Dimensions: 6'' x 9'' 118 pages AEI Press  (Washington) Publication Date: November 2003 Paperback ISBN: 0844741825 Price: $ 15.00 Add to Cart   Examination Copies

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January 2004
The Doha Round and Financial Services Negotiations
By: Sydney J. Key

This study 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 and identifies six broad goals for the financial services negotiations in the Doha round. What makes this study unique is that it integrates the two very different perspectives of trade policy and financial regulatory policy. Throughout, the study 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.

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 book should not be interpreted as representing the views of the Board of Governors of the Federal Reserve System or anyone else on its staff.

The Doha Round and Financial Services Negotiations examines the role of the GATS and the WTO in relation to what the author terms the "three pillars" of liberalization necessary to achieve "international contestability of markets": (1) opening markets to foreign services and service suppliers by providing "national treatment" and "market access;" (2) undertaking domestic structural reforms that would eliminate nondiscriminatory structural barriers to trade in financial services; and (3) liberalizing capital movements. The GATS deals with third-pillar liberalization only insofar as it affects countries' specific commitments to liberalize trade in services; in general, liberalization of capital movements is a matter of concern for the International Monetary Fund (IMF).

The study emphasizes the importance of focusing on fundamental first-pillar liberalization in the Doha round financial services negotiations and sets forth four first-pillar goals:

• "Binding" in the GATS existing and ongoing liberalization that provides national treatment and market access;
• Removing remaining barriers to national treatment and market access and then binding the resulting liberalization;
• Narrowing or withdrawing the broad exemptions that some WTO members have taken from the most-favored-nation (MFN) obligation, which are closely related to national treatment and market access commitments; and
• Using an incremental approach for cross-border services that combines strengthening GATS commitments and achieving greater liberalization in practice.

A difficult issue is how far the Doha round financial services negotiations should extend into the realm of second-pillar liberalization--that is, reducing or eliminating nonquantitative and nondiscriminatory structural barriers to trade in financial services. The study suggests that the Doha round financial services negotiations should proceed selectively in dealing with domestic structural reform and singles out two second-pillar goals:

• Developing stronger GATS disciplines on regulatory transparency; and
• Removing barriers to "effective market access" and then binding the resulting liberalization.

The study argues that stronger GATS rules on transparency in developing and applying regulations, together with related rules on procedural "fairness" in applying regulations, would not only help eliminate barriers created by opaque and unfair regulatory procedures but also help ensure that a country does not use its regulatory process to undermine its commitments to national treatment and market access. GATS rules on transparency in financial services regulation could both complement and build upon the work on transparency that is part of international efforts to strengthen domestic financial systems.

The other second-pillar goal involves domestic regulatory measures that cannot be justified on prudential grounds and serve primarily to keep foreign financial firms from competing in host-country markets by making entry impractical or too costly--thereby denying them "effective market access." Identifying barriers to effective market access that could be negotiated in the Doha round requires a country's trading partners to determine whether, in practice, a host country's measures keep foreign firms from competing in its markets and whether a "critical mass" of regulators believes that the measures are inappropriate for prudential purposes. The study points out, however, that even if the prevalent regulatory view is that the measures cannot be justified on prudential grounds, host-country regulators must be persuaded to accept it.

Barriers to trade in financial services are also created by legitimate prudential measures. The study explains the importance of the "prudential carve-out" for domestic regulation in the GATS Annex on Financial Services: it ensures that the GATS will not interfere with the ability of national authorities to exercise their responsibilities for prudential regulation and supervision to protect consumers of financial services and to promote the integrity and stability of the financial system. While prudential measures sometimes impose additional requirements on foreign firms, they may also create barriers simply because they differ among countries--that is, financial firms operating on a global basis may often find it burdensome to comply with a multitude of different national rules.

The study identifies two approaches for dealing with barriers created by prudential measures. One would have home-country regulatory authorities convince host-country authorities that their prudential concerns can be addressed with less sweeping requirements. These efforts could take place bilaterally or in various international fora, including the financial services negotiations under the auspices of the WTO, where finance ministries play a major role. A second approach would have home- and host-country authorities negotiate a recognition arrangement. Although the GATS Annex on Financial Services facilitates unilateral or mutual recognition of prudential measures by permitting a departure from the MFN obligation of the GATS for such arrangements, the study explains why the WTO is not the appropriate forum for their negotiation.

The study emphasizes that success in achieving the goals it identifies for financial services in the Doha round depends significantly on factors beyond the scope of the negotiations. It points out that the process of liberalization for financial services is being driven not only by market forces and new technologies but also by the growing recognition among policymakers that market opening can both benefit host-country consumers of financial services and contribute to the resiliency of domestic financial systems. It also emphasizes that the intensive international work on development of minimum standards and codes of good practices for sound financial systems--especially with regard to prudential regulation and supervision--and their implementation by individual countries provide a strong foundation for moving ahead with further liberalization of trade in financial services. The negotiations in the Doha round can play an important role in helping to accelerate the process of liberalization as well as solidifying its results in the form of binding commitments subject to the WTO dispute settlement mechanism.

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