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August 05, 2009

The most awesome WTO agreement that no one can remember

After years of celebrating the WTO Financial Services Agreement, many analysts and institutions appear eager to pretend it doesn't even exist.

Take a new report by Gary Hufbauer of the Peterson Institute and his colleagues Luca Rubini and Yee Wong. They assert that:

By far the largest bailouts were extended to the financial sector, both in the United States and Europe. This is not surprising, since reckless behavior by major banks and insurance firms created the epicenter for the Great Crisis and threatened to drag the entire world into the Second Great Depression. By our reckoning, shown in Tables 1 and 2, the United States has extended $1.7 trillion to financial institutions, and European member states have extended $854 billion. These figures exclude mortgage market support and the Fed’s dealings in commercial paper (which exceeded $6 trillion), though of course those measures were entwined with rescuing the financial system. The threat of a Second Great Depression furnished the justification for financial sector bailouts on an unprecedented scale.

The Agreement on Subsidies and Countervailing Measures (ASCM) was not extended to discipline subsidies in the service sector. Moreover, the General Agreement on Services (GATS) does not provide meaningful regulation of service subsidies. Accordingly, WTO members have no grounds for complaining in the WTO Dispute Settlement Mechanism when another member provides massive assistance to a bank or insurer, even when the assistance enables the recipient firm to survive and compete vigorously in the global marketplace.


As support, they cite an opinion piece by Arvind Subramanian and Aaditya Mattoo, the latter a GATS expert who should know better. In their joint piece, they write:

We have witnessed protection imposed through traditional instruments, such as tariff increases, restrictive import licensing, state aid (especially in the automobile and financial sectors), anti-dumping actions, and discriminatory government procurement, which has assumed greater importance in industrial countries because of the increased role of the state and higher government expenditures. There have also been newer forms of protection, including undervalued exchange rates, environmentally motivated trade restrictions, resource nationalism (such as when countries restricted the export of food during last year’s commodity crisis), and now financial nationalism, whereby financial resources are directed to national firms.

These differing forms of protection share two common features – they are consistent with current WTO rules and, for the most part, are not being addressed in the Doha Round.

The authors seem not to have read the Guidelines for Scheduling GATS Commitments, adopted by WTO Members in 2001, which state:

“Article XVII [National Treatment] applies to subsidies in the same way that it applies to all other measures. ... any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on National Treatment or brought into conformity with that Article. Subsidies are also not excluded from the scope of Article II (MFN). In line with the paragraph above, a binding under Article XVII with respect to the granting of a subsidy does not require a Member to offer such a subsidy to a services supplier located in the territory of another Member.”

So, for scheduled sectors, subsidies that favor domestic financial industries can certainly conflict with the GATS. The United States committed essentially the entirety of its financial services sector to GATS coverage, thanks in large part to negotiations led alternately by Timothy Geithner and Larry Summers in the 1990s. And, as pages 12-13 of this document show, subsidies are not excluded from the national treatment obligations for services suppliers operating in the United States (i.e. Mode 3, or establishment).

As the Wall Street Journal recently noted, banks like Goldman Sachs that benefited from government largesse and thus weathered the storm, certainly have a leg up on the competition. Meanwhile, no foreign bank got TARP money, or had access to many of the other bailout programs. Banks that did not have access to these bailout funds and found themselves eliminated from competition are likely to feel very differently than Mattoo and Hufbauer.

Despite disagreeing with these authors on the empirics, I do agree with their prescription to negotiate more policy space on crisis-related measures, especially prudential financial regulations and capital controls.

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Comments

James Woolley

Truly an outstanding article and contribution to the discussion. Especially interesting in light of the letter sent to Pelosi and Reid (dated Feb. 11, 2009) by the Bretton Woods Committee which successfully pressured them in "watering down" (effectively killing) the "Buy American" clause in the federal stimulus package - which instigated further offshoring of jobs and lessened any job-creation impact of the stimulus funds.

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