TACDFinancial Services Policy Committee

Lori Wallach lwallach@citizen.org

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 EraThe Bretton Woods Era

GATT 1947GATT 1947 IMFIMF World BankWorld Bank

• Trade in goods• Tariffs and quotas

• Trade in goods• Tariffs and quotas

• Gold standard• Short-term trade floats

• Gold standard• Short-term trade floats

• Finance rebuilding ofEurope & Japan

• Finance rebuilding ofEurope & Japan

The Bretton Woods Era (post-WWII to mid-1970s)

(early 1990s to present day)

(early ‘90s to present day)

Corporate Globalization Era II

WTO (binding dispute

settlement)

NAFTA, CAFTA,

“Free Trade”Agreements

BITS

GATT

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

• Adam Smith

These pacts are not “Free Trade”

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 as Plaintiff

United States 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 PRE-ESTABLISHMENT 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 INCOMMITTED 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 Glass-Steagall 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-bank-size-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 non-discriminatory 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 related transfers of capital into its territory.”

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 G-20, 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