How does trade between countries impact an investment?
Global trade is the flow of goods and services between countries around the world.
Things we use every day are created by an intricate system of trade between nations. To get a sense of how important global trade has become, we only need to look at the cars on the road.
Global trade exists due to country-specific competitive advantages. Each country produces certain goods and services exceptionally well and will trade with other nations for what it can’t make as well or as cheaply. The direction and magnitude of total imports and exports make up our economic health.
Economies and the stock market benefit when countries export more than they import.
Let's take a look at a few trade policies that impact a country's competitive advantage.
Impact of trade policies on markets
Businesses have the option to buy supplies and sell goods or services in another country because of globalization. In our example, Toyota is a Japanese company that sources its parts from different countries to sell in the American markets.
The countries that take advantage of globalization help their economies grow. By being open for trade and business, countries allow a foreign company like Toyota to build infrastructure and jobs where their citizens directly benefit from the circular flow of money from consumers in other countries.
Developing nations worldwide encourage multinational corporations to build factories or open offices by offering tax cuts or lower wages. Consumers worldwide benefit as companies decide to take some of their business offshore. Lower production costs mean cheaper products and increased purchasing power for everyone.
One of the drawbacks of globalization is that it can lead to large and unequal gains and losses between countries. Even though everyone benefits from lower prices for goods, countries that export more tend to benefit more. A major part of the concern is also that the benefits of trade aren't distributed equally. In the short term, more of it flows to the businesses and wealthy rather than the workers, especially in industries with more competition abroad.
Sometimes it's more difficult for businesses to trade internationally because of protectionism. For instance, protectionist policies could make it too expensive for Toyota to sell cars in the U.S.
These policies aim to address the concerns of globalization in an effort to protect the businesses and workers in the industries that face more foreign competition. To do this, they often make imports more expensive by using policies like subsidies, tariffs, and import quotas. We see subsidies often used in agricultural industries across the U.S. to help farmers compete with countries that can produce crops at a lower cost.
National security is another reason governments will use these policies, which significantly impact industries like aerospace, advanced electronics, and semi-conductors. Relying on foreign manufacturers would impact a country's defense during war.
Impact of trade on investments
The supply chain webs created from global trade mean that changes in global trade policies impact our investments. For example, the value of Toyota stock relies on the value of that business. So, protectionist policies that increase the cost for Toyota or make it difficult for it to sell in the U.S. will hurt the company, causing the stock price to fall. However, that same policy would have a positive impact on a U.S. car manufacturer like General Motors.
In the case of protectionist policies, some companies may benefit in the short term until other countries retaliate with their own protectionist policies. This can lead to trade wars like the one between the U.S. and China. Protectionist tariffs from both sides have hurt domestic businesses, notably in agriculture and silicon chip manufacturing.
We often find that increased globalization positively affects the markets because it reduces costs and leads to increased spending. But, not all investments will benefit. While increased globalization improves overall growth, it can be harmful to domestic industries that aren’t as competitive as others abroad. For example, suppose we are invested in a business that produces something in the United States that can be made better for cheaper elsewhere. In that case, globalization will hurt the profitability of that business and therefore lower the value of our investment.
When global trade policies change, it's a good idea to stay on top of how they might impact your investments. If you own stock, ask yourself if the changes will help the business grow and become more profitable? Or, will it negatively impact its operations? Will it even affect the company at all? Answers to these questions will impact the value of the business, and therefore its stock price will rise or fall as a result.