Market Analysis

Meanwhile, Outside of Ukraine…

While the world focused on the Ukraine and other political happenings globally, free trade talks took a step back.

As weekends go in the geopolitical arena, this was busier than most. Ukraine’s Parliament ousted President Viktor Yanukovych, issued a warrant for his arrest on charges of mass murder, named the Speaker as interim President, and scheduled elections for May 25—and the East and West jockeyed for influence over the struggling nation. Meanwhile, Egypt’s interim government resigned, Thai Prime Minister Yingluck Shinawatra dug in against protestors and the threat of a coup, and the Venezuelan government’s brutal crackdown against opposition protestors continued. Yet while the world understandably focused on the shifting political landscape, a rather eventful weekend in global economic relations went largely unnoticed. Trade negotiators from the US, Japan, Australia and nine other nations launched another round of Trans-Pacific Partnership (TPP) talks in Singapore, and according to most reports, they went backward, splintering into side stalks and stalemates. It isn’t terribly surprising—multiparty trade deals are notoriously difficult to seal—but it is the latest sign investors shouldn’t expect a swift TPP agreement to provide an economic (or market) tailwind.

TPP, if finalized, would be a free-trade zone including the US, Mexico, Canada, Chile, Peru, Australia, Japan, Malaysia, Brunei, Singapore, New Zealand and Vietnam. Taiwan is lobbying to join, too, and South Korea has indicated interest. Talks stalled late last year, but trade ministers entered this round eyeing a broad agreement by Tuesday—which would be great for firms and consumers in all participating nations. But to get the deal, all nations must agree to scrap import quotas and over 95% of tariffs as well as iron out common standards for intellectual property, the role of state-owned enterprises and environmental standards. Getting 12 nations with 12 sets of pet issues and domestic political interests to agree on such sweeping measures is a tall order.

Exhibit A: Japan, the epicenter of the latest breakdown. Japan was a late entry to TPP talks, joining last year as part of Prime Minister Shinzo Abe’s ballyhooed economic reform push. From the start, other nations were wary of Japan’s efforts, pointing to its long-running resistance to dropping tariffs and quotas on imported dairy, rice, wheat and barley, sugar, beef and pork—dubbed “sanctuaries” by the agricultural wing of the ruling Liberal Democratic Party (LDP). But Abe indicated all tariffs were up for grabs, and the other 11 nations rolled out the welcome mat.

Japan’s trade negotiators, however, had other plans. They entered talks determined to preserve tariffs on those so-called sanctuaries, which made other nations less enthused about dropping their own barriers—if Japan pushed agricultural barriers, why shouldn’t Vietnam lobby to protect its textiles, New Zealand its dairy and Malaysia its local procurement policies? And with all parties pushing for a swift accord, a “lowest common denominator” agreement that protected every country’s key interests—ultimately not freeing much trade at all—became a real risk.

That’s about where we are today. Japan and the US met separately over the weekend and made little discernable progress. The US won’t budge on agricultural opening, and Japan isn’t blinking. Japanese negotiators are considering lifting tariffs on 234 of the 586 individual products included in its broad sanctuary categories—coincidentally the 234 products not imported in 2010—but it won’t meet the US’s threshold unless it scraps 397, which US officials would prefer encompass all meat and dairy products. Japan also seems to have an ally in Canada—the two are reportedly teaming up to lobby to keep all dairy tariffs in place.

Given Amari said he and US trade negotiator Michael Froman would play their “last cards” during this round—widely considered the “make or break” round—progress thus far isn’t terribly encouraging. Two potential solutions have emerged, however. One would see a broad agreement on tariff eliminations replaced by a series of bilateral agreements. This would keep all nations in the fold, but instead of all tariffs phasing out over a decade as planned, each country would negotiate separately with each other country on a timeline and target for tariff reduction, likely resulting in more barriers and longer phase-outs. This wouldn’t prevent broader agreements on other administrative hurdles to free trade, like intellectual property and environmental regulations, but it would balkanize the most visible section of the deal, limiting its impact.

The other solution, reportedly suggested by the US, would see Japan booted from the bloc. This would allow the deal to progress as originally envisioned, but it would be the latest example of vested interests crippling Japan’s economic reform efforts. Most observers—and most of Japan’s government—agree freeing trade is vital to regaining the country’s economic dynamism. The 19th century protections in question wouldn’t be an issue if it weren’t for Japan’s powerful agricultural lobby, which is the bedrock of LDP support. Abe has talked a big game since taking office, pledging broad measures to reform the agricultural sector, but aside from a small measure to consolidate small farms, he hasn’t taken much action. Ditto for badly needed reforms to labor markets, corporate taxes and corporate governance, all of which have so far fallen victim to political resistance—in politics, it’s suicide to bite the hand that feeds you. One month ago, Abe told the World Economic Forum he would literally drill through resistance, promising, “no vested interests will remain immune from my drill.” So far, however, agriculture seems an impenetrable wall—and investors’ lofty hopes for a Japanese economic renaissance seem ever-likelier to be dashed.

Whether or not the broader hopes for TPP end up dashed remains to be seen. US officials want a broad agreement in time for President Obama’s Asian tour in April, which seems a mite optimistic. The more they rush, barring a miracle, the higher the likelihood of a slapdash deal that doesn’t accomplish terribly much. Longer negotiations might bring a more comprehensive deal and more of a long-term benefit, but it could take ages to agree to. That said, much as global markets would welcome a meaningful trade deal encompassing 40% of the world’s economy, its potential demise isn’t a negative—just the absence of a very long-term positive. Stocks like free trade, but the fate of a deal that wouldn’t have fully taken effect for 10 years shouldn’t be a big deal for markets, which look more at the next 12 to 18 months. Global trade has grown and thrived amid the current system, and with more trade barriers falling than rising, global commerce should stay strong for the foreseeable future.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.