Auburn University finance professor offers insight to U.S.-Mexico trade deal

Published: August 28, 2018
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Auburn University finance professor John Jahera answers the below questions on the impact of the new U.S.-Mexico trade deal.

What does it mean for consumers both in the U.S. and in Mexico?

The more open trade is, the better it benefits both parties. It opens up our market to their products more, and it opens up markets in Mexico to our products. Some people say that we should not have any tariffs except totally free trade. It can benefit both populations in terms of having a greater selection of products and perhaps better prices. If you think about it … it’s increasing competition. For example, in Mexico there might be a company that makes cookies and that’s their only source. But we allow companies in the U.S. to ship cookies down there and all of the sudden you have a competitive environment. It might lead to better prices for that country and better prices for our country. Open trade can be a win-win for the population of both countries.

Impact on manufacturers?

Manufacturing impact could be great. If you are selling more of your product, you’re going to have to make more of your product. Here’s the ripple effect: If you sell more of anything, you have to make more. If you make more of anything, you need to hire more people. Do you go from one shift per day to two shifts or three shifts? If it really continues, you might need to expand your facilities, add capacity, things of that nature. It has a ripple effect all the way through. You make more, you hire more, people spend more money and pay taxes on those products. Those are positive effects all the way down the line.

Any particular positive or negative impacts?

The positive impacts are better economics for both sides. You could have a negative … Let’s just say any country that we trade with, in a perfect world we would like a zero trade deficit where we buy as much from them as they buy from us. Now, we have a big trade deficit with China. We buy more things from China than they buy from us. A negative effect for a country is: Suppose they didn’t have anything that we want to buy. It all depends on what a country has that is of value to another country. You have to have something to make it all work out.

How will this impact the stock market?

NASDAQ set a record yesterday (Aug. 28). The value for stocks, bonds or any financial asset is a function of three things: the amount, timing and risk of future cash flows. When markets went up like they did in response to NAFTA, it’s because, collectively, all the investors see new information. Somehow, investors re-juggle those three parameters. They say, “NAFTA is going to be good, maybe we’ll forecast higher amounts in the future,” or maybe the risk will change or the timing. Any value change is going to be some function of any or all three of these – amount, timing and risk of future cash flows. That’s what you’re doing when you invest – giving up money today to get some unknown money back in the future.

About John Jahera:

Jahera serves as the Bobby Lowder Professor of Finance in Auburn’s Harbert College of Business. He is the author of more than 80 articles in a variety of academic and professional journals including the Journal of Financial Research, the Journal of Law, Economics & Organization, Research in Finance, the Journal of Real Estate Finance & Economics and the Journal of Banking & Finance. The primary focus of his research has been in the area of banking, corporate finance and corporate governance. He serves as co-editor of the Journal of Financial Economic Policy and is on the editorial board of Corporate Finance Review, Review of Pacific Basin Financial Markets & Policies and International Journal of Business & Finance Research.

Interviews:

To arrange an interview with Jahera, please contact Preston Sparks, director of communications, at 334-844-9999 or preston.sparks@auburn.edu.

A photograph of Jahera is available at https://flic.kr/p/28n2mTr.

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