What will Gatt mean for investors?

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The Independent Online
Let's assume that the Gatt talks do indeed reach a successful conclusion, even if the clock has to be stopped and Thursday's deadline does have to be rolled back a little. What then?

While there is universal agreement that such an agreement is very positive for world economic growth - or at least that disagreement would be very negative - there has been less unanimity on the specific investment implications of a deal. How should investors make money out of it?

Naturally, since agreement is probably now 'in the market' there is nothing much to be gained in the short run. But if the Gatt round hastens big sectoral shifts in the world economy, then on a longer view it should be possible to identify potential winners and losers. There are two ways of doing this: picking regions and industrial sectors that might benefit, and looking at the impact that a Gatt deal might have on the world financial climate.

The sector picking is straightforward enough. The whole purpose of the Gatt deal is to allow greater economic specialisation. It will therefore tend to speed the process already at work of moving manufacturing out of the developed world to the developing world - a process noted by Gavyn Davies in his column here yesterday. By liberalising trade in services, it will also encourage the developed world to increase its own exports of these services.

One could therefore construct a list of sectors that will benefit by looking at the main areas where developed countries, or mature industrial countries, have a clear comparative advantage over the newly industrialised ones. And one could construct a list of sectors where we do not. The London end of UBS Global Research - the old Phillips & Drew - has done just this. It has used a number of measures to assess comparative advantage and come up with five winners and seven losers.

The winners are speciality chemicals, consumer goods, pharmaceuticals, financials and media. The logic is straightforward enough, for these winners represent a collection of strengths that the UK enjoys. UBS adds areas such as biotechnology to the speciality chemicals. It says that allied to our strength in branded consumer products is our strength in retailing, and it adds business services to financial services and media.

The losers are commodity chemicals, general manufacturing, mineral extraction, engineering, electrical and electronics equipment, aerospace and textiles. As with the winners, this list would be unsurprising to most people - if discouraging to companies in the sectors concerned. But if one asks the question, 'What can we do that Taiwan cannot?', there is nothing on that list of losers to which one could point. (Whether Taiwan wants to join in our aerospace industry is another matter, as BAe is discovering.)

So the proposition that emerges from sectoral analysis is that success for Gatt should encourage investors to back excellence, or at least exclusivity. As an investment principle it is not a bad one, although there are plenty of examples of individual companies that have managed to thrive despite the fact that they seem to be on the 'wrong' sector.

What of the other, more general approach? Here the proposition is the same: that Gatt will speed up the process whereby comparative advantage redistributes economic activity in the world. The effect, however, is slightly different, for instead of trying to pick winners, it asks: 'What does the process of shifting industrial activity to newly industrialised countries do to investment returns in general?'

One point that has received very little attention is the effect on global inflation. If labour-intensive industrial activities move to countries that have much lower wage rates - and not just 20 or 30 per cent lower but, in the case of mainland China, 20 or 30 times lower - this must surely have an impact on global price levels. There will be general downward pressure on the price of commodity manufactured goods throughout the world, reinforcing the general downward pressure from lower commodity raw material prices that has played a large part in the present deflation. Ultimately, inflation is a monetary phenomenon, but it is vastly easier to control in any one country if the central bank concerned is operating against a background of falling world prices.

If this argument is right, one of the effects of the Gatt round will be to secure recent progress on inflation. It is even possible, as new countries enter the commodity manufacturing game, that such goods will become progressively cheaper as the decade wears on. Some labourintensive services will rise in price, but overall price levels in industrial countries may become stable, even falling.

This could have enormous investment implications. Most obviously, bond yields are still too high. We should expect more falls in money market interest rates, with the possibility that present UK rates, instead of seeming low, will seem rather high in five years' time. Maybe these lower rates will sustain higher share prices; maybe we will return towards the end of the decade to a yield gap, with the dividend yield on equities again being higher than the return on gilts.

Most people, when thinking of freer trade, think in terms of switches in demand: people buying goods from one country rather than another. They do not think so much in terms of changes in prices: people being able to buy goods that are much cheaper than those that were hitherto available.

Simply speaking, previous Gatt rounds have tended to encourage greater trade between rich countries, so that though the variety and quality of goods have been enhanced, there has been little direct impact on price levels. This Gatt round is slightly different in that it comes at a time when a whole new industrial region - east Asia - is taking off. Accordingly, its effect will be to encourage greater trade between rich and not-yet- rich.

This critical difference is yet to be fully appreciated, but it will change all our lives. While the Gatt round is not the only factor pushing the pace of change, it will undoubtedly have an impact - that is, assuming that some last-minute hitch does not blow away seven years' work.

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