Sectors That Could Win (and Lose) From Trump's Foreign Trade Policies

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In his first days in office, President Trump signed executive orders to withdraw the United States from the Trans Pacific Partnership (TPP), and promised to renegotiate the North American Free Trade Agreement (NAFTA). The moves were a fulfillment of Trump’s campaign promises to renegotiate America’s open trade deals, and he claims that doing so will create new jobs and put America’s interests first.

Understanding Free Trade and Global Production

Most economics agree that that getting rid of free trade agreements will lead to higher prices for consumers. Cars, computers, movies, and t-shirts could all cost more if the United States shuts down trade deals with allies and neighbors.

Virtually everything we buy and consume has some international trade implication. Domestic agriculture is farmed with equipment that includes foreign-made parts. Computers are developed in the United States, but parts are manufactured at different factories around the world, and then assembled overseas and shipped back for you to buy at the Apple Store or Best Buy. Japanese auto company Toyota operates 10 plants in the United States and has more cars that qualify for “made in America” stickers than Detroit-based Ford and Chrysler.

Winners and Losers From Protectionist Policies

While consumer prices increase with restricted international trade, there are some winners from moving towards more protectionist policies. Midsized enterprises in agriculture, energy, and manufacturing have the most to gain.

The largest multinational corporations in the world have enjoyed decades of outsourcing to create their products at a lower cost. Having to bring those jobs back onto US soil will mean higher production costs, which will ultimately lead to higher costs for consumers and lower profits for the business. But the companies in the middle that don’t have the resources to take advantage of outsourcing are poised to gain. Higher prices from the biggest global brands will make their “made in America” products more price and cost competitive.

If midsized manufacturing and agriculture businesses are the big winners here, there are plenty of opportunities to profit. To gain exposure to an array of midcap industrial companies, the First Trust RBA American Industrial Renaissance ETF (AIRR) is a great option. For agriculture industry exposure, consider VanEck Vectors Agribusiness ETF (MOO). As with all fund investments, ensure that the costs, dividends, and holdings align with your portfolio goals and your investing values before you click the buy button.

Adding large import tariffs that artificially increase the prices of foreign products can ultimately lead to some job gains in the United States. There is much debate around the number of jobs and whether or not they would all be sustainable. But workers looking to get back in the factory would have a small victory from less trade and less foreign competition.

Much of our produce and agriculture is brought in from warmer climates in Mexico, Central, and South America where America’s favorite foods can be grown year round and produced with lower labor costs. Shutting down the trade routes will devastate those producers while helping growers in places like California, Texas, and Florida. Again, prices will increase, this time at the supermarket, as production costs will be higher while supply is lower. At the same time, quality of produce could go down and some foods might not be available seasonally when US growers cannot meet demand.

Robots Will Erode Competitive Advantage

While the focus of this debate has been around American jobs, it is important to note that NAFTA is not the big job killer President Trump wants Americans to believe it is. NAFTA did kill some jobs in the United States and pressured wages for unskilled labor and manufacturing. However, the net benefit to the economies of the United States, Mexico, and Canada was an overall positive. It is likely that in the short-term some jobs would return to the United States from a NAFTA renegotiation.

In the long-run, though, these jobs are not coming back in fact, they are ultimately going to go away in Mexico and China as well. The reason has nothing to do with free trade deals, and everything to do with advances in automation technology.

A factory in Japan can run without human intervention for up to 30 days, building 50 robots every 24 hours. This style of “lights out” manufacturing (so named because robots can work with the lights out) is the real cause of the fall of manufacturing jobs. No matter what taxes, tariffs, and regulations President Trump creates or destroys, robots are ending the disparity in labor costs between countries. Before long, there will be little cost difference to assemble a product in Mexico, China, or the United States and all of the manufacturing workers will be out of the job.

There’s Always an Opportunity to Win in the Markets

While the tides of the economy rise and fall with changes in Washington, automation, and other factors, there is always an opportunity to make winning investments. If you can identify companies poised to gain from Trump’s protectionist policies, you can invest for a big winner.

There is always risk when investing in any stock, but by discovering future trends before they happen, you are setting yourself up for a fruitful investment. Starting to look at mid-sized manufacturing and US based agriculture companies is a good start, but as you can see, the ripples of economic activity will reach far beyond those sectors.

Another place you can look to invest that has potential to gain on this activity is the world of commodities. Agriculture products and industrial products are set to move quite a bit, and the Chicago Mercantile Exchange (CME), America’s largest commodities market, is lined up to earn big profits from increased volume. An increase in industrial activity could also drive up the demand for coal, making Alliance Resource Partners (ARLP) another promising bet if Trump’s policies succeed.

There is no magic crystal ball that will tell us with certainty what is going to happen in the markets, but one thing is certain: President Trump’s new policies will create winners and losers in the markets. If you invest accordingly, you are setting yourself up for a healthy profit.