FINANCE SERVICES DEAL ALMOST DONE

twn @gn.UUCP 2:39 PM Jul 26, 1995

FINANCE SERVICES DEAL ALMOST DONE
Geneva 26 July (Chakravarthi Raghavan) -- Subject to formal confirmation Friday morning, an interim financial services deal with individual countries, minus the United States, incorporating their "best offers" on the table on an MFN basis has been concluded Wednesday at a meeting of the WTO's Committee on Financial Services.

At the end of the period of the deal, the period upto 1 November 1997, the WTO secretariat said, all Members will have an opportunity (during the 60 days following 1 November 1997) to modify or improve their offers and schedules and take an MFN exemption in the sector.

But while theoretically, everyone could go back to square one by end January of 1998, in practice, this cannot happen and the chances are greater of what one EU official has privately predicted last week: of continuous ratcheting up of the developing country offers and roll-overs of the temporary MFN deal, until the financial services sectors in these countries are fully thrown up to US and EU exporters and their dominance established.

The accord was adopted with what was described by WTO head, Renato Ruggiero, as a "substantive consensus". Participating countries have to put in their new schedules by Thursday, when it will be circulated to all the participating countries, and formally confirmed and adopted with the protocol on Friday.

The United States has stuck to its position and stood out: effective 1 July, all its "offers" on the table as of 29 June have been withdrawn, and it has entered an MFN exemption with regard to new entries and new activities of foreign financial services providers in insurance, banking and other financial services in the US market.

Much was made by the EU and some other participants, including some WTO officials, of the fact that it had been demonstrated that a deal could be struck in the WTO with or without the US and its stranglehold over the trade organization has been broken.

But while the US did not block the deal and allowed it go through, it was no skin off its nose, since it gets a "free ride". The US enterprises will enjoy the benefits of the MFN commitments on the improved offers of others, who would otherwise have entered like the US MFN reservations guaranteeing only the access that prevailed before December 1993.

Japan, South Korea, India, Pakistan and Egypt were among those who reportedly advised the committee that subject to their formal confirmations and schedulings on Friday, they would go along with the EU proposal for an interim MFN deal, and leave their improved offers on the table.

The WTO secretariat said that of the 76 WTO members with commitments in the financial services sector, around 30 (counting the EU as one) have offered improvements in the negotiations leading to the agreement.

While a six-page summary provided by the secretariat to the media outlined some of the new commitments or improvements of countries, it was difficult to draw any firm conclusions. Several of them dealt with their intentions or their promises of best endeavours.

A more careful analysis of the schedules as filed in December 1993 (when the negotiations were concluded) and the new schedules that countries would put in Thursday, before any conclusions can be drawn as to how far the improvements are cosmetic and how far they are substantial, and what its implications would be -- for the foreigners gaining access and the domestic sectors of countries.

The WTO secretariat conceded that with such very widely varying commitments, it would be difficult to generalize on their practical significance.

But in its view the common elements in the commitments would mean that in many countries there would be the appearance of more foreign banks, securities firms and insurance companies in the market; availability of banking, securities and insurance services sold across the border by overseas companies.

The other side of the picture, it said, was that for countries which are actual or potential exporters of financial services, opportunities for their banks, securities firms and insurance companies are going to be considerably enhanced through the agreement. For those already present in overseas markets, the conditions under which they do business may be improved or their ability to offer new financial products and services enhanced.

WTO Director-General Renato Ruggiero, in a press statement, said the cause of multilateralism had succeeded after tough negotiations, and countries have taken difficult policy decisions in this sector.

"It is a second-best result, but a good second-best", with substantial commitments from countries that would bring new opportunities and greater security and predictability for investors in banking, insurance and other activities in the financial services sector. It would promote merchandise as well as services trade where access, and the functioning of financial services is critical and would facilitate new financial flows to developing and transitional economies, the WTO head added.

Ruggiero noted that after 2-1/2 years, all governments would be free to review their positions. Some might be able to go further with their commitments after that time and "it is to be hoped that the US will then be able to come back within the multilateral MFN framework if it does not do so earlier."

"In any event, this is only the beginning of a process of progressive liberalization in the financial services sector," Ruggiero declared, adding: "We will relaunch negotiations throughout the services sector within five years. That will be a valuable opportunity to build on today's undoubted success."

Observers noted that the EU and Japan clearly have agreed to the WTO multilateral accord only after gaining some bilateral assurances and commitments from the United States about the current and future access of their own enterprises in the US market.

South Korea (which with Japan and the ASEAN countries has been identified by the EU as the minimum of "critical mass" for the success and viability of its proposed deal), also appears to have got some assurances of sorts which, according to some media reports involves assurances from the US and EU that it would not be pushed further during its impending accession to the OECD. But some reports also said that South Korea's support was won over by the EU through some delicate arm-twisting and pressures, including those relating to the formalisation of South Korean accession to the OECD.

The actual nature of these US assurances and bilateral commitments (and for that matter what the EU has held out to others to gain their consent) are not however clear.

The US negotiators have also said here in the WTO talks, and in some capitals, that it was not their intention to act in a discriminatory fashion to other countries.

But as one trade diplomats of a key country put it in private, these types of assurances that the US is reported to have held out, or those that the EU might have provided or explained (about its own accord with the US), namely that there were no hidden deals, have really no meaning.

While the US legal system is such that the executive cannot easily act on its own, without a legal framework to back it, in the prevailing mood in the US - unilateralist and bilateralist and reciprocity provisions could easily sail through the Congress, the diplomat said. As for the EU, its processes are so non-transparent, that it could always come up with political justifications as it did in the TPRM exercise.

But looking beyond the hype and the spin over the accord -- coming from the WTO secretariat, the EU, as well as the other delegations who are a party -- only time will show whether the accord is something that is going to advance the WTO and its multilateralism claims, or like regional agreements virtually dominating the multilateral agreement, the interim deal would be one more of the steps down the slippery path of bilateral reciprocity and unilateralism cohabiting with formal multilateralism.

Even the claims of the benefits of liberalisation in this sector are yet to be proved in practice. There has been no instance in the history of the developed world where financial services liberalisation preceded industrialisation with forward and backward linkages within the economy. There are some experiences to suggest premature and wholesale liberalisation of the financial services, ahead of successful liberalisation and stabilization of other sectors of economy, could even bring countries to grief over the short to medium term.

Even currently, there is evidence that access of financial sector enterprises to foreign markets and their presence there, helps the exports of goods and other services of the home country to those markets.

But there is no evidence, beyond anecdotal claims, of the reverse: of foreign presence and unrestrained competition in financial services markets to the domestic suppliers, improving the capacity of domestic enterprises or promoting exports of goods and services or sustainable capital accumulation in host countries.

There is also some evidence, of correlation (but not of cause and effect proof), between easy flight capital from developing countries and presence of foreign financial services firms. While absence has not really prevented such practices, it has made them more difficult.

Developing countries could easily have stipulated as a condition of access to foreign service providers, guarantees backed by their home governments, against such practices including home governments cooperation in investigations and actions without banking or other secrecy laws being invoked.

This was an option that was suggested to some of the key negotiators in the post-Brussels (1990) period when the GATS agreement and its details were finalised. But this was never pursued by them, and critics say it is because of elites in their governments and businesses being interested in maintaining open such avenues.

But until the trade liberalization claims, of benefits to the importing liberalizing country, are proved over time in this sector, the econometric modelling exercises based on theoretical economic principles of efficiency gains of competition will remain a weak foundation for country-policies.