“Country X imposes new tariffs on steel products from Country Y.” Does this sound familiar? International trade often makes headlines when nations announce adjustments to their trade policies—such as enacting tariffs or signing trade agreements. Investors often wonder what new trade developments mean for markets and their portfolios. While international trade disputes and agreements can have an impact on markets, investors should understand that not every trade-related announcement will have an equal effect on their investments—and some may not affect their investments at all. In this article, we’ll discuss what trade is and how it can impact your investments.
At its most basic level, international trade is the exchange of goods or services between two or more countries. Trade allows countries to specialize in producing certain goods and services, while purchasing other goods and services produced elsewhere.
Specialization and international trade generally allow countries to meet their consumption needs by importing the things they can’t produce efficiently in their domestic market and exporting their domestic products to new markets in other countries. Generally, Fisher Investments believes more open international trade is healthy for the global economy, as it encourages competition, free flowing capital and increased market efficiency.
When measuring international trade’s impact on an individual country’s economy, many economists use measures like the balance of trade (exports minus imports), which regards imports as a net negative and exports as a net positive. However, in our view, treating imports as an economic negative might be misguided, as import levels can indicate healthy domestic demand. An alternative measure is total trade (exports + imports), which casts both imports and exports as positives for an economy.
Trade headlines tend to center around things like tariffs or trade pacts. Sometimes countries create trade obstacles on particular imported goods in order to protect their domestic industries. To carry this out, countries may use tariffs—taxes on imported goods that can cause their prices to rise for domestic consumers, making the equivalent domestic goods relatively cheaper. On the other hand, free trade reduces economic barriers. One way countries may enact this is through a formal agreement or trade pact, where two or more countries agree on a basis for trading goods between them. Not every trade agreement guarantees free trade, but they can help provide businesses some certainty when trading across borders.
International trade barriers can have an impact most directly on the companies in affected industries. For example, if the US enacts higher tariffs on Canadian lumber, that may help US lumber companies but it could hurt Canadian lumber producers. If you’re invested in Canadian lumber producers that rely heavily on US demand, those stocks may face direct consequences from the new tariffs.
However, trade barriers, especially bilateral ones like in the previous example, rarely pack the punch necessary to cause a broad market downturn. When new barriers are announced, investors should scale their specific impact against the broader economy. Additionally, bilateral trade barriers are often easy to avoid. Countries may re-route their goods and services through intermediary countries first or rebrand applicable goods and services as others that face fewer barriers.
That’s not to say tariffs can’t cause a market downturn—they can, but the scale must be enormous to have a meaningful impact on the multi-trillion dollar global economy. Investors should watch out for government actions that curtail trade in big ways—like sweeping tariffs. One historical example of this is the US’s Tariff Act of 1930 (aka Smoot-Hawley). The act intended to bolster US agriculture by enacting large tariffs on hundreds of international goods. In retaliation, many of the US’s major trading partners—the UK, France, Italy and Canada—responded with tariffs of their own. This action and reaction severely impacted global trade and correlated with a broader market downturn.
When it comes to trade agreements, they may be able to encourage trade between two countries, but they aren’t necessarily inherent positives for markets or your investments. Trade agreements aren't necessarily essential for free trade since international trade isn't one bulk transaction between nation-states. It is the aggregation of billions of transactions, big and small between private citizens and businesses. However, in the sense that trade pacts help reduce uncertainty and prevent surprise government-imposed trade barriers, they can boost investor sentiment and set clear rules for businesses—both good things for markets and investments.
Investors should pay attention to international trade developments but not overstate their potential effects—good or bad. The global economy is a huge, dynamic system with the ability to adapt to changes in trading relationships. This is why Fisher Investments recommends investors maintain a globally diversified portfolio which helps reduce the impact any single trade disruption may have on their investments.
The information in this document constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. We provide our general comments to you based on information we believe to be reliable. There can be no assurances that we will continue to hold this view; and we may change our views at any time based on new information, analysis or reconsideration. Some of the information we have produced for you may have been obtained from a third party source that is not affiliated with Fisher Investments.