Friday, the House voted 303-126 to reject a much-discussed trade-related bill, with Democrats leading the charge against the legislation. Now, if you follow economic and political news, it may seem as though the 12-nation free-trade zone spanning the pacific—the Trans-Pacific Partnership (TPP)—died Friday, but that isn’t actually what happened. There is no TPP deal for Congress to vote on—talks are still underway.[i] But this is a setback for the TPP and other potential trade agreements, make no mistake about it. For investors, this might seem a negative—free trade is good for stocks! Lower tariffs mean lower costs for consumers and businesses! Protectionism can cause trade wars! But really, delays and hiccups for TPP are more a step toward the absence of a positive—an absence we’ve long expected.
The bill in question was to renew the Trade Adjustment Assistance program (TAA) , a program designed to assist workers “displaced by trade.” And with it, due to Congressional horse trading, TPA—Trade-Promotion Authority legislation or the “fast track” went down, too. The Senate passed a bill weeks ago combining TAA and TPA, which the House separated into two because the Republican leadership believed it would simplify passage. As The Wall Street Journal reported:
Democrats’ ability to take down the trade bill was made possible by House Republican leaders’ decision to hold two separate votes on the legislation that was passed by the Senate last month. The calculus was that Democratic votes on the first part, the workers-aid program, would compensate for opposition from Republicans. GOP votes for fast track, meanwhile, would offset Democratic opposition there.
The House did vote 219-211 to pass TPA, but it really doesn’t matter much at this juncture. Absent TAA, the House and Senate bills are far apart and need to be reconciled, requiring another vote in each chamber. House Speaker John Boehner said he plans to resubmit the TAA legislation for a re-vote this week, but it is unclear whether more Democrats would be on board this second time around.
Every President since FDR has had TPA (also called “fast-track” authority) save Obama, as the last TPA legislation expired in 2007. Contrary to many Facebook memes and pickets, fast track doesn’t mean an end run around Congress. Rather, it requires Congress to set parameters for a trade deal upfront. After negotiators hammer out a deal, Congress can’t amend it, but they still vote to approve or reject it. The alternative would allow Congress to amend a deal many nations have already agreed to, which could easily kill it. TPP talks were already basically in a holding pattern awaiting passage of TPA. Hence, TPP took a smack upside the head Friday.
We’ve long suggested TPP would be tough political sledding in the US and even more so globally. Politicians are sharply divided on free trade, even in states that rely heavily on exports to boost their economies. The House was well-known to have greater opposition to TPA than the Senate. And earlier this week, reports emerged that Democrats simply wouldn’t support the initiative broadly enough to pass it. The vote Friday was mostly a formality (at least, to us).
Now, this all could change when new legislation is submitted. As The New York Times reported in the following article, House Minority Leader Nancy Pelosi suggested the TAA bill simply wasn’t “sweet” enough for American workers.
House Has Votes to Reject Trade Bill, Rebuffing Obama’s Dramatic Appeal
Jonathan Weisman, The New York Times
So sweeten the pot, maybe it passes. But then again, maybe not. Rep. Pelosi also told reporters, “Its defeat, sad to say, is the only way that we would be able to slow down the fast track.” That sounds more like opposition to fast track than a ploy seeking more in TAA legislation for American workers.
The path forward is fraught with similar “maybes.” Maybe TPA gets done. Maybe differences among the negotiating nations aren’t wide. Maybe TPP nations reach an agreement, and maybe Congress votes it through. But as an investor, that is a huge number of “maybes.” Big deals like TPP are always tough to complete, and this wrangling sure isn’t simplifying things.
All in all, TPA not passing really doesn’t change the existing situation at all, and that existing situation has been enough to send world trade up massively, US GDP to new highs and world stocks to surge 194% in this bull.[ii] While a TAA leading to TPA aiding in getting the TPP the yea would have been A-OK, its absence doesn’t mean stocks are DOA.[iii]
[i] Sort of. They seem to be on hold presently, based on most reports.
[ii] Factset, as of 6/15/2015. MSCI World Index net returns, 3/9/2009 – 6/12/2015.