2:29 PM Jun 9, 1995

US OFFICIALS, CONGRESS THREATEN RECIPROCITY STICK

Geneva 9 June (Chakravarthi Raghavan) -- United States Trade and Treasury officials, in testimony to Congress in Washington and press briefings in Geneva, in effort to pry open markets of developing countries to US financial service enterprises continue to hold out the threat of closing off future access to US markets for major developing country enterprises in banking, securities and insurance.

But the officials seem unable to explain how exactly the developing countries concerned, even the most advanced of the 'tigers' among them -- who have no hope of competing in the US market with the US enterprises -- would lose out in this bargain?

The US assistant treasury secretary, Jeffrey Shafer, could only say that there were already some established banks (of developing countries) in the US and applications were being made and that it was in the interests of the developing countries with rapidly emerging markets to be able to have access to US capital by liberalising their financial services markets.

However, on this logic, the US as the world's leading exporter of its national debt and needing Japanese and European capital flows to finance it, should undertake the unilateral liberalisation and not complain about openness of Japanese markets or 'free riding' by developing countries.

However, the Chairman of the Senate Banking Committee, Alfonse D'Amato, promised to move quickly with reciprocity legislation limiting access of foreign service providers in the US if no progress was made in the WTO financial services negotiations by 30 June.

The testimony Thursday in Washington to the Senate Banking Committee by Treasury Secretary Robert Rubin and US Trade Representative Mickey Kantor showed that the US push is motivated by simple mercantalist logic which it denies to others.

While speaking in terms of benefits to the world through the development of international capital markets, the testimony of Rubin and Kantor, as well as the comments and remarks of the US Senators, left little room for doubts on the real motivation: greater US access to foreign investment markets and markets for finance and financial services results in expansion of US trade and exports of industrial products.

Kantor told the Senators that failure to open up the foreign markets, mostly in developing countries, to US financial services has "an incredibly negative effect upon us because investment leads trade."

"If we can't get our financial services companies and insurance companies into these markets, then our industrial companies, representing hundreds of thousands of US workers can't get their products in... We're only four percent of the world's population; 96 percent live outside us and that is where our markets of the future are going to be... If you can't get your financial services companies into a market, it has a negative effect upon your ability to get your products into the market.."

Richard Self, Deputy US Trade Representative and chief US services negotiator, told newsmen in Geneva that there was no 'understanding' at Marrakesh or in the agreement extending the financial services negotiations with the negotiations on the movement of natural persons which were going on in parallel. Self however conceded that countries could see a link and see what they would get.

Shafer earlier had told newsmen that the reason why the US was pressing so much on financial services -- banking, securities and money-management, and various insurance services -- was because US firms were highly competitive, but that their access to these foreign markets to provide their services was being restricted.

While there were still some three weeks to go for the deadline on these negotiations, if the offers were not substantially improved and developing countries do not commit themselves to liberalisation within an agreed time-frame, the US would enter most-favoured-nation reservations and close its own market to future expansions.

In terms of the General Agreement on Trade in Services (GATS) and the Marrakesh decision to extend the negotiations on financial services till 30 June, any MFN exemption by the US would not restrict the current presence or access of any financial services firm of a country, but only any new access or expansion/branching out of that enterprise into other areas.

While reiterating the US position about entering MFN reservations if sufficient liberalisation offers were not made by the key countries, Kantor and Rubin also said the question of taking such MFN exemption was one to be weighed very carefully. Rubin and Kantor, as also the US senators, dwelt in their testimony with the state of the Japanese market. While they all noted the bilateral agreement between the two in the financial services issue, the Senators and the US officials repeatedly referred to the need for Japan to bind this agreement in the WTO terms, so that the US could use the WTO process to ensure its observance.

If Japan did not do so, Kantor said, the US would still hold Japan to the terms of the bilateral agreement and take action under US trade law (S.301 presumably) to enforce US rights.

Kantor, who has been using 'numerical targets' in the US-Japan trade spats, said that in terms of penetration of domestic financial markets by foreign financial service enterprises, it was 10 percent in France, 33 percent in Italy and 11 percent in the United States, while it was only one percent in Japan. Kantor added: "there is nothing more of a dramatic indicator of what the problem is..."

Asked about the EU's position that if the US entered an MFN exemption, the EU would do the same and revert to its own banking directive providing for reciprocal access, Shafer told newsmen in Geneva that this would not affect US access to the European markets or vice versa.

On the "number" of US derogations in terms of its financial services schedules, arising from the state laws, regulations and jurisdictions which would not be overridden by the WTO agreement, Shafer played it down by arguing that it was not the "numbers" that mattered, but in terms of the market size and in that respect the derogated access was small.

While expressing unwillingness to disclose the names of countries whose offers the US found not sufficient, Brazil, Chile, Indonesia, India, Malaysia and the Philippines were mentioned for their restrictions in one or the other sectors.

Kantor, and some of the senators and industry witnesses, referred to the case of Indonesia which, they complained, allowed majority ownership in the insurance sector, but nevertheless was not willing to bind in the WTO more than 49% equity ownership.

Complaints were also aired about the prohibition of establishment of wholly-owned finance companies, credit card companies and other non-banks in Indonesia, Malaysia and Thailand and of US managers not being permitted to manage Korean mutual funds and Korean restrictions on foreign exchange transactions and amount of stock in local companies available for purchase by foreign investors. India's refusal to schedule any offers in the insurance area was also brought up in the testimony before the Congress by industry spokesmen.