Trade Wars

July 18, 2018  | By Kevin Smith

If wealth creation can be defined as more people accessing better products and services at lower prices, then Trade Wars gum up the works. It is not easy to find a respected economist who favors Trade Wars because it is widely accepted that more trade with less interference has had an extraordinary impact on gains in quality of life for everyone participating. A useful side effect of trade has been fewer violent conflicts between countries involved in trade. In stark contrast, Trade Wars have historically lead to fewer goods and services available, higher prices and increased political tension. Tough sell.

One of the hallmarks of Trade Wars and a common fallacy in economics is the idea that exporting more than importing leads a country to greater wealth because the surplus will be distributed to the ‘winners’ at the cost of the ‘losers’. That theory does not optimize wealth creation because it does not take into account investment, exchange rates and the efficiencies gained from countries specializing in their advantages and trading for whatever other countries do relatively better and/or cheaper.

Although the Swiss Family Robinson seemed to have a lot of fun being 100% self-sufficient, most of us enjoy trading our resources with others so we don’t have to create everything from raw materials using our bare hands. And there are benefits from trade no matter the surplus or deficit. A simplistic example is the trade deficit you run up at a grocery store like HEB. You buy a lot of stuff from them and they buy nothing from you, yet you both benefit. In fact, the value you receive is greater than what you paid because you needed those groceries more than you needed that cash. Better yet, HEB takes cash generated from their trade surplus and makes investments in our economy, which fuels growth and creates opportunities for others. Both you and HEB are better off as a result even though you have a trade deficit with HEB.

Policies that slow down trade are bad for business because they add cost and drag down profit and possibly stock prices. We should not be surprised if investment returns suffer as a consequence.

Ready for the good news? Markets, industries, and companies are wonderfully adaptive and resilient. For example, Harley Davidson added production capacity in Europe to combat the effect of tariffs and keep their business growing. Likewise, European and Asian companies will make investments in the U.S. to offset trade restrictions. More than ever, products and services are created and delivered through a vast network of global participants who are deeply motivated to adapt rather than halt trade altogether.

“One of the great virtues of markets is that it is harder to wreck them than you might think.” – Tyler Cowen

Source: https://www.cato.org/publications/congressional-testimony/americas-misunderstood-trade-deficit

Source: https://www.bloomberg.com/view/articles/2018-06-27/trade-wars-aren-t-good-but-markets-can-adjust

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Kevin X. Smith, CFA
512.467.2003   |  [email protected]

Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More




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