The Paulson Bull Market?

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Maybe it's a coincidence, but the stock market hasn't had a down day since that trade compromise between the White House and congressional Democrats–brokered by Treasury Secretary Hank Paulson–on adding labor and environmental standards to future trade agreements. But the winning streak shouldn't be surprising given how heavily trade issues and protectionism have been weighing on the mind of many on Wall Street. So any good news on that front is welcome. Here is economist Ed Yardeni's sigh of relief:

Last week on Thursday, the Democratic majority in Congress made it clear that they intend to support free trade by agreeing to a breakthrough trade deal with the White House. It could lead to renewal of the president's "fast track" trade-negotiating authority, which expires at the end of June. It might also revive the Doha Round of global-trade talks.

But economist Stephen Roach of Morgan Stanley was less sanguine:

I would stress three key conclusions: One, an outbreak of protectionism is not in the price of world financial markets in any way whatsoever. ... Two, these risks are being dismissed not just because they have been a bad bet in the past several years but also because of the deeply held perception that the United States ultimately always does the thing. Three, the odds of anti-China trade legislation being enacted by the U.S. Congress are high and rising, in my view; this could well become more apparent after the second installment of the Strategic Economic Dialog between the U.S. and China, slated for [next week].... Should those high-level talks produce another set of nonresults–very much the risk–I suspect Congress will most assuredly up the ante. For financial markets steeped in denial, that could be a most bitter pill to swallow.

Here is my take: I think Paulson will get some "deliverables," as he likes to call them, from China at these meetings to show Congress that progress is being made. But he certainly is not going to get a pledge from China to permit a massive strengthening of its currency–that supposed antidote pushed by many protectionists as a cure for America's $800 billion trade deficit. (Of course, even a 20 percent appreciation in China's currency would do little to bring that deficit down if not joined by stronger currencies throughout Asia to prevent other low-cost, export-driven countries from substituting for China.)

So look for Congress to pass some sort of punitive trade measure later this year. There is just too much momentum being generated for this not happen. But as long as President Bush is willing to use the veto pen, protectionism is still in the "headline risk" category for investors, meaning trade news could temporarily spook the markets but not really affect the economy.

Paulson, Henry
international trade

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