Sep 20, 1989

U.S. AND JAPAN DIFFER WITH EEC OVER FINANCIAL SERVICES.

GENEVA, SEPTEMBER 19 (BY CHAKRAVARTHI RAGHAVAN)— The United States and Japan differed with the European community Monday on the applicability of some of the GATT principles or harmonisation of national regulations to ensure a balance of rights and obligations for trade in financial and banking services.

The differences reportedly surfaced in the group of negotiations on services (GNS) which is conducting a week-long meeting to test .the applicability to the financial and banking services of various principles and concepts considered "relevant" to a future framework for international trade in services.

The GNS has before it a secretariat note on "trade in financial services", and a Mexican paper on the applicability of concepts, principles and rules to the financial sector.

The secretariat note in effect argues for "right of establishment" as part of a multilateral framework for trade in financial and banking services, for recourse to the MFN rather than reciprocity principle in reducing barriers, and the need for more supervisory regulation of this sector, rather than less, as part of liberalisation.

The Mexican paper argues for the "relative reciprocity" in relation to the third world in relation to the concepts of "progressive liberalisation", market access, national treatment and rights of establishment.

In the discussions Monday, the U.S. and Japan reportedly conceded that full application by them of GATT’s non-discrimination principle or reciprocity concept might be difficult in some banking areas.

In the context of post 1992 single EEC market, the two are pressing that like banks of EEC member states which are to be allowed to operate throughout the community, their own banks, now established in any one EEC state, should be able to operate in others. The EEC on the other hand favours reciprocity.

In the context of the U.S.-Japanese drive for a multilateral framework agreement to cover trade in services and for its liberalisation, the EEC has been saying that there would have to be harmonisation of national rules and regulations, as a part of liberalisation, in order to ensure a balance of rights and obligations among signatories to such an agreement.

This is difficult for the U.S., even though its drive for services liberalisation has been pushed by some like American express which want to move into third world markets in some areas like credit cards, etc., and be able to undertake the more profitable parts of the banking services in Europe without conforming to domestic banking regulations.

But in other sectors like wholesale and retail banking - where U.S. federal and state jurisdictions are involved and there are disputes about deregulation and liberalisation - the U.S. wants to have a "free ride" in Europe. It wants the financial service markets to be opened up, and for U.S. firms to benefit through MFN treatment without itself having to give anything in return.

Particularly in relation to the EEC and its post-1992 single market, the U.S. domestic laws do not permit grant of reciprocal facilities to foreign banks performing a range of services (wholesale an retail banking, securities-related services, inter-bank services and international financial services).

The U.S. rather favours the EEC allowing a U.S. bank already stationed in an EEC member-country being able to operate all over the EEC countries just like any bank of any of the constituent EEC states.

The EEC on the other hand favours reciprocity so that if it gives facilities to U.S. or Japanese banks to operate throughout the EEC or branch into various types of banking and financial services, under the single market approach, EEC banks in the U.S. should have reciprocal benefits.

There are also similar problems relating to the EEC and Japan.

Reflecting these differences the U.S. and Japan reportedly spoke in cautious terms about the applicability of some of the concepts like liberalisation, etc., while favouring some others like right of establishment.

The EEC on the other hand underscored the importance of the principles of reciprocity and commitment to harmonisation of national regulations as a part of the framework agreement for progressive liberalisation.

A GATT secretariat note has cautioned against the use of "reciprocity" to deal with widely differing regulatory regimes among countries and to secure faster liberalisation by partner countries.

While attractive, it would involve differing policy stances to different trading partners and run risk of retaliation and delay liberalisation and its associated efficiencies in a global market context, it warns.

The concept of liberalisation is generally used in the GATT and by U.S. and other industrial countries synonymously with deregulation.

The GATT secretariat however suggests that financial regulations, particularly those relating to prudential supervisory considerations might need to be made stronger in the context of liberalisation.

"The process of gradually opening up the provision of financial services to foreign competition may indeed involve as much deregulation as deregulation", the secretariat notes.

"Significant differences persist among countries as concerns the degree of development of national regulatory regimes, these being most pronounced in respect of developing countries ... the latter may need, in the context of progressive liberalisation, to devote significant resources to enhancing domestic regulatory regimes and developing better systems of prudential management."

Earlier, the secretariat has noted that some of the financial market reforms in third world countries have come in the context of stabilisation and structural adjustment programmes. Thus in the third world the scope for progressive liberalisation of trade in banking services might be uneven and would be conditioned by ability of individual countries to restore overall macroeconomic stability.

This would mean that "progressively" might be a central element in liberalisation, and countries starting from a position where financial institutions have been shielded from competition for many years might need a longer period to adapt their systems to a competitive environment.

On the issue of "national treatment" (as between domestic and foreign enterprises in this sector), the secretariat suggests that this, along with market access, might not be altogether unrelated to considerations of bilateral or plurilateral reciprocity.

The U.S., as part of a services agreement want to secure the right of "establishment". This would be an important gain for the U.S. in the third world. The GATT secretariat note favours it, noting that "establishment" and/or commercial presence would be necessary for cross-border trading in financial and banking services.

On the issue of measures to increase third world participation in international trade in these sectors, it notes the uneven nature of current participation, across countries and sectors.

The financial systems of third world countries on the whole remain undeveloped. Financial institutions of many third world countries have also been experiencing significant liquidity and solvency problems.

In attempting to enhance international competitivity, third world countries would thus face a differentiated set of problems and issues, and the scope for increasing their participation in world markets for financial services would differ markedly among countries.