US-EC move to open up Asian and Latin American markets

The US and the EU, in a coordinated effort at the WTO are now targeting the major developing economies of Asia and Latin America, to "pry open" their financial services markets. They are now wanting a phased full liberalization of these markets for their financial services providers.

by Chakravarthi Raghavan

GENEVA: Major developing economies of Asia and Latin America are the targets of a coordinated effort by the US and the European Union to "pry open" their markets in banking, insurance and securities services, with the two playing the "bad-cop-good-cop" ploy.

Canada and Japan, the other two members of the Quad, are expected to join this onslaught.

The US earlier, in mid-July, held a background briefing for some media on its demands, target countries and plans, and US plans for its deputy trade representative Jeff Lang and a high-level US treasury official to go on a tour of these capitals to pressure them.

On 17 July, the European Commission's Hans Friedrich Beseler, Director-General of External Relations/Commercial Policy, spelt out the EC's views in an on-record press briefing.

This "round" of negotiations began on 10 April, and have to conclude by 12 December - at which time, the 96 countries (with the EC's 15) have the option of filing their final and revised schedules, take back what they filed at Marrakesh, or as part of the interim accord in 1995, or revise these schedules, with options of filing their own MFN exemptions - as the US did.

In the previous round of financial services negotiations - a sectoral negotiations that continued beyond the Uruguay Round conclusion at Marrakesh, and which resulted finally in the US filing MFN reservations - the US had insisted similarly on reciprocity of full liberalisation matching its own, to be achieved by developing countries at the most over a five-year period, and with specific commitments to this effect.

Both the US and EC now want the developing countries to fully liberalize their financial services markets, at the most phasing-in their liberalization over a one to three-year period. "Five years is too long," declared Beseler at his press briefing.

This is in contrast to the US and EC getting 10-years from 1995 to phase-out their discriminatory quotas on textiles and clothing imports from developing countries, and no target even now, set for full liberalisation of their agricultural sectors.

Particular targets of the EC

Among the particular targets of the EC in the financial services, Beseler specifically referred to Malaysia and its "indigenisation" policy - which requires banks and insurance companies to be incorporated in Malaysia, and with no more than 50% foreign share-holding - the balance to be made available to locals.

Beseler said, this was a "retrograde" measure in terms of global liberalisation and could well prove to be a "killer" of the financial services negotiations.

Beseler said the Malaysian stand - he called it "their slogan of indigenisation" - was more serious, because of the likelihood of its spreading to other countries. Indonesia, he said, had already indicated in bilateral talks that they too had an indigenisation policy.

The EC official put the financial services talks in the same league as the success in the basic telecommunications and information technology products negotiations, and spoke that if the negotiations were not successfully concluded, prospects of new negotiations were uncertain.

This seemed to indicate that the US and EC, in their WTO strategies would continue to pursue their liberalisation drives in sectors of strength and dominance by their TNCs, putting them on a WTO fast-track, while ignoring and sidelining trade liberalisation in areas of interest to developing countries.

[At a WTO briefing on 17 July, where the trade officials more or less took the same line about urgency and time running short for the negotiations, they admitted that in any event, a second round of services negotiations are scheduled for 2000 (under the GATS accord) and the financial services could be part of it.]

The US offer, tabled in mid-July, was a very good signal, Beseler said, in that it was based on the most-favoured-nation (MFN) principle, providing substantial market access and national treatment to its market for foreign suppliers - unlike the last time when they pulled out, because of pressures from their financial service suppliers.

Japan too, had met some of the important concerns and requests of the EC. Canada, because of the elections, had not been in a position to revise its offer, but had indicated that it would do so before the end of the negotiations.

To achieve "critical mass"

For the negotiations to be clinched, and a deal concluded, it was now essential for the Asian and South American countries to greatly improve their offers, so as to achieve a "critical mass" of countries and improved market access offers from participants.

Apart from bilateral talks here, and political level contacts between Brussels and capitals of these countries, the EC plans to pursue these issues at the September meeting of ASEAN finance ministers in Bangkok and of the economy ministers near Tokyo in October.

The EC has also held talks here with India, Indonesia and a number of other countries of Asia and Latin America, Beseler said. The EC welcomed the improved offers that have been tabled by Australia, Bahrain, Hong Kong-China, Hungary, Norway and Switzerland, but wanted "high level of offers" from others.

"Otherwise, there will be a danger that the negotiations will fail and we will lose even the benefits of the temporary deal done in 1995... If we cannot reach a permanent deal in December, there will be little purpose to other initiatives, such as APEC and ASEM, and a dark cloud will hang over the 1998 WTO Ministerial meeting," Beseler said, in a written statement that seemed to be a "veiled threat".

But since in all these fora - APEC and ASEM, as well as the WTO Ministerial meets, the US and EC are the major demandeurs - it was not at all clear, whether the targets will be much impressed.

Beseler noted that many of the ASEAN countries are facing a financial buffeting currently, but claimed that a WTO deal for liberalising the markets will be "part of their solution."

"What these countries need," he said, "is stable investment climate, and well functioning banking and insurance sectors, and incorporating their commitments multilaterally in the WTO and its dispute settlement system which would preclude unilateral and arbitrary actions."

But a EC background paper (by the financial services industries of the US and EC) showed for example, that while India has been throwing open its market for foreign direct investment - removing in many sectors, former conditions over equity or technology and so on - foreign investors have been showing an appetite only for the short-term equity markets investments which in 1995 for example, brought in $777 million - the highest equity investments in 13 emerging markets surveyed, which together accounted for $3,300 million.

Beseler and his aides though, did not elaborate how allowing these foreign enterprises to engage in more speculative and other financial services activities in the emerging markets of Asia - whether via their banks, insurance funds and companies or securities firms - would bring about more stability.

Several academic studies, including some published by UNCTAD as part of the research papers of the G-24 have in fact cautioned developing countries on hasty liberalisation, underlining that liberalisation of the financial sectors should be the last, and not the first or any intermediate stage, and even then it should be combined with very strong regulatory powers and supervision and administration.

And the arguments about the WTO and its rule-based system precluding unilateral and arbitrary actions was also trotted out by EC negotiators as important of preventing US unilateralism in 1993, in "selling" to key developing countries the merits of a single-package WTO and an integrated dispute settlement system.

But the US has not so far repealed the S.301 of its trade law, or its "Special 301" relating to its intellectual property rights or the "Super 301" - but is keeping them on the statute book and using them.

In running through a list of other countries, whom the US and EC are pressing for improvements, Beseler said that the EC's bilateral accords with Japan dealt with some of the regulatory measures, but the EC wanted them to be scheduled in the WTO financial services deal, but that Japan seemed reluctant.

Malaysia's "slogan of indigenisation" requiring foreign companies to divest their shares up to 50% "is contrary to what we are trying to achieve globally through liberalisation." This is particularly troublesome as we get signals from others too about similar intentions and desires, Beseler said and cited Indonesia as a specific example which had mentioned the Malaysian precedent.

South Korea had set a phased-plan for progressive liberalisation to gain entry into the OECD, but was not prepared to do so by scheduling it at the WTO.

India's insurance sector

In the case of Brazil, some of their liberalisation depends on constitutional amendments. But some of the limitations were also being used by Brasilia to hold back, Beseler complained. Even under existing law, he said, President Cordozo could authorize foreign banks to open branches, but acting on a case-by-case basis.

"We want to grandfather all these openings in the new accord," he said. In the case of India, the most important issue was the insurance sector, where there was a state monopoly.

When an Indian journalist remarked that the new budget already envisaged opening up equity in the insurance sector for private investors, Beseler said this should be "scheduled" in the WTO, and be a multilateral commitment, and subject to the WTO dispute settlement.

To achieve a critical mass for successful conclusion, the agreement must encompass all countries covered by the interim agreement, and all of them need to improve their offers.

A worst-case scenario would be a breakdown of negotiations by 15 December - which would mean that all the gains made in the interim accord would be lost, and some could take back even what they have offered now, so as to strengthen their future negotiating position.

The EC could not foresee a deal without guaranteed majority ownership for its enterprises in emerging markets. (TWE 166 1-15 August 1997)

Chakravarthi Raghavan is Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.