We Are the World

In a display of unity even Michael Jackson and Lionel Richie couldn’t have dreamed up, 159 nations came together in Bali on Saturday to sign an unprecedented world trade deal. Yes, after 12 years of haggling, stalling, false starts and collapsed talks, the Doha Round of WTO talks has finally borne fruit. Sure, the Bali deal covers a fraction of Doha’s initial scope, but it’s progress! $1 trillion in new trade and 20 million in new jobs of progress! At least, that’s the rallying cry from those heralding the deal as a monumental breakthrough. Pragmatists point out the deal reduces few tariffs, hikes subsidies, and has numerous escape clauses and a lengthy phase-in. In our view, reality lies somewhere in the middle. Freer trade is freer trade, but WTO talks suffer the same drawbacks as other smaller, multiparty negotiations: Bureaucracy and competing interests tend to prevent meaningful progress. That’s the bad news. Here’s the good news: We don’t need to rely on global or even big regional trade deals. Smaller deals are where the real trade progress comes from, and those are on the rise—something markets love.

When the Doha Round started in 2001, WTO leaders aimed to boost developing and advanced economies’ access to each other’s markets. Goals included giving the poorest developing countries duty-free access to the developed world, reducing agricultural and export subsidies, cutting customs clearance times and procedures and opening developing countries to industrial goods from the developed world, among many other things. But a funny thing happened during negotiations: Many countries wanted everyone else to cut tariffs, subsidies and import quotas—but keep their own. So here we are, 12 years later, with a watered-down package that leaves most tariffs and subsidies intact, though it does give poor countries largely duty-free access to advanced economies and reduces customs procedures by weeks, in certain cases. Or, rather, it will do all that if all 159 nations ratify the deal by the 2015 implementation target. Seems a big if, considering all 159 nations’ legislatures might see things differently than their trade ministers—and considering all the potential political turnover between now and then. Sure, stranger things have happened, but we wouldn’t hold our breath.

Fortunately, most other countries weren't holding their breath or depending on Doha, either. During the 12 years of negotiations, over 50 smaller trade deals were signed. Those deals plus plain old growth were enough to boost global trade by nearly $2 trillion annually since 2001--nearly twice the most optimistic Bali estimates. Global trade doesn't need a massive bureaucratic push. It just needs the will of a few countries here and a few blocs there.

That's the sentiment we'd encourage readers to keep in mind when reading of the inevitable snarls and snafus in Trans Pacific Partnership (TPP) and EU-US Transatlantic Trade and Investment Pact (TTIP) talks (and when digesting the news that Russian President Vladimir Putin doesn't seem to want the Ukraine in his free trade zone after all). TPP and TTIP are ambitious, with over a dozen countries involved in each. They aren't impossible—the EU and the 10-member ASEAN have each managed to sign a number of free trade deals—but it won't be easy. Nor will synchronizing financial regulation, necessary to expanding financial services market access. TTIP's success will require both sides to drop longstanding agricultural subsidies, import bans and restrictions—the same subsidies and restrictions that torpedoed Doha in 2003 and 2008. TPP, by contrast, could rest on Japan's willingness to open. Headlines might coo over the country's decision to phase out some rice subsidies over the next six years as a potential TPP-enabler, but prohibitive tariffs on wheat, sugar, dairy products, beef and yes, rice, are a far bigger deal. As is the continued state ownership of Japan Post, which the US has long cited as a barrier to free trade with Japan. Privatizing Japan Post has long since faded from the Japanese conversation, and it's tough to imagine the US signing a trade pact if Japan doesn't remove that longstanding barrier to competition in banking and insurance—countries only want to grant foreign partners access to their own markets if they get access in return.

Don't get us wrong—we’d love few things more than seeing TTIP, TPP and the China-led Asian trade deal come to fruition. But with many other bilateral and trilateral deals in the pipeline, our hope doesn't rest on multiparty deals alone. Negotiations continue between China, Japan and Korea. Heck, even if TTIP and TPP talks collapse, smaller deals could rise from the ashes. Maybe NAFTA expands to South America or signs a deal with Australia. Maybe the US and UK take the "special relationship" to the next level. Opportunities abound! And with the world inexplicably hyper-focused on Doha and other pie-in-the-sky deals, there are opportunities for progress on small deals to catch investors by surprise—yet one more tailwind for this bull market.