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:
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.
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:
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.