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Trade Time Out? Candidates' Foreign Policy and the Market

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September 22, 2016
How trade policy in foreign markets can affect stock market traders.

It’s safe to say that Donald Trump and Hillary Clinton don’t agree on much. But when it comes to foreign trade, they’re talking similar language, which could be troubling for U.S. multinational companies.

Though the candidates diverge sharply on domestic policy proposals, both have proposed re-working bipartisan deals like the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) to make them fairer for U.S. workers. Assuming they succeed, any resulting pullback on trade could have consequences for U.S. sectors that depend heavily upon exports, including information technology, materials, consumer staples, and industrials.

“Leading up to the election, it’s a little concerning from a market standpoint that there are some protectionist aspects to both candidates,“ said Patrick O’Hare, chief market analyst at Briefing.com.  “Certain industrial companies that derive significant sales from abroad might not do so hot, being that Trump is talking about renegotiating or cancelling trade agreements. And Clinton has pooh-poohed TPP, too. If you have a protectionist President, major exporters and industrial companies like Caterpillar (CAT) or General Electric (GE) might have market participants seeing it as a headwind for those particular products and groups.”

In other aspects of foreign policy, both candidates propose more aggressive stances toward enemies like the Islamic State (ISIS), potentially providing a boost to the defense sub-sector as well as to the energy sector. Trump also wants to tighten immigration policy, which has potential ramifications for a number of domestic sub-sectors, including agriculture, hotels, and restaurants. But trade is where many analysts expect the candidates to have their biggest foreign policy impact, especially with a congressional vote on TPP likely next year, setting up a possible veto by the new President.

Clinton and Trump Both Sound Protectionist On Trade Policy

U.S. exports of goods reached $1.6 trillion in 2015, according to The World Factbook published by the Central Intelligence Agency (CIA). Key U.S. export partners include Canada (18.6% of all U.S. exports in 2015), Mexico (15.7%), China (7.7%) and Japan (4.2%). Excepting China, all those countries happen to be covered by NAFTA and TPP.

What does the U.S. export? Agricultural products, industrial supplies like computers, capital goods like aircraft, motor vehicle parts, computers, and telecommunications equipment, and consumer goods like autos and medicines. U.S. exports supported 11.3 million jobs in 2013, the Commerce Department said, helped by trade agreements like NAFTA that break down barriers so goods can flow more freely across borders.

But both Trump and Clinton say trade agreements have cost the U.S. jobs. Clinton, who originally supported TPP, no longer does. “I oppose it now, I'll oppose it after the election and I'll oppose it as president,” Clinton said last month, according to media reports.

In a Republican primary debate, Trump said, “Because of the monetary devaluations that other countries are constantly doing and brilliantly doing against us, it's very, very hard for our companies in this country… to compete.”

It’s unclear if these comments were simply populist statements made to appeal to certain voters or if they’re core to the way each candidate expects to conduct policy. Some say the former is more likely.

“Hillary Clinton flipped on TPP, even though her husband was a big NAFTA guy,” said Jim Kelleher, Director of Research and Senior Analyst at Argus Research. “She may veer more back toward center on trade. But she would probably first initiate a big job-creating infrastructure stimulus package as political cover before seeking to revive TPP.”

Regarding Trump’s potential trade policies, Kelleher added, “A certain part of the American electorate has been awakened to seething anger based on trade-related job loss. But for every congressional representative in a deep rural district that’s been negatively affected by trade deals, a higher number of congressmen in coastal cities more directly tied to trade” have districts that would stand to benefit from a deal like TPP.

Which Sectors Gain Or Lose if U.S. Pulls Back on Trade?

Trade policy is so complex that it’s hard to simply list a group of companies or sectors that benefit or hurt from a move toward protectionism. Though a less trade-friendly foreign policy might pose a challenge for many companies, getting tough with trading partners, as Trump wants to do, could actually help some U.S. industries.

For instance, Trump says China hasn’t been a fair trading partner, and wants to pursue a World Trade Organization (WTO) case to expose what he calls “illegal export subsidies” from the Chinese government to Chinese exporters. A U.S. success against China at the WTO conceivably could help the U.S. steel industry, said S&P Capital IQ, in a recent note to investors, because that industry has been hurt by Chinese imports.

But at what cost? Perhaps a WTO ruling would ultimately remove some excess Chinese steel capacity and lessen pressure on the U.S. steel industry, as S&P Capital forecasts. But how might that affect other U.S. sectors exporting to China, like pharmaceuticals, automobiles, and agriculture? Would China take counter-measures against the U.S. if it lost? And how might taking China to the WTO affect companies like Apple (AAPL) and John Deere (DE), both of which not only sell products to Chinese customers, but also manufacture there? It’s hard to predict in advance, but some U.S. companies doing well in China now might not relish the notion of the U.S. wrestling China in a WTO battle. Questions like this make trade policy a complex web, with many possible ramifications for different U.S. companies.

While taking China to the WTO might draw some support from Congress and industry, any attempts to step out of or change TPP would likely face notable resistance, because the agreement has support from a large and diverse cross-section of U.S. industry.

“Trade agreements have long been a major contributor to improving U.S. competitiveness and economic growth,” said Lisa Malloy, director of Government Relations and Trade Policy for Intel (INTC), in a press release earlier this year. “That’s certainly true for TPP, which will help U.S. businesses to better access fast-growing markets in the Asia-Pacific region…”

Trade groups publicly supporting TPP include the American Farm Bureau, the American Apparel and Footwear Association, the Semiconductor Industry Association, the Information Technology Information Council, and the Motion Picture Association of America, among others. Besides Intel, corporations including Caterpillar, Boeing (BA), General Electric, IBM (IBM), Honeywell (HON), Nike (NKE), and Lockheed Martin (LMT) are among the dozens that support TPP.

If a President Trump or President Clinton tried to seriously tinker with or veto the agreement, they could face resistance from those same industries and corporations, as well as from members of Congress who count those companies and industries among their supporters. Is Washington on the verge of a major trade confrontation?

Even if a new President successfully opens negotiations with foreign counterparts to adjust TPP, they may not find it easy.

“The trade factor remains uncertain,” O’Hare said. “Does this tough talk translate into prior trade agreements being blown up or better things with renewed negotiations? You won’t know until you get to the bargaining table, and both candidates are probably underappreciating counter parties in negotiations. I don’t know if they’ll roll over because of a new President talking tough.”

How Can Investors Get Ready for Nov. 8?

In the long run, company earnings mean a lot more for stock market performance than anything a Presidential candidate might say about his or her trade policies. Even so, it helps to be prepared, and one way investors can make sure they’re protected from potential market volatility associated with political change is to get more familiar with options, which can help hedge risk.

Read more about the upcoming election and its implications:

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