Canadian ETFs Are Compelling Under Trump Trade Threats

December 06, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Deborah Frame, president and chief investment officer of Toronto-based Frame Global. 

Canada is independently stepping up efforts to expand its free-trade agreements worldwide, and in doing so, is better hedged against U.S. protectionism.

After decades of steady progress toward freer trade, the recent rise in protectionist sentiment from the U.S. risks sparking a global trade war. If provoked enough, trading partners including China, Mexico and Canada could retaliate with their own set of beggar-thy-neighbor trade policies.

This would hurt global trade and make worse an already-fragile global economy. But rather than a victim, Canada has been independently negotiating beneficial trade agreements with the rest of the world, and keeping in its back pocket the significant leverage it has over the U.S. when it comes to oil exports.

Canada Wants Free Trade, Not Disputes

Protectionist policies during the Great Depression were called "beggar thy neighbor" as they sought to shift shrinking demand away from imports in favor of domestic goods. In trade disputes between nations, the larger country usually fares better in imposing its will in a political setting where power triumphs.

It is no wonder that President-elect Donald Trump, with his focus on America first, sees trade disputes as preferred over trade agreements. But trade disputes led by the bigger guy never works out for the bigger guy. Policies like the Smoot-Hawley Tariff Act of 1930 led to a retaliatory cycle that helped to aggravate the Depression.

The benefit does not come from a mercantilist maximizing of the surplus of exports over imports. Treating exports as “good” and imports as “bad” for an economy ignores how imports contribute to rising living standards as much or even more than exports.

The costs of these policies are even greater now than they were in 1930: The world economy is more deeply integrated through trade and investment linkages, and imports are much more likely to be inputs in the production processes of domestic industries as part of global value chains.

Trade Barriers Impact Domestic Production

Trade barriers will primarily disrupt the internal value chains of U.S. firms, raising their costs of production while they face shrinking markets, thereby disproportionately hurting U.S. companies.

Studies support that countries that chose economic independence—such as post-war Latin America, China before 1978, India before 1991, or Cuba and North Korea—remained near the bottom of global rankings of economic development.

 

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