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TACD
Financial Services Policy Committee
Lori Wallach [email protected]
Public Citizen’s Global Trade Watch
www.tradewatch.org
Washington, D.C. June 4, 2012
From Actual Trade Agt. to an Expansive Int’l
Governance Regime Branded as “Free Trade”
The Bretton Woods Era (post-WWII to mid-1970s)
The Bretton Woods Era
GATT 1947
IMF
World Bank
• Trade in goods
• Gold standard
• Short-term trade floats
• Finance rebuilding of
Europe & Japan
• Tariffs and quotas
(early 1990s to
present day)
(early ‘90s to
present day)
Corporate Globalization Era II
WTO
NAFTA,
CAFTA,
(binding dispute
settlement)
“Free Trade”
Agreements
BITS
GATT
These pacts are not “Free Trade”
• Adam Smith
Adam Smith and David
Ricardo rolling in their
graves?
Free trade: an appealing
brand, but not what is
contained in the 900 pages of
non-tariff rules of the WTO or
U.S. and EU Free Trade
Agreements
“We are writing the
constitution for a single
global economy."
- Candid revelation from the
WTO’s 1st Director General
Renato Ruggerio, 1995
Not Mainly About “Trade”, but a System of
Enforceable Global Governance

WTO/FTAs REQUIRE: “Each Member shall ensure the
conformity of its laws, regulations and administrative
procedures with its obligations as provided in the annexed
Agreements.” –Art. XVI-4, Agt. Establishing the WTO
(Annexed agreement refers to 16 major “Uruguay Round” WTO
agts. Only a minority of them focus on trade per se. Went into
effect in 1995 with some phase ins for developing countries)

These rules are enforced by binding dispute resolution via
foreign tribunals with ruling enforced by trade indefinite
sanctions; No due process; No outside appeal
Attacks Against Domestic Laws at the
WTO Almost Always Succeed
All WTO
Disputes
United States United States
as Plaintiff
as Defendant
Plaintiff Win
156
32
58
Defendant
Win
16
6
6
Total % WTO
Cases Won
by Plaintiffs
90.7%
84.2%
90.6%
Free Trade Agts, Even More Comprehensive; Plus
2500 BITS Impose Same Investment Regime, Private
Enforcement
Everything in WTO, PLUS

Special rights and privileges for foreign investors PREESTABLISHMENT and elevate individual private investor to equal
status of nation-state: empower corporations to directly enforce
by challenging domestic health, environmental laws in foreign
tribunals

Expansive TRIPS-plus patent rights, data exclusivity, linkage

Expansive top-down service sector rules (financial deregulation,
‘market access’ rights that promote privatization, concentration,
forbid common policies)

Top-down comprehensive procurement rules
WTO, FTAs EU “Economic Partnership Agts” as
delivery mechanisms for package of “neoliberal”
policies… FTAs/EPA most extensive




Financial liberalization: no
capital controls, radical
deregulation, no bans on
risky products, services
New foreign investor rights:
no approvals of foreign
ownership, limits on
industrial policy/
performance requirements
Establish expansive IP
rights, raising drug prices
Privatize public
procurement sector – no
domestic preferences





Privatize, deregulate
services (health, energy,
water, education)
Food traded like any other
good, not a necessity of life
Cut, weaken or harmonize
to global norms domestic
regulatory standards
Commodify ‘commons’ –
establish tradable units of
natural resources, water,
human genes, biodiversity
STRONGLY ENFORCED
WTO’s Gen. Agreement on Trade in Services (GATS)
& FTA service sector chaps vs. Financial Regulation

5 interlocking WTO agreements: GATS, 2 GATS Annexes on
Financial Services, the 2nd and 5th Protocols to GATS (the 5th
Protocol established WTO Financial Services Agreement (FSA)) &
the Understanding on Commitments in Financial Services

Plus countries’ GATS schedules of financial services commitments –
Brazil limited, so targeted in Doha Round

Scope wide: covers govt policies of general application that ‘affect
services.” Even covers delegated authority: eg. credit rating
agencies;Only services provided exclusively by the govt, not on
market basis or also in private sector excluded from coverage

AGREEMENTS THAT REGULATE
REGULATION…
WTO GATS & FTA Financial Regulatory Limits
(FTAs, EPAs Extend Further than GATS)

WTO’s General Agreement on Trade in Services & FTA service
sector chapters cover every way a service may be delivered
- “Mode 1” is cross border trade in services
- “Mode 2” is consumption abroad: cannot stop capital flight if
banking Mode 2 commitments
- “Mode 3” is foreign investment: right to enter and operate under
deregulatory trade pact rules
- “Mode 4” is immigration policy: “movement of natural persons
across borders to deliver a service”

100 WTO members took financial service commitments. 40
developing countries that have Mode 3 commitments. 26
developed countries took unlimited Mode 1 commitments. 22 more
took significant Mode 1 commitments. Turkey, Sri Lanka, Nigeria,
Aruba, Netherland Antilles and 8 transitional economies now in EU
used “Understanding”
Problem #1: GATS/FTAs conflate
liberalization and deregulation…
“Market Access” (GATS Art XVI-2) simply
forbids countries from using 5 types of
non-discriminatory regulatory measures
in financial sectors they committed to
WTO liberalization:
“In sectors where market-access commitments are
undertaken, the measures which a Member shall not
maintain or adopt either on the basis of a regional
subdivision or on the basis of its entire territory, unless
otherwise specified in its Schedule, are defined as…”
GATS/FTAs conflate
liberalization & deregulation II
CANNOT BAN A SERVICE, FINANCIAL INSTRUMENT IN
COMMITTED SECTOR
“(a) limitations on the number of service suppliers whether in the
form of numerical quotas, monopolies, exclusive service suppliers
or the requirements of an economic needs test;”
-
Some fin services/products so dangerous, lacking in social utility, should be
banned. BUT 2004 WTO ruling In Internet Gambling case: regulatory ban is a
forbidden zero quota.
-
SEC-proposing ban on naked short sales/flash trades; German ban on spec.
short-selling: European Centre for Int’l Political Economy says Germany’s
ban is a GATS violation & not defensible under prudential defense b’ while
non-discriminatory it’s beyond other countries’ approach
-
WTO Secretariat 2/ 2010 paper: “an outright prohibition to provide a certain
financial service would be a trade measure subject to scheduling under the
GATS” IE. if a country’s deregulation-prone gov’t did not think to schedule
a ban during the ‘90s (as the U.S. did with respect to securities and
derivatives, but only for onions futures), imposing a ban now in a committed
sector would put the country in violation of WTO
GATS/FTAs conflate liberalization & deregulation III
NO LIMITS ON SIZE OR FIREWALLS
“(b) limitations on the total value of service transactions or assets in the
form of numerical quotas or the requirement of an economic needs test;
(c) limitations on the total number of service operations or on the total
quantity of service output expressed in terms of designated numerical
units in the form of quotas or the requirement of an economic needs test;
-
Some countries (eg Brazil) scheduled specific exceptions to allow
such measures. US committed to “reform” Glass-Steagall to make it
GATS compatible
-
GEITHNER via FOIA: April 1990 - under-30 year-old Treasury Dept
official named Timothy Geithner raised the possibility that GlassSteagall firewalls, state level regulations, and other prudential
measures could be challenged under the new global rules…
-
See, Markus Krajewski & Petros Mavroidis (was a lawyer at WTO
Secretariat) re. problems with these rules
-
See http://www.citizen.org/documents/memo-gats-conflict-with-banksize-limits-may-10-2011.pdf for more details and how to fix problem
GATS/FTAs conflate liberalization & deregulation IV
CANNOT REQUIRE COMMITTED SERVICE ONLY BE
OFFERED VIA SPECIFIC LEGAL FORMS
(e) measures which restrict or require specific types of legal entity or
joint venture through which a service supplier may supply a service;”
IF YOU LIBERALIZE UNDER GATS, CANNOT ALSO
LIMIT DEGREE OF FOREIGN CONTROL
“(f) limitations on the participation of foreign capital in terms of
maximum percentage limit on foreign shareholding or the total value
of individual or aggregate foreign investment.”
This last constraint is only “Market Access” rule that refer
to degree of “access” – all of the rest are limits on nondiscriminatory regulation
Problem #2: Capital Controls, other Common
Macroprudential Policy Tool Banned

When a country commits to allow cross-border
trade (Mode 1) in a specific sector, cannot
restrict/delay current & capital inflows/outflows
related to service When a country commits to
allow foreign direct investment (Mode 3), it
commits to allow capital inflows. Same in FTAs
but without even an exception for BOP crisis.

GATS Art. XVI fn 8: “If a Member undertakes a market-access
commitment in relation to the supply of a service through the mode of
supply referred to in subparagraph 2(a) of Article I [i.e. Mode 1] and if
the cross-border movement of capital is an essential part of the service
itself, that Member is thereby committed to allow such movement of capital.
If a Member undertakes a market-access commitment in relation to the
supply of a service through the mode of supply referred to in
subparagraph 2(c) of Article I [i.e. Mode 3], it is thereby committed to allow
Bans capital management techniques in
committed sectors…

When a country commits to allow foreign direct
investment (Mode 3), it commits to allow current
inflows and outflows related to that service.
(GATS Art. XI)
GATS Article XI: Payments and Transfers
“1. Except under the circumstances envisaged in Article XII, a Member shall not
apply restrictions on international transfers and payments for current transactions
relating to its specific commitments.
2. Nothing in this Agreement shall affect the rights and obligations of the members
of the International Monetary Fund under the Articles of Agreement of the Fund,
including the use of exchange actions which are in conformity with the Articles of
Agreement, provided that a Member shall not impose restrictions on any capital
transactions inconsistently with its specific commitments regarding such
transactions, except under Article XII or at the request of the Fund.”
Ban on capital management
techniques in committed sectors…

These limits on capital management policy apply to all
service sectors bound to GATS (and the FTAs have similar
language.) But when applied to fin servs commitments
have effect of severely limiting countries’ abilities to
manage their current and capital accounts

No “limitations” on these obligations can be scheduled

Only exception is in GATS Art. XXII: short term use in
balance of payments crisis with IMF ok. So, cannot have in
place to stop in flows of hot money

More at
http://www.citizen.org/documents/MemoonCapitalControls.
pdf
WTO Secretariat 2/2010 Report Affirms




“Although its main focus is on the liberalization of trade in
financial services, the GATS could require individual
Members to allow capital movements associated with a
broad range of – primarily – financial services, depending
on the level of specific commitments undertaken…”
“Cross-border trade in some other services, for example,
acceptance of deposits, lending, or trading in securities, is
inseparable from capital movements. Hence, liberalizing
such services transactions requires the liberalization of the
related capital flows to make the transactions effective…
“restrictions on transfers and payments for current
transactions must not be maintained where a Member has
made a commitment on financial services…
“Members undertake not to impose restrictions on any
capital transactions inconsistently with its specific
commitments regarding those transactions.”
Financial Transaction Tax as GATS
Violation? Economists Call for Changes
Unhappy example comes from EC staff before last G-20:
“the compatibility of such a levy with Article XI of the General
Agreement on Trade in Services (GATS), which provides that WTO
Members cannot apply any restrictions on international transfer
and payments for current transactions relating to their specific
commitments, would have to be further assessed. As the EU has
taken specific commitments relating to financial transactions,
including lending, deposits, securities and derivatives trading and
these commitments relate to transactions with third countries, a
currency transactions tax could constitute a breach of the EU's
GATS obligations.”
-
EC staff working document, “Innovative financing at a
global level,” SEC(2010) 409 final, 4/l/10
1/2011 Letter to Geithner, Clinton, USTR Kirk: eliminate limits
on capital management polices from trade agreements from
260 mainly pro-free trade economists, organized by Kevin
Gallagher
Problem #3: Limits on other forms of
domestic regulation (licensing, etc)



GATS Art VI-4: Domestic Regulations
-covers qualification requirements and
procedures, technical standards and licensing
requirements (Brazil took exception that EU wants
you to remove…)
- Tribunal decides if reg was “foreseeable”
and/or is “more burdensome than necessary to
ensure the quality of the# service”
Working Party on Domestic Regs = more
disciplines
Accountancy Disciplines from Arthur Anderson
Problem #4: Possible Exception for
“Prudential Measures” Is Ambiguous at Best
GATS Annex on Financial Services, Art. 2(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” [italics added].
Agreement it is unclear if/how it can be used. May be self-cancelling.
Weakest of 5 versions put forth in 1990s. And, even if it is operation
would not cover non-prudential matters, like policies directing finance
to development (X% of loans must be in Y sector), banning speculation
in food futures to counter price crisis, etc. More at
http://www.citizen.org/Page.aspx?pid=783
Not absence of a global regime of
financial regulation…
BUT, existence of a binding global
financial governance regime via WTO and
other ‘trade’ agts that explicitly constrains
governments’ domestic financial
regulatory space and includes strongly
enforced provisions that conflict with
‘commitments’ or recommendations at G20, UN Special Commission on Crisis,
UNCTAD related to global norms and
domestic reregulatory efforts
WTO Secretariat says…

Countries should have taken exceptions back in the 1990s (using
crystal ball about future “innovations” they wanted to regulate?)

Prudential “carve out”

Countries can negotiate compensation to remove sectors – GATS
Art. XXI

No challenges yet… yes, during era of deregulation, but now as
countries reregulate, threats starting.

Responses at
http://www.citizen.org/documents/That%27sAllTheyGot.pdf
UN Commission Crisis, UNCTAD on
WTO- Financial Regulation Conflict
Agreements that restrict a country’s ability to revise its
regulatory regime – including not only domestic prudential but,
crucially, capital account regulations – obviously have to be
altered, in light of what has been learned about deficiencies in
this crisis. In particular, there is concern that existing
agreements under the WTO’s Financial Services Agreement
might, were they enforced, impede countries from revising their
regulatory structures in ways that would promote growth, equity,
and stability.”
– Stiglitz Commission
UNCTAD Trade and Development Report 2-11 pages 100-103
goes through problems citing provisions.
World changed, but not “trade” agts…

Despite financial crises, current trend towards
reregulation, 1990s policies remain in place, with
enforcement

WTO Doha Round core element is more financial
deregulation, both more commitments and new
constraints on regulation. Post crisis, US and EU
continue to push for more financial dereg at WTO.
See www.tradewatch.org/DohaMoreDereg

TPP, EPAs
US, EU and their large financial firms
even oppose REVIEW of current rules

Full bore effort by WTO Secretariat and US and EU not to
even discuss possible WTO problems, review old rules…

Blocked Ecuador’s “Proposal for furthering work on Regulatory
Measures in Financial Services, for inclusion in the 2011
Ministerial Declaration”
" …In the context of the current international financial crisis, Ministers
instruct the Committee on Trade in Financial Services to continue to review
the WTO rules so as to promote and ensure the preservation of policy space
for macro-prudential regulations and the integrity and stability of the
financial system..."

South Africa, India, Brazil, China, Argentina, Barbados,
Dominican Republic, Bolivia, Cuba, Venezuela, urkey strongly
supported; US, EU, Canada and Australia oppose
It is a POLITICAL QUESTION
JUST ON FINANCIAL SECTOR…

Institutional turf wars or silos/lack of coordination/ ignorance) w/in nat’l
govs: e.g. regulators/Central Banks v. trade negotiators
(It’s a financial crisis, do you know where your trade negotiator is…?)

Policy incoherence:
- Domestic: Industrial policy in Brazil’s dom. strategy v. WTO position
- G-20 calls for conclusion of Doha Round & for financial reregulation

Threats of challenges against others while simultaneously reregulating
– chilling effect

Role of extremely powerful financial firms at WTO, in US and EU ‘trade’
policymaking vs. diffuse public interest
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