PMD: "Strictly Business" interpretations of a WTO rule
Regular readers of the blog will recall we have a wonkish obsession with a much debated provision in the WTO services agreement related to financial regulations taken for prudential reasons. In 2009, we put out a report and literature review on the topic, and have regularly discussed the topic on the blog. For the last several years, we've submitted Freedom of Information Act (FOIA) requests from various U.S. agencies to try to get a better picture of what this and other WTO financial service obligations mean. The disclosures have been interesting, to say the least. And not only because they involve top officials and lobbyists like Tim Geithner that are still running around DC.
But before we get into what these documents show, some background is needed. For those fortunate enough to not be initiated, here is the provision, which is contained in Article 2(a) of the Annex on Financial Services to the General Agreemeent on Trade in Services:
2. Domestic Regulation
(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.
We'll call this PMD, and no, that's not a reunited hip-hop crew from Brentwood minus Erick Sermon. But it does mean "strictly business." (Sorry, I couldn't resist.)
The prudential measures defense (PMD) is highly confusing. Those familiar with other text from WTO agreements will note that the first sentence sounds like it provides a lot of flexibility for financial regulators, while the second sentence seems to take it all away. After all, a country would only need a prudential defense if it were found guilty of violating WTO rules. What good is a defense if you can't use it?
There are a variety of ways a WTO panel could approach the interpretive challenge of the PMD.