Fisher Investments Editorial Staff
Trade, Geopolitics

Protectionist Hot Air

By, 10/08/2010

Story Highlights:

  • The media and politicians worldwide have set their sights on currency valuations and trade ahead of the US midterm elections and the G20 summit in Korea at the end of the month.
  • This year's fresh round of free trade agreements suggests global trade restrictions are actually decreasing.
  •  Increased cooperation among nations—tearing down trade barriers, not erecting them—is the path to prosperity.  

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There's a confluence of events that's producing a lot of hot air, and no, we're not talking about El Niño. Without much of substance to latch onto, the media and politicians worldwide have set their sights on currency valuations and trade ahead of the US midterm elections and the G20 summit in Seoul, Korea at the end of the month. Political hot air blows hardest ahead of big political events like these. And if the early signs are any indication, it's going to be a windy October.

Politically motivated talk of currency manipulation and trade wars has been in the headlines a lot lately (examples here, here, and here). But despite recent rhetoric (and subsequent media coverage), this year's fresh round of free trade agreements suggests global trade restrictions are actually decreasing—which is good for the global economy.

With all of the currency talk of late, it's easy to forget normal currency fluctuations don't mean much for stocks. Investors often fear that a weak or strong dollar or any other currency will cause stocks to rise or fall. In fact, since 1971, the S&P 500 and the dollar have moved in the same direction (either up or down) 54% of the time. So the odds of correctly predicting stock prices by a weak or strong dollar are roughly 50/50—no predictive power whatsoever.

But recent calls to rebalance currency markets are not about normal currency fluctuations—they're about political posturing. In the US, the upcoming midterm elections—where the likely outcome is political gridlock—are fueling a refreshed round of China bashing, protectionist sentiment, and talks of currency manipulation. (Campaigning pols love scapegoating things they have no control over—no one can blame them!) But it's not just in the US—politicians globally, like Brazilian Finance Minister Guido Mantega, are throwing around phrases like "currency wars" in advance of the G20 meeting. The G20, which started as an informal (and private) gathering of finance ministers, is now little more than a photo op where much is said and little accomplished. 

Politicians might threaten to erect trade barriers in currency standoffs, but most know nobody wins a trade war.  Fortunately, the political posturing we've seen so far involves minor measures that pale in comparison to efforts reducing global trade friction. A wave of free trade agreements is sweeping the globe. For example: The Association of Southeast Asian Nations (ASEAN) and China accord that went into effect in January, the recently inked deal between the EU and South Korea, the free trade deal between China and Taiwan (unimaginable just a few years ago), and a deal between the EU and Mercosur currently in the works. Politicians might talk a big game, but in practice, most countries seem much more eager to tear down trade barriers than erect them. The US is notably and unfortunately absent from the list of countries enacting free trade agreements this year, but that could change as pressure builds on the US to move forward with languishing accords.

Politicians are on the ropes and scrambling to keep their jobs all over the world, and currency and trade are the scare tactics du jour. When you combine multiple global political events and recycled stories of trade wars and currency manipulation—you've got a recipe for epic rhetoric.

 

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

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

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