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April 30, 2010

Europe Admits Speculation Taxes a WTO Problem

Earlier this month, the European Commission (EC) released a Staff Working Document that admits that the commitments that Europe made under the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS) can hinder the Europe's ability to impose financial transaction taxes (FTT). (These taxes can help deter speculative activity that undermines the real economy and jobs.)

Here's what they said:

"the compatibility of such a levy with Article XI of the General Agreement on Trade in Services (GATS), which provides that WTO Members cannot apply any restrictions on international transfer and payments for current transactions relating to their specific commitments, would have to be further assessed. As the EU has taken specific commitments relating to financial transactions, including lending, deposits, securities and derivatives trading and these commitments relate to transactions with third countries, a currency transactions tax could constitute a breach of the EU's GATS obligations."

As I blogged about last month, countries are increasingly raising questions about the GATS / regulation conflict at various WTO meetings. But the WTO Secretariat, in its most recent study of the matter, refused to state that financial transaction taxes, policies aimed at limiting bank size, or many other sound prudential regulations would be protected from WTO challenge. In fact, they confirmed many of the worst fears of WTO critics.

But to my knowledge, the EC document marks the first time since the financial crisis that a government entity has been so explicit about the potential for GATS to conflict with sound financial regulation. That's why the EC study, which also admits that transaction taxes could run afoul of various internal European treaties and directives, is such a big deal.

And just days after the EC study was released, a report by Kevin Gallagher supported by the United Nations trade group (UNCTAD) was also published that examined the GATS conflict with other types of "capital management techniques." As that study concluded:

While the WTO’s financial services provisions remain untested in formal dispute settlement, they nonetheless represent the world’s only multilateral body with enforcement capacity to discipline capital controls, on terms that provide less policy space than the IMF Articles of Agreement. Capital controls may be disciplined under the WTO for approximately 50 of the WTO members.

What's the answer to the potential for GATS conflict with FTTs and other speculation taxes?

It's certainly not to bow to the WTO chilling effect, but instead to push for changes to the WTO.

The most simple solution would be to eliminate several GATS articles that are most responsible for this GATS / regulation conflict. This would include Articles XI and XII, which most closely deal with capital controls; and Article XVI, the market access provision which also has a footnote on capital controls. Article VI and the Understanding on Commitments in Financial Services should also be knocked out for good measure. (For a more in depth introduction to these issues, check out Public Citizen's various backgrounders here.)

In the short term, countries should be allowed to withdraw financial services commitments from GATS without having to pay compensation to other WTO members, as would normally be required. Many countries had deregulation-prone governments in the 1990s that over-committed their financial services sectors to GATS coverage. The Clinton administration was at the top of this list, as former President Clinton himself recently admitted in an apology.

Countries should not be shackled to the past mistakes of previous governments. They should especially not be tied to WTO financial services rules that were pushed on the United States and the rest of the world by Wall Street. We should seize this historic moment to reform domestic financial regulation AND the GATS.

And, BTW, my proposals are not radical. They've been done before - WTO agreements HAVE been amended (under the Bush administration, as it happens) and so don't have to be set in stone forever. Moreover, in 1995-1997 sectoral financial services talks, countries were allowed to modify or withdraw financial services commitments previous governments had made in 1994.

++++

As a postscript, let me make a few technical points.

Now, you may encounter the argument that the GATS protects prudential measures, as folks on the IELP blog recently argued.

In fact, the opposite is true: prudential measures under the GATS are explicitly challengeable in dispute settlement. Indeed, that's what the GATS founding fathers intended, as we show in a recent report.

Academics have also raised concerns about the ability to invoke so-called "exceptions" for prudential measures when it comes to capital controls:

“The right of a member to issue or maintain such prudential regulation seems to find its limits in Article XI GATS. Indeed, paragraph 2 of the Annex on Financial Services underlines that the prudential carve-out should not be used to avoid commitments or obligations under the GATS Agreement. This sheds uncertainty on the relationship between the Annex on Financial Services and the GATS, in particular Article XI GATS. The issue is well illustrated by the current request from the EC to Chile to lift its requirement that a prior authorization by the Central Bank is necessary before profit repatriation to be allowed. Such restrictions are indeed considered by the EC to be in breach of Article XI…

"If this provision is interpreted as prevailing over the prudential carve-out, it seems to prevent countries from taking prudential measures with respect to payment in transfers, in fact measures, which could be ‘nevertheless very effective for dealing with financial stability.’” (Source: Christine Kaufmann and Rolf Weber, “Reconciling Liberalized Trade in Financial Services and Domestic Regulation,” in Kern Alexander and Mads Andenas (eds.), The World Trade Organization and Trade in Services, (Amsterdam: Martinus Nijhoff Publishers, 2008), at 424.)

WTO panels have also addressed closely related issues (although without formal rulings of relevance).

In the US – Measures Affecting the Cross-border Supply of Gambling & Betting Services case, Antigua alleged that:

“the United States maintains measures that restrict international money transfers and payments relating to the cross-border supply of gambling and betting services. In particular, Antigua points to the laws of the state of New York that render contracts that are based on wagers or bets void as well as an example of an ‘enforcement measure’ taken by the New York Attorney General against a financial intermediary that provides Internet payment services. In Antigua’s view, the purpose of these measures is to prevent foreign suppliers of gambling and betting services from offering their services on a cross-border basis. Antigua argues that, therefore, these measures violate Article XI:1 of the GATS.”

The WTO panel stated that:

“Article XI has not, as yet, been the subject of interpretation or application by either panels or the Appellate Body. In light of this and taking into account the limited facts and arguments submitted by the parties with respect to Antigua's claim under Article XI, we believe that there is not sufficient material on record to enable us to undertake a meaningful analysis of this provision and its specific application to the facts of this case …

"However, the Panel wants to emphasize that Article XI plays a crucial role in securing the value of specific commitments undertaken by Members under the GATS. Indeed, the value of specific commitments on market access and national treatment would be seriously impaired if Members could restrict international transfers and payment for service transactions in scheduled sectors. In ensuring, inter alia, that services suppliers can receive payments due under services contracts covered by a Member's specific commitment, Article XI is an indispensable complement to GATS disciplines on market access and national treatment.”  [italics added]

And, as the Secretariat noted in its recent paper, GATS Article XI is a part of the GATS’ General Obligations, and countries cannot schedule limitations to these obligations under their Schedule of Specific Commitments. In this sense, the disciplines on capital controls are even more severe than the Article XVI(2) disciplines (which deal mostly with limits on the size of service sectors), since at least limitations to the latter commitments could have been scheduled by a country’s government in the 1990s. In contrast, the payments disciplines are binding on covered service sectors, irrespective of the scheduling prowess of past governments.

(HT to Aldo Caliari for bringing the EC report to my attention.)

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