8:10 AM Jul 3, 1995

A 30-DAY BREATHER FOR FINANCIAL SERVICES ACCORD

Geneva 1 July (Chakravarthi Raghavan) -- The deadline on the financial services negotiations got a four-week de facto extension, till 28 July, by when the World Trade Organizations members have to make up their minds on the options open to them in the light of the United States decision to provide future access to its markets for foreign financial service suppliers only on selective, discriminatory basis.

The WTO's Council on Trade in Services agreed by consensus Friday night to the four-week extension of the time, in terms of the Marrakesh decision deadline for concluding by 30 June the negotiations on financial services and that on movement of natural persons.

The 30-odd key countries, developing and developed, involved in the negotiations, have to decide whether to emulate the US and take back all concessions they have "offered" in the negotiations and agree to give only selective, discriminatory future access for foreign financial services suppliers, or, as the EU has suggested, "salvage" all that has been achieved by each of them scheduling their 'best offers' as a multilateral Most-Favoured-Nation commitment, but for a limited 3-5 year duration, after which everyone could 'review' the situation and decide anew, including MFN-exemption option.

The EU was presenting this as a move to "salvage" the WTO and its processes of multilateral liberalization including in financial services, and isolating the United States.

The United States, which shocked its trading partners Thursday by announcing that it would take an MFN exemption on financial services, assuring only existing access to existing foreign service suppliers in the US, and limiting all future access on a selective, discriminatory approach, depending on reciprocal accords, made clear that even at end of the four-week extension, it will not change its position.

The EU Commission, and its Commissioner Leon Brittan, who got endorsement from an emergency meeting in Geneva on Friday night of the 15-member EU's Council of Foreign Ministers, has been promoting the idea that everyone should isolate the US, accept the package as a whole and schedule it on a most-favoured-nation (MFN) basis as a multilateral commitment at the WTO, subject to the whole issue being 'revisited' in 3-4 years and allowing anyone to take back what they have agreed to, or go the non-MFN path or anything else.

There were some reservations inside the EU Council on the move, as well as the duration of 3-5 years proposed, with member states were known to be favouring a much shorter period of no more than a year.

The EU Ministers are to meet on 17 July to reassess the situation and take final decisions.

Brittan, and the EU's considerable diplomatic and public relations machinery got into high gear since Thursday night to push for such a package and presenting it as both the EU's action to save the WTO and maintain the general momentum of trade liberalization and in particular of financial services.

Trade diplomats from other countries said Friday night that their capitals, including their finance and trade ministries, would have to make an assessment and the extension was to give them some time.

Some trade diplomats said that the EU proposal, though formulated vaguely by its negotiator as a personal one, had been received favourably, by a key group of countries - including Japan, Canada, Switzerland, Korea, India, the ASEAN countries and Brazil.

Among the developing countries, Indonesia was reported by others as agreeable to the move, but whether it also represented views of other ASEAN members was not clear.

At the GATS Council, where the extension till 28 July was approved, Indonesia made a statement that was pretty strong. In the statement, copy of which was made available to the media, the Indonesia said everyone had worked hard to make the financial services negotiations a success in order to put in place a rule-based multilateral system that would serve the interests of the weak and the strong. They had made great efforts to offer what they could to open their markets, consistent with the level of development and development needs, but in the belief and hope that the multilateral system could be strengthened.

Indonesia had made a substantial contribution in its offer and had done so, although at present its service providers had not yet reached a level of competitiveness to be significant exporters.

Developing countries had come to these negotiations knowing that their competitiveness did not lie in the services sector. But they had negotiated the Uruguay Round as a package, covering a wide-ranging field, with developing countries contributing their share by opening up their services markets. They did so because the multilateral system had to be sustained in order to maintain an open world trading system.

Developing countries had also negotiated in good faith, and with the expectation that they would assume their full share of responsibility to help the process, but also that those who would benefit most from the opening up of the developing country-markets, "will also exercise statesmanship, that they would be realistic about what is achievable at this stage of the negotiations and take steps to preserve the principles of the multilateral trade, not least, the principle of non-discrimination".

Many years had been spent to achieve a fair agreement, and this should not be undermined because of "unrealistic expectations". To throw away what had been achieved would place them in poor light and they would be judged unkindly for rejecting it because of "hasty eagerness" to have more than could be achieved.

"Statesmanship and wisdom is not only required of the weak. It equally applies to those who are strong. It is important that we do not weaken the trust and faith in the multilateral system which would help the further opening of the world trading system".

Among the other speakers, the EU emphasized the need for a multilateral agreement without "free riders" -- a reference to the US in the context of the moves for multilateralizing the package on the table. Brazil explained at length its economic reform moves and the constitutional changes under consideration in its Parliament that would enable the further liberalization to foreign competition, as well the considerable efforts it had already made within those limitations. In an indirect criticism of the US, Brazil complained that while it had done so to further the multilateral system, others had not.

The multilateralization of the package negotiated, and scheduling it on an MFN basis for a 3-5 period and subject to its being reviewed with everyone able to exercise at that time an MFN-exemption option, would in effect mean an extension of the decision taken at Marrakesh by the Ministerial meeting on this issue.

It could be done by crafting a decision using the same or similar language, or by everyone of those who have negotiated the final package to take an MFN exemption, but announce that they would unilaterally implement on an MFN basis the package for a 3-5 year period, and decide at that time.

If the idea really is to apply collective pressures on the US to a multilateral process, it would involve their not talking or negotiating with the US in the interregnum bilaterally. This is a big question mark.

Even then, realistically, while it would be possible for everyone at the end of the period to go back to square one as the US did now, in practice it would be difficult for countries to take back what they have given. It would have repercussions on their financial markets and inward investments. Without a firm commitment to preserve the concessions in future, they won't attract new investments and suppliers in either. No supplier would invest on the basis of a three-year accord. The EU move in effect would thus force the importing developing countries to lock themselves into the 'liberalization' dogma and process.

The United States is the world's leading provider of financial services, with the EU coming behind as the second. While it is thus a competitor with the US, it also has some common interest with the US visavis other markets -- Japan, Korea and the 'emerging markets' in Asia and Latin America.

The motivation, behind the EU move is thus that with a multilateral framework and an MFN commitment in place, any bilaterally negotiated agreement of the US to expand the market for its financial services enterprises would be automatically available on an MFN to all other providers - benefiting EU.

Whether the EU proposal would 'fly' thus depends on how some of the key players, particularly the key countries in Asia -- Japan, South Korea, ASEAN, India -- would react to a move which would have some political repercussions in their own countries, and whether it is seen by the governments as opening them to further bilateral pressures from the United States or acting as a shield of sorts.

This would mean that any country under pressure to reach a bilateral accord with the US would be able to safeguard itself against an US domination, because of its obligation to extend the benefits to the US multilaterally via the GATS and the WTO. This might also encourage the US to abandon its bilateral approach and join the multilateral process.

Many of the countries in Asia who have engaged in good faith negotiations on financial services, and had improved their offers of December 1993, note that whatever the legal 'rights' they would have, whether in the bilateral negotiations that the US would press on them, or in the process of 'revisiting' the agreement after a three-year period, they would continue to be under pressure to undertake more commitments, to contribute to the success of negotiations, and enable the US to join.

But there would be no guarantee, at that time either, that the US would not engage in similar tactics as now, and announce that it would continue its bilateral discriminatory approach, one diplomat commented.

Key delegations said they would have to reflect on this in their capitals and consult with each other.

Some of the majors like Japan and South Korea might find it politically difficult to take such an MFN commitment, even for a limited 3-4 year period that could be later resiled from, when the United States is not committed, and is determined to use bilateral pressures to expand access for itself.

Even the other key countries of Asia -- the ASEAN, India and Pakistan -- might have similar problems.

In countries like India, facing a vocal and growing opposition to the policy of opening up to the TNCs indiscriminately, and criticisms over other areas of the WTO like the TRIPs agreement and its obligations (to meet US demands), there could be an outcry to an MFN commitment when the US had not.

The same is the case in Asean, several of whom are also complaining that having negotiating in good faith, and made concessions beyond their developmental stages and capacities, they would now be caught in a position of starting the future negotiations, and even the reassessment after 3-years, on the present basis and under pressure to improve and expand on them.

Some of these countries are already under pressure to take back what they had scheduled, subject to revision, in December 1993, and may find it difficult to keep their revised and improved offers. Their offers in this area have been done by their finance ministries, pressured also by the World Bank, while other parts of the government have been expressing doubts. The 30-day period, one of them said, should not be seen by the EU or the WTO head as a time to apply pressures on them to keep their offers and commitments, but pressure the United States too.

They and many others are also angry with the Americans, who argue that the negotiators and administration agree with what has been done, but that their business lobbies and Congress does not, and the trading partners must move forward to satisfy their lobbies.

As one ASEAN delegate put it: "We might as well negotiate with the lobbies, instead of giving the US administration a place at the WTO".

Another Third World delegate said: "We are all fed up with this American tactics, where the government does not accept its own responsibility, but uses its lobbies and Congress to constantly demand more".

Another major developing country negotiator noted that the country with a competitive technological and other edge in the financial services sector is the US, but with the EU closely behind. While the US and EU have differences, they have a common interest and have common demands on the rest of the world.

"So we have to look very carefully at the EU moves in all these matters. But we also have to weigh whether it is easier for us to negotiate and withstand pressures multilaterally or bilaterally and whether our multilateral commitments would become mere starting point for further bilateral demands and pressures from both..."