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The financial sector is a critical component of a nation’s economy: it not only contributes directly to output and employment but also provides an essential infrastructure for the functioning of the entire economy. International trade in financial services—together with enhanced prudential regulation and supervision and other basic structural reforms—can play an important role in helping countries build financial systems that are more competitive and efficient, and therefore more stable.

In this study, Sydney J. Key analyzes the role of the General Agreement on Trade in Services (GATS) and the World Trade Organization (WTO) in the liberalization and regulation of the financial services sector.  What makes her analysis unique is that it integrates the very different perspectives of trade policy and financial regulatory policy. Throughout, she emphasizes the complementary and mutually reinforcing relationship between efforts to open markets under the GATS and the intensive ongoing international work on strengthening domestic financial systems, including prudential regulation and supervision.

Key’s study identifies six broad goals for the financial services negotiations in the Doha round. Four of the goals involve what she terms “first-pillar liberalization,” aimed at achieving national treatment and market access.  These include “binding” existing and ongoing liberalization; removing remaining barriers to national treatment and market access and then binding the resulting liberalization; narrowing or withdrawing broad most-favored-nation (MFN) exemptions; and an incremental approach to cross-border services. The final two goals involve “second-pillar liberalization,” aimed at removing nonquantitative and nondiscriminatory structural barriers—namely, developing stronger GATS disciplines on regulatory transparency; and removing barriers that serve primarily to deny to “effective market access” and then binding the resulting liberalization.

Key emphasizes that success in achieving the goals discussed in this study depends significantly on factors beyond the scope of the Doha round negotiations, but concludes that the negotiations can play an important role in helping to accelerate the process of liberalization of trade in financial services as well as solidifying its results in the form of binding commitments subject to the WTO dispute settlement mechanism.

Sydney J. Key is on the staff of the Federal Reserve Board's Division of International Finance in Washington, D.C. She is the author of numerous articles and studies, including Financial
Services in the Uruguay Round and the WTO.

The views expressed by the author in this publication should not be interpreted as representing the views of the Board of Governors of the Federal Reserve System or anyone else on its staff.