Joe Davis discusses free trade and tariffs


According to Joe Davis, free trade helps lower prices. He thinks higher trade tariffs would impact other countries more than the U.S., but we’d see modestly higher domestic inflation.

Notes:
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This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2016 The Vanguard Group, Inc. All rights reserved.


TRANSCRIPT

Rebecca Katz: Turning back to kind of U.S. policy and again, this is another one where I don’t want it to get too political, but we have two questions. One is from Chris in Ardmore, Pennsylvania, up the street here, and he asks, or potentially she asks, “What is your assessment of the impact of decreased U.S. participation in global trade deals and higher trade tariffs on U.S. and global economic growth and equities?” And then, a question just in was similar, “How would unraveling NAFTA impact the market short-term?” So, if we put up trade barriers, how does that impact the U.S. markets, global markets potentially?

Joe Davis: Yes, that’s I think clearly one of the big wild cards, so it’s understandable the questions. I think it is— I think it’s fair to say, and there’s widespread economic agreement, that not only if we’ve had an increase in trade amongst various nations of the global economy over the past 50, 60 years, that the margin, that’s generally raised economic growth. And so, if you would have— The question is, is trade as a percentage of the global economy, does that kind of go into decline; I would actually hope not. I think that if we saw a marked rise in protectionism, so tariffs across the board, you could expect a retaliatory strike by other economies. It could potentially hurt some other economies more so than the U.S.. The U.S., although we’re exposed to a global economy, we’re not nearly as much so as say our trading partners, Canada or Mexico, right. Their trade with the U.S. is much higher than our trade with either of them. But it would be what I would call a debt-weight loss, which means you would have modestly higher inflation domestically. I mean, trade has probably lowered consumer prices; if you said an average basket throughout the year they spent $1,000 on consumer goods, that would probably be well north of $1,100 or $1,200 if you went back to the trade levels we had 50 years ago. So, it tends to lower prices. That’s not to say everyone makes out equally to that and that’s where I think some of this divide is and tension is. But, I think, you know, to— For policy makers to look at, you know, the various trade policies, that actually happens with some regularity. So, I— If it’s— If they’re small and they’re targeted, or negotiated bilaterally, I’m not as concerned as if there was a very large increase in tariffs across the board. The last time we saw that, was in the 1930s, and although that may not have been the primary catalyst or contributor to the Great Depression, that certainly did not help economic growth prospects, with the Smoot-Hawley Tariffs. So, you know, although it would seem like, hey, we would become insular and so we would trade with each other, there would be certain corporations that clearly would have to cut spending plans and investment plans, because many of their partners are overseas. In fact, roughly 50% of earnings in the S&P 500, so the largest companies in the United States, their revenues are derived overseas. I think also it seems that a loss and a debate though, despite all the discussion with it, I don’t— I think it’s harder said than done if one really wanted to close, you know, some of the economy to trade. Supply chains, whether you manufacture a car, or you trade computer software or make computers, those global supply chains are more integrated than they ever have been in just-in-time inventory delivery. I think it would be very hard to actually do that and so, that’s different than where it would have been 20 or 30 years ago. So, although we may see, you know, industry by industry increased both focus as well as discussions with respect to bilateral trade agreements.

Rebecca Katz: That’s incredible. We’re looking at new cars, and you can see the laundry list of where all the parts came from.

Joe Davis: Oh, hundreds— There’s thousands of parts from hundreds of countries. There’s thousands of parts from hundreds of countries, and many of them have one or two suppliers for each part. So, the other thing that would happen— One of the first things you would see is not only the financial markets potentially sell off, you would also have disruptions in even U.S. activity until you could work that out. We saw a little bit of this, unfortunately, a very unfortunate event, the earthquake in Japan and so you saw certain industries whether it’s from tires to computer chips, you know, production was really disrupted globally because the key components were made by certain Japanese suppliers. So, there’s really this increasingly intertwined that I don’t think is fully appreciated.

Important information
All investing is subject to risk, including the possible loss of the money you invest.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2016 The Vanguard Group, Inc. All rights reserved.