TWN Info Service on WTO and Trade Issues
WTO holds first-ever
"dedicated discussion" on financial crisis
Geneva, 2 Jul (Kanaga Raja) -- Three years after the onset of the financial crisis that originated in the US and other world financial centres, and the massive bailouts at taxpayer's expense that ensued, the World Trade Organization held this week its first-ever dedicated discussion to examine the effects of the financial crisis and of rescue measures on trade in financial services.
The day-long discussion took place on Tuesday (29 June) at the Committee on Trade in Financial Services, under the agenda item of "Recent Developments in Financial Services Trade."
The unprecedented bailouts, involving unorthodox measures by central banks as well as direct injection of funds by government treasuries, involved not only financial firms - banks, insurance firms and others - but also various "consumer" credit and financing operations of automobile manufacturing and other corporations.
While some of the major
developing countries had been pressing repeatedly for an in-depth discussion
in the Committee on Trade in Financial Services (CTFS), the
While the WTO and the Secretariat, as well as the majors, have attempted to keep the trade organisation and the GATS out of the extensive discussions taking place outside, more recently, there have been some academic writings, as well as position papers at web-sites by activist civil society groups (like Public Citizen's Trade Watch), focussing on the connections between the financial crisis and the trade in financial services of the General Agreement on Trade in Services (GATS).
The decision to organize a dedicated discussion on the financial crisis and trade in financial services was the outcome of two proposals, the first by Argentina, Ecuador, India and South Africa, which formally put forward a proposal on 17 September 2009 (subsequently revised in November 2009), and the second by the United States that was put forward at the meeting of the CTFS on 4 February 2010 - when other members put forward a number of suggestions during the discussion at that meeting.
According to an informal note circulated by the Secretariat, topics suggested for discussion by Members included the following:
-- The effects of the financial crisis on the cross-border supply of financial services through modes 1 and 2, and sales and purchases of financial services through mode 3 (commercial presence);
-- The effects of the financial crisis on the operations of foreign and domestic financial service suppliers, including investment, employment, as well as product mix;
-- Whether these effects vary by product (e. g. Banking relative to insurance or securities; trade finance as compared to other banking services; marine, aviation and transport insurance versus other non-life services);
-- The effects of global liquidity conditions in the wake of the financial crisis on trade in financial services and the availability of trade financing;
-- The effects of government measures in support of the financial sector on trade in financial services, including competitive conditions and global financial stability; and
-- Possible systemic implications in terms of the GATS.
According to the informal note, the purpose of the discussion is to allow Members to exchange information and discuss their experiences, and to be informed about research conducted by other international organizations.
The discussion was divided into two segments, the first segment being devoted to presentations by international organizations having undertaken work in this area, such as the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Financial Stability Board (FSB), and the Organization for Economic Cooperation and Development (OECD).
The second segment was to be devoted to an exchange of information and experiences among Members on the issues outlined for discussion, as well as other topics of interest for Members related to the financial crisis, such as its implications for financial services trade and the Doha Round.
At a media briefing on Thursday, Mr Hamid Mamdouh, Director of the WTO Trade in Services Division, noted that this was the first real dedicated discussion of the financial crisis and trade in financial services in the WTO by a standing WTO body. The discussion was "extremely un-confrontational," said Mamdouh.
According to trade officials, some twenty developed and developing countries spoke during the discussions. Some had brought along capital-based officials.
Trade officials said that in their various statements, delegations focused on whether the financial crisis had - or had not - affected their financial systems and the types of actions that they undertook in response to the crisis.
In what seemed to be the Secretariat's interpretation of the discussions, Mamdouh said that in the deliberations in both the segments of the dedicated discussion, it was quite significant that "nobody at all saw that commitments under the GATS were among the root causes of the (financial) crisis."
The WTO official said: "We've gone over all the analysis that the experts delivered as well as the interventions and presentations by delegations. I think what was stressed was the importance of (a) strong, sound regulatory framework." And implicitly, according to Mamdouh's interpretation, (the stress was on) how important it was that the regulatory framework keeps being developed, adjusted and updated to stay in pace with innovation and competition in the financial markets.
In the interventions
by Members during the discussion, he said that there were references
made to possible distortions (arising out of the massive bailouts of
financial institutions in the developed countries, particularly in the
Mamdouh further said that the counter-argument to that is that when governments face serious crisis, they resort to exceptions, and that this is why there is the "prudential carve-out". There is an exception provision for prudential regulations in order to protect the stability and integrity of the financial system.
(This Secretariat view of the "prudential carve-out" in the financial services annex of GATS, and the scope it provides for such government bailouts and interventions has been challenged in some recent academic writings, as well as by some civil society groups tracking these issues.)
Asked whether the issue of the implications of the financial crisis for the Doha Round was raised during the discussion, he said that this issue was not talked about.
Asked about the issues that were discussed, the WTO official said that the statements of delegations were mainly centred around their own experiences with the financial crisis, in how it affected their financial systems and what was done by them in response to the crisis.
A number of developing countries said that their financial systems were not affected in a serious way by the financial crisis. In terms of their experience with the financial system, many developing countries explained how their approach to sound regulation has helped them avoid the negative consequences of the crisis, Mamdouh added.
A developing country trade diplomat who attended the dedicated session told SUNS that the speakers made a compelling case about the competitive problems that were caused by the bailouts in the financial sector.
While it was not a confrontational session, the trade diplomat said that some of the speakers made a reference to the competitive distortions that were created as a result of the bailouts (of the troubled financial institutions by the developed countries).
For the most part,
the trade diplomat said, many developing countries took the floor to
explain how the financial crisis had affected them, and how they coped
with the crisis.
According to the trade
The OECD, BIS, FSB and the IMF made presentations on the financial crisis. They highlighted the type of measures that they were taking and how the countries have reacted to those measures. They also talked about the bailouts that were provided by some countries, said the trade diplomat.
(The title of the presentation by the IMF was "Cross-cutting Themes in Economies with Large Banking Systems"; the title of the presentation by the FSB was on "Priorities on Global Regulatory Reform"; the title of the presentation by the BIS was "An Assessment of Financial Sector Rescue Programmes"; and the title of the presentation by the OECD was on "The Government as Guarantor of Last Resort: Benefits, Costs and Premium Setting Issues.)
The diplomat pointed out that there were no conclusions drawn by the Members at the end of the dedicated discussion.
In its statement at
Referring to the session earlier in the day, India said that it has heard from the experts about the huge size of the rescue packages in some of the countries and how provision of blanket guarantee transferred risks from the banks to the Sovereign, thus, in effect changing the condition of competition in favour of the weaker banks.
On a separate track,
with effective regulation is probably the way to go as developing countries
do not have the deep pockets to resort to large rescue packages in case
of a crisis," said
A representative of
the Reserve Bank of India (RBI),
According to the RBI
representative, foreign banks play an important role in the Indian financial
sector. There are currently 34 foreign banks operating in
The RBI representative said that the crisis has shown that in countries where foreign banks had a large presence and had also acquired a large share at the expense of domestic banks in the boom years, when the home countries were afflicted, the foreign banks had tended to substantially curtail their operations in or withdraw from the host country.
The Indian experience
in this regard has been no exception, as the foreign banks had withdrawn
substantially from the credit markets in
"The events have demonstrated that when a banking group gets into difficulty, liquidity which was believed to be available to the whole group can be hoarded' by the parent or, in some cases, seized by local authorities intervening to protect their own depositors," the RBI official added.
This is often exacerbated after the collapse of the group as liquid assets are retained within the parent either by the management of that firm or the actions of local authorities, which may be contrary to group assurances or even cross-border agreements and international obligations.
Therefore, there is an increasing realisation that there should be a calibrated approach in opening up of the domestic banking system to foreign banks. This may also call for some kind of limitation on the size of operations of foreign banks in terms of market share at a macro level.
In contrast to the
global scenario, the RBI official said that
[In some of the comments
in business sections, both in some leading Indian media and in US media
like the New York Times, as well as in posts by specialists in some
of the blogosphere sites (moderated by financial experts), it has been
noted that in countries like India, the central bank, resisting pressures
from the banking trade, have stricter regulations on bank credits. In
[In the extensive discussions
taking place in the
There are a variety
of reasons for this, said the RBI official. In
Though the Indian banking system remained stable during the crisis, there was adverse impact on the Indian economy, the official noted.
After clocking an average of 9.4% during three successive years from 2005-06 to 2007-08, the growth rate of real GDP slowed down to 6.7% in 2008-09. Industrial production grew by 2.6% as compared to 7.4% in the previous year. In the half year ended March 2009, imports fell by 12.2% and exports fell by 20.0%. The trade deficit widened from $88.5 billion in 2007-08 to $119.1 billion in 2008-09. Net capital inflows at $9.1 billion (0.8% of GDP) were much lower in 2008-09 as compared with $108.0 billion (9.2% of GDP) during the previous year mainly due to net outflows under portfolio investment, banking capital and short-term trade credit.
The expansion of trade in services has included not only cross-border trade but also foreign direct investment. Banks, for example, typically establish branches or subsidiaries within a host country. As a result, the RBI official said, the GATS covers foreign direct investment as well as cross-border trade. IMF research on the current crisis shows that larger stocks of debt liabilities and of FDI (foreign direct investment) in the financial sector are associated with worse growth slowdowns.
Countries with larger stocks of debt liabilities or financial sector FDI fared worse in the current crisis, whereas those with larger stocks of non-financial FDI fared better.
Under GATS, it is difficult to realize fully the benefits of liberalization of trade in financial services without free cross-border movement of capital. The GATS therefore contains certain provisions aimed at ensuring that a country does not apply restrictions on payments and transfers that would undermine its commitments to market access and national treatment.
The new findings of the IMF on FDI in financial services sector therefore sits oddly with the requirements of GATS for liberalization of financial services, stressed the RBI official. +