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IMF vs. WTO: who is better on financial services regulation?

Last month, the International Monetary Fund (IMF) prepared a "reference note" on trade deals and financial services. The note echoes our own finding that the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS) constrains some regulations, even when they apply to domestic and foreign firms alike. Here are some of the more interesting tidbits from the IMF note:

If a member no longer wishes to conform to its specific commitments, it may modify its schedule by providing compensation in the form of alternative market access (even across sectors). However, this undertaking may involve difficult negotiation and can confuse understandings regarding the member’s commitments. (Page 5)

In the case of challenges by other WTO members on the legality of a specific (prudential) measure adopted by a member, a determination on the consistency of such a measure with the prudential carve-out clause would be made through the WTO dispute settlement mechanism. (Page 5-6)

While capital controls may be considered a legitimate part of the toolkit to manage capital inflows in certain circumstances,13 they may, in some cases, be inconsistent with GATS obligations. Such controls can take various forms, including pricebased measures such as explicit taxes or unremunerated reserve requirements with respect to specific investment vehicles (stocks, bonds, loans), or other measures, such as an outright prohibition against the sale of short-term securities to nonresidents. A country imposing such controls may have commitments under the GATS to allow nonresidents to provide the specific financial service unhindered and thus its underlying capital flows... (page 7)

The original commitments were often limited to the partial “locking in” of policies that had already been implemented on a unilateral basis at the time of the initial services trade negotiations (Uruguay Round, 1986–94).15 In the case of financial services, the relatively high number of commitments (second only to tourism services) is explained by the fact that negotiations were extended well beyond the Uruguay Round end date, and finally concluded in December 1997. While developed countries made more substantial commitments than developing countries,16 reflecting actual openness at the time, in practice, many WTO members have less restrictive policies than implied by their legal bindings; it would be inconsistent with their GATS commitments to apply more restrictive policies (unless justified for prudential reasons). It is nonetheless evident that, under significant external pressure, latecomers—25 emerging markets and low-income WTO accession countries—have made substantial commitments, either binding the sstatus quo or, in some cases, using those commitments to motivate domestic reform programs.... (page 8)

Some PTAs and BITs restrict the use of capital controls during macroeconomic and financial distress and do not provide for a “safeguard” clause. That is, a provision that allows a country to impose capital controls during times of macroeconomic or financial crisis. The absence of a safeguard provision can potentially create problems for the Fund... (page 11)

My main criticism of the IMF note is that it persists with the completely untested notion that the GATS prudential measures defense provision is a "carve-out" and that "governments have considerable leeway in introducing prudential measures that fit their needs." As we show here and here, these common operating assumptions miss the mark.

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