11:03 AM Jun 6, 1997

US UPS ITS DEMANDS ON FINANCIAL SERVICES

Geneva, 5 June (Chakravarthi Raghavan) -- The United States, playing as usual an aggressive hard-ball negotiating tactics, has made some forty requests on its trading partners for "improved" offers in financial services - covering in particular banking, securities and insurance areas -- and promised to table by mid-July its own MFN-based offer.

This was the second meeting of the group on financial services.

Involving some 40 countries, the group under the WTO Council on Trade in Services (of the GATS), kicked off the resumed negotiations in April, and met again this week to review the situation.

Side by side, a number of bilateral meetings have taken place where the US and other major demandeurs in this area (the US, EC and Japan in particular) both among themselves and with developing countries put forward their "requests" for market-opening.

At the meeting Thursday, the US promised to table by mid-July its revised MFN offer and indicated it has put in "requests" on its partners. A few other industrialized countries like Canada, EC, Japan and Korea, according to trade officials, have indicated they might also be tabling their revised offers.

Many developing countries have said they may not be able to put forward any "offers" (whether new or improved) before September.

Everyone at the meeting spoke of the "positive" and "encouraging" tone for the talks, and this was dutifully relayed to the media by trade officials. But trade observers saw these as no more than pep talk.

But Chile reportedly made a statement (in Spanish, and wanted it to be reflected fully in the minutes of the meeting) about a demand from one of its trading partners regarding the present and future prudential regulations that Chile might impose in this sector.

Trade officials who provided a briefing to the media on the talks (which like others in the WTO are held in private) could not explain what the Chilean statement meant.

The post-Marrakesh Financial Services talks ended in July 1995, with the United States refusing to join, and filing its schedule with most-favoured-nation exemption stipulation, and providing only for the continued access to its markets of financial service providers already present in the US market (through commercial presence) and in respect of the services they have been permitted to provide.

All others, whether for fresh entrance or expansion of activities of existing providers, the US said, would be based on bilateral and reciprocal agreements.

What should have ended as a collapse of the financial services sector negotiations was however "saved", by the EC and the WTO Director-General pressuring and persuading the developing countries to "leave their offers" on the table, and file GATS schedules on that basis, and with an opportunity to all of them to "revisit" and revise their own schedules and file their own MFN reservations (as the US did) by mid-December this year.

The socalled 'resumed' negotiations is with a view to another round of negotiations that could either persuade the USA to lift is "MFN reservations" or enable others to reconsider their own schedules in this light.

Though the talks are all about liberalising the financial services, and developing countries are being told (and persuaded and pressured by the Fund and the Bank on the one side and the WTO officials on the other) about the great benefits to them of liberalising financial services and binding them in the WTO, a number of developments, and new insights, have not only thrown some serious doubts on this, but also has placed developing countries in a quandary.

First and foremost, particularly in the light of the 30-month experience of the working of the WTO system and the Singapore Ministerial Conference, is that the trade liberalisation agenda of the WTO, already biased in favour of the major industrial trading nations, has been further skewed up.

This is evident from the focus and push at Singapore on the Information Technology Products negotiations (for zero tariff and removal of all other barriers on a fast track by year 2000).

On top of this, was the push (temporarily staved off through the 'study process' working groups) for agreements on investments, selective approach to competition, and initial steps to open up the government procurement in developing countries to foreign TNCs.

After Singapore early this year, was the concentration at the WTO on the ITP pact and the conclusion of Basic Telecom negotiations where developing countries under pressure have provided market-opening opportunities (and bound them in the WTO) without getting anything in return in any other area.

Even the small advantages developing countries had (enabling them to earn foreign exchange) through bilateral accords for international settlement of accounts is now being taken away by unilateral US measures, and ITU secretariat's own moves.

All this has led to the perception of the US and majors that they are better off through sectoral negotiations in areas of interest to them -- namely, areas where they want to break open foreign markets for their own corporations, either directly by exports or via investments, and where they have a high dominance and advantage, brings in more results to them than a general round of negotiations across sectors where they have to make some concession or other to the developing world.

As a result, the view of their negotiators have strengthened that it is more advantageous for them to press for liberalisation in isolated sectors of interest to them, without a package based on "reciprocity and mutual benefit" that underlie traditional multilateral trade negotiations.

So much so, the USTR, Ms. Charlene Barshevsky, has been quoted in some media reports as saying that the US is not in favour of a general round of trade negotiations in year 2000, but would only favour the sector by sector talks through the inbuilt agenda.

This might be a tactical stance of hers, particularly in the light of the problems the Clinton administration seems to face over fast-track authority in the Congress. But it is also a reflection of the post-Marrakesh gains for the US in the piece-meal trade negotiations that have taken place.

The second element that developing countries are faced with is the fact that contrary to the intentions of Uruguay Round negotiations in agreeing to a WTO, and the implicit assurance there will be no of a "GATT plus" approach, the majors are adopting the tactics of negotiating basic rules and principles outside the WTO, and then forcing them on the general membership of the WTO.

The totally non-transparent methods of the WTO's decision-making process is helping them.

This is evident in the way the ITA was negotiated, or the other "liberalisation" agendas are pushed forward on the basis of what is agreed in APEC (which is only a forum and not a pact) or in the OECD (such as on the investment issue and the Multilateral Agreement in Investment) or regional accords like NAFTA.

The argument used by the majors, and propagated and pushed by the WTO head and WTO officials, is that if the WTO does not take on board these issues and agendas, the majors would negotiate them regionally and this would leave the WTO and its membership behind.

This is antithetical to the letter and spirit of Art. III of the WTO.

In respect of the MAI (in the OECD), the US and others in private say that their experience of the Uruguay Round (in TRIMs, GATS etc) showed that developing countries would exact a price (in other areas) and also dilute the rules or seek special provisions to suit their pace, or codify what is already implicit in the old GATT (as happened in TRIMs) or adopt the positive list approach for liberalisation as in GATS.

So, they want to negotiate agreements among themselves outside, and then come before the WTO members, particularly the emerging markets or major developing countries, and force or persuade them to join or transplant the OECD agreements into the WTO.

Though a little thinking should show developing country policy- and decision-makers that this is not feasible, and investors would go where profits can be made (whether or not there are bilateral or plurilateral investment treaties), nevertheless a panicky frame of mind has been generated, and some developing country institutions have even begun to project and formulate solutions on that basis.

When the financial services negotiations were to be continued beyond Marrakesh, some developing countries tried to balance it by prolonging the negotiations on movement of natural persons as a mode of delivery.

But in July 1995, when the financial services talks ended (with US MFN reservations and opportunity to revisit), the talks on movement of natural persons was concluded.

The maritime services talks were ended without an accord, but the failure was masked by rolling the talks over to be taken up with the second round of liberalisation in services envisaged under GATS for 2000.

As a result, the developing countries, have no reciprocal demands to make in the financial services talks.

The only option for them is not to yield to US and EC pressures to liberalise more of their financial services, and if the US persists in its non-MFN approach, similarly put their own MFN reservations on new access or market openings.

This does not mean that they need not proceed with their own liberalisation policies they have launched - either under Fund/Bank pressures or their own assessments.

It only means that they need not bind themselves in the WTO.

However, few of the major developing country negotiators or their capitals seem ready to act on their own, and the prospects of their acting together have been clouded by the way they approached and ended the Singapore Ministerial Conference.

The US hard-ball tactics is perhaps evident from the kind of demands it has been making in its "request" lists to individual developing countries.

Apart from demanding "further liberalisation" of their banking, securities and insurance services -- and a credible target to achieve full liberalisation -- the US appears to have demanded of some of its partners removal of some of their regulations, and freezing in the WTO their present regulations (precluding any future ones), and curbing further their ability to introduce new prudential regulations.

For e.g. the US has apparently demanded of some developing countries that they should do away with what is known in the jargon as "needs test" in dealing with new entrants or requests for expansion of activities by existing entrants.

The "needs test", means that financial (banking, insurance or securities industry) authorities look at request for new licences for commercial presence on the basis whether the domestic market and activities there can be served best by the existing level of competition or new entrants would have to be allowed.

The US wants this power to be given up (and scheduled).

Curiously, in the US itself both at the Federal and at state levels, where regulatory permission is needed to incorporate a bank or other financial service provider or expand activities by opening new branches, the law requires and enables regulators to apply such a test.

While it is true that in recent years, the regulators have taken a more relaxed view (in the light of the situation of their domestic markets), the power has not been given up.

Developing countries are also faced with the new element of electronic mail commerce (internet commerce) and its implications in terms of financial services and their delivery.

Most of them (including developed countries) have only scheduled market opening through commercial presence, and not for deliver via telecommunications.

However, while the technology is evolving and seems likely to smudge the dividing lines, even the most developed country regulators are only now beginning to grapple with implications and problems.

The US regulators, for example, have only now issued for comments a very lengthy questionnaire, to deal with internet trading (of stocks and bonds, financial derivatives, and financial services).

Should developing countries allow their regulations to be frozen via the scheduling of their commitments in the WTO in this sector, or enter specific reservations (going beyond their undoubted right to put in place at any time prudential regulations) or what approach should they adopt for a future whose outlines are not clear to anyone?

Another consideration involved in the financial services talks now, is its relationship to the on-going talks at the OECD on the Multilateral Agreement on Investment.

The general approach currently being adopted there is for "national treatment" rights for investors of OECD countries in each other's territory, even in advance of "establishment" i.e. the right of a foreigner to invest would be equal to that of a national.

In so far as some of these "investments" would cover "trade" issues covered by the WTO accords -- whether in the GATS trade in services including financial services, or in TRIPs and other agreements (which the WTO secretariat and the UNCTAD secretariat now assert cover some investment rights) -- on the face of it, the OECD signatories are bound to extend MFN treatment (in terms of rights, without any reciprocal obligations) to all WTO members.

Provisions and exceptions in the OECD accord will not save them from the WTO MFN obligation - only a change in WTO rules or, where allowed, listing such MFN obligation in their WTO schedules?

In the case particularly of financial services -- whether short-term and portfolio investments as well as FDI, and financial derivatives trade that could enable FDI risks to be spun off, would be involved -- any rights flowing out of OECD MAI would need to be extended to WTO members -- unless a country's financial service schedule contains a specific MFN exemption.

This has been one of the reasons behind the US itself having slowed down the OECD negotiations on MAI (which otherwise were to have been concluded this May).

The US currently, in its financial services schedule, has a very wide MFN exemption listed, but has held out the prospect of knocking it off if other countries provide a better market opening opportunity in the renewed financial services talks.

Since most developing countries, even in the distant future of the second or third decade of the next century, cannot hope to enter and compete in these areas in the US market, denial of reciprocal rights would not influence them too much to fully liberalise their financial services markets. At best they could marginally improve on their offers to provide the US a face saving way out of its situation in the WTO, as a result of a last-minute decision of Washington in 1995 financial services talks.

But if the US were to enter now an amended MFN to take care of a possible OECD investment agreement, should developing countries go along or should they decline and put their own blanket MFN exemption listing, along the lines of that of the US in its present schedule?

And if the alternative they face is to negotiate an investment accord in the WTO, should they not then adopt a different strategy whose elements would need to include:

* collapse the financial services negotiations now, and roll that negotiations (with maritime services thrown in) into the second round of GATS to be undertaken in 2000;

* bring in this round of GATS talks, the issues of safeguards, concessions envisaged in the GATS rules to strengthen developing country ability and presence in service markets;

* access to networks and technology;

* combine these services talks with other goods negotiations (including agriculture) and modifications to TRIPs and other rules weighted against them; and

* ensure that investment negotiations exclude right of establishment and national treatment for foreign investors, but adopt the positive list approach of GATS (of countries being committed only to what they offer and schedule, with limitations spelt out), along with rules for obligations of home countries, particularly of their tax and competition authorities, to cooperate with developing countries to tackle issues of transfer pricing, tax avoidance etc of the TNCs?

Some of the developing country negotiators have become seized of these issues in some private briefings and consultations among themselves.

But what effect it may have on the course of these financial services talks, which are working to a mid-December deadline (with a normal WTO summer holiday schedule of no activity for 6-8 weeks) is not clear.