Scott Schmidt is about to lose his job.
So are the 221 other workers at the General Electric (GE) engine plant in Waukesha, Wisconsin.
GE has found that moving its production to Canada would make doing business easier across the board. It’s looking to make the move later this year.
Some of the workers are worried about finding new jobs. They’ve seen countless others struggle to find work after mass layoffs…
It just one of the “symptoms” of globalization…
As we’ve been discussing lately, countries with cheaper labor forces attract a greater number of jobs, especially from the U.S. where the labor force requires higher pay.
On one hand, this is a good thing. Countries depend on each other for their specialties, and the dynamics of trading specialties boosts the global economy. In this environment, each party in a trade comes out ahead. It’s a win-win deal.
Why, then, are so many people ticked off?
Why are they voting to put up trade restrictions and tariffs?
Because of stories like Schmidt’s.
The Dark Side of Global Trade
It’s not just GE that’s outsourcing jobs. Other large companies like Caterpillar, United Technologies, Dana Inc., 3M, and Timken also have plans to move factories overseas in the coming years. The Labor Department estimates these outsourcing plans will cost over 2,400 American jobs.
Outsourcing (or offshoring, as it’s commonly called) is a major trend that started in the 1980s. As technology has made communication and transportation easier, companies have utilized cheaper labor forces in other countries.
That’s all well and good, as long as the “left-behind” workers can find new jobs.
The problem is: They can’t.
Right now, many Americans are having trouble finding work. We’ve seen a decline of over 7 million jobs in the manufacturing sector alone since 1980. The chart below illustrates this trend.
Now, not all of these job losses are from offshoring…
Technological advancement is another major culprit. Technology has made work more efficient, so factories need fewer workers.
Either way, 7 million people have lost their manufacturing jobs… and are now looking elsewhere.
Those lucky enough to find new jobs usually have to accept less pay. Experts estimate these new jobs pay 8%–26% less than their previous job.
No wonder these people are upset—I wouldn’t be happy with a 25% pay cut either.
That’s why they vote for protectionism. They see wealth leaving the U.S. and going to those who import goods from countries with lower pay and lower labor standards. These are clearly not win-win deals for them.
The End of Globalization
It’s easy for politicians to point fingers at companies that send jobs offshore. They paint a picture of the evil, greedy corporation that doesn’t care about America… just about making a quick buck.
Politicians know those 7 million people who’ve lost their jobs will agree. And the friends and families of those affected will cast their votes for politicians who promise to “protect” jobs.
As the number of jobs shifting to foreigners increases, so too will the number of people supporting protectionist measures.
We’ve now reached a breaking point. Peak globalization is here… and the trade winds have shifted.
We’re going to witness countries ceasing to work with one another in the name of protecting jobs. As trade agreements decline, we’ll have fewer countries specializing. That means the world will produce fewer goods as people are forced to make things they’re not efficient at. The goods we buy in America will become more expensive.
A smaller economy with higher-priced goods is the definition of stagflation. Stagflation is one of the worst possible things for an economy.
You see, stagflation turns into a vicious cycle. As prices rise, people purchase less. That leads to lower production and layoffs. With factories producing less, they have to charge higher prices to make a profit. But workers have even less money because fewer people are employed. The cycle continues.
The last time that happened in America was in the 1970s. This was a time of mass chaos in America and across the world. There were gas shortages, double-digit price increases, and civil unrest.
Unraveling decades of relationships and trade agreements throws the economy into chaos… and brings uncertainty to the markets.
Our advice remains the same: Pick your stocks carefully. Watch out for companies that rely on a global supply chain. And consider holding some gold to protect your wealth. The markets will get more volatile as this trend plays out.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
P.S. We’ve mainly talked theory the past couple days. That’s because it’s important to know the background of an issue.
But next week, I’ll show you a real example of how protectionist measures have backfired in the past… and hurt the people they were trying to protect.
New free trade agreements are on the decline.
As you can see in the chart below, the number of new free trade agreements has plunged since peaking in 1996. There were 44 new trade agreements inked that year. Last year, there were only four.
Fewer trade agreements mean fewer win-win deals throughout the world. Yet another sign that the great world trade unraveling has begun.
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Are Financials Ready to Snap?: The S&P 500, Dow, Nasdaq, and Russell 2000 all broke out to new highs this past week. But while the bulls celebrate, many experts suspect the “rubber band effect” might soon snap them back to reality. As we’ve said in the past, we may soon be entering a new phase of the business cycle. That would mean it’s time to start banking on financial, retail, auto, and housing stocks—before the snap stings your portfolio.
Editor’s Note: Is this bull market long in the tooth? Or are the next benchmark highs right around the corner? Let us know right here.
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