What’s next for free trade? Many have wondered since the supposedly “final” round of Trans-Pacific Partnership (TPP) free trade talks broke down late Friday, delaying (and potentially killing) the deal. Negotiators got 98% of the way there but couldn’t agree on autos and dairy, so they packed up and went home without scheduling the next round of talks. With Canadian elections looming in October and US elections on the horizon, time is running short, leaving TPP’s future in jeopardy—and, in turn, potentially jeopardizing other big deals in the works. Question marks abound, but our views haven’t changed. TPP and other sweeping trade deals have always been long shots—great for stocks in the long run if they happen, but this bull market doesn’t need a free-trade bonanza to keep climbing.
TPP, if finalized, would reduce or eliminate most trade barriers between 12 nations, freeing trade across roughly 40% of global output. Like all trade deals, it would create winners and losers, which is why it is such a tough sell. Each participating country has its own pet interests and protected industries, and it is often hard to convince voters removing niche protections is a net benefit for society. Normal human behavior makes folks emphasize the potential short-term pain, however small, over the long-term benefits, which are all but impossible to quantify. Governments worry they can’t sell the deal back home if they don’t win a concession or two, so they dig in. On Friday, Canada and New Zealand dug in on behalf of dairy farmers, Australia and others dug in over US drug patents, and Japan and the NAFTA bloc dug in on behalf of automakers. In the end, those disagreements were enough to upend the whole shebang, at least for now.
Talks will probably continue, and Canada and Mexico are already working on a plan to bridge the gap on autos. But time is of the essence, as Canadian Prime Minister Stephen Harper dissolved Parliament over the weekend and scheduled elections for October 19. If his government is unseated, the new administration could demand to start from scratch. Harper’s team can continue negotiating in the run-up to the election and finalize the deal before the contest, but ratification would fall to the next Parliament, which could emerge more gridlocked than the current. The 2016 US elections add another obstacle, considering the deal’s widespread opposition among the 22-person roster of Presidential candidates. So there is still a window to get this done, but it is closing.
TPP isn’t the only mega trade deal in progress. There is also the Transatlantic Trade and Investment Partnership (TTIP), a free trade deal between the US and EU. Japan is also trying to nail down an EU deal, as well as the 16-nation Regional Comprehensive Economic Partnership (RCEP) with China, South Korea and several Southeast Asian countries. TPP, as the closest deal to completion, is widely seen as both a litmus test and a catalyst for the other deals. Completion would signal a greater will for free trade, perhaps giving the remaining deals momentum. It would also spur competition. A finalized TPP might make Europe scared of losing market share in the US and Japan, motivating the EU to finalize those deals. It might also motivate the Asian and Southeast Asian nations outside the TPP to finalize the RCEP, lest they lose ground in Japan and Vietnam. Without TPP, some fear, there may be less urgency to complete the remaining deals.
There is probably quite a bit of truth to that, but it is only one of several reasons we wouldn’t be optimistic for these deals. Big free-trade deals are a rare breed. TPP’s twists, turns and failures are a case study in why. Getting countries with diverse interests and political leanings to find common ground is a tall order. If TPP is Exhibit A, TTIP is Exhibit B. Most EU-US trade is tariff-free or close to it, but contentious administrative barriers abound. Negotiators have squabbled for months over something as simple as cheese. We daresay financial regulations will prove even more contentious than feta.
Stocks love free trade, so the demise of TPP and other deals, if it indeed happens, wouldn’t be wonderful news. But it also isn’t terrible, bull-market-ending news. These deals, if finalized, would take years to phase in fully. They aren’t near-term economic drivers, just very long-term structural changes. Continued economic expansion doesn’t depend on them. Their full benefits would probably kick in a decade or so out, and stocks simply don’t look that far ahead. Plus, world trade can continue growing without them. The status quo has been fine thus far and can remain fine. Not finalizing TPP, TTIP, RCEP and other big deals isn’t a negative. Just the absence of a very long-term positive—a positive stocks have done fine without.
If the world were creeping toward protectionism, that would be a negative for stocks, but even if these deals stay on ice, stalled free trade isn’t protectionism. Countries aren’t erecting new barriers for the most part. Actually, trade is still getting freer in some places. The EU and Vietnam finalized a deal this week. China and South Korea sealed one in June. Japan and Australia signed their own deal while TPP talks progressed, and more sideline two or three-country deals could emerge. Logistics are also getting easier as global trade infrastructure improves. The expanded Suez Canal—which will enable two-way traffic for the first time—will open Thursday, to great fanfare. The expansion could reduce wait times by several hours, which doesn’t sound huge, but eases a bottleneck all the same. Incremental improvements add up.
So stocks have plenty of free-trade mojo already. They also have continued global economic growth and a recent pick-up in world trade, which is hanging on even as commodity shipments struggle. There is plenty to cheer right now, TPP or no.