From the earliest days of commerce, merchants seemingly longed for distant markets that would embrace their products. Christopher Columbus’ primary goal to was to find a faster trade route west to the East Indies in order for Europe to improve participation in the Asian spice trade. Ironically, the U.S. is still working to improve trade with Asia via the Trans-Pacific Partnership (TPP). The TPP is the most recent and the largest of the U.S.’ 15 free trade agreements (FTAs), although TPP needs to be approved. The Trans-Atlantic trade agreement between the EU and the U.S. could be even larger and is currently under negotiation.

The chart below illustrates the currently active U.S. FTAs. For an easier comparison, we excluded the U.S. percentage of global aggregate gross domestic product so the economic size differentials between agreements is more readily apparent (the U.S. is 22% of global GDP). The data is based on 2015 country specific GDP using 2010 Constant U.S. Dollar conversion ratios.

Comparing the TPP and the Transatlantic Trade and Investment Partnership (T-TIP) with other FTAs clearly shows the significance of the deals, both in terms of partners as well as percentage of global GDP. When including the U.S., TPP and T-TIP account for about 35% and 46% of global GDP, respectively, though neither agreement is approved.  When considering only increases in trade value, in-force FTAs have been a success:  Since the start of NAFTA in 1994, U.S. exports to Canada have increased 200% by 2013 to $301 billion while imports from Canada have increased 199% to $332 billion.

With regard to the third partner in that agreement, Mexico, U.S. exports have increased 443% to $226 billion through 2013 and imports from Mexico have increased 602% to $280 billion during the same time frame[1]. Other FTAs such as that with Singapore witnessed the U.S. grow its trade surplus with that country since 2004 by over 800% to $12.8 billion.  Based on the tremendous increase in trade flows between the U.S. and its FTA partners, it is reasonable to state that revenues of many publicly traded companies, both large and small, have benefited from increased market access with lower transactional friction.

The top 50 stocks in the S&P 500 derive about 40% of their revenue from non-U.S. sources.  Certain sectors such as technology and energy derive more than 60% from non-U.S. regions, while others such as healthcare and industrials derive 40% or less[2].  The point is that the largest corporations in the U.S. derive a material amount of revenues from non-U.S. sources.  But not everyone likes every aspect of FTAs.  Concerns focus on lost U.S. jobs due to outsourcing to less costly offshore operations, respect of intellectual property, currency manipulation and generally “unfair” trade practices.  Both Hillary Clinton and Donald Trump seemingly have more concerns than cheers for FTAs.

Clinton has a mixed history on trade deals but generally is open to engaging trading partners and establishing trading agreements.  Clinton initially supported NAFTA (initiated under the Bush administration and approved under Bill Clinton’s administration) but more recently has called it a “mistake” and has publicly stated that the agreement could be re-worked.  As a senator, Clinton opposed the Central American Free Trade Act because it did not protect U.S. workers sufficiently.

As part of the Obama administration, David Axlerod has stated that Clinton served as the point person on the Trans-Pacific Trade Agreement Partnership though she seems to be distancing herself from that agreement.   In a 2011 featured essay in Foreign Policy Magazine titled “America’s Pacific Century,” Clinton called notions to downsize foreign engagement and focus on domestic priorities “understandable” but “misguided.”  While Clinton’s rhetoric has been critical of trade agreements, her history does not suggest she is “anti-trade.”

Trump does not have a history of negotiating trade deals and generally refers to them all as “Bad.”  From the rhetoric, it appears that Trump would be more acrimonious toward free trade partners than Clinton.  Trump has stated repeatedly that he would go after those countries that are perceived to be manipulating their respective currencies or have benefited to a greater extent over the U.S. as partners in trade deals.

Countries and regions included in this are Mexico, China, Japan and possibly the Euro Zone.  The markets appear to weigh a Trump administration as riskier for international investments.  Anecdotally, after the second debate, in which the media claimed a Clinton victory, the Mexican Peso appreciated against the U.S. Dollar in an apparent reduction of the threat posed to that country by a Trump administration.

Regardless of who wins the White House, a key risk to renegotiating or, in the extreme, terminating FTAs, is the potential for reprisals by U.S. trading partners.  From a historical perspective, during the Great Depression, President Hoover signed the Tariff Act of 1930, more commonly known as the Smoot-Hawley Tariff, despite the protests of over 1,028 economists[3].  The result of this action was increased tariffs on over 900 goods imported to the U.S.

Historians also note the reaction of 23 countries protesting the U.S. action as well as the League of Nations, the precursor to the United Nations, calling for a “Tariff Truce.”  At that time, Canada was the U.S.’s largest trading partner, who retaliated with higher tariffs on U.S. goods, leading Canada to source more imports from the UK.  Between 1930 and 1933, global trade declined from $3.3 billion to $1.8 billion[4].  The combination of U.S. deflation, negative economic growth and increased tariffs all made the U.S. Depression incrementally worse.

Investment Strategy:  A Trump victory would likely raise the risk premium for international investments.  While nothing is likely to happen overnight, the markets will discount future returns based on his rhetoric.  We would expect higher volatility in share prices and higher currency fluctuations as well.  Under that scenario, we would likely recommend lower non-U.S. exposure and emphasize U.S.-focused companies.  Under a Clinton administration, we would expect a continuation of the prior eight years with the potential for FTA modifications.  A consistent policy with some level of certainty should keep volatility at a reasonable level.  Both TPP and T-TIP have not been approved or even finalized in the case of T-TIP.  Companies will continue to conduct international business, however, investors need to be aware of new and changing rules that may impact multi-nationals.

[1] U.S. Department of State,, “Benefits of U.S. Trade Agreements”

[2] Bloomberg

[3] The Economist “The Battle of Smoot-Hawley” December 18, 2008

[4] League of Nations “World Economic Survey” 1932 to 1933

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