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Financial crisis & reforms, FTA negotiations on financial services

Financial crisis & reforms, FTA negotiations on financial services. Myriam Vander Stichele Senior Researcher SOMO Bangkok, 25 November 2010. TRADE IN SERVICES: SOCIETAL CONSIDERATIONS.

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Financial crisis & reforms, FTA negotiations on financial services

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  1. Financial crisis & reforms, FTA negotiations on financial services Myriam Vander Stichele Senior Researcher SOMO Bangkok, 25 November 2010

  2. TRADE IN SERVICES: SOCIETAL CONSIDERATIONS • Services sector has high value added: EU is very keen BUT when allowing foreign investors taking over services sector (FTA rules: no restriction on foreign ownership) = sectors with highest contribution to economic growth and profits in foreign hands  profits go abroad • Foreign service providers do not always behave as national ones, and are not always more ‘efficient’ than national ones: e.g. foreign banks: focus on services rich, most profitable but giving less credit and services to rural areas, SMEs, farmers,etc. ; much more involved in foreign currency actitivities (loans, swaps); capital transferred abroad in time of crisis; braindrain away from domestic banks; bailed out by home authorities and thus competing unfairly with banks in host country that does not bail out. . • The appropriate regulation, supervision and enforcement is needed to ensure benefits to the country: not guaranteed in FTA negotiations and rules (but sector specific requirements to benefit foreign investors) • No legal possibility under FTA for citizens to complain about negative impacts of foreign services and services’ investors

  3. EU FTAS in TRADE IN SERVICES: ECONOMIC & POLICY CONSIDERATIONS • EU FTAs have to respect GATS Art. V : “substantial coverage”: EU requires 85% of services sectors to be covered (65% for LLDCs) • FTA rules similar (with some differences) to GATS rules that apply to committed services in the schedules (positive list): = limit how governments can regulate and how governments have to protect foreign service companies > No tarifs in trade in services: regulations are considered barriers • FTA on trade in services: EU combines mode 3 with investment liberalisation = GATS rules apply on how foreign investment in agriculture and industrial sectors can (not) regulated • FTAs have been lobbied for by big service companies and EU trade policy is in focus on market access for EU big multinationals = FTA rules and liberalisation are designed to meet the needs of foreign service companies not the population

  4. FINANCIAL SERVICES : MAJOR INTEREST OF EU • Very profitable sector (main sector for UK) before the crisis; in emerging countries after the crisis = strong pressure from EU negotiators to liberalise • Very risky sector all of which is covered in FTAs: • Basic financial services • Credit rating agencies • Investment banking: issuing of shares • Trading in (OTC) derivatives • Asset management (Hedge funds, pension funds, etc.) • Financial innovations are difficult to supervise but FTAs have clause to allow new financial services under some conditions • To be linked with FTA rule that limits restrictions on capital movements

  5. FTA negotiations on financial services based wrong assumptions • Rules based on “more regulation as you go along with liberalisation”, “no need for regulation before you liberalise” • Light touch regulation integrated in the GATS financial services  Supported rapid expansion of risky financial products and financial operators without sufficient regulation and supervision, without limiting their negative impacts = contributed to the financial crisis;  crisis showed clearly: regulation needed before liberalisation EU FTA rules are wrong basis for negotiations

  6. FTA RULES ARE DEREGULATING • Permanent commitments: very difficult and costly to stop these activities and withdraw from commitments (No pull out without requested compensation) e.g. commitment on derivatives trading = difficult to ban speculative trading on food commodity derivatives • Market Access rules : “measures which a Member shall not maintain or adopt” ! in times of crisis, except if goverments write exemptions in list of committed financial services: • limit the total number of financial service suppliers in covered sectors; • limit the total value of the services transactions or assets (e.g. limiting lending by hedge funds or banks; position limits in derivative trading); • No limit on the total number or total quantity of financial service operations; • Economic needs test • National treatment: no special support for domestic financial industry; but ‘no less favourable’ treatment for ‘bailed out’ banks

  7. FTA RULES CONTRARY TO FINANCIAL REFORMS • ‘prudential carve out’: • allowing prudential regulation for the stability of the financial system and protect savers but should not be a means to avoid commitments (respecting the rules: but many financial reforms are against GATS rules = use of prudential carve out shows bad model of GATS) • still very unclear if all financial reforms can be protected by this prudential regulation clause; • Only protects financial stability: cannot be used to stop speculation on food • ‘Transparency rules’: EU wants to include ‘interested’ persons and companies can comment before a new legislation is decided • EU wants FTA signing countries to agree to apply all standards by international bodies (e.g. G20, Basel Committee) which are very undemocratic.  Have been resisted by Caribbean countries in EPAs

  8. EU FTA RULES ON CAPITAL MOVEMENTS • Prohibition of restricting on ALL capital movements (EU-Korea FTA) • Restrictions possible only with lot of conditions:e.g. • Only in exception circumstances and ‘serious difficulties’ of exchange rate and monetary policies; • Only stricly necessary measures; • Measures should not be longer than 6 months; = Lisbon Treaty : forbids restrictions on capital movements with third countries, except in exceptional circumstances with special procedures • Capital control measures that limit swaps in foreign currency (S Korea) = against commitment to liberalise swaps/derivative trading • Taxes imposed to limit capital are considered to be restrictions on capital movements : ?

  9. Why financial services should not be further negotiated in the FTAs • International, EU and financial regulation and supervision not ready = getting risky financial products and operators in ASEAN  speculators are driving up Asian currencies • there is no level playing field in the financial sector after the crisis because of bail outs • trade negotiators continue to ignore how to deal with the riskiness of the financial sector and lessons of the crisis • many financial conglomerates are still engaged in very risky businesses whose risks could spill over to (new) host countries

  10. How to deal with the FTAs and trade in financial services • no financials services negotiations in WTO and FTAs • withdraw commitments without compensation • exclude new disciplines on domestic regulation from financial services sector • more flexibility on control of capital movements • Full discussions in all financial reform fora, including how to trade and invest in financial services

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