Trade! What is it Good For? | Saturna Capital
From the Yardarm

Beneath the headlines and political rhetoric, we find a complicated, global story of how trade benefits both developed and emerging economies.

The current US presidential candidates might say, "Absolutely nothing!"


Donald Trump's stance on trade can be summed up by several quotations:

"If we want jobs in America . . . mandate a 15% tax for outsourcing jobs and a 20% tax for importing goods."¹

"I am all for free trade, but it's got to be fair. When Ford moves their massive plants to Mexico, we get nothing. I want them to stay in Michigan."¹

Hillary Clinton, too, has publicly criticized trade agreements like the Trans-Pacific Partnership (TPP):

"I oppose it now, I'll oppose it after the election, and I'll oppose it as president."²

There's certainly merit to questioning aspects of trade deals. Invariably, a document with 5,600 pages, like the TPP, is going to have contentious issues. However, it is worrisome to think that both candidates might foster an environment where free trade is vilified and isolationism displaces sound trade agreements.

Nor should we ignore that the US often derives ancillary benefits from trade agreements. According to candidate Trump, illegal immigration from Mexico is a serious problem facing this country (despite the population of undocumented Mexicans in the US having declined nearly 9% since 2009).³ How much worse would it be without the 1994 North American Free Trade Agreement (NAFTA) between the US, Canada, and Mexico?

China has implied that, coming in the wake of the Obama administration's foreign policy "pivot" to Asia, the TPP strengthens US relations with countries in the region and is another step in the perpetual effort to "encircle" China. Whether true or not, passage of the agreement would demonstrate to countries throughout the region that the US is committed to their economic development and, in the wake of Chinese belligerence in the South China Sea, their security. To the extent Chinese behavior may be moderated over time by the agreement, that represents a win for the US.

Political jockeying aside, beneath the headlines and rhetoric is a complicated, global story of how trade benefits both developed and emerging economies. It is easy to point to the decimation of manufacturing employment in the US and claim that various free trade accords have harmed American workers disproportionately. It is true that the number of manufacturing employees in the US has declined from 16.9 million when NAFTA was signed into law on January 1, 1994 to 12.3 million as of July 1, 2016.

However, there is no single cause for these job losses. Part of the loss in manufacturing jobs can be attributed to increases in productivity and technological advancement. The availability of cheap labor in China and other developing countries contributes as well, making it difficult to pin manufacturing job losses to one driving force. Nor should we think of the phenomenon as being one of cheap apparel and electronics. Ford Motor's recent announcement of its plans to shift small car production to Mexico likely reflects the challenges of profitably manufacturing low cost vehicles in the US. If the activity weren't moving to Mexico it might disappear altogether. Finally, manufacturing automation may have reached an economic inflection point at which Ford finds it more profitable to set up a fully automated factory with a small workforce of highly trained operators than to employ thousands of semi-skilled laborers in an existing plant. From 2002 to 2014, the estimated worldwide annual supply of industrial robots increased from 69,000 to 229,000 — a compound annual growth rate of 10.5%.4

Whether your job has been outsourced to a robot or not, a great irony of today's technological advance is that workers in the countries that have supposedly been taking our jobs are most at risk of losing theirs to progress.

This is an obvious result of the relatively low productivity of workers employed to do manual piecework and a clear indication that the issue wasn't other countries unfairly taking American jobs. Rather, it was the inability to make a product in America for a price American consumers would prefer to pay. Yes, we took a detour to China and Thailand, but if that labor hadn't been available, the technological development to automate the jobs may have occurred that much sooner and the end result would be the same.

Clearly, having nearly half your workforce at risk of being displaced by automation does not bode well for employment, while simultaneously driving home the point that the most important investment the US can make is education. But that's a topic for another From The Yardarm.

These factors point to a shift in the constitution of the labor force not dissimilar from the decline in agriculture employment, which represented 50% of employed persons in 18705 but only 1.4% in 2014.6Export-related employment continues to climb with 11.7 million jobs supported by goods or services in 2014 versus 10 million in 2009.7 This natural reconstitution of the labor force may be hampered by free-trade restrictions, with the Peterson Institute estimating that four million private jobs in the US could be lost if Donald Trump's proposals on international trade are implemented.8 There's likely a wide distribution of outcomes, but this issue should be considered in a global context, carefully balancing the costs and benefits of stricter trade.

The benefits of trade are difficult to parse out of the dynamic, increasingly integrated global economy, and they aren't always economic in nature. Generally, we see benefits arise from comparative advantage, increased trade through bilateral reductions in tariffs, increased exports, increased competition that produces lower prices for consumers, and acceleration of economic growth. We also see shared interests and common purpose in global affairs. China is a prime example of an emerging economy using its comparative advantage to reduce poverty. Due to its labor advantage, China's per capita GDP has increased from $472 in 1994 to $7,925 in 2015. As China's wealth increases we should expect greater demand for US products and services and, as that occurs, perhaps a more accommodating China. Countries that would be disproportionately affected by stricter trade with the US include China, which represented 21.5% of 20159 US merchandise imports; Canada, 13.2%; Mexico, 13.2%; Japan, 5.8%; and Germany, 5.6%.10

Politicians often portray free trade as a zero-sum game. Economists favor it because it is almost always welfare-improving — it's just a matter of how the benefits are distributed. That's where the devil is in the details, as well as perhaps in the unintended or unanticipated consequences.

Saturna invests globally, and any reduction in free trade will certainly have an effect on how we allocate capital. To that end, we hope that cooler heads prevail in the post-election aftermath, and that free trade is encouraged and enhanced going forward.

Major Trade Agreements at a Glance

Saturna's investment professionals monitor trade developments across the world. For investors, the promise of expanded trade may provide various benefits. Companies that can deliver the lowest costs or best products or services can expand to new markets, potentially benefiting both shareholders and their expanded customer base. Likewise, companies subject to increased competition find a strong incentive to boost their own efficiency. Open trade often involves easing of foreign investment restrictions, which can provide investors with greater avenues for diversification and expanded access to investment opportunities that may not be available in their respective domestic markets.

Trade Agreement Map
  NAFTA: North American Free Trade Agreement
  ASEAN: Association of South East Asian Nations
  TPP: Trans-Pacific Partnership (signatories)
  TPP: Trans-Pacific Partnership (negotiating)
  TTIP: Transatlantic Trade and Investment Partnership
  EU: European Union   Leaving the EU


¹ Jurschewsky, S. Donald Trump's beliefs and policies: the potential consequences for Canada, Pulse,, February 8, 2016.

² Palmer, D. How Trump or Clinton could kill Pacific trade deal,, August 30, 2016.

³ Krogstad, J.M., Passel, J.S., and Cohn, D. 5 facts about illegal immigration in the U.S., Factank, Pew Research Center, November 19, 2015.

4 Industrial Robot Statistics, International Federation of Robotics.

5 Daly, P. Agricultural employment: has the decline ended? US Bureau of Labor Statistics Monthly Labor Review, November 1981.

6 US Bureau of Labor Statistics, Employment Projections: Employment by major industry sector.

7 U.S. Exports Support a Record 11.7 Million Jobs in 2014. US Department of Commerce, Office of Public Affairs, March, 4, 2015.

8 Press Release: PIIE Analysis of Trump and Clinton Trade Proposals Finds Substantial Divergent Effects. Peterson Institute for International Economics, September 19, 2016.

9 The World Bank, GDP per capita (current US$).

10 Top U.S. Trade Partners Ranked by 2015 U.S. Total Import Value for Goods


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Copyright 2016 Saturna Capital Corporation and/or its affiliates. All rights reserved. Vol. 10 · No. 7