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Global trade observers and scholars following America’s policy direction the last five years must be dizzy by now. In just this short span—which encompasses parts of three presidential administrations—our nation’s approach to global trade has zigged and zagged wildly. Meanwhile, with few exceptions, domestic economic policy hasn’t swung nearly so drastically. The reason why this dichotomy exists is also the reason Fisher Investments thinks investors should follow global trade closely: Congress ceded significant authority to the president on trade policy. Hence, the whims of the White House have an outsized effect relative to many other matters that are more subject to checks and balances.

To see this phenomenon, take a quick tour of recent history. Five years ago, America’s global trade policy seemed targeted at expanding the nation’s existing network of free-trade agreements. Under President Barack Obama, the government entered multilateral talks with 11 other nations rimming the Pacific (including Japan, Canada and Vietnam) over a deal called the Trans-Pacific Partnership (TPP).

But progress was slow. When President Donald Trump—who talked up protectionism in his 2016 presidential bid—took office, he withdrew America from the potential deal. Trump also dialed up tariffs on China, talked tough about trade with the EU and renegotiated the North American Free-Trade Agreement (NAFTA), the existing trade deal with Mexico and Canada. Now, with President Joe Biden in office, it seems the government is taking steps to cool the tensions to some extent. Contrary to many forecasts, he has kept Trump’s strict approach to China, but he canceled tariffs on EU wine and cheese to facilitate talks over the long-simmering dispute over state aid to aircraft producers Airbus and Boeing. Many speculate that, as the Biden administration unfolds, further moves to court free trade may be coming.

Now, the actual scope of these changes is smaller than the policy direction may seem. Trump’s tariffs on China were never gigantic and are easy for businesses to dodge. Wine and cheese are pretty far from significant EU exports to America, too. That renegotiated NAFTA didn’t turn out to be nearly as significant a change for businesses as many feared. Similarly, America’s TPP exit was no shock.

That said, global trade policy is clearly front of mind for policymakers, and tariffs are the watchword. A tariff, as Fisher Investments’ global trade infographic explains, is a tax on imported goods—one of several broad categories of protectionist restrictions governments sometimes use. You may think this would give Congress control over tariffs—after all, the US Constitution grants it power over the nation’s purse strings. This was undoubtedly true at one time, as tariffs were a chief source of the US government’s funding before the country enacted an income tax in 1913.

Congress used to exert vast authority over tariffs. The two famous tariff acts enacted between 1920 and 1930—the latter being the infamous Smoot-Hawley Act—were crafted through extensive congressional debate. In the course of debating potential legislation, many representatives and senators argued for a “high, protective tariff” on industries in their jurisdictions. Few considerations were given to the potential response from our trading partners. When Smoot-Hawley became law in 1930—the early days of the Great Depression—many trading partners responded in kind. Global trade sank precipitously, contributing to the four-year contraction’s deep decline, which is unmatched in subsequent economic history. Between September 7, 1929 and June 1, 1932, the S&P 500 fell -86%—history’s worst bear market by far.[1]

Of course, Smoot-Hawley wasn’t entirely to blame for this decline, but many thought it was part of the problem. When Democratic President Franklin Delano Roosevelt took office in March 1933, he thought centralizing the power to negotiate tariffs with trade partners would assist a recovery. Hence, he proposed—and the Democrat-dominated Congress passed—the Reciprocal Trade Agreements Act of 1934. This Act gave the president authority to negotiate a tariff agreement with trade partners and present it to Congress for an up-or-down vote. No more protecting local constituents. No more haggling.

Building on this, later legislation passed in the 1960s, 1970s and 1980s gave the White House the authority to slap punitive tariffs on foreign countries in the name of national security or for perceived unfair practices, like currency manipulation. Under 1988’s Omnibus Foreign Trade and Competitiveness Act, the Treasury Department got the authority to determine who was and wasn’t manipulating their currency based on factors like the trade balance between the two nations. The odd parameters included in this authority have led to bizarre outcomes, like having Germany—a country that has no national currency and no control over domestic monetary policy—being placed on a watch list for manipulation.

Through the passage of these laws, Congress voluntarily took a back seat to the White House on trade. The president has broad authority to negotiate deals without legislators’ input; place or lift tariffs, sanctions and quotas on imported goods; restrict exports; and more. Some credit this authority with the vast reduction in tariffs in the postwar era—a factor contributing to America’s and the world’s rising prosperity over this span. But what it also does, in our view, is make trade policy more volatile than most economic policies in Washington.

For this reason, Fisher Investments thinks investors should closely watch global trade policy developments coming out of Washington. Don’t overrate them—scaling and understanding the breadth of shifts is critical. But as a source of political risk, global trade is a key area to watch regardless of who is in office.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[1] Source: Global Financial Data, as of 03/12/2021. S&P 500 price return, 09/07/1929–06/01/1932.

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