Has the WTO's services agreement contributed to the crisis or is it a tool which can help create a more stable environment for international financial services? Myriam Vander Stichele, TNI Fellow and senior researcher at the Centre for Research on Multinational Corporations, and Sergio Marchi, senior fellow at the International Centre for Trade and Sustainable Development, discuss this topic with Keith Rockwell, WTO Spokesperson.
The WTO's General Agreement on Trade in Services (the "GATS") has very much underpinned expansion without regulation and supervision, so the financial corporations had the guarantee that their expansion would be underpinned. But financial services are not the same as other services – they need special supervisory structures.
Chair, Keith Rockwell: Hello and welcome to WTO Forum.
The WTO's General Agreement on Trade in Services (the "GATS") is designed to open trade in services like transportation, telecommunications and financial services. Proponents of the GATS say that by increasing competition we spur innovation and efficiency in markets around the world. Services comprise more than 50 per cent of total global output, so enhancing efficiency in these sectors can raise economic growth and improve prospects for development.
Critics of more open services markets, however, have said that opening markets, particularly in finance, can raise risks and may have contributed to the global financial crisis that has sent shock waves around the world.
Has the WTO's Agreement on Services created greater risks or does it offer prospects for stability and innovation that can actually create a more stable environment for trade in services, particularly financial services.
With us today are two experts on this question. Myriam Vander Stichele, the Senior Researcher at the Amsterdam based Centre for Research on Multinational Corporations, and Sergio Marchi, formerly Canada's trade minister, the Chairman of the General Council here at the WTO, and currently a Senior Fellow at the International Centre for Trade and Sustainable Development.
Welcome to you both.
Myriam, your thoughts.
Myriam Vander Stichele:
My thoughts are that the GATS Agreement has very much underpinned this expansion without regulation and supervision, you know the innovation was being allowed. And because of the expansion – and the underpinning was happening, for instance, one of the GATS rules saying you should not allow the limitations on foreign ownership – so the companies, the financial corporations had the guarantee that their expansion would be underpinned. But we also see, and it's now recognized, that this competition was then putting pressure on the regulators to kind of relax the regulations and the supervision, which is called this "light touch regulation". Because of the negotiations being in that atmosphere, these were also being included in the GATS rules.
Don't forget that GATS liberalization is not about tariffs. It's basically looking at the measures that restrict the trade. And one of those measures is, for instance, to say that you can't limit the size of the operation or the value of the operation. So this is like, too big to fail, was being underpinned by those rules. And at the same time, now, it also becomes more difficult to kind of look at the new reforms because there wasn't a kind of model in the GATS which is called the "Understanding", but it also says, well, you shouldn't regulate further, it's a standstill regulation, or you have to allow any new financial services. So especially the rich countries, which abided to them. So in that sense it seems that what is now on the table, and which is in the Rules, is underpinning the old model, and I think it's about time for the GATS negotiators to recognize the lessons that need to be learned, and not to go on as they have been doing in the past.
Chair: Sergio Marchi, do you agree with that?
Sergio Marchi: There is always lessons to be learnt, but we also need to learn what the lesson was, principally. And clearly in the United States constituency, in terms of the housing bubble, and what went wrong, and the lack of oversight, clearly, obviously people looking the other way. But I would not make the jump or the correlation that liberalization means no regulation. That's clearly not true. It's complementary. For instance, in Canada, once that financial storm from America hit the world, it had more to do with the integration of that world rather than its regulations, because in Canada, we did not suffer, then or now, any financial crisis. Our crisis was when the world economy slowed down, when trade slowed down, when consumership moved back, that's when we got the crisis. We got an economic crisis which then transformed itself into an unemployment crisis or challenge that we're dealing with. But our banks, in Canada – touch wood – and other financial institutions, have remained as healthy after the crisis than they were before. And that was because of regulatory oversight. So I don't think we should simply make the simplistic argument that liberalization means no regulation. Of course liberalization should be accompanied by astute overhanging oversight and regulation.
Chair: So can openness and regulation be complementary?
Myriam Vander Stichele: It can be, but it depends on how the regulations are being put, because exactly what some of the GATS rules do, is kind of, for instance, to look at what some of the measures that now have been taking by the G‑20, and I've looked also at the European regulations. They want to limit what is called the "over the counter" trade in derivatives, because, you know, it's complex, the volume is extremely high – in the trillions – but one of the GATS rules on domestic regulations says that you should not have licensing requirements which are aiming at restricting your services. So there is a contradiction. There is no view that regulations might kind of reduce some of the services, which is exactly the objective. While the rules in the GATS are of course especially done to make sure that there are no restrictions. So there is a contradiction there. So in that sense I think half of the international regulations supervision, it's a long process, have them there, and then based on that you have to see what is possible to liberalize, etc.
Chair: Is there a vacuum in the global regulatory structure as it pertains to financial services?
Sergio Marchi: Well, I think a lot of governments and a lot of institutions are looking exactly at that, but what we don't necessarily want, perhaps, is these pendulums to go from one extreme to the other, because we always have to work our way out of those extreme positions. And so hopefully that pendulum can perhaps be recalibrated somewhere in the centre so that it facilitates both for governments and companies a predictable level playing field.
But the other thing that we have to understand about services is that it is probably not so much about trade as much as I would want it to be from a GATS perspective. Services is being liberalized autonomously. Countries are moving on their own. Why is that? Because services, as you said, is 50 per cent of world GDP. It's 70 per cent + in my country, and in America, as it is in developed countries, and about 50 per cent – and growing – in developing countries. Why should developing countries play in yesterday's manufacturing industrial sand box when they can be creating the kinds of technologies and jobs and opportunities with services? And secondly they know that services is a relationship to your own competitiveness. That is to say, if you don't have good quality services infrastructure, your national economy will not be as competitive. And the quality of life enjoyed by your citizens will not be as high as you should have for them, and that's why countries are moving on their own, because services is an indisputable economic force today, and more so for tomorrow's prosperity, not only in rich countries, but particularly with countries who are struggling to have a better performance for themselves and for their peoples.
Chair: Isn't it true that efficient services do underpin competitive economies, Myriam?
Myriam Vander Stichele: But efficient for whom?
We have been looking at more case studies, because the literature is not there. This is an old argument. If you look at what foreign banks are doing in developing countries – and we have a case study with all the figures for India – the national banks are more efficient, looking at different ratios, than the foreign ones. The foreign ones – you are saying it's better for the citizens – the foreign ones don't care to go to the rural areas, they don't go to the poor areas, so they don't give credit to the small and medium‑sized enterprises. So that's the problem, where you have to look at the profit making strategies of those companies. And also what you see in the current crisis, they are actually repatriating capital. They are sometimes leaving in times of crisis. So the argument to say it's foreign and therefore it's more efficient is absolutely not an argument you can make. I think it's per country you have to look at what is happening. What are the needs of the countries, and whether or not these foreign companies, and especially I'm talking about the banking sector, whether or not they will really fulfil the needs of that country.
Chair: Sergio Marchi, final thoughts.
Sergio Marchi: I don't think anything is perfect, but I certainly don't buy that argument for one moment. Some old arguments are still good arguments. Just because they were old doesn't make them bad. And secondly, developing countries, can, through services, develop in the next era much better and much quicker than they are today. It's interesting that at the time of the Uruguay Round, with GATS, India was the greatest proponent for introducing GATS. Today in the GATS negotiations they are one of the leading proponents. Why is that? Because they have figured out the magic of services. So let's spread that magic rather than spreading myths.
Chair: Last word for you, Myriam.
Myriam Vander Stichele: This is about financial services. Financial services is not the same as other services. We've seen it. I know exactly what you're saying. You're underpinning your economy, and whatever. And we always had these kind of special supervisory structures which are not sufficient now, because they were so special, and we have to recognize that they are special and therefore they cannot be treated as they are, as normal services or other services in the GATS negotiations. And I would say, you know, it's extremely dangerous for the current negotiations. I would say, if you're not dealing with it, not trying to see that there are differences, you have toxic assets which might undermine your WTO system.
Chair: Myriam Vander Stichele, Sergio Marchi, many thanks to you both. And thanks to you for watching WTO forum.
Myriam vander Stichele
Senior Researcher, Centre for Research on Multinational Corporations (SOMO)
Myriam Vander Stichele has been monitoring international trade negotiations and agreements since 1990, both at a regional and global level. She is an advisor to many NGOs whose indepth research on investment agreements and policies, and private investor strategies has sparked many international campaigns.
With an M.Phil in International Relations from Cambridge, Myriam's research is particularly focussed on the financial, food and supermarkets sectors, and the corporate strategies and services liberalisation related to these.