14 November 2016
Over the past week Australian shares were 3.7% higher. Shares in developed countries gained 2.2% with the US market up 3.8%. Shares in emerging markets lost 3.5%. The Australian dollar was 1.7% lower at 75.46 US cents. The 10 year bond yield in Australia was 0.24% higher at 2.57% while in the US, the 10 year bond yield closed the week 0.37% lower at 2.15%. The oil price lost 1.5% to 43.41 US dollars per barrel.
One of the largest concerns surrounding a Trump presidency is the impact on global trade. During the election campaign Trump outlined changes to trade policies, for instance tariffs on some imports, to protect domestic industries and jobs. While many economists believe that free trade has strong benefits for global economic growth, anti-trade protectionist policies contributed to Trump’s election success. How do we reconcile this?
Free trade simply means that countries can import and export goods without any trade barriers. The rationale is as follows:
- Free trade can only reduce prices for a good or service or leave the price unchanged. If foreign countries offer a similar quality good or service at a higher price there is no rational reason for it to be purchased.
- Lower prices mean that people will have more money left over to save, invest or use to purchase additional goods and services. The ability for people to purchase more goods and services increases living standards.
- Free trade means that countries with a competitive edge in one area, for instance strong natural resource reserves, can maximise this advantage. It also encourages specialisation and eliminates the inefficiencies of countries trying to create every good and service themselves.
- Free trade assists company profits by increasing overall demand for goods and services.
So why did people appear to support Trump’s anti-free trade policies? The reason is that at a micro, individual or household, or even regional level, free trade has hurt some people. Industrial America feels, correctly or incorrectly, that Chinese production has taken their jobs. Australia has had similar experiences: in two years we’ll no longer have a car manufacturing industry. While the theory of free trade suggests a global benefit, at a country level it can leave a country heavily concentrated in a small number of industries, thereby exposed to changes in global demand.
Free trade is a complex issue. We can see the negative impacts which can fall on individuals, households and regions. However, we also identify the benefits to global economic growth, which flow through to long term market returns and ultimately the retirement outcomes of our members. For this reason we are watching closely the impact of a Trump administration on free trade.