GATS and Financial Services: Current State of Play and the Doha Agenda Dr Apostolos Gkoutzinis, Lecturer in Financial Law, SOAS, University of London

Summary Introduction The GATS Framework of Financial Services Negotiations The Current State of Play regarding financial services commitments (1997 Agreement) The Doha Agenda and Current Developments

Financial Liberalization in Action Geneva, November 2004: WTO Members express anxiety over China’s decision to limit foreign ownership of Chinese banks to 25% of equity capital Rome, 2005: The Bank of Italy openly discourages the otherwise inevitable takeover of Italy’s 9 th largest bank by the Dutch ABN Amro. According to the Italian press, the government and the BoI agree that a total foreign participation of 15% is more than enough for the Italian banking system

FDI in the Financial Sector Developed countries still the largest exporters of financial services Developing countries still predominantly “host countries” to foreign financial institutions In 29 developing economies, foreign banks account for more than 70% of assets Foreign banks account for: 46% of assets in the UK 20% of assets in the US 8.5% of assets in Spain 6.7% of assets in Japan 5.7% of assets in Italy 4.3% of assets in Germany How Important is the Regulatory Treatment?

Financial Liberalization: Tracks of Legal Reform Unilateral Liberalization (genuine policy initiative or under external pressure conditionality eg South Korea) Bilateral Liberalization on the basis of bilateral investment or trade agreement Multilateral regional: the Internal Market pillar of the EU, NAFTA Multilateral with global reach: GATS in the context of WTO

The Elements of Legal Reform Removal of direct and discriminatory barriers to market access and national treatment (EC Treaty, NAFTA, GATS) Removal of indirect and collateral trade restrictions by way of regulatory reform such as harmonization, mutual recognition, requirements of proportionality, transparency etc (EU and to a much lesser extent GATS- “prudential carve-out”)

The Complexity of Financial Services Negotiations Amalgamation of Foreign Direct Investment, Capital Account Liberalization and Immigration (different barriers, liberalization strategies, economic considerations and political sensitivities) The collateral trade effects of financial and monetary regulatory standards (eg Glass- Steagall and interstate branching in the US)

GATS and Financial Services Multilateral framework of principles and rules Specific national commitments for market access and national treatment Regulatory autonomy unimpaired

Inherent and Structural Limitations in the GATS Process Trade in services, a poorly understood concept, was not included in international trade and policy debate and negotiations until after the early 1980s Barriers to financial services trade more effective and diffused than tariffs and quotas Collateral trade effects of innocent regulations Substantive negotiations involved one sector at a time, preventing cross-sectoral trade-offs Lack of a single external voice and tension among trade ministries and finance ministries/central banks/regulators “positive list” approach in scheduling national commitments (complexity and lack of technical capacity) Great divide among ‘developed’ and ‘developing’ countries’ trade interests and comparative advantage

The Current State of Play 148 WTO members Fifth Protocol to the GATS: Financial Services Agreement (December 1997) 140 WTO members with commitments of MFN in financial services 108 WTO members with commitments of national treatment and market access in financial services Mode 2: good progress Mode 3: far deeper liberalization than mode 1 (which remains one of the Doha challenges)

“Understanding on Commitments in Financial Services” Endorsed by 37 WTO members (mostly developed countries) A smaller group of OECD countries wanted more Full liberalization for mode 2 Foreign financial institutions can provide services to public sector entities Full market access for mode 3 (including participation to payment and clearing systems, organized securities markets, self-regulatory organizations) “endeavor” to remove or limit effects of non-discriminatory measures with collateral trade effects

Market Access and National Treatment (in general) on average high and medium income countries scheduled the most advanced commitments Commitments analogous to financial sector development Emerging market economies: With few exceptions (eg Malaysia and Mexico), limited “fresh” liberalization Either scheduled existing practices (Argentina, Brazil, Chile, India, Indonesia, Thailand) or less than what they actually practice (Philippines: 51% foreign participation against 60% actual) Extensive grand-fathering provisions

Remaining Barriers “positive list” approach ‘economic needs’ test: eg USA, Portugal, Egypt, Malaysia, Singapore, Sri Lanka, Chile, India Moratorium on new charters: Brazil, Malaysia Limits on foreign investment in domestic institutions: Ghana, India, Korea, Malaysia, China Limits on branching: a large number of countries Limits on permissible activities of foreign banks: eg Vietnam, China Higher regulatory requirements and other disadvantages for foreign branches: large number of countries Transparency Deficit and Tax Disadvantages: large number of countries

Broad Assessment Ongoing process of negotiations resulting in legally binding commitments Elimination of a substantial number of direct barriers Broad participation which keeps expanding BUT Many countries remain unbound Little progress in mode 1 Few instances of going beyond the status quo ‘positive list’

Remaining issues Binding more services and modes of supply Eliminating existing limitations and exemptions Clarification of difference between modes 1 and 2, with special regard to e-banking Commitments in mode 1 can be bolder Vast scope for improvement in developing countries Simplify the institutional framework Adopt a ‘negative list’ Eliminate gaps between commitments and actual practices Clarify the prudential carve-out Adopt a standstill provision Automatic incorporation of unilateral commitments (eg South Korea) Relationship between “regulatory initiatives” (eg Basel) with “liberalization initiatives” (WTO) : Some of these items are already in the Doha agenda (eg improvements on the scope and scale of commitments)

DOHA: A Brief Introduction In-built “GATS obligation” to resume negotiations in 2000 Doha (Qatar), November 2001: Ministerial Declaration incorporates services in the new round of trade negotiations Several deadlines missed Hong Kong, China, December 2005

DOHA and Financial Services Progress sporadic and disappointing “Offers” limited in number and poor in quality A mere 11 WTO members tabled initial or revised offers Turkey, Chile, EC, Liechtenstein, USA, Japan, Norway, Canada, Australia, New Zealand and Iceland Apparent that these jurisdictions are already coming from strong positions and are close to exhausting the room for further GATS-related improvements The crucial developing and emerging market countries remain silent and wait…

The EU 2005 Revised Offer: An Interesting Approach Requests for financial services commitments to 85 WTO members Requests tiered according to level of financial development Requests in sectors that involve little or no capital movements For financially developed countries, requests for endorsing the “Understanding” For poorer countries, very modest requests For LDCs, two out of five sectors (telecommunications, construction, financial services, transport and environmental services)

Concluding remarks Progress has been made but political will for further liberalization will be tested Trade effects of financial regulation: the elephant in the room Non-WTO avenues of liberalization on the rise: US/EU regulatory dialogue, bilateral treaties, regional arrangements