Markets: Traders nonplussed by trade vote - Wall Street
just try explaining what GATT, the Uruguay Round or Blair House are all about - but US investors have adopted a sensibly direct approach to the North American Free Trade Agreement: if Congress passes the treaty next week, it will be good for the economy, good for US companies, good for the stock markets, and good for President Clinton. Their reasoning is quite simple. Investors believe that Nafta will lift corporate profits because in a more open trading environment between the three signatory countries the US, with its superior industrial productivity rates and better-quality products, will enjoy the greatest economic benefits. The expectation is that growth in US exports to Mexico and Canada will outpace growth in imports from its neighbours to the north and south. Investors are not alone in their optimistic view of Nafta. Most Wall Street economists are pro-Nafta, as are the majority of business leaders, if recent polls are to be believed. There is, however, the dark side of Nafta to consider. What if Congress votes no? Investors fear that a rejection of Nafta would have dangerous knock- on effects around the world, depressing share prices in the US, Latin America and eventually Europe, and endangering vital trade negotiations over the Uruguay Round. By coincidence, the day after next week's Nafta vote, Clinton will be in Seattle for a trade conference with leaders of Asian Pacific Nations. If he arrives there fresh from defeat on Nafta, the President's authority on trade issues will be compromised. Investors' darkest fear is that a no vote on Nafta would throw such a spanner in the works of world trade that it would lead to a new era of international protectionism, higher inflation and slower world economic growth. In this scenario, inflation would be the biggest concern of markets. Many economists argue that the competitive forces unleashed by the accelerating collapse of international trade barriers have helped restrain global inflation. Low worldwide inflation has kept bond yields at historic lows, which in turn have boosted share prices to record highs in many markets. Thus, any reversal in that trend - a return of trade barriers, higher inflation, higher bond yields, - could undermine equity markets that are already vulnerable to a sharp downward correction because of expensive stock valuations. Then there is the political cost of Nafta's failure to consider. Although the President inherited the trade pact from his Republican predecessor, he has invested a lot of his own political capital in getting Nafta through Congress. On paper, this should not be a particularly difficult task, because Congress is controlled by Democrats. Yet, opposition to Nafta among Democratic legislators beholden to labour interests is considerable. Anti-Nafta forces have warned that opening up trade with Mexico will lead to a migration of American jobs south of the border, where wages are much lower. Because the domestic labour market remains weak, this line has struck a strong chord with ordinary Americans. The result is that the President faces a tough fight ensuring that the House of Representatives votes to approve the treaty on Wednesday. As of yesterday, the outcome of the vote was deemed too close to call. Stock markets in Mexico and the US, however, believe the chances of success for Nafta improved this week. Share prices in Mexico rose on Wednesday and Thursday, and US stocks made solid gains, following the televised debate on Tuesday between Vice-President Al Gore and Ross Perot, who is Nafta's most celebrated opponent. Gore clearly bested Perot in a heated war of words, and polls taken over the next few days revealed that more Americans had been won over to Nafta. Whether this helped swing the votes of some anti-Nafta legislators the Clinton administration's way remains to be seem. Nafta is playing on investors' minds because doubts over its passage through Congress have arisen at a vulnerable time for stock and bond prices. A week ago bond yields jumped amid worries that resurgent economic growth might rekindle inflation. Although data released this week on producer and consumer prices showed that fears of rising inflation are, at least for now, unjustified, equity investors remain nervous about rising bond yields. Amid all the doubts over the Nafta, one thing is certain, trading on markets next week is likely to be hamstrung by uncertainty over Wednesday night's vote, which, like the battle over President Clinton's first budget, will be extremely close. ----------------------------------------------- Monday         3647.90    +   04.47 Tuesday        3640.07    -   07.83 Wednesday      3663.55    +   23.48 Thursday       3662.43    -   01.12 Friday         3684.51    +   22.08 -----------------------------------------------
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