) tend to suffer the most.

The Bottom Line

Free trade agreements have become a cornerstone of capitalism over the past several decades. Despite widespread support from economists, these agreements have been controversial among the general public and criticized by advocates of protectionism. International investors should be cognizant of political support for free trade agreements within a given country and position their portfolios to mitigate risks within certain industries.