I. Toward the end of the negotiations
The Uruguay Round trade negotiations were launched at the conference of the GATT contracting Parties in September 1986 at Punta del Este (Uruguay). The aim of these negotiations was a substantial overhaul of the world trading system; for the first time, multilateral disciplines were to be established at almost world-wide level for subjects such as intellectual property, trade-related investment measures and above all trade in services; at the same time, the functioning and institutional framework of the GATT system was to going be reviewed substantially.
As far as services were concerned, the negotiations would aim at establishing a multilateral framework of principles and rules for trade in services, including transparency and progressive liberalization, and respecting the policy objectives of national regulations (cf. Punta del Este Declaration). This relatively broad and vague mandate resulted at the end in a fully fledged draft agreement.
After five year of negotiations, the Director General of GATT, Mr Arthur Dunkel, tabled in December 1991 a draft agreement on all subjects covered by the Uruguay Round, which includes a draft General Agreement on Trade in Services (GATS).
The Uruguay Round negotiations received a recent boost
as a consequence of the progress made in certain important areas in the
margins of the G-7 summit in Tokyo, and following a commitment of the G-7
leaders to conclude the negotiations as a matter of the highest priority.
However, uncertainties persist as to whether a global agreement will be
achieved, as expected, before the end of 1993; a number of participants
have still misgivings with one or other part of the text (such as on intellectual
property, the proposed Multilateral Trade Organization or MTO, the package
on agriculture...). In the services area, discussions are still being held
on certain aspects such as the treatment of certain sectors such as audio-visual
and maritime transport, and the negotiations on initial liberalization
commitments are being pursued. However, the momentum for the conclusion
of the Round is now back, and there are sufficient reasons to assume that
the text presented by Mr Dunkel on services would be, in case of global
agreement, the final text with few significant amendments, at least as
regards financial services.
II. Application of GATS principles to financial services
The draft GATS has a complex structure; it is composed of:
- a series of articles forming a general framework of
rules, principles and procedures applicable in principle to all services
(we will call it "framework agreement");
- three sectoral annexes, which complement or specify how the provisions of the framework apply to individual sectors; one of these annexes apply to financial services;
- other complementary annexes, decisions and texts; among these, there is an understanding on commitments in financial services.
1. The framework agreement
The framework agreement applies to all measures of the contracting parties affecting trade in financial services. "Trade in financial services" is defined in a broad way: it covers the provision of cross-border services by a non established services supplier, the purchase of services abroad by a services consumer, the provision of services by natural persons in the territory of another contracting party, and the provision of services through a permanent establishment.
The main features of the framework agreement are a series of general obligations applicable to all services sectors, and the mechanism for the progressive liberalization of trade in services. It also contains some exception clauses, and institutional provisions such as the creation of a Council for Trade in Services and procedures for the settlement of disputes among contracting parties.
a) General obligations. The most favoured nation (MFN) clause
The most important provisions are the most favoured nation clause, an obligation on transparency, and provisions outlawing an arbitrary application of domestic regulations on services. Also important is a transparency provision making obligatory the publication of measures of general application affecting trade in services and the supply to other contracting parties of information on these measures.
The most favoured nation clause establishes that any contracting party shall accord to services and services suppliers of other contracting parties a treatment no less favourable than that it grants to services and services suppliers of any other country. In other words, a contracting party cannot discriminate among services suppliers of other signatories on the basis of the country of origin.
The MFN clause is the corner stone of the multilateral system set up by GATS. It is an unconditional obligation; exceptions to the application of MFN are possible however, but in principle with a time limit and subject to revision, and requiring prior acceptance by contracting parties when the agreement is adopted.
A general exception to the application of this clause is available, under certain conditions, for economic integration agreements establishing a free trade area in services between several countries. These agreements cannot result in a market access situation more restrictive for the services suppliers from countries outside the free trade area. Parties to such an agreement are not obliged to extend to other countries the preferential treatment accorded to the other parties to the agreement, but subsidiaries of services suppliers from countries outside the free trade area which are established in the free trade area are entitled to the benefits of the preferential agreement.
An immediate consequence of the MFN clause of particular importance for financial services is the incompatibility with the agreement of the unilateral application of reciprocity provisions, such as provisions in national legislation granting access to its market or certain benefits only to service providers of countries which accord a reciprocal treatment to its own service providers or which do not discriminate against them. These reciprocity provisions are frequent in particular in the field of financial services, where negotiations between countries on market access have often been conducted on the basis of such reciprocity clauses.
b) The mechanisms for the progressive liberalization of trade in services
The GATS does not impose on contracting parties any obligation to liberalize market access. It establishes a framework for the negotiations on market access among contracting parties and, as a consequence of such negotiations, each country will establish its own "schedule of commitments", i.e. will indicate in which sectors and to what extent it will enter commitments.
When a participating country decides to enter commitments for a sector or sub-sector, it shall then respect the two fundamental principles of liberalization: on the one hand, the principle of market access both through the establishment of a commercial presence; and in the form of cross-border services, on the other hand, the rule of national treatment, which runs counter any discrimination between domestic service providers and those from other contracting parties.
However, in this system contracting parties may subject
their commitments to conditions, limitations or other restrictions. They
may enter commitments on market access and national treatment at the existing
level of openness, or even at a lower level. The extreme flexibility of
this liberalization mechanism is the result of a compromise between positions
previously irreconcilable of countries participating in the negotiations.
2. The Annex on Financial Services
GATS has three sectoral annexes which adapt the application of the provisions of the framework agreement to certain sectors in order to take into account particular specificities of these sectors. Mr Dunkel's draft contains annexes on financial services, telecommunications and air transport.
The financial services has an open-ended definition of financial services based on a long illustrative list of financial activities divided into insurance activities on the one hand, and banking and other financial services on the other. Its has three main provisions, which are essentially of a technical nature:
a) The exclusion from the scope of the services agreement of the activities of central banks in the area of monetary and exchange rate policy, and the activities of social security and other activities conducted by public institutions for the account of the government. However, these exclusions are not absolute (except in the case of monetary and exchange rate policy): in case a contracting party allows any of these activities to be conducted by private entities, these activities would no longer be excluded from the agreement and would therefore be subject to liberalization negotiations.
b) An exceptions clause allowing supervisory and regulatory authorities to take measures from prudential reasons, in particular for the protection of investors, depositors and policy-holders, or to ensure the integrity and stability of the financial system. This exception is not absolute either, since it could not be used as a means to circumvent the obligations assumed by a country under the agreement.
c) A clause allowing contracting parties to recognize, mutually or unilaterally, the equivalence of prudential regulations applied by other countries, and therefore allowing them to limit the benefits resulting from this equivalence to financial institutions from countries where such an equivalence exists. This provision is qualified by transparency conditions aimed at avoiding, in the exercise of such a recognition, discriminations vis-a-vis countries where prudential regulation and supervision is equivalent.
As regards institutional questions, this annex establishes
that the persons dealing with the settlement of disputes in financial services
should have an appropriate financial expertise. In addition, a draft ministerial
decision would set up a "Committee on Trade in Financial Services" whose
tasks would essentially be advisory and which would be involved in the
preparation of and assistance to the work of the GATS Council.
3. A multiple-speed agreement: the "understanding on commitments in financial services"
As indicated above, in the present compromise framework agreement the level of liberalization commitments is left to the negotiating process. The starting point of the negotiations is the absence of commitments, and the technique used is a "bottom-up" one as regards the sectoral coverage: each country tables offers for commitments which may range from a complete absence of commitments in the financial services sector to a full coverage of all financial services without limitations on market access and on national treatment. In theory at least, the framework agreement allows a country to enter no commitments in a given sector, thus keeping its hands free to introduce new restrictions in that sector (and indeed this happens).
Since the beginning of the sectoral negotiations, the industrialized countries (especially the EC and the US) tabled proposals for a financial services annex containing precise and detailed obligations on market access and national treatment for the whole of the financial services sector. The proposed liberalization mechanics was then very different: all contracting parties would be obliged as a minimum not to introduce any new measures incompatible with the market access and national treatment provisions (standstill obligation). This would have had as a consequence that the negotiations on commitments would deal exclusively with actual liberalization and the elimination of existing restrictive measures.
However, the thesis of industrialized countries were not accepted by the rest of participants, who argued that it was contrary to the general approach of the framework and the balance of the services agreement. The solution finally proposed by Mr Dunkel was therefore to detach from the financial services annex the standstill obligation and the provisions on market access and national treatment, and to convert them into a text annexed to the GATS and called "understanding on commitments on financial services". The provisions of the understanding, instead of being applicable to all participants, would then become optional: whereas the general rule is that contracting parties enter their commitments in financial services in accordance with the provisions on market access and national treatment of the framework agreement, they may also decide to apply the obligations of the understanding.
In addition to the standstill commitment for all the financial services sector, the understanding contains the following obligations (some of which overlap with the provisions on market access of the framework agreement):
- The MFN and national treatment obligations also apply to public procurement of financial services (public procurement in services is effectively excluded in the framework agreement).
- Specific rules are established as regards cross-border provision of financial services and the ability of residents to purchase financial services abroad. In insurance, the obligation to liberalize applies only to transport insurance, reinsurance and services auxiliary to insurance. In banking and other financial services, a distinction is made: while active provision of cross-border services is very limited in scope, residents shall be allowed to purchase abroad all banking and financial services, including those involving capital movements, i.e. to carry out abroad all kinds of financial transactions.
- An unequivocal right to establish and expand a commercial presence, subject only to prudential considerations, is provided for.
- Subject to prudential considerations, financial institutions shall be allowed to provide in the territory of other countries new financial services, i.e. those which it may already provide in the country of origin.
- Freedom of transfers of cross-border financial information and data, without prejudice of privacy regulations.
- An obligation to allow temporary entry of managerial personnel and specialists.
- A best endeavours provision to deal with the problems arising from differences of regulatory regimes, in particular those of non-discriminatory regulations existing in certain countries and imposing the segmentation of activities (rigid separation of banking, insurance and securities activities) and restrictions to geographical expansion.
The understanding does not contain a complete national treatment provision, it being understood that the national treatment provisions of the framework.
agreement are applicable. However, it specifies that national
treatment shall be granted as regards access to funding and refinancing
facilities, and that self regulatory organizations are also bound to respect
the national treatment obligation.
III. The liberalization commitments
Since the negotiations on initial liberalization commitments have not yet been concluded, wecan only provide a description in general terms of progress made so far. In addition, practically all the offers presented are conditional on a satisfactory outcome of the negotiations in the financial services area, in the services sector in general, or in other areas of the negotiations.
The negotiating situation of the participating countries can be divided into three main groups:
a) A few dozens of countries have presented offers with a comprehensive coverage of the financial services sector and with an overall commitment to a standstill - not to introduce any new restriction incompatible with the market access and national treatment principles -. These are almost all OECD countries, which are the only ones so far which have offered to enter their commitments in financial services on the basis of the provisions of the "understanding". As a general rule, these offers contain clear commitments to grant market access both in the form of establishment and cross-border services, and relatively few limitations to the application of national treatment. However, it is still expected that the offers of certain major industrialized countries will be further improved in certain respects.
b) Some middle income developing countries have adopted a positive and constructive attitude in the financial services negotiations, and are expected to come with revised offers containing a standstill commitment for all or almost all the financial services sector with a relatively open regime.
c) A third category of countries includes a number of middle income countries, in particular grouped in certain geographic regions, which so far have not yet given clear indication of willingness to enter a broad-based commitment at least not to introduce any new restriction against foreign financial institutions.
To complete this picture, it is necessary to add that during the negotiations a number of countries - including some of the Community's major trading partners - have put on the negotiating table concessions implying the elimination of restrictions, therefore creating new market opportunities.
Pending a satisfactory outcome in other areas of the negotiations,
it can realistically be expected that a majority of the countries having
significant financial markets will at the end of the day come with meaningful
offers: an acceptable package is within reach. There may remain a few countries
with important markets whose financial services offers contains relevant
shortcomings, but their relative importance is not likely to be substantial
IV. Conclusion: the case for a financial services agreement
Sometimes it has been argued that the financial sector in industrialized countries would be better served by bilateral negotiations based on reciprocity threats than through a multilateral agreement based on an unconditional MFN provision. Although those fears were real at the beginning of the negotiations, they would no longer be justified: it is very unlikely that liberalization based on reciprocity could achieve the same results as those expected from a GATS agreement covering financial services.
The future GATS will set a solid framework for a continuation and deepening of the liberalization process at world-wide scale in a sector which is critical for the functioning of the world economy, the allocation of resources world-wide and the promotion of international investment. Free trade in financial services is a normal and necessary component of an open trading system.
The benefits of the agreement will be materialized in two main ways. First, a number of countries have shown their readiness to undertake positive liberalization steps in the context of the negotiations. Recent indications have been encouraging in that respect, and negotiations in any event continue with the aim of deeper liberalization commitments. Second, there will be the consolidation of the present market opportunities, which is estimated to cover significantly more than 90 % of the international operations of financial institutions around the world. It will also consolidate (and therefore protect its expansion) the existing freedoms to provide cross-border insurance services for the most internationally traded insurance classes, and a very large proportion of the cross-border banking and other financial business carried out by residents abroad. The EC is well positioned to benefit from this (1).
In this last area, it is particularly relevant to remark that, via the commitment to allow residents to purchase financial services abroad contained in the "Understanding" and in the offers of other countries, the agreement in its present form would consolidate the overwhelming majority of all international bank lending (97 %), of cross-border transactions in securities (in the primary and secondary markets), of dealing in derivative instruments and foreign exchange, and of international investments in the capital markets. As it is well known, the value of these cross-border transactions and investments amount to many trillions of US $ (2).
To give an idea of the volume of business covered by the agreement, according to an unpublished study carried out by the author of this article and A. Salvia-Camps at end November 1992, the draft GATS would consolidate free access, with relatively few restrictions and with a degree of market access broadly similar to that offered in practice by most EC countries, to markets representing:
- in the banking area, 93.3 % of world assets held by credit institutions (both domestic and foreign assets), and 95.1 % of assets held by banks in would-be GATS member countries (a total of 22 trillion $); 93.7 % of world bank deposits, and 95.4 % of deposits with banks in would-be GATS member countries (a total of more than 20 trillion $); in addition, 97.0 % of world international lending (3);
- in the insurance area, 91.8 % of world insurance premiums and 95.6 % of total premiums perceived in would-be GATS member countries, representing a business of over 1.3 trillion $ a year (4);
- in the securities area, 89.1 % of the world equity trading (4.5 tn $), 94.7 % of world stockmarket capitalization (10.5 tn $), 89.9 % of new equity raised, 97.9 % of market value of bonds listed in stock exchanges (7.9 tn $), and 93.8 % of world bond turnover traded in stock exchanges; these figures would be between 91.9 and 96.0 % if only would-be GATS member countries are taken into consideration (5).
These data are based in the situation of the negotiations
at the end of 1992, (6) and without including among liberalized
countries the markets of countries which have indicated their intention
to present improved offers. If the situation is unblocked in other areas
of the negotiations, and provided that the momentum is kept, the contribution
to an open and liberal international trading system of a the financial
services package will be very substantial and may even prove decisive for
a successful conclusion of the Uruguay Round negotiations.
* Administrator in the Secretariat General of the Commission of the European Communities. The author participated in the negotiations on financial services, on behalf of the European Community, since the start of the negotiations until January 1993. The opinions expressed in this article are the author's own and do no represent any Commission position.
(1) Just to give some indications of the importance for the EC of the business which will be safeguarded by the agreement:
- the EC surplus in cross-border transactions in financial services
accounted in 1986-89 for a yearly average of 5.2 bn Ecu or one third of
the EC surplus in services (source: Eurostat);
- in 1990, EC banks established in the US, Japan, Canada and Australia alone had in those countries assets totalling 271.2 bn $, of which 202 bn $ in the US (source: EC Commission);
- in 1990, EC insurance companies in these four countries perceived 60.4 bn $ in premiums, of which 41 bn $ in the US (source: EC Commission);
- in the period 1984-89, yearly investments in third countries by EC financial institutions were on average 3.8 bn Ecu, or 17.3 % of total EC direct investment abroad, and 50.7 % of total EC direct investment abroad in the services sector (source: Eurostat);
- business done by non-residents in European financial centres and in particular issuing and trading activity in equities and bonds on the Euromarkets, and foreign exchange trading in EC financial centres, which account for some 40 % of world foreign exchange trading (data from the BIS).
(2) For instance, trading in foreign exchange averaged in 1992 880 bn $ a day, world outstanding international loans totalled in March 1992 almost 6 trillion $, the outstanding value of bonds issued in the international markets was 1,7 trillion $ in June 1992, and total outstanding value of financial derivatives traded on organized exchanges at end 1991 was 3,3 trillion $ (data from different BIS reports).
(3) Figures for 1991. Source: IMF International Financial Statistics, July 1992.
(4) Figures for 1990. Source: Sigma (Swiss Reinsurance), May 1992.
(5) Figures for 1991, covering only business carried out in official stock exchanges. Source: International Federation of Stock Exchanges.
(6) This assessment is still valid at present because
since December 1992 no new offers requiring a correction of our evaluation
have been tabled, and since that time there have not been negotiations
on initial liberalization commitments in Geneva; these are expected to
resume later in July 1993.