World trade watchers and academics who have followed America’s policy direction over the past five years must now be gobsmacked. In this short period, which encompasses parts of three presidential administrations, our nation’s approach to global trade has gone wild zigzags and zigzags. Meanwhile, with few exceptions, domestic economic policy has not changed so drastically. The reason this dichotomy exists is also why Fisher Investments believes investors should be watching global trade closely: Congress has ceded significant authority to the president on trade policy. Therefore, the whims of the White House have an outsized effect compared to many other issues that are more subject to checks and balances.
To see this phenomenon, take a quick tour of recent history. Five years ago, US global trade policy seemed aimed at expanding the existing domestic network of free trade agreements. Under President Barack Obama, the government has begun multilateral talks with 11 other Pacific-rim nations (including Japan, Canada and Vietnam) on an agreement called the Trans-Pacific Partnership (TPP).
But progress has been slow. When President Donald Trump, who spoke of protectionism during his 2016 presidential bid, took office, he pulled America out of the potential deal. Trump also raised tariffs on China, talked about trade with the EU and renegotiated the North American Free Trade Agreement (NAFTA), the existing trade deal with Mexico and Canada. Now, with President Joe Biden in power, it looks like the government is taking steps to ease tensions to some extent. Contrary to many predictions, he maintained Trump’s tough approach to China, but canceled EU wine and cheese tariffs to ease talks on the dispute over China. long-standing on state aid to aircraft manufacturers Airbus and Boeing. Many believe that as the Biden administration unfolds, further moves toward judicial free trade may occur.
Now, the actual scope of these changes is smaller than the policy direction seems. Trump’s tariffs on China have never been gigantic and are easy for businesses to dodge. Wine and cheese are also quite far from important EU exports to America. This renegotiated NAFTA did not turn out to be as big a change for business as many feared. Likewise, the US exit from the TPP was not a shock.
That said, global trade policy is clearly on the minds of decision-makers, and tariffs are the watchword. A tariff, as Fisher Investments’ global trade infographic explains, is a tax on imported goods, one of many broad categories of protectionist restrictions that governments sometimes use. You might think that would give Congress control of tariffs – after all, the US Constitution grants it power over the nation’s purse strings. This was undoubtedly true at one time, as tariffs were one of the main sources of funding for the US government before the country passed an income tax in 1913.
Congress used to exercise broad authority over tariffs. The two famous tariff laws enacted between 1920 and 1930 – the last being the infamous Smoot-Hawley Act – were crafted following extensive debate in Congress. During the debate over potential legislation, many Representatives and Senators argued for a “high and protective tariff” on industries in their jurisdiction. Little consideration has been given to the potential response of our trading partners. When Smoot-Hawley became law in 1930, at the start of the Great Depression, many business partners reacted accordingly. World trade fell precipitously, contributing to the deep decline of the four-year contraction that is unprecedented in subsequent economic history. Between September 7, 1929 and June 1, 1932, the S&P 500 fell -86%, by far the worst bear market in history.
Of course, Smoot-Hawley was not entirely responsible for this decline, but many believed that was part of the problem. When Democratic President Franklin Delano Roosevelt took office in March 1933, he believed that centralizing the power to negotiate tariffs with trading partners would help a recovery. Therefore, he proposed – and the Democratic-dominated Congress passed – the Reciprocal Trade Agreements Act of 1934. This act gave the President the power to negotiate a tariff agreement with trading partners and present it to Congress for a positive or negative vote. No more need to protect local voters. More haggling.
On this basis, subsequent legislation passed in the 1960s, 1970s and 1980s gave the White House the power to impose punitive tariffs on foreign countries in the name of national security or for practices perceived as unfair, such as manipulation currencies. Under the Omnibus Foreign Trade and Competitiveness Act of 1988, the Treasury Department gained the power to determine who manipulated and did not manipulate its currency based on factors such as the balance of trade between the two nations. The strange parameters included in this authority led to bizarre results, such as Germany – a country that has no national currency and no control over national monetary policy – being placed on a watch list for manipulation. .
Through the passage of these laws, Congress voluntarily took precedence over the White House in matters of commerce. The president has broad authority to broker deals without interference from lawmakers; impose or waive customs duties, sanctions and quotas on imported goods; restrict exports; and more. Some credit this authority with the vast reduction in tariffs in the post-war period – a factor that contributed to the growing prosperity of America and the world during this period. But what it also does, in our view, is make trade policy more volatile than most economic policy in Washington.
For this reason, Fisher Investments believes investors should closely monitor developments in global trade policy out of Washington. Don’t overvalue them; it is essential to measure and understand the magnitude of the changes. But as a source of political risk, global trade is a key area to watch, no matter who is in power.
Investing in stock markets involves risk of loss and there is no guarantee that all or part of the capital invested will be returned. Past performance is not indicative of future returns. Fluctuations in international currencies may result in a higher or lower return on investment. This material constitutes the general opinion of Fisher Investments and should not be considered personal investment or tax advice or a representation of its performance or that of its clients. No guarantee is given that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or revisions. Further, no assurance is given as to the accuracy of the forecasts made herein. All past forecasts have not been, and future forecasts will not be, as accurate as those contained herein.
 Source: Global Financial Data, as of 03/12/2021. Return of S&P 500 price, 07/09/1929–01/06/1932.
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