Close encounters at the WTO

An accord at the WTO liberalizing the financial services sectors of ultimately, some 102 countries was concluded on 13 December in Geneva. Although its proponents were effusive in welcoming the accord, Third World experts, however, warned of Northern financial giants taking over the financial sectors of the South. "A one-way affair with all gains to the North", said a senior Ambassador. The several articles that follow provide a report of the state of negotiations leading up to its conclusion on 13 December.

by Chakravarthi Raghavan

GENEVA: Trade negotiators ended in the wee-hours of 13 December morning, virtually 4-year old talks on financial services, with a pact hailed by its proponents and industry, almost rhapsodically, as a "landmark" and "historic" agreement to "free" an important sector of world trade.

The deal at the World Trade Organization, to enter into force (if everything works out as planned) in March 1999, would benefit mainly, if not only, financial services companies (banks, securities and insurance firms) of the US and the European Union.

The deal became possible, in the view of many observers here, because of the financial turmoil in Asia, threatening to become a global deflationary crisis, which clearly made the US decide that walking away from the deal could further unsettle the financial markets and envelop the industrial world.

No guarantee

[Over the weekend, the secretariat of the Paris-based rich men's club, the OECD (which is due to release later, its semi- annual growth outlook and forecast of 3% this year and 2.9%, next year), pared down the growth projections in the OECD countries, and said that growth would be less by 0.3 percentage points this year and by 0.9 percentage points next year.]

But the WTO deal is no guarantee that it would calm the turbulence in Asian markets, arrest the continuing downslide of their currencies and stock markets as a result of the IMF rescue packages, programmes and conditionalities, and ensure an early return by these countries to the growth path.

The WTO deal may, and this is just an untested premise on which policy-makers in developing countries have based their market opening "offers", help the access of developing countries to trade and investment finance.

But it is doubtful, if not unlikely, that because of the pact, any of the foreign banks and others who have fled the Asian markets or are unwilling to roll over the short-term finances, would return quickly.

Short-term portfolio investors, and international banks lending money to local banks and financial institutions, or other investors, went into these countries on the basis of their high growth rates and higher returns (than in their home countries).

There are no signs that the IMF-mandated programmes would restore confidence of foreign funds and banks in these countries over the short-term.

Given the crisis on world markets and the world economy, the last-minute negotiations and US hold-up of an okay to the deal on the night of 12/13 December - as messages went back and forth from Geneva to Washington, and according to reports, between the US Treasury and the American International Group (AIG) and its backers in the US Congress - the processes of the multilateral trade organization bordered on a farce.

It seemed as if the Secretariat and its leadership, instead of functioning on behalf of all the membership in a multilateral negotiating process, was tacitly helping the US to bully and face-down one or two countries, who were not ready to meet its demands.

The rest of the WTO members, who gathered for the meetings of the Committee on Trade in Financial Services (CTFS) to conclude a deal by a 12 December midnight (Geneva time) deadline, were repeatedly convened for informal meetings which were recessed, as the US "negotiated" one floor above, separately, with Malaysia, Japan and South Korea.

Top officials at the US mission to the WTO kept running back and forth, between the US trade mission office on the opposite side of the road and the first floor of the WTO building, relaying messages and responses, between the US Deputy Trade Representative, Jeff Lang at the WTO and the US treasury and trade officials in Washington, while milling journalists and some diplomats were being relayed messages by the WTO press spokesman, Keith Rockwell, that a deal was near.

It was like a science fiction movie, except that in the real life of "globalization" and the WTO multilateral trade system, the benefits go to the mega-corporations of the US and Europe, while it is the majority, the poor people (in all countries) and the poor developing countries, who pay the price.

When the movie, "Close Encounters of the Third Kind", a science fiction movie about "good guys" from outer space, came out, a film guide magazine described it as a "combination of Walt Disney, 1950s science fiction and junk food turned into a persuasive - if arrested - version of the American dream."

The outcome of negotiations

The entire financial services negotiations, a carry-over of the unfinished business of the Uruguay Round, which was brought to a close in the early hours of 13 December, is a combination of an effort to bring back visions of 19th century empires and laissez faire, and its fiction of trickle-down effects, benefiting everyone, but instead is wearing thin and looking more like a post-dated cheque on a crashing bank, with money (not serving any of the economic text-book definitions of its use) moving back and forth in a global casino, and being mistaken for production of goods and services and assets.

The outcome of the 8-9 hours of "drama" was a farce of sorts:

  • an eye-ball-to-eye-ball confrontation with Malaysia ended with a deal where Malaysia refused to budge beyond its 51% equity offer and guarantee existing insurers with more equity and not to dilute their shareholdings and offer them to the Malaysian public, but acquiesced to a US Most-Favoured Nation (MFN) exemption entry in its GATS schedule on insurance. But the US wording of the exemption seemed to be an ineffective, and not a very credible threat of the use of future trade sanctions, and will provide no legal cover for the US and is bound to be ignored, if not knocked out, at the first challenge in a dispute settlement process;

  • a blank from South Korea, sinking under a financial crisis and US-inspired IMF conditionalities and engaged in a presidential election process: its delegation declined US demands for scheduling at the WTO, some of South Korea's promises at the OECD and in IMF conditionalities to enable foreign (US) take-over of the Korean banks; and

  • a multilateralization of the US-Japan bilateral pact on insurance, which was really a multilateralization of an "illiberalization" - misleadingly described as "additional commitments" of liberalization - of a part of Japan's insurance sector, with Japan committed to not allow any new suppliers (Japanese or non-Japanese) into its market for some specialized personal insurance.

The US-Japan bilateral accord

Japan, unless it enters an MFN reservation (which would have been unacceptable to others) under the MFN provisions of the WTO/GATS accord, would inevitably have had to extend to other WTO members, the benefits of the US-Japan accord to open its insurance sector to foreign competition. But that accord, while opening up for competition, what the Japanese call the first two sectors (life insurance, marine and other general insurance), and some areas in the third sector of specialized personalized insurance (direct response system for automobile insurance and so on), also specified restrictions on new entrants for supply of such insurance as against cancer, and student travel insurance for study abroad and so on. In these, it seemed that the US-Japan deal, now multilateralized, would block Japanese and others from competing in an area of insurance service by a few US, and perhaps also, European insurers.

The US-Malaysia deal, and the wording of the MFN exception, was apparently okayed by Treasury Secretary, Rubin, after consulting with American International Group (AIG) chief, Greenberg. The Malaysian side expressed its inability to go beyond the 51% equity ownership for foreign insurers in its "offer", but negotiated down a US MFN-exemption clause of possible future retaliation in the insurance sector.

As inscribed in the US schedule, the MFN exemption stipulation of the US in the insurance sector, which does not mention Malaysia by name, is intended to enable the US to deny a Malaysian insurer, entry to the US market or block any existing Malaysian enterprise (bank or security firm) extending its activities to the insurance sector, in the event of a US person (individual or corporate) being compelled "on the basis of its nationality" to reduce its share of ownership in an insurance services provider operating in Malaysia.

The Malaysian law requiring dilution of equity below the 51% level, is not specifically directed against the US insurers (the AIG and reportedly, also Aetna), but all foreign insurers. All except AIG appear to have agreed with the Malaysian authorities that they would dilute their equity to the extent required by offering it to locals. This means that if and when Malaysia moves beyond its present efforts to persuade foreign insurers to voluntarily comply, it would not be a case of a US insurer, cue US nationality, to divest and dilute.

Market access commitments

In any event, the framework of GATS provides for a country (as the US has done) to list in its financial services schedule under the column for market access, the sector or sub-sectors it throws open for foreign competition, and under four modes of supply: from territory of one member to another across borders, in the territory of one member to consumers of another, through commercial presence, and through movement of natural persons.

This market access, can be limited in terms of "national treatment", that is, the right to be treated equally with a domestic supplier. Otherwise, all foreign suppliers in relation to the market access commitments have to be treated on an MFN basis.

But GATS also envisages that a country could provide better access to the service supplier of another country through a bilateral accord. It would then apply multilaterally to all others, unless the country providing the more favourable treatment lists it in a schedule as an MFN exception or exemption.

The GATS does not envisage, and does not allow, a market access commitment entered in a country schedule to be the subject of an MFN exemption - as the US has sought to do in relation to Malaysia and the AIG.

The recent banana panel ruling against the EC in a case brought by the US, has stipulated that while an entry in a schedule of a country can go beyond the rules of an accord and provide more concessions, an entry cannot restrict the scope of the rules.

This legal argument would be a precedent against the US and its MFN exemption schedule in this matter.

The US offer with MFN exemption

One WTO trade official, who did not want to be identified, said that the US provision would have no legal effect in the event of any future dispute, but that it may provide an "optical illusion or spin" to enable the US administration, and the AIG and its backer, Senator D'Amato, to back off and agree to the deal.

Malaysia appears to have agreed to the US provision, having succeeded in persuading or requiring the US to limit any such exception to the insurance sector where Malaysia was unable to comply with the US demand. But it was not clear whether the actual (faulty) wording was negotiated with Malaysia by the US.

The revised offer by the US, with the MFN exemption provision, was presented at the last, and several trade diplomats from the Third World who saw it, did not feel impelled to raise objections and hold up the overall accord.

As one of them said later, it may not even hit Malaysia, and certainly not others, so why bother now.

But some are expected to raise the issue, and enter their own reservations or reservation of their rights, in February, when all the schedules will be subject to a multilateral verification process, before incorporation.

After the tortuous negotiations, the WTO head, Renato Ruggiero, US officials here and in Washington, the EC Trade Commissioner, Sir Leon Brittan, and others were effusive in welcoming and praising the accord.

Ruggiero called it a "historical day for the WTO with three major successes this year (under his leadership) of agreements on information technology, basic telecommunications and now, financial services liberalization". And in a misuse of political lexicon, Ruggiero added that the financial services pact was "a referendum on liberalization".

EC Trade Commissioner, Sir Leon Brittan unconsciously evoked the imperial glory of 19th century Britain by calling the three accords, the "three jewels in the WTO crown".

Effusive statements

Representatives of US financial service industries rushed into the WTO lobby to distribute effusive statements of support to the pact and how it would enable them to serve consumers globally, but not concealing their glee that they would now be able to operate and gain in many developing country markets.

Several of them also said that the success of the deal showed that sectoral negotiations could work, and thus presumably, opposing any general round of negotiations involving many sectors, where enterprises in one sector would benefit and support a deal while in another, they would lose and oppose it.

The statements, as one veteran English journalist present characterized them, bore the marks of remarks of those "intoxicated with the exuberance of their own verbosity".

The actual effects of the various offers and country- schedules can be assessed only after they become public, and can be analyzed carefully.

But the general impression of many delegates was that most of the major developing countries have only scheduled and committed partially, to the liberalization process that they were already doing autonomously - whether in terms of operations of foreign banks, insurers, security firms and so on.

But there was no reciprocal benefit or gain for their enterprises in a trade dominated and oligopolized by US and European enterprises and suppliers.

The Egyptian Ambassador, Mounir Zahran, perhaps reflecting such views, said that the negotiations and the accord was a "one-way" affair, with all the benefits to the North and their corporations who could now go and compete and make money in the South. In contrast, the South's banks and institutions are unlikely to penetrate Northern markets.

"But we all need trade finance and foreign investment, and have agreed to this in the hope that this will help bring in finance and foreign investments," Zahran said. But most countries like his own, he added, have merely scheduled at the WTO what their domestic legislation allowed and what they were already doing in terms of allowing foreign competition. Very few would probably need to change any law to comply with the accord, he said.

Several trade diplomats privately said that perhaps in many countries of the South, the openings and competition would mean that their domestic companies may be unable to compete with the foreigners, but perhaps the foreign presence would help other sectors of their economy.

But Third World experts said that, though the WTO, the US, EC, IMF et al are presenting a picture of major benefits to the developing world through the liberalized financial sectors - through efficiency and access of industry and consumers to such services - this is an unproven economic theory at best.

Detriment to the real economy

The suppliers are the major banking, securities and insurance corporations of the North: an expanded market in the South, and the benefits of profit-maximization and capital accumulation would flow to their shareholders in the North. These mega-institutions look to those with lots of money as investors, and provide finance and services to major businesses.

Even in the industrialized world, where there is supposedly competition and its benefits, small and medium enterprises find it difficult to get loans or seed capital, and the situation won't change. In today's world (as the turmoil in Asia shows), banks, hedge-funds and others are now in the business of trading assets to make more money, and are not engaging in more difficult, and risky work in the real economy - of setting up production enterprises and selling the output.

In the developing world, the situation is and will be worse.

The financial services pact would buttress the operations of this "unreal world" of trading in money and assets, but may work to the detriment of the real economy of production and distribution of goods and services. (Third World Economics No.175, 16-31 December 1997)

The above article was originally published in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.