A better deal for some than others: Markets have reacted enthusiastically to the Gatt breakthrough but not everyone will benefit from the tariff reductions

Click to follow
The Independent Online
WARNING: the latest Gatt deal could seriously damage your pocket.

That was the view of equity strategists at the main London securities houses last week, as they digested the implications of what is officially known as the completion of the Uruguay round of the General Agreement on Tariffs and Trade.

The agreement, which takes effect in 1995 after ratification by national governments, cuts a swathe of tariffs by an average of 40 per cent and creates a new body, the World Trade Organisation, to supervise free trade in agriculture, textiles and services.

The impact is expected to be dramatic. The World Bank and the Organisation for Economic Co-operation and Development estimate that the global economy could gain to the tune of dollars 270bn (pounds 180bn) a year after a decade of the new regime.

That is equal to some 50p a week for every man, woman and child on the planet. But, of course, the effects will be nowhere as evenly spread as that. Some areas, notably Asia and Europe, will gain far more than others.

The World Bank/OECD argue that the countries of the European Union will be easily the biggest winners, adding dollars 80bn a year to its revenues. Europe is the world's main exporter, so will win most from freer markets. China, Japan and the US will also benefit significantly.

Roger Barker and Alasdair Nisbet, at the stockbrokers UBS Group, declared: 'Although most studies suggest that the short-term impact of Gatt would be modest, there is a general perception that a Gatt deal is required to 'jump-start' the world economy.'

But while President Bill Clinton could not resist describing the deal as 'historic', to some London stockbrokers it was just another story to sell to the punters.

'We have not adjusted our economic forecasts in the light of Gatt,' said Jerry Evans, at NatWest Capital Markets, 'so there is no logical reason to adjust our equity earnings forecasts or recommendations. But the market is driven by sentiment, and this agreement is undoubtedly good for sentiment.'

Everyone agrees that the stock markets would have been badly dented had the exhausting seven-year negotiations come to nothing.

As Nigel Hugh-Smith, Hoare Govett's strategist, put it: 'If it hadn't gone through, it would have taken 150 points off the FT-SE 100 index because of what it would have meant for trading blocks turning in on themselves. The fact that it has gone through perpetuates the movement towards trade liberalisation.'

Share prices were buoyed by the removal of uncertainty that the deal represents, but the prospect of another cut in interest rates soon overtook Gatt in the minds of brokers.

However, although analysts warned that investors should not get carried away by Gatt theories to the exclusion of the many other influences affecting the stock market, the agreement does favour some companies and will gradually make life tougher for others.

'Transport companies are obvious beneficiaries,' said Mr Evans, at NatWest, ''and the UK and Scandinavia dominate the world trade networks.'

That will be good for P&O, which owns the OCL container shipping operation and earned pounds 1bn of its pounds 5.5bn turnover last year from container and bulk shipping.

Mr Evans even suggested that this might be beneficial to the beleaguered Tiphook, which may conceivably extract a higher price for its container operations. It is negotiating to sell this business to the US-based Transamerica.

While it is considerably dearer to send freight by air than by sea, British Airways earned nearly pounds 400m from this in the year to last March, again out of pounds 5.5bn. Analysts believe that proportion can be expected to rise.

Many other smaller suppliers to these big businesses will gain indirectly from Gatt.

Hadleigh Industries Group, based in Ipswich, Suffolk, makes industrial storage tanks and tank containers, and repairs commercial vehicle trailers and containers. It has been a supplier to Tiphook, but has been steadily cutting its exposure in that direction.

Sutcliffe Speakman, which announced a return to profit last week, currently has to cope with a 20 per cent tariff barrier on its sales to the US. That should now be removed, paving the way to higher sales and profits.

The biggest business winners from the Gatt deal are the industries that have suffered most from tariff barriers. Chief among these is the Scotch whisky trade, which earns pounds 2bn a year in nearly 200 countries.

Bill Bewsher, director-general of the Scotch Whisky Association, said: 'In the short term, implementation of the 'zero for zero' agreement, initiated in Tokyo in July, will remove import duties for Scotch in seven countries. But the real importance of the Gatt agreement is that it sends a clear signal to trading nations around the world that all barriers to trade are unacceptable.'

That will be very good for Guinness, whose Johnnie Walker, Dewars, Black and White and White Horse whiskies earned only pounds 1bn of its pounds 4.4bn sales abroad last year. And Guinness is reckoned to have a strong bias to Asia and South America, two fast-growing regions where employment and living standards should improve dramatically in the wake of Gatt, giving their inhabitants the power and inclination to drink more Scotch. They are also likely to smoke more, generating more sales for BAT Industries, one of the world's biggest cigarette makers.

The bulk of the dollars 270bn - around dollars 210bn - will be generated from farm trade reform. This will be bad for food-importing countries like Britain, but also good for Britain in that millions of pounds' worth of the food it imports is re-exported after having further value added to it.

'Cheaper raw materials should feed through to manufacturers,' Mr Evans claimed, 'which should enable them to widen profit margins and pass on some benefit to consumers.'

A typical gainer from this process is United Biscuits (Holdings), which is responsible for Hobnobs, McVitie's and KP Nuts. It benefits from cheaper wheat, sugar and fats. In 1992, the latest year for which figures are available, nearly pounds 1.2bn of its pounds 2.8bn turnover originated outside the UK and Ireland.

One of the biggest fat processors is the Anglo-Dutch Unilever, which makes soap and cooking fat and uses fat in its Wall's ice creams and sausages. More than a fifth of its turnover goes to third-world countries.

And Unilever sells pounds 2bn a year of speciality chemicals, which Mr Nisbet and Robyn Coombs, at UBS, believe will be among the big Gatt winners, along with oleochemicals and intermediate pharmaceuticals.

'Even though the implementation of the agreement is unlikely to take place until January 1995,' say the two in a paper, 'the confidence it will generate will stimulate trade before that time. Once implementation starts, the benefits will be progressively felt over the next decade.'

They point out that the OECD expects the speciality chemical and pharmaceutical industries to save dollars 8bn (pounds 5.3bn) a year, of which dollars 3bn will fall to western European countries.

That will be good for SmithKline Beecham, Wellcome, Glaxo, Zeneca and specialist drug makers like Vinten. But commodity chemicals groups such as ICI will not do so well. 'The reduction of tariffs into Europe will increase competition there, where producers are high-cost in both petrochemicals and many inorganic chemicals markets,' they add.

Other sectors, such as textiles, will be torn between immediate benefits and long-term disadvantages as China mobilises its vast army of low- paid workers.

That two-way pull will ultimately cast a cloud over clothing groups such as Dawson International and will add to the current woes of Courtaulds Textiles.

The main industrial loser is British Aerospace, which is still in the throes of tense joint-venture negotiations with Indonesia and Taiwan and is trying to forge a series of European partnerships.

'We need a good mix of civil and military businesses to get the necessary volume throughput to remain a leading competitor,' said Dick Evans, BAe's chief executive, last week.

But aerospace manufacture was one industry left out of the Gatt deal, leaving BAe to continue to face barriers to the world's biggest airframe market, the US.

Other sectors left hanging, but in stronger positions than aerospace, included financial services, shipping, telecommunications and the film and television industries.

These were the loose ends left out so that an agreement could be signed by last Wednesday's deadline. Negotiations will continue, in the hope that deals can be concluded before the World Trade Organisation gets into its stride in two years' time.

And, as the otherwise delighted whisky industry pointed out, there remain many hidden non-tariff barriers that need to be overcome.

According to the Scotch Whisky Association, Chile puts a 70 per cent tax on Scotch while the local drink, pisco, is taxed at 25 per cent.

Mr Bewsher stated: 'Now we believe the climate is right to look seriously at negotiations on non-tariff restrictions. These are protectionist measures that deny consumers free choice and access to world brands, and can be a crucial hindrance to free trade.'

(Photographs omitted)

Comments