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TWN Info Service on WTO and Trade Issues (Sept09/21)
29 September 2009
Third World Network

Abandon "lunatic idea" of further deregulation of services trade
Published in SUNS #6779 dated 25 September 2009

Geneva, 24 Sep (Kanaga Raja) -- The leaders of the Group of 20, at their summit meeting in Pittsburgh (USA), must commit themselves to reform of the World Trade Organization to build financial stability, and pull the plug on the "lunatic idea" of further deregulation of the services trade and in particular, of trade in financial services on the Doha Round agenda.

In a report, "No Meaningful Safeguards for Prudential Measures in World Trade Organization's Financial Service Deregulation Agreements," released on the eve of the Pittsburgh summit, the Washington-based Public Citizen challenged the view of the WTO officials and proponents of the WTO that GATS only calls for liberalisation of trade in financial services, and not deregulation, or that the "prudential carve-out" in the GATS Financial Services Annex provides a safe harbour against regulatory challenges.

(The full report can be downloaded from www. citizen. org/hot_issues/issue. cfm? ID=2374)

The current World Trade Organization (WTO) provisions on financial services deregulation have failed to safeguard prudential measures undertaken by governments and should be revised to ensure that financial stability measures especially in light of the current global financial and economic crisis are not threatened by the WTO rules, according to Lori Wallach and Todd Tucker, the authors of the report.

The report was released on Wednesday and was specially prepared for the G20 Summit taking place in Pittsburgh on 24-25 September.

Public Citizen said that the question of whether governments will commit to the real reforms needed will again come to the forefront at the G20 Summit, whose communique, it added, is expected to once again simultaneously call for re-regulation of the financial sector and the completion of the WTO Doha Round (with its agenda for further deregulation).

"It is not possible to have it both ways," said Public Citizen, adding that failure to remedy the existing WTO financial service deregulation requirements and eliminate further Doha Round financial service deregulation will fuel general public ire against the current terms of globalization generally and the WTO specifically.

The report cites several steps that must be taken to ensure that financial stability measures are not threatened by WTO rules.

First, says the report, is "do no further harm": there should not be further financial service deregulation in any international agreement coming after the hard-learned lessons of the crisis.

Practically, this means that the demands and offers on financial services should be taken off the Doha Round negotiating table. There should be a moratorium on financial service commitments for countries now negotiating terms of accession to the WTO, given that the crisis has the proven perils of the extreme deregulation model.

Further, said Public Citizen, the financial service provisions of the pending Free Trade Agreements (FTAs) with Korea, Panama and Colombia must be renegotiated.

Furthermore, the existing WTO and FTA terms that limit financial re-regulation should be renegotiated. This includes elimination of the Understanding on Commitments in Financial Services (a supplementary modality used by some 30 countries in scheduling their commitments in 1997, and which is now sought to be pushed on other WTO members). Revoking this text would eliminate the most extreme financial deregulation rules that apply to countries like the United States, Nigeria and most developed nations.

As well, the de-regulatory elements of the GATS market access rules - namely GATS Article XVI(2) - should also be eliminated, Public Citizen said in the report.

Art. XVI (2), the report says, is the provision that forbids governments to employ nondiscriminatory limits on the size of banks, securities and insurance firms if they agree to provide market access to "liberalize" such sectors.

"Getting rid of this text restores the policy space to address the too big to fail' problem. Effectively, this change would separate out commitments to provide market access from requirements to simultaneously deregulate such offered sectors," says the report.

The report also recommends that the new constraints on all service sector domestic regulations now under negotiation in the Doha Round be jettisoned. Given the brutal lessons the current crisis has provided with respect to the perils of extreme financial service sector deregulation and the Enron scandal which showed the risks of deregulation of energy services, the WTO GATS Working Group on Domestic Regulation should simply be shut down and its negotiations for a draft agreement scrapped.

"There is no excuse for having such a negotiating group, whose remit is to limit domestic regulation at the very time WTO countries are committed to re-regulating," says the report.

Also, if the Doha Round were concluded, one of the texts that would be automatically implemented is new "disciplines" to restrict non-discriminatory regulations in the accounting sector. These disciplines, which the now defunct Arthur Anderson firm helped formulate, will restrict accounting regulations to what WTO tribunals judge "necessary", putting pressure on governments to de-regulate as much as possible. This text should be scrapped.

Unless the changes noted above to the WTO financial service terms are implemented, WTO signatory countries should agree to a period during which existing WTO financial services commitments may be withdrawn without being required to negotiate terms of compensation, according to normal WTO rules.

"Either the de-regulatory aspects of the WTO financial service terms must be remedied through multilateral negotiations as part of the global re-regulation effort, or countries must be allowed to safeguard their domestic re-regulation efforts by withdrawing from WTO commitments that undermine such efforts."

The report examines the existing financial services deregulation requirements of the WTO, and the proposed expansion of these through the "Doha Round" of trade talks.

It highlights some of the WTO limitations many governments have placed (by scheduling commitments under the "Understanding") on their financial regulatory policies: A "standstill" on financial regulation of sectors already committed to WTO jurisdiction, so countries risk WTO challenges if they re-regulate elements of the financial industry; a ban on policies that limit the size of financial institutions (aimed at dealing with the too-big-to-fail problem), regardless of whether such rules apply equally to domestic and foreign forms; foreign firms must be allowed to offer any new financial product or services - no matter how risky - limiting the ability of countries to keep out harmful products, such as the credit default swaps and collateralized debt obligations that fueled the current financial crisis. Also, government aid to the financial industry cannot favour domestic over foreign companies - even inadvertently.

It rejects the view that WTO member countries could be relied upon to exercise forbearance in raising disputes over prudential regulations or other such regulatory disciplines, and hence no changes are needed.

According to the report, when the WTO's financial services provisions were negotiated and implemented in the 1990s, there was a prevailing consensus that the shift towards expansive deregulation would be permanent. This consensus has been all but swept away after the 2007-09 financial meltdown, but the binding WTO obligations remain.

Many members of Congress and legislators in other nations now grappling with how to best re-regulate the financial sector remain largely unaware that these WTO rules require countries to maintain the very financial sector policies that led to the crisis and could pose impediments to effective re-regulation.

According to the report, WTO defenders have tried to shut down the needed review and re-negotiation of these WTO provisions. First, they claimed that the WTO does not require deregulation, only "liberalization." Then, faced with the plain deregulatory language of the actual WTO provisions, they switched their defensive argument to focus on a provision on "domestic regulation" of financial services, sometimes (disingenuously) called the "prudential exception" or "prudential carve-out."

However, according to the report, this provision offers no safe harbour for financial safety measures - in that it contains a self-cancelling loophole clause.
(Indeed, a true "carve-out" would have excluded prudential measures from WTO coverage altogether.)

The report notes that one of the root causes of this crisis has largely been ignored: over the last several decades, the US government and corporations have pushed extreme financial deregulation worldwide using "trade" agreements and international agencies. The WTO oversees 17 commercial agreements and has locked in domestically and exported internationally this model of extreme financial service deregulation.

And, contrary to claims by defenders of the WTO, there is no WTO exception that provides a safe harbour for provisions related to "prudential" measures, i. e. those aimed at safeguarding the stability of the financial system.

The recent ruling in the "Fireman's Fund" case under the North American Free Trade Agreement (NAFTA) unfortunately demonstrates how a tribunal interpreting even NAFTA's more meaningful financial regulatory safeguards can impose its own interpretation of what is considered a prudential matter over a government's judgment, says the report.

It explains that in the NAFTA "Fireman's Fund" challenge of a financial stability measure, a tribunal ruled that even this more robust exception would not necessarily be sufficient to protect a NAFTA signatory country's prudential measure. The target of the challenge was a series of measures related to Mexico's bailout of its financial sector: Mexico deemed these "prudential" in nature, while Fireman's Fund claimed they constituted an indirect expropriation (among other violations) requiring compensation under NAFTA.

The tribunal cited writings by the US Treasury Department official who negotiated the NAFTA financial services chapter as support for the conclusion that investors can challenge prudential measures as expropriations, and that tribunals in investor-state cases can decide whether challenged measures qualify for the prudential exception.

The report observes that the binding terms of the WTO pacts under the WTO Financial Services Agreement are the exact opposite of the non-binding terms of various international accords between banking, securities and insurance supervisors, which attempt (however imperfectly) to create a global regulatory floor. Rather, the WTO financial service rules constitute a global regulatory ceiling.

The WTO includes a dispute settlement system with foreign trade tribunals empowered to instruct the United States and other nations to eliminate WTO-forbidden financial service regulations, with trade sanctions authorized for failure to comply. To date, WTO tribunals have ruled against the domestic policy in question in nearly 90% of the cases brought before them.

Not surprisingly, says the report, the WTO financial services agenda - an unusually potent system of international rules - was pushed by the top financial institutions that stood to make short-term gains from deregulation, including AIG and Citigroup.

The report also points out that the constraints on WTO signatory countries' financial service sector regulations are expansive and onerous: For example, the GATS Market Access rules (contained in Article XVI(2) of the GATS text) prohibit government policies that limit the size or total number of financial service suppliers in covered sectors. This ban applies absolutely.

Furthermore, under the above-cited market access rules, a country may not ban a highly risky financial service in a sector (i. e. banking, insurance, or other financial services) once it has been committed to meet GATS rules. A WTO tribunal has already established the precedent of this rule's strict application: The US Internet gambling ban - which prohibited both US and foreign gambling companies from offering online gambling to US consumers - was found to be a "zero quota" and thus violate GATS market access requirements.

The report notes that while the November 2008 and April 2009 G-20 Summit declarations have called for financial re-regulation on the one hand, on the other, they have simultaneously called for completion of the WTO Doha Round - one plank of which is further financial services deregulation.

The report cites some specific Doha Round proposals that would further financial services deregulation. Among these are that WTO countries are under pressure to submit additional financial sectors to the GATS market access rules.

It also cites "[I]ncreased use of the Understanding (on Commitments in Financial Services) by Members as a minimum standard for liberalization." This would mean more countries would be required to allow in all new risky financial products and services of foreign firms, and also to allow establishment of foreign firms operations within their countries, unconstrained by size-limiting regulations.

The report cites a sign-on letter by Americans for Financial Reform and 50 other groups representing over eight million Americans to President Barack Obama in advance of the G-20 Pittsburgh Summit that noted: "rather than calling for completion of the current Doha Round agenda (as they did in November and April), the leaders of the G-20 countries must agree to review and repair the existing WTO limits on financial service regulation and devise a future WTO negotiating agenda that takes into consideration the harsh lessons of the crisis."

Because pre-crisis, says the report, the global trend has been towards continual financial service deregulation, to date there has been no WTO dispute settlement case involving the GATS financial services terms. Thus, there is a high degree of uncertainty about the meaning and effectiveness of the Financial Services Annex provision on domestic regulation, where the last sentence appears to cancel out the first.

(The GATS Annex on Financial Services Article 2a states: "2. Domestic Regulation: (a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement".)

The report explains that as the second sentence makes clear, the provision may only be used to defend regulatory policies if such policies do not undermine the commitments and obligations established through the other WTO rules.

"Ultimately, the decision about if and when a country would be permitted to defend a challenged prudential measure through use of this provision would be left to a specific WTO tribunal applying the measure in a specific case."

The report also notes that the GATS' Financial Services Annex provision on domestic regulation provided the basis for the 2004 Model US Bilateral Investment Treaty's (BIT) provision on prudential regulation, which was contained in BITS with Rwanda and Uruguay. Similar language was also contained in US "Free Trade Agreements" (FTAs) with Australia, Bahrain, Central America, Chile, Morocco, Oman, Singapore, and agreements signed by President George W. Bush but not approved by Congress with Colombia, Korea, and Panama.

Many of these deals allow not only governments, but also private investors, to bring cases against prudential measures. Under these FTA "investor-state" enforcement provisions, foreign investors can directly demand cash compensation from governments in foreign tribunals - in addition to the pacts being enforceable by government-to-government dispute settlement tribunals.

While the GATS Financial Services Annex provision on domestic regulation has not been tested under the above listed pacts, Argentina invoked a broadly comparable provision known as the "essential security exception" when corporations like Enron brought cases against its financial rescue measures under the US-Argentina BIT. Yet, in 100% of these cases, tribunalists ruled that they, not Argentina, must be the judges of whether the exception constituted a defense against investors' challenges of financial stability measures.

According to the report, even WTO defenders argue that renegotiation of the GATS rules on domestic prudential regulation of financial services would be useful. They acknowledge that leaving the definition of acceptable prudential measures up to a WTO panel risks the legitimacy of the entire system.

The report recommends that the current Article 2(a) of the GATS Annex on Financial Services be replaced with the following language to ensure that prudential measures are not subject to WTO challenge: "Domestic Regulation: Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from adopting or maintaining measures relating to financial services it employs for prudential reasons, including for the protection of consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system. For greater certainty, if a Party invokes this provision in the context of consultations or an arbitral proceeding initiated under the Dispute Settlement Understanding, the exception shall apply unless the Party initiating a dispute can demonstrate that the measure is not intended to protect consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or is not intended to ensure the integrity and stability of the financial system."

Such a measure would allow countries to define for themselves what prudential regulations are required to ensure financial stability, and provide a default in favour of such measures' sanctity, while also providing a means for countering attempts to abuse such a designation, the report concludes. +

 


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