Market Analysis

Let Free Trade Take Its Course

For years, technology products have been a shining example of the power of free trade and globalization. Today new tariffs and protectionist measures are threatening that trend.

There's no doubt our economy is increasingly globalizing. Both developed and developing countries alike are benefiting from trade with one another. But what can we do to ensure our path is one towards prosperity and a higher standard of living? The answer is simple: free trade.

I recently came across an article in the Wall Street Journal detailing a free trade agreement that has existed over the last decade–the Information Technology Agreement (ITA). Signed under the World Trade Organization and originally created in December of 1996, the ITA is a pact between various countries with one simple goal: eliminate all tariffs on information technology products. It essentially covers computer related products and office equipment such as fax machines and phones. That means corporations from Japan or China can sell their products in the United States without having to pay a tariff. Likewise, companies in the U.S. can sell their products abroad tariff free (obviously this applies only to participating nations).

The agreement originated with 29 signatories including Australia, Canada, Japan, Singapore and the United States to name a few. However, in order to take effect the ITA needed to incorporate at least 90% of world trade in information technology products (at the time it only represented 83%). The following months brought new participants such as the Czech Republic, India, Israel, and New Zealand. Thus, the 90% stipulation was reached and the first round of tariff cuts began in July of 1997. The ITA now incorporates close to 40 nations.

So, what can we learn from this agreement? By eliminating tariffs, IT corporations are able to compete on a truly level playing field. That means the products of any given company either need to be superior in some way, or they need to be cheaper. The result over the last ten years is stronger innovation and industry-wide price declines. Under this system, everyone benefits.

As consumers, we are now able to go out and buy a desktop computer for less than $350! That means more computers in homes, schools, and businesses around the world. This creates a higher standard of living for all. But do the corporations lose? Absolutely not! Over the last decade firms such as Dell and Hewlett-Packard have learned that they can produce more efficiently by shifting manufacturing to lower cost regions. Despite the significant drop in computer prices, Dell has managed to keep its margins within 5 percentage points of where they were ten years ago. In other words, the firm continues to create significant value for its shareholders.

The ITA is a shining example to the benefits of free trade, and it represents one of the most successful agreements in recent history.

But it's not all sunshine and rainbows in the world of information technology. Aside from computers, the last ten years have given rise to a wide array of new products and technologies. Items such as MP3 players and flat screen televisions have become more and more ubiquitous. It would seem logical that they be added to the list of products in the Information Technology Agreement, but they haven't. Despite myriad efforts to amend the pact over the last decade, no new products have been successfully added to the list.

This is a bit concerning, and it represents a very inefficient path. Many countries increase tariffs on imports in order to make their domestically produced goods more attractive. Such practice goes completely against the laws of free markets, and is simply a form of mercantilism, or perhaps worse still, protectionism.

And it's happening more and more these days. Look no further than US Congress, which recently introduced a bill to increase tariffs on Chinese goods. Even the Doha talks are failing as nations resist cutting back on agricultural subsidies. Who loses in these types of situations? We all do.

If a country cannot manufacture a competitive product without the help of import tariffs, it shouldn't be manufacturing that product in the first place. Let other more efficient producers take on the task, allowing each country to focus on the things it does best. This will lead to more innovation and cheaper goods, and a higher standard of living for us all.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.