The aftermath of the “Brexit” vote is sure to create plenty of winners and losers, but perhaps most-watched will be those affected in the realm of trade. At this stage, there’s no sense in speculating how the trade relationship between Britain and the EU will ultimately look— there are far too many unknowns. But, what is worth a closer look is how the Brexit vote has seemingly stirred a movement—one that is bringing into question the benefits of globalization and trade.
Is Free Trade on the Chopping Block?
Something we learned from those leading the “Leave” campaign in Britain was how effective it was to appeal to isolationism. Boris Johnson and Nigel Farage focused their messages on how Britain could do it all on their own—no need for Brussels bureaucracy, no need for a trade deal they felt benefited the EU more than Britain, no need for labor coming from other countries.
Readers may have a strong opinion on the topic of ‘trade’ one way or the other, some even more so who have been directly affected by it with a job loss. The economic benefits of trade are very difficult to measure directly, but the costs are quite tangible (job losses, immigration) and it is easier to see trade hurting more than it helps. In this sense, the emotional argument often trumps the analytical one.
As a career asset manager, I’m hard-wired to put my weight behind the analytical when it comes to cost/benefit analysis, and for trade I’m convinced that freer is almost always better. There is a relatively new data set available that supports this case. The Organization for Economic Development (OECD) and the World Trade Organization (WTO) have created a joint initiative to better measure how countries, in their trade relationships, benefit from and contribute to total output.
The metric is known as the Trade in Value-Added (TiVA) and, in the WTO and OECD’s words, it’s “the value added by each country in the production of goods and services that are consumed worldwide.” A look at some of the findings reveal quite a few highlights:
The OECD-WTO joint initiative examines 61 countries and 34 unique industrial sectors, so one could study the findings all day and night. But, the consistent discovery you’ll make is that very few mass produced goods are made in just one country—the global supply chain is vast and interconnected. To make an iPhone, about a dozen countries are involved, and if that supply chain breaks down or a link goes missing (or is legislated away via tariffs) then the cost effectiveness of the iPhone goes out the window. Just ask any Brazilian (with whom the U.S. does not have a free trade agreement) how difficult it is to acquire an Apple computer at a reasonable price. Citizens in Brazil pay at least double what we do.
Raising tariffs or nixing free trade agreements can easily result in a backlash to protectionism, which could mean the ultimate costs of goods sold rises significantly. Roughly two-thirds of GDP in this country is comprised of consumer spending, and the last thing anyone really wants is the costs of goods skyrocketing. Trade is by no means perfect all of the time, but it’s also one of those things that ‘you don’t really know how much it hurts until it’s gone.’
Bottom Line for Investors
Again, I’m not arguing that freer trade is a perfect economic solution and that globalization is the end-all solution for creating the most wealth possible. But, I’d argue that they help more than they hurt. The reason sentiment against trade and globalization is easy to ignite is because the effects are felt by some acutely (those who lose jobs), and that is certainly a problem governments need to work to figure out. Ultimately, the benefits of globalization and trade are distributed throughout society via the lower cost of goods—an iPhone costs $600 instead of the $1,200 it costs in Brazil. If folks were able to see a menu of goods before tariffs and after tariffs, my guess is that free trade wouldn’t get such a bad rap.
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