While it's been quite an... eventful few days in the world of American politics to say the least, what with October surprises and the raucous second presidential debate, the most important happening was probably the least discussed - that of the leaked Democratic Party e-mails revealing Hillary Clinton's paid speech extracts to various international financial institutions over the past decade. Perhaps it is because contained in those extracts is what most investors and individuals essentially already expected - that despite Mrs. Clinton's apparent shift to the more radical left, the stateswoman privately remains committed to the fundamental ideals of globalization and capitalism. Oh no... what a travesty...
What most stands out is her comments on the future of trade in the western hemisphere:
My dream is a hemispheric common market, with open trade and open borders, sometime in the future with energy that is as green and sustainable as we can get it, powering growth and opportunity for every person in the hemisphere...
... I think we have to have a concerted plan to increase trade already under the current circumstances... We have to resist protectionism and other kinds of barriers to market access and to trade, and I would like to see this get much more attention and be not just a policy for a year under president X or president Y but a consistent one.- Hillary Clinton; alleged speech extracts (2013) to Itaú Unibanco (ITUB) leaked by Wikileaks
The idea of a 'hemispheric common market' is not a new one. The U.S. is already party to many bilateral/multilateral agreements in the western hemisphere including the NAFTA (North American Free Trade Agreement) and DR-CAFTA (Dominican Republic-Central America Free Trade Agreement), not to mention agreements still in negotiation such as TPP (Trans-Pacific Partnership), TAFTA (Trans-Atlantic Free Trade Agreement), and most importantly the FTAA (Free Trade Area of the Americas), which would create the hemispheric common market that Hillary Clinton is talking about.U.S. Free Trade Agreements
|Existing Bilateral FTAs||Australia, Bahrain, Chile, Colombia, Israel, Jordan, Morocco, Oman, Panama, Peru, Singapore, South Korea|
|Existing Multilateral FTAs||Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), North American Free Trade Agreement (NAFTA)|
|Proposed Bilateral FTAs||Ecuador, Ghana, Indonesia, Kenya, Kuwait, Malaysia, Mauritius, Mozambique, New Zealand, Taiwan, United Arab Emirates, Uruguay|
|Proposed Multilateral FTAs||Free Trade Area of the Americas (FTAA), Middle East Free Trade Area (MEFTA), Transatlantic Free Trade Area (TAFTA), Trade in Services Agreement, Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP)|
|Suspended FTAs||Southern African Customs Union, Thailand, Qatar|
And whether we like it or not, Hillary Clinton looks set to become the next U.S. president with an 81.6% chance of winning according to statistician Nate Silver's forecast models, not to mention a 55.8% chance of Democrats regaining the Senate this year. So, the odds of such a trade agreement coming to fruition in a Clinton term are quite high.
Investors should be celebrating because, unfortunately, we live in a day and age in which politicians with an elementary understanding of economics and trade are hard to come by. National populist movements are the flavor du jour, especially among indiscriminate politicians looking to capitalize on electoral sentiment. So, to have confirmation that the leading U.S. presidential candidate does indeed still support liberalization should be refreshing.
Below is a chart I often share of the United Nation's Conference on Trade and Development's (UNCTAD) research into intra and interstate investment policies which have shown a dangerous trend towards protectionism (e.g. tariffs, quotas, etc.) over the past few decades:
Francis Fukuyuma's 'End of History' Utopian vision of the grand global neoliberal shift has clearly hit a roadblock; liberalization is not automatic, nor is it popular.
In fact, according to the Journal of Artificial Societies and Social Simulation, humans may be hard-wired towards ethnocentric (group-based, competitive, protectionist) as opposed to humanitarian (open, cooperative) behaviors, with the former strategies having a natural evolutionary advantage against the latter. The researchers utilize a kind of 'evolutionary game theory' and variant of the Prisoner's Dilemma game wherein abstract types of 'rational agents' interact over time:
The agents in these simulations can either defect against, or cooperate with, other in-group or out-group agents, generating four possible strategies: (1) a selfish strategy of constant defection, (2) a traitorous strategy of cooperation with out-group, but not in-group, agents, (3) an ethnocentric strategy of cooperation within one's own group but not with agents from different groups, and (4) a humanitarian strategy of indiscriminate cooperation. From a random starting point, ethnocentrism evolves to become the dominant strategy under some variation in parameter settings, eventually characterizing about 75% of the world population.
(Source: Journal of Artificial Societies and Social Simulation)
Reality is unfortunately not so simple as these simulative concepts. However, we can extract some greater social meaning for our own tendencies and behaviors - mainly, (1) that there are indeed natural social order strategies (e.g. it is not random or chaotic) and (2) that the ethnocentric strategy tends to always eventually dominate said strategies.
What does this mean for trade and investment? It means that these types of protectionist behaviors exhibited lately in the Western world are natural - an instinctual reaction to perceived and actual declines in income, for example, that gets directed towards the 'out-groups' - and will continue if growth remains subdued. The unfettered era of American capitalism of the past century was an anomaly.
This also means that we are likely to see more of these watered-down regional and mega-regional trade agreements for some time, at least until populist sentiment calms down and politicians feel more comfortable pursuing larger, more comprehensive agreements with more non-Western nations. Because, as we can see, even with all of the political capital that Hillary Clinton enjoys (e.g. the backing of the entire Democratic Party), she still felt it was necessary to conceal her true viewpoints on policy.
Why should all of this matter to you? Because open trade/open borders deals are good for everyone, especially investors. Say what you will about manufacturing jobs in Michigan or auto jobs from Detroit, the evidence is clear - trade is good. Putting aside the actual technical benefits, such as the tripling of trade and cross-border investment with Canada and Mexico and the millions of jobs created as a result of NAFTA for example, free trade and comparative advantage are fundamental tenets of Western capitalism and finance anyway.
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.
The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
- Adam Smith; An Inquiry into the Nature and Causes of the Wealth of Nations
Of course, trade is not as simple as Adam Smith describes; sometimes problems arise such as when a single town or city is too dependent on one industry or company or when an industry is disproportionately affected by a sudden new policy shift (e.g. U.S. auto jobs to Mexico). However, these short-run effects pale in comparison to the long-run benefits of increased trade, investment, and integration among nations. And prudent governmental policy can always offset these short-run issues, such as by supporting laid-off workers via job initiatives or unemployment insurance and investing in higher education and vocational pursuits.
Say what you will about the apparent untrustworthiness of Hillary Clinton in relation to her having public and private policy positions or her 'too cozy' relationship with large financial institutions. I, for one, am glad to see that my suspicions have been confirmed - that Mrs. Clinton does indeed have enough of an understanding of macroeconomics to still believe in American capitalism... albeit secretly. This improves the global growth outlook because it means the likely leader of the free world will continue to support the ideals on which said world was built not renege on that which made this country so great.
Relevant ETFs: iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), iShares Russell 2000 ETF (NYSEARCA:IWM), ProShares 30 Year TIPS/TSY Spread ETF (NYSEARCA:RINF), SPDR S&P 500 ETF (NYSEARCA:SPY), and the PowerShares QQQ Trust ETF (NASDAQ:QQQ)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.