Donald Trump and Bernie Sanders are mostly wrong in their sharply negative trade outlooks – especially regarding the North American Free Trade Agreement (NAFTA).
Instead of altogether dismissing U.S. trade relationships with our neighboring countries, it’s actually well worth taking a closer look at our political and economic ties with Canada and Mexico. The U.S. may profit from new growth trends with both countries.
Trade to the North
Our competitive relationship with Canada dates all the way back to the pre-independence power struggle between France and England over claims to U.S. territories.
In fact, America has even made two serious attempts to invade Canada.
The first was in 1775 when the newly formed Continental army made an effort to take Quebec.
More significantly, throughout the War of 1812, several more endeavors to take Canada were launched. In short order, American troops destroyed the British fleet on Lake Erie, grabbed the strategically important Fort George, and took back Detroit on their way toward winning the Battle of the Thames with a bold cavalry charge.
The American cavalry also captured York (the city that is now Toronto), and burned several government buildings there – an act the British reciprocated the following year in Washington by burning down the White House after enjoying the elegant dinner left on the table by Dolly Madison as she hastily retreated.
A bungled campaign against Montreal, however, turned the tide, and the British pushed the Americans back across the Niagara River.
Perhaps things worked out for the best, though, as Canada has proved to be a valuable and friendly neighbor to America over the years.
Canada is the world’s second-largest nation by area, but with only 35 million people, it ranks 39th by populace, internationally. Because the country is not densely peopled, Canada enjoys a certain stability in its bond with the U.S. Its strategic interests are closely tied to American interests and the security and economic welfare of both countries are closely aligned.
In 2015, America exported $280 billion of goods to Canada and imported even more, valued at $295 billion.
For the United States, Canada represents not only the largest export market for the country, but also for most American states, individually, as the chart below illustrates.
Clearly, the trading ties between America and Canada are crucial for both countries’ economies and cannot simply be undone, much less ignored.
South of the Border
To the south, the U.S. has another, equally important, NAFTA partner – Mexico.
Way before the Mexican-American War began in 1846, Alexander Hamilton mused about the potential of separating Mexico and South America from Spain, which ultimately ensured Mexico’s reliance on U.S. trade for the years to come.
In 2015 alone, America exported $236 billion and imported $294 billion to and from Mexico.
But this $62 billion trade imbalance is overstated, because Mexican exports to America contain 40% U.S. content being manufactured within Mexican borders.
For example, 40% of the parts of a refrigerator are actually made in America, exported into Mexico, assembled amongst other foreign parts, and then imported back into the United States. By comparison, imports from China contain only 4% U.S. content.
Due to manufacturing necessities and reduced labor prices, the Mexican manufacturing industry is an integral part of the American economy, and to ignore this fact, along with Canada’s invaluable trade efforts, is to ignore the make-up of the U.S. market.
The Void in Party Platforms
These facts are badly out of sync with the hot rhetoric coming out of the Trump and Sanders presidential campaigns. This is because America’s annual $600 billion trade gap can largely be explained by deficits with three countries: China, Germany, and Japan.
In 2015, the trade discrepancy between the U.S. and China grew to $350 billion, and together Japan and Germany account for another $145 billion.
Here’s another way to look at it: In the consumer goods sector, the U.S. buys $400 billion more than we sell abroad. This money is spent importing things like clothing, electronics, and appliances that Americans buy at big box chain stores such as Wal-Mart, Target, and Costco.
What is so striking about these numbers is how little the U.S. actually exports to Japan and Germany – only $112 billion to both countries in 2015.
Instead of focusing on how not to deal with Canada and Mexico, the U.S. needs to focus on doing more where it benefits us and less where it doesn’t. Presidential candidates should be addressing the gaping hole in our dealings with China, if for no other reason than the fact that this discrepancy gives ammunition to the protectionists.
How to Invest in Our Neighbors
Investors should have exposure to both Canada and Mexico for two very different reasons.
With Mexico, the key trend is that manufacturing wages are now below that of China. This has led to an uptick in industrial activity and foreign investment in the Mexican manufacturing sector.
Our Southern neighbor is quickly emerging as the premier manufacturing platform in the world, not to mention within North and South America.
As far as investments go, the iShares MSCI Mexico Capped ETF (NYSE:EWW) will suffice, but it’s also worth drilling down to find specific Mexican stocks that are leading this manufacturing surge. Time will reveal more of these exciting investments while Trump continues to downplay Mexico’s value.
To the north, however, the strong greenback has put Canadian stocks on sale.
The iShares MSCI Canada ETF (NYSE:EWC) is up 18.6% already this year, and offers broad exposure to Canada’s three largest sectors: energy, materials, and banking.
Another area on which to focus is tourism. Americans and other travelers will, inevitably, head to north of our borders to enjoy discount vacations to some of the most beautiful sites in the world.
Rather than falling victim to the panic of Trump or Sanders’ apathy regarding our neighbors, investors should take heed of the Mexican and Canadian markets. With plenty of opportunities for profit within North America, there is no reason to pander to pressure from overseas markets… yet.