Saturday marked almost two decades since Canada, Mexico and the US signed the North American Free Trade Agreement (NAFTA). Since then, all three have benefited from open borders, tariff-free trade and the freer flow of goods and services.
It seems like not that long ago many feared a “giant sucking sound” as jobs were pulled from the US to points in Mexico. And we’re betting some jobs did relocate—freeing trade can create some dislocations, which are no doubt a negative for those directly impacted. Yet considering we’ve had what economists refer to as “full employment” twice since its enactment, it seems this view is far too narrow and short term.
As our boss, Ken Fisher, often reminds us, when trade barriers fall and tariffs disappear, society overall benefits in the long run. And that’s been true of NAFTA, too. Across the continent, freer trade has set the stage and partly contributed to tens of millions of jobs created over the years, trillions of dollars in added GDP and an overall improvement in the standard of living. Exporters enjoy broader end markets, and consumers benefit from cheaper goods and more choices—and not just in the categories of products imported. For example, say a tariff increased the price of bread by $5 (assuming, of course, barriers didn’t prevent bread imports). Once the tariff’s gone, the price falls, giving consumers an incremental $5 more to spend as they choose. The businesses and entrepreneurs—often local or domestic businesses and entrepreneurs—making these now tariff-less products get more sales than they otherwise would, and more profits. They’re then able to deploy the additional capital throughout the broader economy—like hiring more employees, purchasing more equipment or renting or buying new facilities, to name a few.
With tariffs, however, that money would go to government, which would likely spend it less efficiently—as we’ve written before, the private sector, guided by capitalism’s invisible hand, is better at determining how to allocate resources. If the government were directing the traffic, that money may (almost certainly) take far longer to reach those small domestic producers—if it ever did. In this way, high trade barriers hurt the very people they aim to protect. It sounds counter intuitive, but as Ken Fisher’s written, you must fathom the unfathomable.
Overall, with freer trade, existing businesses and industries can grow and new ones can form—employment rises, production increases to meet growing demand and economies grow. Hence, freeing trade is a great way to foster that growth many claim the global economy is struggling to achieve. It isn’t so much that reduced barriers to trade promote immediate, cyclical economic growth. It’s that they lessen barriers to it passing from nation to nation.
Which is why investors should be encouraged the free trade push isn’t just talk—several countries are signing or pursuing new deals. Last month, China, Japan and South Korea came together to start free trade talks despite recent land disputes. ASEAN and six other nations are pursuing an Asia/Pacific free trade zone. The US and several Asian and Latin American countries are pursuing their own trade zone through the Trans-Pacific Partnership. The EU and Canada are finalizing a deal, and the EU greenlit talks with Japan. And recently adopted agreements between the US and Korea and Korea and the EU are already yielding positive results.
If more and more nations can work together to create legislation like NAFTA, in our view, all global trade partners are sure to benefit—just like the US, Mexico and Canada have for the last two decades.