What Is the Value of Trade Deals?

Governments have been pursuing trade deals with different countries and economic trading blocs for at least the last 25 years or so. The benefits of increased GDP, more goods produced for less cost, higher corporate profits and greater consumer choice were promised. As with many things, the intentions are good and the concept works in the beginning but the results are not clear over time.

The very beginning of trade featured barter between people or groups or people. The synergy afforded through co-operation versus doing everything by yourself was tremendous. As more goods were produced and economies become larger, a standardized system of exchange and accounting was developed, which is called money. As the economies grew to a national level, trade became linked to prosperity and survival of the groups who organized the economy. These groups were primarily governments, and taxes (or tariffs) were used to protect local economies from non-local market forces who were trading unfairly (dumping cheap goods to destroy local commerce, monopolies to drive out competitors, or businesses that harmed the society as a whole). The last 25 years or so theorized that since everyone is charging each other taxes, why not do away with all of them and save everyone some money? This sounded good in theory: it does have merit to an extent, but there are some assumptions which are coming to light in the last 20 years which show that trade deals may not provide the value that was promised.

The first assumption is that cheaper goods are always a benefit to society. The buyer of these goods is equal to the worker who makes the goods is equal to the taxpayer who pays for the structure of the economic system. The evidence of the last 20 years shows that cheaper goods are abundant, but the capacity to earn money to buy these goods is much lower (high unemployment and wage stagnation), and the taxes are much higher. If either the worker, taxpayer or consumer is worse off, this means that the assumption does not hold.

The second assumption is that higher GDP is always a good thing. Implied in this assumption is that a dollar worth of goods produced is the same value no matter what the product is. A dollar of toxic waste is just as good as a dollar of a beneficial product. The GDP does not take into account how the value was created. A war would increase GDP tremendously, but it does not serve society very well. The same holds true for environmental events, rebuilding after natural disasters, or society breakdowns like riots or civil unrest. The GDP does not examine the quality of the products produced or how long they last. A good quality product that lasts longer may have more value and a smaller GDP contribution than having more cheap products.

The third assumption is that higher corporate profits are a good thing. Once again, the intention starts out well, but the results are questionable. This idea holds true if the corporation invests all of its profits within its own borders and caters to its workers, customers and government (which are all the same people). Once you have access to other jurisdictions, this assumption no longer holds. This means that money is siphoned out of a local economy and does not come back. The economics prior to trade deals allowed this money to come back into circulation, guaranteeing that it would be recycled by the local people, ensuring prosperity would continue. Is this necessarily true today?

Trade deals are part of an experiment in how to conduct an economy. Like every experiment, modifications will have to be done to ensure that the outcome is beneficial. The economy and trade is supposed to benefit the users of the economy – the worker, taxpayer and consumer. Every experiment also needs feedback to indicate its success. Is this really what is happening?




About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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