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TWN Info Service on Finance and Development (May08/02)
7 May 2008
Third World Network

QUESTIONABLE TIMING FOR TIGHTER GATS RULES, LIBERALIZED BANKING

The new efforts to breathe life into the Doha round of trade negotiations at the WTO are targeting international trade in services as well as in manufactures and agriculture. The processes envisaged appear to involve “horizontal” negotiations for modalities - in agriculture and non-agricultural market access (NAMA) at senior-official levels leading to a mini-ministerial (mid-May being a possible date), as well as a “signalling” conference on services, and conclusion of negotiations with an agreement while George W. Bush is still in White House.

Among the requests and offers on the table in the services negotiations, the plurilateral request for banking (as well as other financial services) of a number of industrial and emerging-market economies (Australia, Canada, the European Communities, Ecuador, Hong Kong China, Japan, Republic of Korea, Norway, Chinese Taipei and the United States) is of special interest owing to the identity of the countries which have submitted it and to the scope of the activities which it covers. The countries principally targeted, it is reasonable to assume, are emerging-market countries with substantial banking sectors, mainly in Asia and Latin America.

Below an analysis of the GATS negotiations by Andrew Cornford. It was published in SUNS # 6458, Friday, 18 April 2008. This article is reproduced here with the permission of the SUNS.  Reproduction or recirculation requires permission of SUNS (sunstwn@bluewin.ch).

With best wishes
Martin Khor
TWN

Questionable Timing for Tighter GATS Rules, Liberalized Banking
By Andrew Cornford, Geneva, 16 April 2008

The new efforts to breathe life into the Doha round of trade negotiations at the WTO are targeting international trade in services as well as in manufactures and agriculture.

The processes envisaged appear to involve “horizontal” negotiations for modalities - in agriculture and non-agricultural market access (NAMA) at senior-official levels leading to a mini-ministerial (mid-May being a possible date), as well as a “signalling” conference on services, and conclusion of negotiations with an agreement while George W. Bush is still in White House.

[The term modalities used in trade talks is something more than its ordinary dictionary meaning, and even stretched to characterise something whose implications the proponents don’t want to define. At its simplest, it could probably be defined, in the words of one former GATT negotiator, as “a framework of principles, procedures, methods and guidelines for undertaking market access commitments.” In the current Doha Round negotiations, the drafts in agriculture and NAMA probably involve more. But once schedules of commitments are submitted by countries, and after scrutiny accepted by others, and incorporated in the concluded agreements, the “modalities” document disappears, and is not a legal text that can be used in disputes. SUNS]

An article in the Wall Street Journal co-authored by Australia’s Minister for Trade and the United States Trade Representative estimates the gains to the global economy by comprehensive liberalization of services trade at US$1 trillion. [Simon Crean and Susan Schwab, “Doha dealbreaker”, Wall Street Journal Asia, 11 April 2008]. It is not clear whence the two authors conjured up this figure in view of the continuing lack of services-trade data and a proper statistical basis for valuing offers and commitments under the GATS. Nevertheless, the Crean-Schwab intervention indicates the urgency attached in some official quarters to an ambitious outcome in services as part of completed Doha round negotiations.

Among the requests and offers on the table in the services negotiations, the plurilateral request for banking (as well as other financial services) of a number of industrial and emerging-market economies (Australia, Canada, the European Communities, Ecuador, Hong Kong China, Japan, Republic of Korea, Norway, Chinese Taipei and the United States) is of special interest owing to the identity of the countries which have submitted it and to the scope of the activities which it covers. The countries principally targeted, it is reasonable to assume, are emerging-market countries with substantial banking sectors, mainly in Asia and Latin America.

The most sweeping part of the request concerns Mode 3 of supply (through commercial presence) and is for commitments to rights to establish new and to acquire existing firms, in the form of wholly-owned subsidiaries, joint ventures and branches. National treatment in the form of the removal of discrimination between domestic and foreign suppliers in the application of laws and regulations is also requested.

These contents reflect long-standing objectives of industrial countries in WTO negotiations on banking services. These objectives and the reasons why emerging-market and other developing countries may want to maintain limitations on both market access and national treatment in the face of such requests have been widely rehearsed. As serious negotiations may be about to start, what is new at this time is the crisis in financial markets which began last summer. It is now generally agreed by policy makers and financial regulators in industrial countries, that the financial market crisis has demonstrated the need for major revamping of the regulation of financial sectors.

Also of interest in the context of the crisis are ideas which have been put on the table (in the Doha services negotiations) regarding the development of new disciplines for domestic regulation under Article VI of the GATS, since these ideas bear on a subject which, in the case of banking services, has assumed additional importance as a result of the financial crisis. The ideas are contained in a recent informal note by the Chairman of the Working Party on Domestic Regulation of the Doha round negotiations on services.

Some of the suggestions in the note would have been potentially problematic for the regulation of international trade in banking services even before recent events. But reservations concerning proposals which might place additional constraints on national prudential regulation have arguably now become starker.

Domestic regulation has been a contentious subject in negotiations on international trade in services since the preparations for the Uruguay Round in the early 1980s. According to the Punta del Este Declaration the multilateral framework to be negotiated was to “respect policy objectives of national laws and regulations applying to services”. Among developing countries reticence concerning this framework centred on potential conflicts between the principles of progressive liberalization, transparency and non-discrimination, on the one hand, and policy autonomy regarding the establishment of regulations required by their development objectives, on the other.

Much of Article VI of the GATS (on domestic regulation) is of a general character and directed at ensuring that administration of measures affecting trade in services is fair, objective and impartial. Moreover, according to Article VI, the Council on Trade in Services is to develop disciplines regarding qualifications, technical standards and licensing requirements for services suppliers which are based on objective and transparent criteria, are not unnecessarily burdensome, and are not in themselves a restriction on supply. The need for progress on the mandate for the development of disciplines was stressed in Annex C of the Doha Work Programme agreed at the WTO Ministerial Conference in Hong Kong in December 2005.

There are few provisions in the GATS concerning the contents of domestic regulation. According to Article VI, pending the results of the Council’s development of disciplines, determination of a country’s conformity with obligations regarding qualifications, technical standards and licensing requirements is to take account of its adherence to international standards of international organizations open to members of the WTO. Article VII contains provisions concerning the mutual recognition of procedures for the authorization, licensing and certification of services suppliers.

Throughout the Uruguay Round financial services were treated as a special case. There was general acknowledgement that macroeconomic stability and the stability of the financial sector were closely connected. Moreover developing countries held the view that policies towards the sector should recognize its essential and pervasive role in economic development and thus the need to accord them flexibility regarding commitments as to liberalization. Even among the industrial countries - which were pressing emerging-market and other developing countries to liberalize - there was acknowledgement that the GATS framework should accommodate explicitly particular features of financial markets and regulation.

The concerns over financial stability were reflected in the “prudential carve-out” of the Annex on Financial Services of the GATS. Paragraph 2(a) of this Annex permits the taking of “measures for prudential reasons... or to ensure the integrity and stability of the financial system” notwithstanding other provisions of the agreement. Flexibility regarding liberalization in relation to economic development was implicit in the approach adopted for the negotiation of commitments, which apply only to services listed in these commitments and are subject to countries’ scheduled limitations concerning policies towards the financial sector.

One of the objectives of the latitude afforded by the “prudential carve-out” was to enable countries to avoid burdening their commitments with references to their national prudential regimes. But in this objective it was not completely successful since some countries (including Japan and Republic of Korea), in the headnotes of their schedules of commitments (which set out limitations applicable to all the services covered in these schedules), specified references to their freedom to take measures under these regimes in accordance with paragraph 2 (a) of the Annex.

One can only speculate as to the reasons for this unwillingness to rely on the “prudential carve-out”. But it seems likely that the caution reflected lack of experience of handling banking crises under GATS rules, and lack of GATS case law and precedents. The measures which countries may require during such crises - and thus compatibility with GATS rules and the obligations contained in the schedules of commitments of countries regarding trade in financial services - are difficult to anticipate.

The features of these measures will be related not only to particular crisis conditions but also to national laws and supervisory capacity. Additional problems may have to faced owing to the still underdeveloped state of agreed procedures for cross-border banking insolvencies (see below). Narrowing the applicability of the “prudential carve-out” during the Doha round could have the counter-productive consequence of leading more countries to include references to the policy autonomy inherent in their prudential regimes as part of the headnotes of their commitments - a recourse which would reflect uncertainties due to the recent experience of financial instability.

The apparently anodyne language on new disciplines in the informal note for the Working Party on Domestic Regulation contains a number of problematic concepts.

According to paragraph 11 of the note, “Measures relating to licensing requirements and procedures, qualification requirements and procedures, and technical standards shall be pre-established, based on objective and transparent criteria”. The measures covered here are likely to comprise large parts of regulatory regimes of countries.

Yet even before the ongoing crisis international agreement was still lacking on features of the regulatory regimes for banking services which bear on cross-border relations and transactions. Moreover, as already noted, the regulatory regimes in important industrial countries now face substantial restructuring in response to the financial crisis. Both of these issues raise questions as to how “pre-established, based on objective and transparent criteria” would be interpreted as part of future application of GATS rules.

The references in paragraphs 17 and 31 of the note to the need for licensing and qualification procedures to be “as simple as possible” embody an unexceptionable objective but may not be a meaningful criterion for rules covering the granting of permission to foreign banks to engage in complex financial transactions. The problems which such transactions are capable of causing for regulators, financial firms and for whole economies have been highlighted by the current crisis.

According to paragraph 32 of the note, “An applicant shall, in principle, not be required to approach more than one competent authority for qualification procedures”. This seems to be in conflict with the regulatory regimes of some countries with federal systems such as Canada and the United States. The 1997 commitments of these two countries contain several limitations referring to state or provincial authority regarding the regulation of banking.

In the case of Canada one may question whether these limitations will be removed or if not, whether their implementation will be centralized as part of concessions negotiated, during the Doha round. In the United States, the blueprint for regulatory reform recently released by the Treasury Department is intended to achieve a simplification of the country’s existing multi-regulator and multi-tier regime. But even if enacted - a prospect unlikely to be realized within the time frame of a near-term completion of the Doha round - the blueprint will accommodate at least a measure of autonomy in regulation of banking services by states. This autonomy may continue to apply to market access and national treatment for some activities of foreign banks.

Even before the current crisis drew attention to glaring weaknesses in the regulatory regimes for banking and in banks’ own internal controls in industrial countries, international consensus was lacking concerning procedures in connection with the resolution of cross-border financial crises where domestic and foreign firms and economic agents are subject to different rules.

Examples of such procedures are those related to insolvencies of banks with cross-border operations and deposit insurance.

Regimes for insolvency were originally designed within national legal frameworks. So long as the cross-border operations of banks were carried out mostly through locally incorporated subsidiaries, their foreign entities could be treated by regulators in the host country in the same way as domestic banks. But with growing use by international banks of cross-border branches, which are not legally independent of their parent institutions, this framework has ceased to be adequate. Moreover, with the increasing integration of the operations of international banks, dismemberment of its subsidiaries by regulators in different countries in accordance with different national procedures and priorities during insolvencies is likely to be increasingly difficult.

The claims and legal status in the bankruptcy proceedings of an insolvent cross-border bank still differ in some countries for the foreign and domestic depositors and other creditors. Nevertheless, limitations regarding insolvency procedures are absent from the commitments for banking services which were the outcome of the GATS/WTO negotiations that concluded in 1997.

This absence may reflect confidence that such procedures would be covered by the “prudential carve-out” of the Annex on Financial Services and could thus not be challenged in the WTO. But it may also reflect unwillingness to face the consequences for international trade in banking services of a subject concerning which international consensus has yet to be reached.

At the time of the 1997 agreement the prospect of the cross-border insolvency of a major international bank may also have seemed too remote to merit attention in the WTO. However, the losses incurred by some such institutions during the recent crisis may have changed this perception.

In the flux resulting from the financial crisis greater caution regarding additional commitments as to liberalization within the WTO on the part of emerging-market and other developing countries would appear both understandable and justifiable. Such caution could appropriately be reflected in the responses of countries to the plurilateral request described above.

Moreover, as far as banking is concerned, the initiative for the introduction of new disciplines regarding the domestic regulation of international services trade is also being put forward at an inauspicious time. The objective of those who originally drafted the “prudential carve-out” of the GATS Annex on Financial Services was to afford broad flexibility for the regulators and regulatory rules of a sector which can be considered a key part of the infrastructure of the economies of both developed and developing countries, and which is still undergoing radical changes owing to transactional and institutional innovation that often demand wide-ranging regulatory responses. This does not seem a good moment for tampering with this flexibility.

 


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