The rise of nationalism and trade protectionism poses perhaps the most serious threat to the global economic order since the Great Recession of 2008. Countries from the U.K. to the United States to France on both sides of the Atlantic, to name just a few, are increasingly turning to populist and inwardly focused political and economic agendas in a 180-degree pivot away from the forces of globalization that have shaped the last 30 years. This movement is troubling, as globalization and the expansion of international trade and the “thinning” of national borders have been tremendously beneficial to global economic growth. Arresting and reversing this trend poses great risks, as historians generally agree that tariffs and protectionism exacerbated the world’s economic woes during the Great Depression.

But not everyone shares this view today. Many voters feel disenfranchised by globalization and believe that its economic benefits have accrued disproportionately to the so-called “one per cent” without trickling down to the broader population, leaving unemployment and underemployment too high and standards of living too low. Politicians, notably in the U.S., have seized upon this malcontent and promise to reshape trading relationships to the advantage of their own citizens. The superficial allure of this promise is easy to see … the simple narrative is that trade deficits are bad as jobs are exported, and, conversely, trade surpluses are good and are synonymous with repatriation of overseas jobs and the renewal of the domestic manufacturing base.

A basic economic identity is that GDP is the sum of the following elements: GDP = C (consumption) + I (investment) + G (government spending) + X (exports) – I (imports).

So, if economic growth, or increasing GDP, is the desired objective, then the appeal of growing exports and curtailing imports is seemingly unassailable. Of course, the reality is more nuanced and illustrates the old adage that “a little knowledge can be very dangerous.” To see why, let’s carry out a little thought experiment.

The year is 2020. Three years prior, the U.S. withdrew from NAFTA and levied a 100 per cent import duty or border tax on Canadian and Mexican goods crossing the border. Naturally, Canada and Mexico responded in kind, and trade flows between the three countries fell precipitously. No longer marginalized by the scourge of northbound avocados, tortillas, and Coronas or the relentless southbound flow of Québécois maple syrup, Céline Dion CDs, Ontarian auto parts, Manitoban back bacon, and Albertan crude oil, America declared itself great again with trade deficits finally zeroed out vis-à-vis its continental neighbours. A great many jobs were created in previously hollowed-out sectors. Yet somehow, still, all was not well. The price of a gallon of gasoline had skyrocketed, given the insatiable appetite for oil and the now 100 per cent higher cost of Canadian crude oil. Imported produce formerly sourced in winter months from Mexico was now being shipped from as far away as Costa Rica and even Brazil, leading both to episodic shortages and ongoing tremendous food price inflation. Border states in both the north and the south found themselves with excess capacity, and companies were scratching and clawing for overseas export markets for their advanced manufactured goods and consumer products, with the previously vibrant Canadian and Mexican export markets all but closed given these countries’ retaliatory import taxes on U.S. goods.

Over time, the malaise deepened and regional disparities surfaced, notwithstanding America having ostensibly been made great again, with strong job creation and a huge improvement in the trade deficit. Then, in 2021, a firebrand populist governor in North Dakota was elected. Tired of the chronic trade deficit his state ran in agricultural products with Florida, he enacted a 100 per cent import duty on Florida oranges, noting that “we have the technology to become agriculturally self-sufficient” and promising impressive job creation in the agricultural sector. In time, greenhouses were built; chemicals, fertilizers, and harvesting equipment were sourced; and labour was lured via high wages away from the oil rigs of the Bakken shale fields into this new North Dakotan growth industry. Oranges grew in abundance across the frozen North Dakotan tundra in January. Yet, oddly enough, few North Dakotans seemed much interested in purchasing $14 oranges. Florida, in turn, tired of the ongoing trade deficit in oil it was running with North Dakota, levied an import duty on North Dakotan oil. Of course, with its population of some 20 million, the state’s enormous energy demand soon prompted the governor to lobby federal authorities to lift the ban on offshore oil drilling. Soon the Floridian coastline was blanketed with rigs pumping offshore oil. Oddly enough, though, the thriving Miami, Naples, and Tampa Bay tourist and snowbird economies shrivelled up to a shadow of their former selves, as vacationers seemed somehow less enamoured with the shoreline, now dotted with rigs and the occasional oil slick. The Sunshine State’s orange growers found themselves scrambling to find markets for their glut of oranges, with North Dakota now fully self-sufficient in citrus fruits. Not to be outdone, West Virginia—long weary of feeding those parasitic Wall Streeters and seeking to shore up their trade deficit in financial services—invoked an import duty on brokerage and investment management services, promising, in the words of their new governor, “to spawn a financial hub to rival New York, London, or Hong Kong, creating thousands of high-paying jobs.” Oddly enough, though, five years hence as West Virginians opened their investment statements, they found that former coal miners turned hedge fund managers were surprisingly inept at beating the S&P 500. Brash New Yorkers were, naturally, incensed by the West Virginian slight and, vowing to wean themselves off of dirty Appalachian coal, introduced a tariff on West Virginian coal, resolving to support the state’s fledgling solar panel and clean electricity industry. In time, New Yorkers realized that the state enjoyed a mere eight hours of daylight and was often under overcast skies in December and January. Thus, hundreds of thousands of acres of solar panels were needed to replace the coal-fired electricity. Hydro prices skyrocketed, and blackouts and brownouts were recurring features of life in the Empire State. Yet, throughout all of this, many new jobs were created in each state, and the persistent irritants of regional trade imbalances were eradicated; thus, North Dakota, Florida, West Virginia, and New York all declared themselves great again.

Close on the heels of this, a new mayor in Los Angeles was elected on a platform of technology self-sufficiency, promising to reverse the trade deficit his city had with its Golden State rival in iPhones, semiconductors, and other electronics. Accordingly, L.A. invoked a punitive import duty on electronics from San Francisco and Silicon Valley. Hollywood A-listers couldn’t live without their cellphones, tablets, and computers, and thus, a fledgling semiconductor industry took shape in L.A. In time, however, Los Angelenos came to realize that former Hollywood starlets struggled to climb the learning curve in their new roles as software engineers, web developers, and lean manufacturing experts. Product quality was suspect, innovation was non-existent, and prices skyrocketed given sub-scale production facilities. San Francisco, in turn, slapped a retaliatory tariff on all forms of Hollywood “content,” be it films, music, television, or web media. Slowly, an entertainment renaissance took hold in Silicon Valley with studios sprouting up in vacated semiconductor facilities, although most came to grudgingly agree that the region’s former scientists, PhDs, and software engineers somehow failed to set hearts aflutter as onscreen femme fatales.

Naturally, both Los Angeles and San Francisco declared themselves great again

Reductio ad absurdum

The above thought experiment is an illustration of the principle of comparative advantage (in reverse), which, as per Wikipedia, is “widely regarded as one of the most powerful, yet counterintuitive insights in economics.” Wikipedia notes that “David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country’s workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market, each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labour productivity between both countries.”

In this “Art of the Deal” era, wherein strong-arming trading partners and badgering corporate decision-makers are glorified, it’s tempting to view international trade as a zero-sum game … a “deal” with a clear winner and loser. This view is 200 years outdated, simplistic, and incorrect. It ignores the principle of comparative advantage as illustrated herein, and poses a tremendous risk to the decades of advancement and economic benefit that globalization has brought about.

“Reductio ad absurdum: In logic, reductio ad absurdum (Latin for “reduction to absurdity”; or argumentum ad absurdum, “argument to absurdity”) is a form of argument which attempts either to disprove a statement by showing it inevitably leads to a ridiculous, absurd, or impractical conclusion…”
— Wikipedia

Of course, risk is merely the flip side of opportunity, and while populist and protectionist forces have dominated the conversation on trade recently, I’m hopeful and encouraged that win-win scenarios can be thoughtfully constructed. For instance, NAFTA, now almost 25 years old, is not without flaws, and, accordingly, renegotiating the treaty in the spirit of finding a win-win scenario that further expands regional trade could certainly yield opportunities to iron out some of its wrinkles. Similarly, the EU and the U.K. have the opportunity to let bygones be bygones and to negotiate a “graceful Brexit,” preserving the free market access each side enjoys, while erasing aspects of the union that are no longer politically tenable for Britons. Here at home, Canada has blazed an exemplary path for free traders with the signing of the Canada-European Union Comprehensive Economic and Trade Agreement last year, and having signalled our willingness to sign the Trans-Pacific Partnership trade accord as well. The stakes are very high in these matters, given the benefits of increasing global trade, and investors will need to monitor developments in this area very closely, as the macroeconomic and, in some cases, stock-specific implications are quite profound.