TWN Info Service on WTO and Trade Issues (Sept08/14)
30 September 2008
Third World Network

Trade: Financial crisis calls into question GATS finance negotiations
Published in SUNS #6556 dated 26 September 2008

Geneva, 25 Sep (Martin Khor) -- With the current global financial crisis, this is not the time for countries to make commitments to open up their financial services under the WTO's General Agreement on Trade in Services (GATS), according to an expert speaking at the WTO's Public Forum.

The crisis clearly shows that the deregulation and liberalization of speculative financial products can lead to tremendous financial instability, said Ms. Myriam Van der Stichele, senior researcher at the Amsterdam-based Centre for Research on Multinational Companies and author of several studies on financial services liberalization.

She added that commitments on financial services should not be made at the Doha negotiations at the WTO, especially until the right regulations are in place and the role of the public sector is reviewed and strengthened.

Van der Stichele was speaking at a session on "Public Services and the GATS", organized by Educational International and Public Services International, which are global trade unions. The session was held at the WTO as part of its Public Forum 2008.

She said that the past week's events on global finance showed up the problems that can arise from financial liberalization. Yet the developed countries are still pressing developing countries in the Doha GATS negotiations to open up their financial markets.

She elaborated on six problems and challenges thrown up by the WTO's financial services negotiations.

First, financial services have a public function, and should not be treated only as a commercial sector. The financial crisis makes the public interest aspect of the financial sector clear, as the US government is now spending billions of dollars for bailouts of financial institutions, and has nationalized AIG.

The second problem is the failure of foreign banks (whose entry is facilitated by GATS liberalization) to provide universal access to financial services, said Van der Stichele. Citing studies, including by UNCTAD, she said foreign banks have been shown to fail to provide credit to SMEs and domestic industry in developing countries, and fail to serve the poor. They also undertake "cherry picking" (funding only profitable activities or sectors) and do not provide credit to farmers or pay for basic services.

Thirdly, the current GATS negotiations have been carried out without consideration of whether proper regulation is required or is in place. Van der Stichele said that up to now the requests put forward by WTO members that want to open up financial markets in developing countries do not link their requests to the state of existing regulations or regulatory capacity in the countries being asked to liberalise.

This is a big problem because the present financial crisis makes clear the need for adequate regulation to avoid instability.

Van der Stichele said international financial agencies have identified weaknesses or the absence of regulations. For example, the Financial Stability Forum has warned of the lack of liquidity management regulation at cross-border banks. Another organization warned of a lack of conglomerate-wide risk management mechanisms.

She concluded that at present, especially in light of the financial crisis, there is no appropriate context for making financial services commitments or for making requests for such commitments, since there is an absence of regulations and an absence of taking account of the state of regulation of the countries concerned.

Fourthly, the commitments under GATS can increase financial instability. The liberalization of speculative financial products have been shown to result in immense instability and crises. If commitments are made in the WTO, various GATS provisions prohibit or constrain the ability of the country to take action.

Van der Stichele said that even if countries are allowed by GATS to have prudential regulations, in fact, some developed countries have made "dangerous requests" to developing countries to eliminate existing prudential regulations during the GATS negotiations. For example, the EU had asked Korea to remove its regulation limiting banks' credit in speculation in real estate.

Fifthly, the proposals in the negotiations would weaken regulatory functions for social, ecological, development and public welfare. For example, it would be difficult to prohibit speculation in food commodities if full commitment had been made in trading in futures and options, said Van der Stichele.

Developed countries had also made requests to developing countries to remove their social lending policies. For example, the EU had asked Korea to remove mandatory lending by banks to SMEs, and the EU had raised questions to Malaysia on its lending quota requirement for low-cost housing, she said.

Sixthly, financial liberalization can also lead to the weakening of public services, said Van der Stichele. For example, the financial crisis resulting from liberalization has led to a massive bailout in the US, which will divert government funds from public services. Also, big international service providers help facilitate tax evasion, undermining the public budget for public services.

Van der Stichele concluded that the crisis is not a good time to make financial sector commitments. The GATS rules should also be reconsidered so that they do not undermine policy space of governments and democratic decision-making.

Svend Robinson from Public Services International, who chaired the panel, criticized the draft text on services issued in July by the Chair of the Doha services negotiations, Ambassador Fernando de Mateo of Mexico. The text called on countries to bind their present level of liberalisation and national treatment into GATS commitments and to increase market access in areas which are not so liberalized.

"The Mateo text is bad for public services," said Robinson. "Binding the current levels of liberalization into commitments and asking for a similar level of ambition for services as with NAMA and agriculture flies in the face of a development agenda.' It is not a development agenda but a corporate agenda and it goes against the public interest."

Robert Stumberg, director of the Harrison Institute for Public Law in Georgetown University, presented a detailed critique of the draft on disciplines for domestic regulations under the GATS negotiations.

He said an original draft of the domestic regulations explicitly contained the principle of the "necessity test", that domestic regulations must be no more burdensome than necessary to achieve domestic policy objectives. This explicit principle was removed two years ago. (It had been opposed by many developing countries).

But principles similar to the necessity test (which Stumberg called "cousins of the necessity test") exist in the present text.

He cited the procedural necessity test for simplicity (ensure that licensing procedures are as simple as possible), the pre-establishment principle (that measures shall be pre-established), the objectivity test (that measures shall be based on objective criteria), the relevance test (that measures shall be relevant to the supply of services to which they apply) and the transparency requirement (that laws and details of laws have to be notified, and these include license requirements, qualification requirements, technical standards, appeal and enforcement procedures, and public involvement).

Stumberg gave examples for each of these principles or "tests" of how regulations in the public interest would be called into question and adversely affected if disciplines containing these "tests" were adopted.

Examples he gave include the regulations at various stages of the licensing process (for example, a license for operating a dam or power plant); and licensing requirements for coastal development.

He said the draft regulations raised serious concerns about the constitutional balance, implying a tilting of the balance against the public interest. He said the negotiations and the regulations text should have respect for the constitutional balance.

Thus, he suggested that the disciplines he spoke about (on simplicity, pre-establishment, objectivity, relevance and transparency) should be removed or clarified.

He also proposed a return of the negotiations in the GATS working party on domestic regulation to the mission of the earlier working party on professional services. +