Kill a Turtle for the Dow? No, but Trade Does Matter
Evidently, anti-World Trade Organization protesters will have to break a lot more Starbucks store windows before they’ll get under Wall Street’s skin.
Despite a level of protest in Seattle’s streets that far exceeded what WTO authorities (and Seattle city officials) might have expected--and a level of media coverage that probably far exceeded what protest organizers had hoped for--global stock markets betrayed no hint of worry that the era of expanding trade might be at end.
By Friday, markets in Mexico, Brazil, France, Sweden, Spain and Israel, among others, had hit record highs. Hong Kong stocks were at their highest level since the East Asian economic crisis began to mushroom in August 1997. And the Dow Jones industrials capped the week with a spectacular rally--up 247.12 points, or 2.2%, to 11,286.18 on Friday--and briefly topped their own record close of 11,326.04 set on Aug. 25.
For the Nasdaq composite, there was just more of the same: a gain of 2.1% for the week, to a record 3,520.63 on Friday. The year-to-date rise in the technology-dominated index now exceeds 60%.
The breakdown of many barriers to world trade in the 1990s has hardly been the only reason stock markets in many countries have performed so well, but it’s a significant enough reason. On a micro level, a company that has more opportunities to sell goods in foreign markets offers its investors more long-term earnings growth potential. That makes the stock more attractive.
Perhaps more important is the idea that greater competition among companies worldwide keeps inflation subdued, because competition should favor the lowest-cost producer of the highest-quality goods and services.
Inflation rates worldwide have fallen sharply in the 1990s, which certainly isn’t a mere coincidence given the declines in trade tariffs and the continuing globalization of the world economy since the last major trade accord was reached in 1993. From that accord the WTO was born.
Lower inflation, in turn, has allowed interest rates to drop on every continent in the 1990s. And lower rates, of course, provoke a Pavlovian reaction in equity markets: Most of the time, they go up in response.
Thus, if investors were beginning to believe that the protests in Seattle were truly symptomatic of an anti-trade, pro-protectionist movement that was global in scope and likely to balloon in the next decade, it is unlikely we’d be seeing share prices rocketing to new highs.
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True, stock markets aren’t perfect predictors of such mega-trends. But often they demonstrate an uncanny ability to see ahead.
When the Dow reached its 1970s peak of 1,051.69 in January 1973, consumer inflation in the United States was running at an annual rate of about 4%. Few economists at the time could have imagined that within two years inflation would be at 12%. But the market, in its steep decline through 1973 and 1974, seemed to recognize what was coming.
Still, the protests against much of what the World Trade Organization stands for weren’t just outside the hotels where delegates were meeting. There is substantial disagreement among the 135 member nations over what future trade liberalization should include--and over who is being protectionist versus free-trade in their proposals.
That poor countries and rich countries should disagree over what is “fair” in terms of free trade shouldn’t surprise anyone. In the past, however, the United States and Europe had greater power to shape global trade agreements that the have-not countries may not have liked, but felt largely powerless to oppose.
Now, the have-nots in Africa, Asia and Latin America are taking a much harder line: Many believe that free trade in the 1990s has been much freer for the developed world--and specifically for the giant corporations of that world--at the expense of the developing world.
Again, using stock prices as a measure, it would certainly appear that the economic benefits of the 1990s global expansion have accrued disproportionately to the developed world, perhaps excluding Japan, which has been suffering its own peculiar structural problems.
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People such as Kristin Dawkins, program director at the Institute for Agriculture and Trade Policy, and Martin Wagner, director of international programs at Earthjustice Legal Defense Fund--two of the organizations sanctioning the Seattle protests--see the WTO as an agency for the advancement of corporate interests at the expense of workers and the environment.
“The WTO has one overarching goal--removing barriers to trade. Although it has no environmental or public health expertise, the WTO has not hesitated to pass judgment on these issues,” Wagner says.
The result, he and other opponents argue, is a “race to the bottom,” with nations challenging each other’s regulations on labor, human rights and environmental protection in the name of driving sales and profits at large native companies.
“The WTO is responsible for decisions affecting everybody: our pocketbooks, health, career options and many other day-to-day matters affecting the overall quality of our lives,” Dawkins says. “And yet most people have never heard of it. That shouldn’t be a surprise--it’s on purpose: the purpose of the rich getting richer.
“Most bureaucrats won’t admit it, but high-level government officials from time to time have let it slip: They want the WTO to undo the laws of our land, so the Fortune 500 will be unrestricted to increase profits,” Dawkins alleges.
That kind of vitriol no doubt plays well with certain audiences, many of which were represented on the streets of Seattle last week. But many average Americans may instantly realize the potential conflict of interest they face in agreeing with someone like Dawkins: If you’re a shareholder of one of those Fortune 500 companies, the idea of increasing corporate profits--and a rising stock price--is a goal you share with management.
The surge in the number of Americans invested in the stock market in the 1990s obviously hasn’t perfectly allied the interests of corporate executives and the rank-and-file, but it has given millions of people a new perspective on things.
Richard Nadler, writing in a recent issue of the conservative Cato Institute’s Policy Analysis newsletter, argues that “the most significant demographic shift of this century is the rise of history’s first mass class of worker capitalists--men and women whose wealth-seeking activities include both wage earning and capital ownership.”
A survey this year by the Investment Company Institute (the chief trade group for mutual funds) and the Securities Industry Assn. put the percentage of U.S. households that own stock at 48.2%, up from just 19% in 1983.
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A major reason for that increase has been the shift of pension programs from “defined-benefit” (i.e., the company takes care of you) to “defined-contribution” (i.e., 401[k] plans in which the employee takes responsibility for investing his or her future pension dollars).
Many Americans may well have resented that shift in the beginning. Some probably still do. But the fact is, more people than ever now are in the stock market, are running those investments themselves and are well aware that their future livelihood will depend on stock prices not only holding their gains of the 1990s, but extending them.
Thankfully, that fact still isn’t likely to turn most people into disciples of the rabid free-trade-at-any-cost camp. How small-minded would you have to be to support wanton environmental destruction or oppression of small nations just for another 10% rise in the Dow?
Nonetheless, workers who also are shareholders should recognize that a lot is riding on the continued expansion of global trade and the side effect of low inflation. The alternative--the threat of rising protectionism and less commerce among nations--is a prescription for serious pain in financial markets.
* Tom Petruno can be reached by e-mail at tom.petruno@latimes.com
