President Donald Trump says he wants to change the way the United States handles trade abroad. It’s rhetoric Americans have been listening to for months. He’s looking to shake things up with the NAFTA and TPP. Only days into his presidency, and Trump already made good on his promise to withdraw from the Trans-Pacific Partnership. Next on his list is renegotiating the North American Free Trade Agreement.
This has left many people wondering about what these agreements actually are. They also want to know what effect they might have on their investments. We’re at a time when it’s largely independent investors who are driving the Dow higher every day. They want to know where to invest next, and if they should switch their funds around. Here’s how these negotiated global trade agreements might change their plans.
What Is TPP?
The Trans-Pacific Partnership, or TPP, was put in place by the Obama administration. It facilitated trade between 12 countries in the Pacific: Australia, Japan, Peru, Brunei Darussalam, Malaysia, Singapore, Canada, Mexico, United States, Chile, New Zealand and Vietnam. This collection of Pacific rim countries has an “annual gross domestic product of nearly $28 trillion that represents roughly 40 percent of global G.D.P. and one-third of world trade,” according to the New York Times. Yet, despite this, it was opposed by both Trump and his opponent Hillary Clinton. The president wasted no time in pulling out of TPP. It took only a few days after his inauguration.
What Is NAFTA?
Bill Clinton signed NAFTA into place in 1993. The trade agreement went into effect in 1994. NAFTA governs trade between the the U.S., Canada, and Mexico. It is designed to help facilitate the free flow of goods across borders. According to the Wharton School of business at University of Pennsylvania:
- Overall trade between NAFTA partners has increased from $290 billion in 1993 to more than $1.1 trillion in 2016
- The stock of U.S. foreign direct investment (FDI) in Mexico rose from $15 billion to more than $107.8 billion in 2014
- Six million U.S. jobs depend on U.S. trade with Mexico
Despite the positives, President Trump feels that NAFTA is causing the U.S. to lose jobs and money. For this reason, he has promised to renegotiate it.
How Withdrawal From NAFTA and TPP Affects U.S. Industries
The true impacts of withdrawing from NAFTA and TPP (should the negotiations end in a withdrawal) remain to be seen as they play out. However, there are a few outcomes that are expected. The first is that trade will be affected by enacting bilateral trade agreements with various countries. How much will this change the businesses that rely on imports and exports? It will depend on how these agreements are arranged and with which countries.
For example, automakers might bring their plants back to the states due to large import tariffs from Mexico. That may drive up the price of what was supposed to be an economically conservative vehicle. This is because smaller cars are built in countries where labor is cheaper. Plus, profit margins on small cars are already slim.
Industries that Win
President Trump is setting certain industries up for success by keeping his promise to put “America first,” and to “buy American.” An obvious winner is the the oil industry, followed by the coal industry. Trump promised — and is keeping good on that promise — to roll back environmental regulations on industries like these. The market is responding in kind. In the time since he took office, the Washington Post reports that the nation’s largest solar panel maker, First Solar, slid more 8 percent. Vestas Wind System, a wind turbine manufacturer, fell 11%.
On the other hand, coal is looking better and better. Peabody Energy, the nation’s largest coal company, jumped up more than 70%. Westmoreland Coal rose about 17%. Oil drillers like Continental Resources are expected to make gains as well, especially due to the expected relaxation of environmental regulations on oil and gas drilling. The potential opening of federal lands to oil and gas drilling as well as coal mining means he potential for rising prices on traditional energy stocks and commodities.
So, it’s safe to say that oil is once again a good place to put your money, despite the strides solar power is making.
Along with this comes investing in infrastructure companies. By striving to create jobs and bring business back into the U.S., Trump is setting the stage for what could be an infrastructure boom. This means steel, and therefore real estate, will be some other smart investments.
Industries That Lose
As mentioned above, sustainable energy won’t be a smart investment at this point in Trump’s presidency. With the roles of NAFTA and TPP weakening, expect to see the retail industry suffer, as well. The Post notes, “Retailers such as Walmart, Dick’s Sporting Goods, Under Armour and Zappos co-signed a letter to members of Congress [in 2016] urging them to support TPP.”
That’s a fair indication that their business would suffer from a lack of more affordable manufacturing and trade options. If you’ve invested in these companies or some like them, it may be time to move your funds to oil.
It’s still too early in the President’s term to confidently call out who will be the big winners and losers. However, his stance on NAFTA and TPP give us some indication of where things are going. This also shows how the market is already reacting. Traditionally safe investments in natural resources and basic American goods, like steel, are good options. However, if you’re thinking too far outside the box, you may want to reel it back in for a few months.