SUNS  4368 Friday 5 February 1999

Geneva, 4 Mar (Chakravarthi Raghavan) -- The Fifth protocol of the WTO/GATS incorporating the financial services agreement concluded at the WTO in December 1997 has missed its 29 January 1999 deadline to enter into force.

The agreement, and the protocol, requires its acceptance by all 71 countries who participated in the negotiations and put forward their liberalization offers.

But by 29 January deadline, of the 71 who initialled the agreement, 54 countries have completed their domestic legislative requirements and have signed and accepted the protocol, but 17 others are yet to do so. The 54 who have accepted the protocol will now meet on 11 February to decide whether they should recommend to the GATS Council to decide to go ahead and allow the entry into force of the agreement, or extend the deadline to enable the others to complete their processes and join.

If the 54 decide to bring the agreement into force, one result would be that it would be applicable on an MFN basis to all the WTO members, including those who have agreed but not ratified and accepted, and the 54 would be subject, in matters relating to financial services, to the jurisdiction of the WTO's Dispute Settlement Understanding.

Trade officials said that the 54 accounted for nearly 90% of the world "trade" in financial services, and most of the important players, and that indications from those who have not yet accepted is that they were in the process, but that their domestic processes need more time.

Among those who have initialled the accord but who have not completed their domestic processes to accept the protocol include are Australia, Brazil, Luxembourg (an important banking centre in the European Union).

The others are: Bolivia, Bulgaria, Costa Rica, Dominican Republic, El Salvador, Ghana, Honduras, Jamaica, Kenya, Nigeria, the Philippines, Poland, Slovenia and Uruguay.

Representatives of the 54 countries who have ratified and accepted the financial services agreement, concluded in Dec 1997 at the World Trade Organization, are to meet on 11 February to decide on their course of action.

The 54 have two options: to decide to allow the protocol to enter into force, or (as over the basic telecom agreement) extend the deadline for a reasonable period to allow others to hurry up and accept.

Those who may not meet the deadline, could still do so at a later time, by a different process, namely filing a schedule of their own (based on their offers in the 1997 negotiations) for attaching to their GATS schedule or replacing their existing one.

Among the 54, the United States, India and Thailand had filed (in their earlier GATS schedules) broad MFN exemptions based on reciprocity. Under the new schedules, they have withdrawn it.

Just before Marrakesh, and afterwards when the negotiations were continued as part of the Marrakesh sanctioned continuance of the Uruguay Round talks on this, the US had tried to use the threat of "reciprocity" to force market openings in developing countries.

But this did not produce any results, and having used the negotiations leading to the conclusion of the 1997 accord, with considerable help from the WTO acting in tandem with the IMF (in Asia), raked in as many market openings in developing world as it could, before giving up the reciprocity concept (through an MFN exemption).

But one result of allowing the entry into force would be that the concessions in the schedules of the 54 would be commitments available to all WTO members (including those in the 17 who have not ratified and accepted) on an MFN basis and could be subject to the DSU processes, for any violation of their commitments, while the others would not be.

Much would depend on what the US administration would do, and this may depend on its view of possible reactions from the Congress, and the US financial services corporations which have been behind the drive for opening up and liberalizing markets of other countries.

Trade officials, and the trade negotiators and diplomats, try to differentiate between the financial services liberalization and the WTO remit and the issues of the financial sector, behaviour private
financial sector operators (hedge funds, portfolio investors of institutional funds etc) in countries and the lack of transparency in their operations and of the markets.

Trade officials try to argue that these financial services trade issues, and issues of current and capital account transactions -- which have been shown to be pretty blurred in terms of the financial crisis that broke out in July 1997, and has been having contagion effects across countries and continents -- are quite different, and hence the financial services accord is not affected by the various discussions about the new international financial architecture.

Trade officials try to make a distinction to suggest that the basis of the ideas being propounded by the US Treasury, and US initiatives (via the so-called Group of 22 that President Clinton convened last year) - ignoring the views of other countries, and of the wide-ranging views and discussions among academics and economists.

On paper, there may be some "technical" differences between liberalisation of financial services at the WTO -- and the scope for prudential regulations, balance-of-payment questions etc -- and the
wider financial sector liberalization questions (whether under proposals for multilateral investment rules, or capital account convertibility questions at the IMF and elsewhere).

But in the practical, seamless world of finance, with the ingenuity of 'over-the-counter' designed derivatives, so non-transparent that even all the parties involved don't know exact details and risks, that banks and other financial services operators use, the distinction is probably meaningless.

And when disputes, to use a recent WTO panel ruling, countries may find themselves hit by a cumulation of obligations, in which the leeway thought to be available under one agreement, can be taken away by a panel's interpretation of another agreement.