Financial crisis & reforms, FTA
negotiations on financial services
Myriam Vander Stichele
Senior Researcher
SOMO
Bangkok, 25 November 2010
TRADE IN SERVICES:
SOCIETAL CONSIDERATIONS
 Services sector has high value added: EU is very keen BUT when
allowing foreign investors taking over services sector (FTA rules: no
restriction on foreign ownership) = sectors with highest contribution
to economic growth and profits in foreign hands  profits go abroad
 Foreign service providers do not always behave as national ones,
and are not always more ‘efficient’ than national ones:
e.g. foreign banks: focus on services rich, most profitable but giving less credit and services to rural
areas, SMEs, farmers,etc. ; much more involved in foreign currency actitivities (loans, swaps);
capital transferred abroad in time of crisis; braindrain away from domestic banks; bailed out by
home authorities and thus competing unfairly with banks in host country that does not bail out. .
 The appropriate regulation, supervision and enforcement is needed
to ensure benefits to the country: not guaranteed in FTA negotiations
and rules (but sector specific requirements to benefit foreign
investors)
 No legal possibility under FTA for citizens to complain about negative
impacts of foreign services and services’ investors
EU FTAS in TRADE IN SERVICES:
ECONOMIC & POLICY CONSIDERATIONS
 EU FTAs have to respect GATS Art. V : “substantial coverage”: EU requires
85% of services sectors to be covered (65% for LLDCs)
 FTA rules similar (with some differences) to GATS rules that apply to
committed services in the schedules (positive list):
= limit how governments can regulate and how governments have to protect
foreign service companies
> No tarifs in trade in services: regulations are considered barriers
 FTA on trade in services: EU combines mode 3 with investment liberalisation
= GATS rules apply on how foreign investment in agriculture and industrial
sectors can (not) regulated
 FTAs have been lobbied for by big service companies and EU trade policy is
in focus on market access for EU big multinationals = FTA rules and
liberalisation are designed to meet the needs of foreign service companies
not the population
FINANCIAL SERVICES :
MAJOR INTEREST OF EU
 Very profitable sector (main sector for UK) before the
crisis; in emerging countries after the crisis
= strong pressure from EU negotiators to liberalise
 Very risky sector all of which is covered in FTAs:
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■
■
■
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Basic financial services
Credit rating agencies
Investment banking: issuing of shares
Trading in (OTC) derivatives
Asset management (Hedge funds, pension funds, etc.)
Financial innovations are difficult to supervise but FTAs have
clause to allow new financial services under some conditions
 To be linked with FTA rule that limits restrictions on
capital movements
FTA negotiations on financial
services based wrong assumptions
 Rules based on “more regulation as you go along with
liberalisation”, “no need for regulation before you
liberalise”
 Light touch regulation integrated in the GATS financial
services
 Supported rapid expansion of risky financial products and
financial operators without sufficient regulation and
supervision, without limiting their negative impacts =
contributed to the financial crisis;
 crisis showed clearly: regulation needed before
liberalisation EU FTA rules are wrong basis for
negotiations
FTA RULES ARE
DEREGULATING
■
Permanent commitments: very difficult and costly to stop these
activities and withdraw from commitments (No pull out without requested
compensation) e.g. commitment on derivatives trading = difficult to ban
speculative trading on food commodity derivatives
■
Market Access rules : “measures which a Member shall not maintain or
adopt” ! in times of crisis, except if goverments write exemptions in list of
committed financial services:
 limit the total number of financial service suppliers in covered
sectors;
 limit the total value of the services transactions or assets (e.g.
limiting lending by hedge funds or banks; position limits in derivative
trading);
 No limit on the total number or total quantity of financial service
operations;
 Economic needs test
■
National treatment: no special support for domestic financial industry;
but ‘no less favourable’ treatment for ‘bailed out’ banks
FTA RULES CONTRARY TO FINANCIAL
REFORMS
 ‘prudential carve out’:
■ allowing prudential regulation for the stability of the financial system
and protect savers but should not be a means to avoid commitments
(respecting the rules: but many financial reforms are against GATS
rules = use of prudential carve out shows bad model of GATS)
■ still very unclear if all financial reforms can be protected by this
prudential regulation clause;
■ Only protects financial stability: cannot be used to stop speculation
on food
 ‘Transparency rules’: EU wants to include ‘interested’ persons
and companies can comment before a new legislation is
decided
 EU wants FTA signing countries to agree to apply all standards
by international bodies (e.g. G20, Basel Committee) which are
very undemocratic.
 Have been resisted by Caribbean countries in EPAs
EU FTA RULES ON CAPITAL MOVEMENTS
 Prohibition of restricting on ALL capital movements (EU-Korea
FTA)
 Restrictions possible only with lot of conditions:e.g.
■ Only in exception circumstances and ‘serious difficulties’ of
exchange rate and monetary policies;
■ Only stricly necessary measures;
■ Measures should not be longer than 6 months;
= Lisbon Treaty : forbids restrictions on capital movements with third
countries, except in exceptional circumstances with special
procedures
 Capital control measures that limit swaps in foreign currency (S
Korea) = against commitment to liberalise swaps/derivative
trading
 Taxes imposed to limit capital are considered to be restrictions
on capital movements : ?
Why financial services should not be
further negotiated in the FTAs
 International, EU and financial regulation and supervision
not ready = getting risky financial products and operators
in ASEAN  speculators are driving up Asian currencies
 there is no level playing field in the financial sector after
the crisis because of bail outs
 trade negotiators continue to ignore how to deal with the
riskiness of the financial sector and lessons of the crisis
 many financial conglomerates are still engaged in very
risky businesses whose risks could spill over to (new)
host countries
How to deal with the FTAs and
trade in financial services
 no financials services negotiations in WTO and
FTAs
 withdraw commitments without compensation
 exclude new disciplines on domestic regulation from
financial services sector
 more flexibility on control of capital movements
 Full discussions in all financial reform fora, including
how to trade and invest in financial services