Why Free-Trade Deals Don’t Mean Much for Equities

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In recent months, high-profile trade-deal chatter has made headlines in financial publications Fisher Investments Canada analysts follow. The UK reached a trade agreement with Norway, Iceland and Liechtenstein, proposed one to Australia and entered negotiations to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—a trade agreement including 11 countries in the Pacific Rim. The EU restarted trade talks with India, though negotiations on a new, overarching treaty just fell through with Switzerland. Now, Fisher Investments Canada agrees with one common argument many economists make: Free-trade pacts can be economically beneficial for participating countries. However, free-trade agreements’ impact on equities is limited, according to our research—important for investors to keep in mind, as headlines cheer or fret trade-deal progress.

Free-trade agreements aim to lower or even eliminate barriers to trade between countries. In Fisher Investments Canada’s view, this is generally an economic positive. Reducing obstacles to commerce such as tariffs—taxes on imported goods—allows businesses to spend less time and money on trade-related costs when exporting or importing products from another country. That can benefit consumers, too, as our research shows companies often pass the higher costs of doing business to customers. Trade agreements also establish the rules that govern the terms of commerce between countries. In Fisher Investments Canada’s experience, that clarity reduces uncertainty—a positive for businesses, as they can then create and move forward with plans to maximise profitability.

Whilst trade pacts should make commerce easier in theory, Fisher Investments Canada’s research shows reality isn’t so clear-cut. Many countries use tariffs to protect select domestic industries from foreign competitors, and free-trade agreements may not cut all of them. The widely touted CPTPP eliminated many—but not all—protective tariffs. For instance, Japan reduced tariffs on many beef products but didn’t outright abolish them.[i] Also, by installing a shared set of regulations and codifications, trade-deal members may create nontariff barriers to trade with countries that aren’t party to the agreement. Though the EU’s 27 member states comprise the world’s largest free-trade zone, EU rules and standards can make it difficult for non-EU countries to trade with members.[ii] So free-trade agreements don’t necessarily make trade freer. They can, but aren’t assured to—a critical detail shares don’t overlook, in our view.

Beyond the fine print, deals often take a long time to reach and implement. Take the timeline of the aforementioned CPTPP, which originated as the Trans-Pacific Strategic Economic Partnership Agreement (P4)—a pact involving Brunei, Chile, New Zealand and Singapore.[iii] Australia, Peru, the US, Vietnam and Malaysia sought to join this agreement in 2010, turning the P4 into the Trans-Pacific Partnership (TPP).[iv] Canada and Mexico entered talks in 2012, whilst Japan joined in 2013.[v] After several years of negotiations, these 12 countries signed the TPP in February 2016.[vi] Yet a year later, the US withdrew—so the agreement didn’t enter into force. The 11 remaining countries negotiated a revised agreement, and the resulting CPTPP finally entered into force at the end of December 2018.[vii] The upshot: Negotiations took more than a decade, and the result didn’t even include all participating members.

Drawn-out talks seem to be more the rule than the exception—and sometimes even countries with long-running relationships fail to agree to terms. After seven years of talks, Switzerland ended efforts with the EU for an updated, modernised deal that aimed to replace over 150 separate agreements with one overarching treaty.[viii] For deals that seem to come together quickly, well-known parameters are often used—mitigating surprise power. Last year the UK made its first free-trade deal as an independent country in nearly 50 years with Japan.[ix] But as a former EU member, the UK had an existing framework for countries with EU trade agreements already—like Japan. Some slight tweaks aside, the UK-Japan trade deal looked similar to the EU-Japan trade deal.

For finalised deals, too, terms don’t go into force right away. The CPTPP will eliminate some tariffs only after a 10- to 15-year transition period.[x] Similarly, the UK’s free-trade pitch to Australia involves some tariffs lingering for up to 15 years.[xi] This drawn-out, gradual process gives equities plenty of time to price in the changes and prevents free-trade agreements from being material cyclical economic drivers, in Fisher Investments Canada’s view.

Free-trade agreements can make international commerce easier, but it wouldn’t cease if they didn’t exist, in our view. The UK doesn’t have a free-trade agreement with the US. Yet America is the UK’s largest single-country trading partner.[xii] China has become a major trading partner with the UK, EU and America without establishing a free-trade agreement with any of them. In our view, markets care more about the general state of global commerce. Trade agreements tend not to radically alter existing trade relationships, let alone broader economic conditions, in short order. Our research shows equities focus on economic and political factors that may affect corporate profits over the next 3–30 months. Trade-deal changes usually fall beyond this scope, so don’t overrate developments—for good or ill.

Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

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