Doha delivers more pressure on investors, markets

The collapse of the Doha round of trade talks on Monday is just one more pressure point on financial markets already bruised by interest rate uncertainty, fear of economic retrenchment and escalating geopolitical tension.

It robs investors who believe in the wealth creating properties of globalisation of the prospect of yet more openness, replacing it instead with worries about growing protectionism.

“All the previous trade rounds managed to prevent a failure. They [papered] over the cracks,” said John Ip, senior economist with Morley Fund Management in London.

“If it’s an outright breakdown [this time] it makes me very uncomfortable because the goodwill pushing forward in trade liberalisation is gone.”

Talks aimed at boosting the global economy and easing poverty by opening up world trade in agriculture and services collapsed in Geneva on Monday and the negotiation round was suspended.

Analysts immediately began predicting that a spate of bilateral or regional trade agreements would rise up in place of a global pact, a move widely seen as more likely to create blocs and barriers than knock them down.

Indeed, French Trade Minister Christine Lagarde told Reuters her country would have to start looking at “multinational negotiations of a regional nature”.

That prospect is likely to kindle fear among investors that protectionism, the throwing up of barriers to trade, will make a comeback as global liberalisation wanes.

Return to protectionism

Among international investors, a return to protectionism would widely be seen as nullifying much of the openness that has been behind the wealth-creating growth of the global economy and the rise in asset prices for a decade.

Throwing up trade barriers would threaten the free movement of money and goods and likely would lead to slower economies, it is argued. “Protectionism is definitely one of the issues that can cause a world recession, alongside monetary policy errors, tax increases and regulations,” said Emmanuele Ravano, managing director at PIMCO Europe, in London.

“That’s clearly ...
not positive to financial assets,” he said.

Like other investors, Ravano has already been concerned by tendencies towards perceived protectionism that have arisen over the past year.

He cited in particular the furore in the United States over a Dubai company’s bid to control key United States ports, forcing the company to back down.

But there have been other cases that worried investors, notably France’s so-called economic patriotism policy of warding off foreign takeovers.

Blocking financial trade as in the Dubai case, Ravano said, was particularly dangerous for a country like the US that requires foreign investment to fund its current account deficit and keep its currency from falling.

Others see problems ahead for companies—and hence equities—from the Doha talks breakdown.

A rise in protectionism would, of course, hurt exporters, but Germany’s Chambers of Industry and Commerce implied it might not even take that. Even just a move towards bilateral trade agreements was bad news.

The chamber said regional or bilateral pacts were opaque and expensive for companies to deal with, raising costs and hitting competitiveness.

Little immediate reaction

These dangers, however, are longer terms ones, which is why markets obsessing about interest-rate uncertainty and economic growth generally passed the event by on Monday.

There was little immediate reaction, mainly because failures of negotiational diplomacy—particularly trade talks that grind on and on—tend to be too long term for daily market reaction.

“They are too slow moving for equity or bond markets to move,” said Giorgio Radaelli, chief strategist at wealth manager BSI in Switzerland.

But in an already wobbly investment climate this may not last, particularly if the focus turns, as economists have argued, towards the inflationary impact any roll back from globalisation might bring with it. - Reuters

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