8:02 PM Jul 18, 1995

EU MINISTERS FOR 2-1/2 YEAR FINANCIAL DEAL

Geneva 18 July (Chakravarthi Raghavan) -- The EU's Council of Ministers appear to have given their backing Monday at their meeting in Brussels to the EC Commission proposal for a financial services deal at the WTO, without the United States, but to run only till end December 1997.

The EU's Executive Commission proposed such a deal, presenting it as a major exercise by the Commission to save the WTO, when the US at the last minute, walked away from the extended post-Marrakesh negotiations for a financial services liberalisation agreement.

Under the EU Commission proposal, everyone would have scheduled their "best offers" on the table into a financial services accord at the WTO on a most-favoured-nation basis, but for a limited duration.

The intention was that before the end of that period either the US would be drawn in or if the US persisted in its refusal, participants could reassess their own positions and still exercise the option of entering their own MFN reservations like the US.

There had been some talk in this regard of a 3-5 year deal, with several participants last week (at an informal meeting of the financial services committee) even favouring a five year deal on the ground that it would provide security to foreign investors. Japan was then reported as still 'weighing' its options (with Japan's foreign office and finance ministries as divided). But the EC chief negotiator, Hugo Paemen told the media Monday that Japan was in the EU camp on this proposal.

However, even on Tuesday, news agency reports out of Tokyo quoted Japanese finance ministry officials as saying that the government had not yet decided on its final stance.

Other Japanese sources said that in terms of the US-Japan financial services bilateral agreement, both sides had agreed to multilateralise their commitments. While the major market opening concessions were on the Japanese side, the US had agreed to extend 'national treatment' to Japanese enterprises in this sector -- i.e. treat them equally with US enterprises.

The Japanese finance ministry was said to be weighing the implications of Japan multilateralising its deal with the US and committing itself in the WTO, without the US not being committed for its part of the bargain in the WTO, even if it stood read to carry it out bilaterally.

At Marrakesh in April 1994, ministers agreed to the extension of the financial services negotiations till 30 June 1995 -- with all countries leaving on the table their "offers" and schedules in this area filed in December 1993 and applying market access on an MFN basis to all participants. They also agreed that on 30 June 1995, everyone could exercise an option of filing an MFN exemption if so warranted -- the option that the US had wanted to exercise in December 1993.

After protracted negotiations, since Marrakesh the large number of key developing countries, against domestic opposition in their countries, had improved their offers.

While US negotiators privately admitted that the overall package was a good one, the US financial services industry, and its supporters in the Congress, rejected it and pushed the Treasury to spurn the package and go the non-MFN bilateral reciprocal approach.

The US negotiators had thus announced on 30 June that the US would not be a party to a multilateral accord, but would exercise in terms of the WTO and its General Agreement on Trade in Services (GATS) its MFN exemption option -- i.e. agreeing only to existing access in its market to existing foreign suppliers without discrimination, but restricting all future access or expansion of existing access to a case-by-case approach and based on reciprocal accords with its trading partners.

Whatever the merits of such an approach in terms of major players in this area like the EU or Japan, with an eye on the US markets, for developing countries the refusal of new access or future expansion of existing access in the US market was not a deprivation that would worry them to open up their own markets more.

But the US in choosing this path undoubtedly has in mind using its other levers -- political, security and other pressure points -- to gain market access in developing countries for the US financial services industry -- banking, security and pension funds, and insurance.

But the US position shocked others, and coming on the heels of the auto dispute with Japan and exercise of unilateral S.301 sanctions pressures, was seen by many as one more blow to the fledgling WTO.

In this situation, the EU came up with its proposal and the GATS Council agreed to extend till 28 July the final date for other countries to exercise their own options, failing further efforts to persuade the US to change.

Since then EU Commissioner Leon Brittan has taken a high profile posture and has sought to create a band-wagon effect (both to persuade other countries to fall in line, as well as the EU member states themselves who had doubts) in adopting an MFN multilateral approach, giving the US a free ride for the moment.

However, some EU members like France had been known to have serious doubts on the wisdom of an EU MFN commitment in the absence of the US -- a concern shared in other countries too.

If a deal is concluded by July 28, it would still take a minimum of six months for countries to ratify and bring it into force. Till then, countries, through executive fiat, would maintaining their 'offers' on the table and apply them on an MFN basis until the entry into force of the agreement, which in terms of the EU Council of Minister's decision, would run only till December 1997.

It would really amount to keeping the issue alive, and on a backburner, until the US elections in 1996 -- for the White House, the House of Representatives and one-third of the Senate -- when the new or the same old players could take a decision.

Even if the US then changes its mind, it is going to demand and try to force the developing countries to make more concessions to be able to justify domestically the change of stance.

Several Third World diplomats said that an agreement of the type promoted by the EU -- with an MFN application by everyone except the US which would have a free ride, but would also try to exercise bilateral pressures -- may have some imponderable dynamics, and a limited duration accord would suit them too, since if the US persisted in its approach after the elections, they would need to exercise their own options and revise their WTO commitments.