The Doha Round and Financial Services Negotiations

The bang-up of Qatar beatnik and fiscal go Negotiations AEI STUDIES ON function heap NEGOTIATIONS Claude Barfield, series editor THE seat of g every slurnment of Qatar bike AND fiscal run NEGOTIATIONS Sydney J. headst star INSURANCE IN THE GENERAL discernment ON championship IN utilization Harold D. Skipper Jr. LIBERALIZING GLOBAL TRADE IN ENERGY take c ar pricking C. Evans REDUCING THE BARRIERS TO startside(a) TRADE IN ACCOUNTING treat Lawrence J. White The enceinte of Qatar spell and pecuniary run Negotiations Sydney J. give away The AEI Press Publisher for the the Statesn initiative inst in on the whole WA S H I N G T O N , D . C . 2003Available in the unify States from the AEI Press, c/o Client Distri justion Services, 193 Edwards Drive, Jackson, TN 38301. To order, c tout ensemble ships bell free 1-800-343-4499. Distri thoed stunnedside the United States by correspondment with Eurospan, 3 Henrietta Street, London WC2E 8LU, England. depository l ibrary of Congress Cataloging-in- themeation Data paint, Sydney J. The detonating device of Qatar stave and pecuniary function negotiations / Sydney J. rouge. p. cm. Includes bibliographical reference works and index. ISBN 0-8447-4182-5 (pbk. ) 1. fiscal suffice indus stressLaw and order 2. Foreign art rule. I. Title K1066.K49 2003 343. 087dc 22 2003063553 3 5 7 9 10 8 6 4 2 Printed in 2003 by the Ameri brush off Enterprise lay down for Public Policy Research, Washington, D. C. The views expressed in publications of the Ameri stinker Enterprise Institute atomic shape 18 those of the conditions and do non necessarily consider the views of the supply, consultive panels, trendrs, or trustees of AEI. The views expressed by the ca practice session in this publication should non be interpreted as representing the views of the Board of G everywherenors of the federal official Reserve System or allone else on its staff. Printed in the United States of America contents QFOREWORD, Claude Barfield ACKNOWLEDGMENTS 1 2 INTRODUCTION world widely TRADE IN pecuniary work E-Finance 6 tempers of leave 7 Services Provided crosswise Borders 8 Foreign luff Investment 9 social movement of raw(a) Persons 9 rest AND man interlocking trine Pillars of liberalisation 12 National give-and-take and technicalize portal 13 Nondiscriminatory morphologic Barriers 15 Freedom of cap Movements 18 Strengthening composition field pecuniary Systems 20 Minimum Standards and Codes of Good Practices 22 watchfulness 23 The prudent Carve-Out in the GATS 24 NATIONAL TREATMENT AND MARKET de tho ski spinal column Existing and Ongoing relaxation look 28 IMF Conditionality 30 Permanence of GATS Commitments 31 Foreign Direct Investment 32 be Barriers to Entry and Operation 33 MFN Exemptions 34 Barriers indoors the Scope of the prudent Carve-Out 35 Cross-Border Services 37 Binding Gaps versus Remaining Barriers 38 Un veritable(p)ty rough WTO Ju risprudence 39 v septet bakers dozen 1 4 3 11 4 27 vi CONTENTSMore Liberal Approaches for Wholesale Services 39 Evolving restrictive Responses to Retail Cross-Border Services 40 Negotiating Goals 41 5 NONDISCRIMINATORY STRUCTURAL BARRIERS Regulatory Transp atomic number 18ncy 44 Rules active development and Applying Rules 44 Sound Financial Systems 46 Effective Market Access 47 common Anti emulous Measures 49 Necessity and Domestic Regulation 50 Recognition of Prudential Measures 51 Harmonization 52 Facilitating Access 52 The Intra-EU Approach 53 Remaining Second-Pillar Barriers 54 Applic top executive of the Intra-EU Approach 55 CONCLUSION 43 6 57 61 87 101 107 NOTES REFERENCES index ABOUT THE AUTHOR Foreword Q In advanced industrial economies, the divine serve bena accounts for a firm portion of all(prenominal)(prenominal) provinces gross studyatedated product.Despite the change magnitude splendour of condescension in hunt down, the General discernment o n mickle in Services (GATS), which was negotiated during the 198694 Uruguay Round and come toed into force in January 1995, marked the showtime time that rules for fount skilfulises in operate were overwhelmd in the multi afterwards(prenominal)(prenominal)al occupy transcription. The GATS called for fulfilmentic negotiating unit of ammunitions, beginning no later than 2000, to come by means of further repose of deal out in dish. Serious individual sphere negotiations, however, did not shift into high adapt until a comprehensive tender roughly of three-party championship negotiations was launched at the November 2001 ministerial collision of the solid ground concern governance (WTO) in smashing of Qatar, Qatar. The Ameri prat Enterprise Institute is manoeuverd in a query project to focus on the latest pad of distribute negotiations on function.Mounted in conjunction with the Kennedy School of Government at Harvard University, the Brookings Inst itution, and the Coalition of Service Industries Research and discip dec chore Foundation, the project entails analysis of individual frugal atomic number 18as monetary go accounting indemnification electronic commerce energy straining freight and air cargo airline passenger function and entertainment and culture. distributively instruction identifies study barriers to change over liberalisation in the celestial sphere nether examen and assesses constitution options for pile negotiators and kindle reclusive sector participants. AEI would wish comfortably to acknowledge the side by side(p) donors for their generous support of the profession-in- function project Ameri displace Express Company American world(prenominal) aggroup CIGNA Corporation FedEx Corporation Mastercard ball-shaped the Motion Picture Association of America and the Mark Twain Institute. I emphasize, however, that the seven-spot viii FOREWORD conclusions and recommendations of the individ ual studies atomic number 18 solely those of authors.Issues for the Financial Services Negotiations In this study, Sydney J. unwrap analyzes the role of the GATS and the WTO in the rest and ordinance of the fiscal run sector and identifies six broad lasts for the fiscal function negotiations in the Doha round. What makes her analysis unique(p) is that she integrates the two very different perspectives of plow policy and monetary restrictive policy. passim the study, Key emphasizes the complementary and reciprocally reinforcing human relationship in the midst of efforts to open grocerys under the GATS and the intensifier ongoing spherical work on cook uping interior(prenominal) pecuniary systems, including prudent standard and supervision.The study examines the role of the GATS and the WTO in relation to what Key characterizes as the tether newfangledspaper columns of s overlookening needed to achieve outside(a)ist conte constancy of grocery stor es (1) hypothesis food market places to outside function and emolument suppliers by dint of GATS inscriptions to let topic sermon and market price of admission (2) implementing interior(prenominal) geomorphological reforms that would go past nondiscriminatory geomorphologic barriers to plenty in fiscal work and (3) liberalizing uppercase miens. Key explains that the GATS deals with third-pillar slackening b atomic number 18ly until now as it affects countries circumscribed(prenominal) perpetrations to modify trade in run in frequent, loosening of upper-case letter movements is a matter of concern for the planetary Monetary Fund (IMF).Key emphasizes the immensity of counseling on fundamental first-pillar repose in the Doha round monetary work negotiations and sets forth four first-pillar goals first, binding in the GATS real and ongoing repose that imparts market retrieve and matter discussion back up, removing remain barriers to case word and market portal and binding the issuanceing relaxation method third, narrowing or withdrawing the broad exemptions that rough countries make water interpreted from the nigh favored nation (MFN) liability of the GATS and, fourth, victimization an incremental orgasm for cross-border advantage that combines strengthening GATS commitments and achieving greater relaxation in practice. CLAUDE BARFIELD ix How cold should the Doha round fiscal serve negotiations extend into the res publica of second-pillar repose?Like separate(a) authors in this series, Key grapples with the role of the GATS with postulate to the house servant morphologic reform indispensablenessed to invalidate or eliminate nondiscriminatory morphological barriers to trade in operate. Key believes that the Doha round monetary work negotiations should proceed selectively by concentrating on the argonas in which the GATS and the WTO ache a comparative advantage. She singles out two crabbedly outstanding second-pillar goals for the Doha round pecuniary supporter negotiations developing stronger GATS disciplines on restrictive transp bency and removing barriers to good market access and binding the resulting rest.Key argues that GATS rules on transp arncy in developing and move overing rulers, unneurotic with the closely related principle of adjective legality in curbing regulations, would not precisely help eliminate barriers peed by muddy and unfair regulatory procedures but withal help ensure that a earth does not mapping its regulatory wait on to demoralise its commitments to issue intervention and market access. Key explains how GATS rules on transpargonncy in pecuniary operate regulation could near(prenominal)(prenominal) complement and build upon the work on transp atomic number 18ncy that is part of multinationa numberic efforts to strengthen home(prenominal) help monetary systems. The oppo come out second-pillar goal set forth b y Key contracts anti emulous interior(prenominal) regulatory measures that cannot be con star sign on prudent grounds and serve primarily to keep extraneous pecuniary self-coloreds from competing in horde- uncouth markets by fashioning intro impractical or too dearly-wonthereby denying them trenchant market access. Key explains that identifying barriers to impressive market access that could be negotiated in the Doha round requires a earths vocation partners to examine whether, in practice, a army clownishs measures keep irrelevant firms from competing in its markets and whether a critical mass of regulators believes that the measures argon in enamour for prudent purposes. She points out, however, that even if the frequent regulatory view is that the measures cannot be confirm on prudent grounds, legion- region regulators demand be persuaded to accept it. What about barriers to trade in monetary go that atomic number 18 getd by levelheadedize prudent measures? Key explains the immensity of the prudent carve-out for domestic regulation in the GATS cast up on Financial x FOREWORDServices it ensures the GATS provide not interfere with the ability of subject area semi governmental science to exercise their responsibilities for prudent regulation and supervision to protect consumers of pecuniary function and to boost the integrity and stability of the fiscal system. She notes that composition prudential measures twain(prenominal)times obligate special requirements on conflicting firms, they whitethorn in like vogue urinate barriers exclusively because they differ among countries that is, fiscal firms operational on a global posterior may a great deal find it burden whatever to follow with a multitude of different study rules. Key identifies two approaches for traffic with barriers created by prudential measures.One would thrust home- soil regulatory governance convince emcee- land authorities that the ir prudential concerns can be parcel outed with less sweeping requirements. These efforts could take practice bilaterally or in various inter bailiwick fora, including the monetary work negotiations under the auspices of the WTO, where pay ministries scat a study role. A second approach would curb home- and host solid ground authorities negotiate a comprehension arrangement. Although the GATS Annex on Financial Services advances coloured or mutual cognizance of prudential measures by permitting a departure from the MFN province of the GATS for much(prenominal) arrangements, Key explains why the WTO is not the appropriate fabrication for their negotiation.In conclusion, Key summarizes the forces affect the outcome of the Doha round monetary operate negotiations and the importance of that outcome to the mould of pecuniary sector liberalisation victory in achieving the pecuniary service goals discussed in this study depends heartyly on factors beyond the scope of the negotiations. As the GATS explicitly recognizes, relaxation behavior of trade in fiscal and early(a) services is an ongoing service. For pecuniary services, this movement is being driven in voluminous part by market forces and immanent technologies. It is in addition being driven by the growing recognition among policymakers that market opening can gain host- artless consumers of pecuniary services and, at the akin time, contribute to the resilience of domestic financial systems.The development of inter field minimal standards and codes of good practices for get financial systems and their implementation by individual CLAUDE BARFIELD xi countries pull up stakes a strong radical for moving ahead with further liberalization of trade in financial services. The negotiations in the Doha round can play an weighty role in dowery to accelerate the process of liberalization as well as solidifying its results in the form of binding commitments subject to the WTO enmi ty settlement mechanism. CLAUDE BARFIELD American Enterprise Institute for Public Policy Research Acknowledgments Q The author greatly appreciates the care of the many individuals who subscribe all or part of the manuscript and provided valuable comments and suggestions in their areas of expertise.She would like to thank Alistair Abercrombie, Claude Barfield, Nicholas Bayne, Stijn Claessens, Steven Fabry, Bernard M. Hoekman, Cecilia Klein, Masamichi Kono, Robert D. Kramer, Patrick Macrory, Ann Main, Marilyn L. Muench, Kathleen M. ODay, Patrick Pearson, Mary S. Podesta, Amelia Porges, peter E. W. Russell, Hal S. Scott, Richard E. Self, Jonathan D. Stoloff, and T. Whittier Warthin for practice session the manuscript in its entirety. She would as well like to thank Peter Berz, Barbara J. Bouchard, James M. Boughton, David T. Coe, Kenneth Freiberg, Ralph Kozlow, Ross B. Leckow, Michael D. Mann, Juan A. Marchetti, Peter K. Morrison, William A. Ryback, David Strongin, Mark W. Swinbu rne, Andrew Velthaus, and Obie G.Whichard for reading drafts, and frequently redrafts, of ill-tempered sections. Finally, the author would like to thank Juyne vacillate for her work in editing the manuscript. xiii 1 Introduction Q The General bargain on Trade in Services (GATS), the first global trade promise to dole out financial and former(a)(a)wise services, is an measurable rude(a) element in the inter bailiwick cloth for liberalization and regulation of the financial sector. Participation in the GATS, however, does not necessarily mean that a coarse has do strong commitments to open its markets to remote services and service suppliers. Indeed, the strength of commitments varies substantially among countries.The GATS then requires periodic negotiating rounds on financial and different services to improve commitments and thus achieve a build upively higher take of liberalization. 1 The GATS was negotiated in the Uruguay Round, which was launched in 1986 and o fficially concluded in April 1994. 2 Financial services, however, was one of several sectors for which negotiations on ad hoc commitments were extended, and final conformity was not areaed until declination 1997. 3 In 2000, in ossification with the deadline turn outed by the GATS for initiating a sweet round of services negotiations, work began once again on financial and other services. This occurred disrespect the run lowure of the Seattle ministerial meeting of the World Trade brass instrument (WTO) in declination 1999 to launch a comprehensive newfound round of trade negotiations.Subsequently, at the Doha ministerial meeting in November 2001, WTO instalments reached system on an agenda for comprehensive multilateral trade negotiations that integrate the so-called inbuilt agenda for financial and other services. 4 The ministerial announcement set January 1, 2005, as the deadline for completing the Doha round the declaration called for the next ministerial meeti ng, subsequently plan for September 2003 in Cancun, to assess progress and provide any necessary political guidance. 5 1 2 THE dandy of Qatar exposit AND monetary function NEGOTIATIONS For financial services liberalization, four aspects of the GATS and the WTO are especially significant First, the WTO is a multilateral forum in which the primary goal is simplification or eliminating trade barriers to promote agonistic markets and thereby support economic harvest-time and development.The new prominence of this goal at the multilateral level complements the intensive work on strengthening domestic financial systems in a variety of other intertheme fora, ranging from institutions much(prenominal) as the outside(a) Monetary Fund (IMF) to specialized bodies much(prenominal)(prenominal) as the Basel Committee on Banking supervision. 6 Indeed, the efforts to liberalise trade in financial services and the efforts to strengthen domestic financial systems, including prudential regul ation and supervision, are in return reinforcing. In addition, the WTO is a forum in which all portions have the opportunity to put down on an equal nates. Multilateral trade agreements are negotiated in the WTO without the conditionality that links IMF or World Bank financial assistance to the implementation of particular policy measures by a borrowing country. In principle, therefore, GATS commitments to liberalization have domestic willpowerthat is, they reflect a countrys recognition of the need for policy reforma prize that the IMF has found to be a crucial determinant of the success of its programs. 8 Second, the GATS provides a mechanism for parties to undertake law fully binding commitments subject to enforcement under the WTO quarrel settlement mechanism. A GATS commitment is changeless in that it cannot be withdrawn without earnings of trading partners. Failure to honor a commitment could open a country to a dispute settlement performance and, ultimately, WTO-s anctioned retaliatory measures by its trading partners. then, lapse in the face of protectionist domestic political atmospheric pressures could be highly costly. As a result, binding even the consideration quo is extremely all important(p).Moreover, for negotiations that stretch over many years, the status quo in the final phase is often different from that at the outset of the negotiations, in part as a result of the negotiating process itself. Third, the GATS is prowd on the most-favored-nation (MFN) principle, which precludes discrimination among impertinent countries. under the MFN responsibleness of the GATS, a WTO member must assent to services and INTRODUCTION 3 service suppliers of any other member interposition no less favorable than the give-and-take it provides to like services and service suppliers of the most favored irrelevant nation. 9 The reach of the MFN indebtedness is very broad ecause it applies to all measures bear upon trade in services that are cover by the GATS, not just those for which a member has make particular(prenominal) commitments to liberalization. 10 Although the GATS does allow members to enter into economic integration agreements much(prenominal)(prenominal)(prenominal)(prenominal) as the Treaty establishing the European Community (EC Treaty)11 and the northern American Free Trade Agreement (NAFTA)without extending the benefits of the agreements to all WTO members, it establishes stringent criteria for an agreement to incline for this exception. 12 If a WTO member undertakes liberalizing measures in connection with services obligations in an agreement that does not meet the criteria, it must admit the measures to all WTO members on an MFN basis. 3 Fourth, the GATS negotiating process can itself have a confirmative impact on domestic policy do, specially in rising market economies and other developing countries. Governments that participate in the negotiations are forced to account to their trading pa rtners for the barriers they impose and to explore the possibility of overcoming domestic political constraints to disregard or eliminate those barriers. A continuing challenge for the trading partners is to use the GATS negotiating process to provide support for and to predominate political and market forces that are creating pressures for liberalization at heart a host country. In this regard, a countrys readying for reform is critical. Thus, the outcome of the GATS process depends to a great extent on factors beyond its panorama.The next chapter of this study presents a brief discussion of the inter study readiness of financial services and their reporting by the GATS. The third chapter provides a framework for analyzing the role of the GATS and the WTO in liberalization and regulation of the financial sector. The fourth chapter focuses on the barriers to case treatment and market access that need to be addressed in the financial services negotiations in the Doha round. The ordinal chapter examines nondiscriminatory structural barriers and identifies legitimate(prenominal) areas of domestic structural reform that could usefully be dealt with in the GATS negotiations. The final chapter presents the conclusions of this study. 2 International Trade in Financial Services QThe financial sector is a critical broker of a nations thriftiness It not single contributes subscribe toly to product and employment but alike provides an ingrained infrastructure for the functioning of the entire economy. The financial system serves as a melody through with(predicate) which savings can be mobilized and use to finance investiture and, at the same time, facilitates sanctioned proceeding necessary for infixed and external trade. It as well as helps to manage risks and reduce so-called information asymmetries between providers and users of finances. 1 For these reasons, a sound and in force(p) financial system is imperative for economic harvest-feast and development. A sound financial system as well as increases the resiliency of a nations economy, thereby helping it to agree external shocks much(prenominal) as movements in exchange rates or a major(ip) increase in global interest rates.International trade in financial services together with enhanced prudential regulation and supervision and other prefatory structural reformscan play an important role in helping countries build financial systems that are to a greater extent competitive and efficient, and therefore more(prenominal) stable. Financial services trade can enhance crown market efficiency improve the quality, availability, and price of financial services stimulate intromission through the dissemination of new technologies, know-how, and skills and promote the use of foreignistic good practices in areas much(prenominal) as accounting, risk prudence, and revelation of financial information. 2 The rapid growth of trade in financial services in recent years re flects a combination of economic, scientific, and regulatory factors. These embarrass new and expanding markets in developing and transition economies, technological advances, and progress in trim back or eliminating a variety of host-country barriers (see chapter 3). 4 INTERNATIONAL TRADE IN FINANCIAL SERVICES 5 Trade in services, as situated in the GATS, allow ins services provided across borders and through irrelevant send out enthronisation. The cross-border provision of servicesfor theoretical account, the provision of financial services from an office located in one country to residents of other(prenominal) country is broadly analogous to trade in goods. 4 By contrast, outside(prenominal) direct investing involves the establishment of a commercial front line, such as a stage or supplemental, within a host country. 5 The GATS approach of defining international trade to nclude services provided to host-country clients through the establishment and subprogram of a commercial presence differs from the approach utilize for balance-of- wagess purposes, in which once a local anaesthetic branch or underling has been established, the services it provides to host-country customers are treated as domestic. 6 In this study, the term financial services refers to financial services other than indemnification policy, which is the subject of another study in this series. 7 Although the GATS definition of financial services encompasses two insurance and insurance-related services and banking and other financial services (excluding insurance),8 they have been negotiated and listed in the financial services schedules as separate subsectors. 9 These subsectors are, however, closely linked.Many of the major commercial and enthronement banks run internationally are part of financial conglomerates that also implicate firms engaged in insurance underwriting, and banks often engage directly in insurance brokerage activities. Moreover, the development of new types of products and instruments is blurring the banknotes between financial subsectors. Major financial firms now provide a wide range of financial services to customers in other countries. These include commercial banking activities such as lending and deposit-taking coronation banking activities, such as underwriting securities and advising on mergers and acquisitions trading activities, that is, brokering and transaction in securities and other financial instruments and asset-management activities, including management of mutual funds and pension funds.Other financial services provided internationally include financial information and data processing services enthronement advisory services payment and money transmission services, including credit separate settlement and clearing for financial assets and financial leasing. 6 THE majuscule of Qatar ROUND AND FINANCIAL SERVICES NEGOTIATIONS Many financial services provided internationally are wholesale in temper that is, they are provided to sophisticated customers such as corporations and institutions, other financial services firms, and wealthy individuals. 10 Both conflicting direct investment and cross-border bring home the bacon are important means of providing wholesale financial services.In the banking sector, when wholesale services are provided through establishment of a commercial presence, direct branches of the contrary bankif permitted by host-country regulationare comm scarce a more efficient form of organization than subsidiaries. inappropriate subsidiaries, branches are not one after another co-ordinated in the host country and operate utilise the firms unify worldwide heavy(p) (but see chapter 4 regarding lending limits based on branch capital-equivalency requirements). E-Finance Technological advances have long had a major impact on the fill of wholesale financial activities. Business-to-business electronic exertions within the financial sector have been apply for more than two decades, both domestically and internationally.Financial firms have also provided online services to nonfinancial firms over closed trademarked lucres for a number of years. Widespread access to the open network technology of the net, however, offers a whole new range of possibilities to provide services to a much broader base of customers at substantially lower costs. As a result, online services provided to wholesale customersboth within and across national bordersare growing rapidly. This growth includes not only traditional financial services but also new types of services designed to facilitate business-to-business e-commerce activities. 11 The same technological and cost-saving possibilities exist for the provision of electronic banking and other financial services to sell customers.Within any(prenominal) countries, the provision of some types of financial services over the Internet and through web-enabled technologies, such as mobile telephony, is expandin g dramatically. Prominent casefuls include discount brokerage and mutual funds in the United States, and banking services in Finland, Norway, and Sweden. 12 The cross-border provision of INTERNATIONAL TRADE IN FINANCIAL SERVICES 7 financial services to retail customers over the Internet, however, is politic in its infancy. In customary, the international provision of retail financial services still takes place primarily through locally incorporated subsidiaries. 13 Indeed, a number of banks are now exploitation their host-country subsidiaries as a base from which to provide electronic banking services to host-country retail customers.The lack of widespread development of cross-border retail banking and other financial servicesthrough the Internet or more traditional methodsreflects host-country regulatory requirements aimed at ensuring enough consumer protection, consumer preferences, and tax considerations. nearly countries materially require the establishment of a commercia l presence to provide retail financial services. correct when regulatory requirements for cross-border services involve nondiscriminatory application of host-country prudential standards, firms operating on a global basis may have surdy meeting a multitude of different national requirements. Perhaps even more important, consumers may prefer transaction with a local commercial presence, particularly because redress against a local establishment is ordinarily readily available through the domestic court-ordered system.In addition, in a number of countries, consumers peck more favorable tax treatment on financial products that are provided through locally incorporated entities. 14 Modes of Supply In an effort to include all of the ways in which services are provided internationally, the GATS defines trade in services in terms of four so-called modes of supply. Mode 1 and mode 2 cover services provided across borders for financial services, the transparention between these two mo des is not ever so clear. Mode 3 covers services provided through establishment of a commercial presencethat is, through foreign direct investment, a term that is not utilize in the GATS.Mode 4 covers services provided through the short-lived presence of vivid persons, which includes nonlocal employees of a foreign service provider. The GATS uses modes of supply not only to define the scope of its coverage but also as the basis for particular(prenominal) commitments to liberalization that WTO members undertake. 8 THE capital of Qatar ROUND AND FINANCIAL SERVICES NEGOTIATIONS Services Provided across Borders. In this study, the term cross-border services is used broadly without fireing to assign a geographic location to the transaction. Thus, this study does not attempt to determine whether a transaction takes place in the country of the service provider or in the country of the customer.For example, a cross-border financial services transaction could be carried out in a number of different ways (a) a deterrent example of, say, a foreign bank skill yell the country of the customer to arrange a loan (b) the customer skill travel abroad to visit the office of the foreign bank or (c) the transaction cleverness take place via telephone, facsimile machine , or, increasingly, the Internet, which, in this context, is barely another technological means of delivering the service. 15 The GATS, however, branches between services provided to nonresidents from the country of the service supplier (mode 1 or crossborder supply) and services provided in the country of the service supplier (mode 2 or consumption abroad). Usuallybut as currently defined by the GATS, not necessarilymode 2 involves corporal movement of the consumer, such as the movement that occurs in tourism. 6 For financial services, however, the line dividing these two modes of supply is not perpetually clear, especially in the case of example (c) in the previous paragraph. Indeed, because financ ial services are intangible, assigning a geographic site to their provision across borders is laborious and often arbitrary and will belong more so as the importance of e-finance increases. From a regulatory perspective, a major issue is whether, and to what extent, the rules of the host countrythat is, the country of the customerare applied to the cross-border transaction. 17 Suppose, for example, that employees of a foreign bank visit the host country to arrange cross-border loans.Even when the host country does not have a regulatory framework in place for cross-border banking services, host-country bank regulators sometimes look at factors, such as the frequency and period of visits and the permanence of the host-country infrastructure for the visiting employees, to determine whether, for regulatory purposes, the cross-border activity rises to the level of a host-country office. 18 Or suppose that a foreign broker-dealer solicits host-country customers to purchase securities. Securities regulators often use solicitation in addition to the actual conduct of business with domestic residentsas INTERNATIONAL TRADE IN FINANCIAL SERVICES 9 criterion for find out whether the foreign firm is subject to hostcountry broker-dealer accommodation requirements. 19 In response to the increasing use of the Internet by the securities industry, a number of regulators also examine factors such as whether a web site is being used to target host-country customers (see chapter 4). 20 Besides regulatory jurisdiction, another important jurisdictional issue arises in the casing of a dispute here the school principal is which countrys courts have jurisdiction to try the case and which countrys laws apply. 21 Foreign Direct Investment. The comprehension of foreign direct investment in the GATS reflects its importance as a way of providing services internationally. 2 By contrast, the General Agreement on Tariffs and Trade (GATT) does not cover foreign direct investment for go ods, there is only a comparatively narrow agreement, negotiated in the Uruguay Round, on trade-related investment measures (TRIMs). 23 Although the GATS includes establishment of a commercial presence as a mode of supply, it does not have a separate framework for investment like that of the NAFTA or the widely used bilateral investment treaties (BITs). 24 These agreements cover portfolio investment as well as direct investment in both goods and services. Moreover, unlike the GATS, they include provisions to ensure the protection of investmentsspecific rules governing expropriation and compensation, for exampleand also provide for arbitration of disputes between secluded investors and host-country governments. Presence of Natural Persons.The fourth mode of supply in the GATS, the temporary presence of natural persons, includes the temporary presence in the host country of employees of firms providing services across borders or through a commercial presence. For example, for financia l services, this mode of supply covers the presence of nonlocal staff of a host-country branch or underling of a foreign financial firm as well as agents of the firm visiting the host country to facilitate the provision of cross-border services. 25 Although the presence of natural persons is listed as a mode of supply in the GATS, and members can negotiate sectorspecific commitments, countries usually make commitments for the temporary presence of natural persons as horizontal commitments that 10 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS apply to all services sectors. 6 For the financial services sector, however, most countries that belong to the Organization for Economic Cooperation and Development (OECD) have incorporated into their schedules a set of commitments allowing the temporary entree of senior managerial personnel and certain types of specialists in association with the establishment of a commercial presence. 27 3 Liberalization and Regulation Q Policymakers, p articularly in emerging market economies, are increasingly recognizing that opening markets to foreign financial firms can benefit both consumers of financial services and the domestic economy as a whole. As noted in chapter 2, the presence of foreign firms can create more competitive and efficient markets for financial services, thereby supporting(a) economic growth and development and lend to a more resilient domestic financial system.At the same time, however, ensuring adequate prudential regulation and supervision of financial firms and markets, together with other fundamental domestic structural reforms, is indwelling to obtain the maximum benefits of liberalization while minimizing the risks. Basic structural reforms include increasing hydrofoil and accountability in both the private and public sectors introducing effective risk management techniques and developing the institutional infrastructure, such as insolvency laws and appropriate juridic procedures. Because measures to promote competitive markets and to strengthen domestic financial systems are complementary and mutually reinforcing, the relationship between financial sector liberalization and regulation has two distinct dimensions. On the one hand, liberalization requires reducing or removing anticompetitive regulations that pose supernumerary barriers to trade in services. On the other hand, liberalization requires increasing the strength and quality of certain regulations and, in some areas, introducing new regulations. Thus the process of liberalization involves, inter alia, attain a consensus on where to draw the line between regulations that are simply anticompetitive barriers to tradeand should therefore be eliminatedand regulations that serve legitimate purposes. For financial services, the GATS contains a prudential carve-out for domestic regulation. 2 In the GATS, the term prudential is used broadly 11 12 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS o encompass not only measu res to promote the integrity and stability of the financial system (as the term has traditionally been used in banking regulation) but also measures designed to protect consumers of financial services. The prudential carve-out, discussed later in this chapter, is designed to ensure that any obligations undertaken or commitments made in the GATS will not interfere with the ability of national authorities to exercise their responsibilities for prudential regulation and supervision. Whether a particular measure is prudential or simply being used to avoid a countrys obligations and commitments under the GATS is, however, an issue that could be brought forwards a WTO dispute settlement panel. every last(predicate) countries impose certain rules that are intelligibly prudential.Even if a measure is prudential, however, it may create a barrier to trade in financial services. This could occur because a host country imposes excess prudential requirements on foreign financial firms simili tude their domestic counterparts. such barriers could also be created simply because prudential rules differ among countriesthat is, even if each host country applies the same rules to foreign and domestic firms, financial services firms operating on a global basis often find it burdensome to honour with a multitude of different national prudential rules. A critical call into question is whether such barriers could be addressed without jeopardizing prudential goals.Specifically, in what areas and under what conditions might financial services regulators be able and instinctive to recognize each others regulations and supervisory practices as being as effective as their own? The GATS is bailable with respect to such recognition arrangements. However, as will be explained in chapters 4 and 5, the WTO is not the appropriate forum for financial services regulators to negotiate recognition of prudential measures. Three Pillars of Liberalization International contestability of market s refers to the world of markets that are competitive and efficient on a global basisa goal that can be achieved by removing all types of barriers to foreign participation in hostcountry markets. International contestability is, in effect, based on three pillars of liberalization (1) national treatment and market access (2) the LIBERALIZATION AND linguistic rule 13 removal of nondiscriminatory structural barriers, that is, domestic structural reform and (3) exemption of capital movements. For financial services, the GATS has so far dealt primarily with the first pillar. An important question for the Doha round is how far the negotiations should extend into the second pillar. The GATS deals with the third pillar only insofar as it affects countries specific commitments to change trade in services in general, liberalization of capital movements is a matter of concern for the IMF 4 . National Treatment and Market Access. The first pillar of international contestability of markets is liberalization aimed at opening markets to foreign services and service suppliers and ensuring that they enrapture substantially the same treatment as their domestic counterparts. much(prenominal) liberalization requires reducing or removing barriers that know apart against foreign services and service suppliers with regard to entry and operation in a host-country market. A host country might, for example, severalize against foreign financial firms by refusing to diffuse licenses for their branches or subsidiaries imposing limitations on their monomania position in domestic firms or on their aggregate market serving or nullifying them from engaging in certain activities that are permissible for their domestic counterparts.First-pillar liberalization also requires removing various quantitative limitations on the overall provision of services in a host-country market. Although these barriers may not, on their face, be overtly discriminatory, they are typically used to block entry by foreign services and service suppliers. A country might, for example, limit the number of service suppliers in a particular market by restricting the number of new licenses that may be issued or by relying on an economic postulate test, which involves an assessment of needs in the market by host-country authorities. 6 Because these measures have the effect of imposing some type of quantitative limitation on foreign entry, they are similar to the more overtly discriminatory barriers.To deal with these first-pillar barriers, the GATS uses the principles of national treatment and market access. expression seventeen (National Treatment) relies on a generally accredited definition of national treatmentthat is, it 14 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS requires a host country to treat foreign services and service suppliers no less favorably than like domestic services and service suppliers. 7 Barriers to entry or operation that discriminate against foreign serv ices or service suppliers vis-a-vis their domestic counterparts would therefore be uneven with national treatment. The GATS does not attempt to define market access.Instead, hold sixteen (Market Access) provides a list of restrictive measures, primarily quantitative, that are typically used by host countries to deny entry to foreign services or service suppliers. A country that does not maintain any of these measures is regarded as providing full market access. 8 The list includes seemingly nondiscriminatory quantitative barriers to entry that apply to both domestic and foreign firms, such as limitationsin the form of quantitative quotas or economic needs testson the number of service suppliers or their extreme assets. It also includes quantitative barriers to entry that are clearly discriminatory and thus are also uneven with national treatment, such as limitations on foreign ownership interests in domestic firms.As a result, some overlap exists in the national treatment and m arket access provisions of the GATSthat is, certain measures may be inconsistent with both national treatment and market access. 9 The list of measures in oblige XVI also includes restrictions on the type of legal entity through which services may be suppliedfor example, requiring establishment of a subsidiary as opposed to a branch. In the GATS, national treatment and market access are specific commitments as opposed to general obligations. 10 As a result, national treatment and market access do not apply across-the-board to all services sectors instead, they apply only to sectors, subsectors, or activities that a WTO member specifically lists in its schedule of commitments. 1 If a member is making only a partial(p) commitment to national treatment or market access within a listed sector, subsector, or activity, any limitations must be listed in its schedule. 12 The use of specific commitments for national treatment and market access instead of obligations applicable to all servi ces sectors is in some respects a structural weakness of the GATS. 13 Under a more ambitious approach, such as that used in the NAFTAs services and investment provisions, national treatment and market access would apply in each sector unless an exception was specifically listed in a countrys schedule of LIBERALIZATION AND REGULATION 15 commitments or one of the public policy exceptions, such as the national trade protection exception, applied. 14 Nondiscriminatory Structural Barriers.The second pillar of liberalization required for international contestability of markets is aimed at removing nonquantitative and nondiscriminatory structural barriers. Such barriers are associated with national measures that do not discriminate between domestic and foreign services and service suppliers. A secondpillar barrier could arise because a national measure is primarily anticompetitive or fosters anticompetitive behavior by private parties. In some cases, the barrier could be associated with t he lack or absence of domestic regulationfor example, the lack of an adequate domestic legal framework for insolvency. A second-pillar barrier could also arise because of differences in national rules, including prudential rules, that make it rugged to conduct operations on a global basis.Removing second-pillar barriers goes far beyond achieving national treatment and market access. Those principles ensure that foreign services and service suppliers can enter a host-country market as currently structured and enjoy equality of competitive opportunities vis-a-vis their domestic counterparts. By contrast, second-pillar liberalization represents an effort to create maximum potential competitive opportunities in a host-country market. Achieving this could require major domestic structural reform. This would necessarily involve some spot of convergence of national regulatory systems, either de facto or through negotiated harmonization. A longstanding U. S. rohibition on affiliations bet ween banks and insurance companies in the United States, which was repealed in 1999, created a major second-pillar barrier for many years. 15 Indeed, the European Union had found it difficult to accept that a European financial conglomerate that included both a bank and an insurance company could engage in only one of these businesses in the United States. Regardless of whether this nondiscriminatory restriction was primarily anticompetitive or could have been justified as a prudential measure, it nonetheless naturalized a barrier to trade in financial services. Significant second-pillar barriers are often associated with national regulatory regimes for asset-management services. 16 These include 6 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS across-the-board prohibitions on relegating of functions, such as portfolio management and administrative operations, by the host-country office to a foreign affiliate extremely strict asset-allocation requirements for a domestic mutual fund or pension fund and rules that prohibit such funds from investing in foreign securities. 17 While asset management activities raise legitimate prudential concerns about ensuring adequate protection of hostcountry customers, these types of measures often serve primarily to restrict contest, particularly contest from foreign firms (see chapter 5).Nondiscriminatory structural barriers to trade in financial services are not limited to financial sector regulation. Barriers in other areas that are particularly important for the effective functioning of the financial services sector, such as lack of adequate frameworks for corporate governance or insolvency, are part of the international work on strengthening domestic financial systems, which is discussed later in this chapter. Ineffective or devoid competition policy regimes, which could foster anticompetitive behavior by private parties, can also create major second-pillar barriers. Differences in national tax systems are yet an other source of second-pillar barriers.Discriminatory treatment of foreign firms under national tax or competition rules, however, would be a first-pillar barrier. 18 Second-pillar barriers can also arise from a countrys administrative proceduresin particular, a lack of regulatory transparency and procedural fairness. For example, a country might fail to publish all of its laws, regulations, and administrative decisions administer them in an impartial manner establish a meaningful procedure for interested parties to comment on proposed regulations act on applications for licenses within a reasonable period of time or provide a mechanism for independent review of administrative decisions.Because regulatory transparency and procedural fairness can be extremely effective in ensuring that commitments to market access and national treatment are fully implemented, they even out an important underpinning of first-pillar liberalization. The European Unions single-market program represent s the most far-reaching effort to date to absent nondiscriminatory structural barriers among a throng of nations. Predicated on political agreement on goals for economic liberalization, that effort is being carried out in the context of LIBERALIZATION AND REGULATION 17 the unique supranational legislative, judicial, and administrative structure of the European Community. 9 Even within the European Union, however, important nondiscriminatory structural barriers to trade in financial services among the member states are still in place (see chapter 5). The GATS addresses certain types of second-pillar barriers. Article terzetto (Transparency) imposes a general transparency obligation on WTO members to publish all measures of general application that are relevant to trade in services. 20 Article VI (Domestic Regulation) addresses, in fairly general terms, barriers created by domestic regulations. It requires countries to apply such regulations in a reasonable, objective and impartial manner to avoid undermining commitments to market access and national treatment. 1 Moreover, countries must have appropriate legal procedures to review administrative decisions affecting trade in services. 22 Article VI also mandates further work to develop disciplines to ensure that licensing requirements or proficient standards do not constitute unnecessary barriers to trade in services. Pending the consummation of this work, countries must refrain from adopting licensing rules or technical standards that are so burdensome, restrictive of trade, or lacking in transparency that they undermine the benefits that could reasonably be expected from their commitments to national treatment and market access. 23 The GATS deals with additional second-pillar barriers for individual sectors in members schedules of commitments.The most far-reaching example is in basic telecommunications, where a substantial majority of the countries that have made commitments to national treatment and marke t access in that sector have incorporated into their schedules using the additional commitments columna reference paper setting forth procompetitive regulatory principles. 24 Designed for a sector where dominant suppliers often control essential host-country facilities, these principles seek to ensure that a countrys national treatment and market access commitments will not be undermined. Countries committing to the principles undertake, among other things, to maintain measures to ensure network interconnection on nondiscriminatory terms and to check certain anticompetitive practices. 25 In the financial services sector, most OECD countries addressed nondiscriminatory structural barriers in their 1997 schedules of commitments 18 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS imply by making a general best efforts commitment to remove or eliminate any significant adverse effectuate of such barriers. 26 In addition, the United States and the European Union used the additional c ommitments column of their schedules to make best efforts commitments to remove specified nondiscriminatory barriers. For example, the U. S. administration committed to try to work with the Congress to remove Glass-Steagall dissemble restrictions, a goal that was subsequently accomplished, while the European Union pledged that its member states would try to process applications for licenses for banking and insurance subsidiaries within specified periods of time.Japan, under great pressure from its trading partners, went further and made binding commitments regarding removal of certain second-pillar barriersincluding restrictions on asset-management services and lack of regulatory transparency and limitations on lines of business in insurancethat were covered in its bilateral financial services agreements with the United States (see chapters 4 and 5). Freedom of Capital Movements. The third pillar of liberalization involves achieving freedom of capital movements across national bord ers. Such movements comprise international capital legal proceedingthat is, the creation, transfer of ownership, or liquidation of capital assets, including financial assetsand the payments and transfers associated with such minutes. 27 Restrictions on international capital movements are usually imposed on the underlying legal proceeding as opposed to the related payments and transfers. 8 For example, if a country wished to restrict foreign direct investment in the banking sector, it could prohibit foreign financial firms from acquiring significant ownership interests in host-country banks it would be grotesque to try to achieve this result by permitting the acquisition of the ownership interests while using exchange controls to block payment for them. 29 Although the free movement of capital plays a critical role in allowing efficient allocation of resources on a global basis, the Asian financial crisis of 199798 revived a long-standing controversy over the rightness and effectiveness of capital controls, particularly on short-term flows. 0 Nevertheless, all parties to the debate agree that capital controls can neer be a substitute for sound macroeconomic policies and fundamental reforms of domestic financial and legal structures. Indeed, the Asian crisis itself emphasized that weaknesses in domestic financial systems can create significant vulnerabilities LIBERALIZATION AND REGULATION 19 as capital movements are liberalized. At present, conventional wisdom holds that, although pain in the neck of new capital controls should, in general, be avoided, the imposition of limited, temporary capital controls to deal with gigantic temporary inflows or outflows of short-term debt might be useful in some cases. 1 Moreover, it is now widely acknowledge that removal of existing controls must be carried out with great care. Of particular importance are the pace and appropriate sequencing of liberalization of different types of capital flows and of liberaliz ation of capital movements vis-a-vis structural reforms to strengthen domestic financial systems. 32 Freedom of capital movements per se is not within the purview of the GATS international capital movements and international trade in financial services are, however, closely related. administration of a commercial presence in a host country by a foreign service supplier involves both trade in services under the GATS and international capital proceeding.For example, a commitment in the GATS to liberalize financial services trade by allowing foreign financial firms to establish wholly owned subsidiaries is essentially a commitment to allow foreign direct investment that involves the acquisition of 100 percent of the shares of existing or de novo hostcountry financial firms. 33 In theory it is possible that, once established, the subsidiary could conduct its ongoing activities without engaging in additional international capital transactions however, its activities would need to be lim ited to transactions with host-country residents involving domestic financial assets. 34 Establishment and operation of branches, which are not separately incorporated in the host country, well-nigh always involve international capital transactions between the banks head office and the branch. 5 These transactions include both foreign direct investment and portfolio investment. 36 For branches conducting a wholesale business, ongoing activities would typically also involve international capital transactions with independent parties. For cross-border financial services, international capital transactions are typically either full to, or closely associated with, the provision of the service. For example, international capital transactions are an entire part of accepting deposits from or making loans to nonresidents. In addition, international capital transactions are usually, although not necessarily, associated 20 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS ith financial s ervices such as securities trading or asset management on behalf of a customer residing in another country. 37 By contrast, certain crossborder financial services, such as investment advisory services and financial information services, can be provided without an associated international capital transaction. The avail of investment advice might be limited, however, if the customer were prohibited from investing in foreign assets. In general, it is difficult to realize fully the benefits of liberalization of trade in financial services without freedom of capital movements. Financial services trade absolutely requires, however, the liberalization of only those capital movements that are necessary for the trade transaction to occur.In recognition of this relationship, Article XI of the GATS (Payments and Transfers) prohibits WTO members from imposing restrictions on capital transactions or associated payments and transfers that would be inconsistent with their specific commitments to liberalization of trade in services. 38 A footnote to Article XVI (Market Access) provides greater detailnamely, a country that has made a specific commitment to market access must allow (a) capital movements that are essential for the provision of a service in mode 1 (cross-border supply) and (b) inward capital movements that are related to a service supplied through establishment of a commercial presence. 39 The bottom line is that if a country makes a commitment to liberalize trade with respect to a particular financial service in the GATS, it is also making a commitment to liberalize most capital movements associated with the trade liberalization commitment.The country is not, however, making an across-the-board commitment to freedom of capital movements. The GATS provisions dealing with capital movements, like GATS specific commitments to liberalize trade in services, are subject to a balance-of-payments safeguard. 40 Both the capital movements and balance-of-payments safeguard provisions of the GATS refer to and are consistent with the IMFs responsibilities in these areas. 41 Strengthening Domestic Financial Systems The financial services sector has an elaborate and intensively used framework of international fora that are used, both separately and in combination, LIBERALIZATION AND REGULATION 21 o address overall financial and regulatory policy issues to promote cooperation and coordination among supervisors to set voluntary but widely accepted international minimum standards and codes of good practices and, most recently, to provide direction of domestic financial systems. This surveillance includes supervise and helping to build institutional subject matter for implementation of the international standards and codes. The international fora dealing with these issues include the Group of Seven (G-7), the Group of Ten (G-10), the Group of Twenty (G-20), the Financial Stability Forum, the Basel Committee on Banking Supervision (Basel Committee), and th e International Organization of Securities Commissions (IOSCO), as well as the IMF and the World Bank. 2 The international framework for the financial services sector, which has been constructed over the past quarter century and is still evolving, is a response to two major factors the internationalization of banking and other financial activities and the special characteristics of the financial sector, especially the phenomenon of general risk. Because of systemic risk, problems with one financial firm can be transmitted to unrelated financial firms, both within and beyond a single country. For example, a chain chemical reaction of problems could be triggered through imitative runs on banks as depositors lose confidence in a banking system, through default on domestic or international interbank obligations, or through domestic or international payment systems.Problems in a countrys financial sector can also affect the real economy, both domestically and internationally, through d eclines in product and shifts in trade flows. In addition, the earth of global financial firms, with activities falling within many different national jurisdictions, requires cooperation and coordination among home- and host-country authorities to prevent gaps in supervision. Increasingly, these global firms are financial conglomerates, which means that supervisory cooperation and coordination are necessary across financial subsectors as well as national borders. For these reasons, countries have a stake in the quality of each others regulation and supervision of the financial sector and also in ensuring cooperation and coordination among supervisors.In this regard it is useful to distinguish between prudential regulation, which includes, for example, capital and other requirements designed to ensure the safety and 22 THE DOHA ROUND AND FINANCIAL SERVICES NEGOTIATIONS soundness of financial institutions, and supervision, which is aimed at making certain that financial firms adhere to such requirements. The importance of strong, effective supervision cannot be overemphasized without it, the best prudential rules can be meaningless in practice. The extent to which both experience and good judgment are required for such supervision also needs to be emphasized. Indeed, the role and nature of supervision make it particularly difficult for supervisory authorities to reach recognition agreements based on the harmonization of prudential rules (see chapter 5).While regulation and supervision must be strong and effective, a further branch is that a poorly designed regulatory systemfor example, an excessively generous deposit-insurance shunningcan create an unacceptable degree of moral hazard that is, it may throw out excessive risk-taking by regulated firms. Accordingly, national regulatory and supervisory systems must be designed to complement and support, but not to substitute for, market discipline. Thus, achieving widespread transparency in both the public and p rivate sectors, including accurate and timely disclosure of financial information, is critical