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In Which GATS Gang Calls Each Other and Decides GATS Gang Not a Problem

Over at IELP, Simon Lester has written some reactions to our recent memo to the Senate Finance Committee on the conflict between financial services regulations and the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS).

Simon agrees with our take that the GATS language is vague, hard to pin down, unclear, and could benefit from clarification. He walks through a clever thought experiment, trying to guess how tribunals might look at the question of whether a measure taken for prudential reasons could be found to violate the GATS, and whether a means-ends test would be applied, etc. Would a tribunal view the prudential measures language as analogous to GATT-style exceptions and go through a similar chapeau-to-obligation procedure? Good question. The fact that even highly informed readers have to make that type of leap suggests that there is room for revising the language, as we suggest.

But the comments to Simon's post suggest that the overly self-referential methods of what I'll call the GATS Gang are blinding them to incoming data.

So I'd like to focus on some of the comments that Simon's post sparked from others, primarily from Mark Kantor. Mark starts off by citing the first sentence of this paragraph from our memo to Senate Finance:

"To our knowledge, neither the USTR, Treasury Department, or the WTO Secretariat have ever released a formal, comprehensive legal analysis of the GATS prudential measures defense (GATS Annex 2(a)) language on which such airy dismissals of this problem rely. When theses entities are confronted with questions about the conflict between GATS and financial regulation or the prudential provision’s scope, they “reassure” or “cite” unofficial sources as suggesting there is nothing to be worried about."

I could make the inside joke that GATS defenders seem to suffer from second-sentence-deletion syndrome (since they do the same when discussing the prudential measures language in GATS Annex 2(a)). But that would be cheap. However, if Mark had quoted the full paragraph, it would have been clearer to IELP readers that we believe that private, off-the-record reassurances to "don't worry, be happy" about the GATS conflict with reregulation are not enough. So a private, off-the-record shrug of the shoulders from Mark’s anonymous friends at Treasury, USTR, the Fed and beyond is exactly what we hope to get beyond.

Mark then makes a deal of the fact that our memo only contains a single citation of the February 2010 WTO Secretariat “report” on financial services. We actually gave this “report” a very extensive treatment in a memorandum sent to the Hill and beyond on March 15. It’s title says it all: “That’s All They’ve Got?”: What Latest WTO Secretariat Paper on Financial Crisis Does and Does Not Say About GATS Disciplines on Financial Regulation." In fact, maybe we should have stated more clearly in our recent memo that it was precisely the inadequacy of the February 2010 WTO report that prompted us into action.

In that earlier memo, we go through the Secretariat’s “non-response” in considerable detail. In sum, the Secretariat does not address the 13 substantive concerns raised in the Stiglitz Commission report, in our work and by others. Instead, the Secretariat confirms many of our concerns. It also employs exactly the kind of partial and misleading sourcing strategies that we criticize in our memos. Mark even quotes two of the more objectionable paragraphs in the whole report in his comment (paragraphs 30-31), where the Secretariat ducks out of pronouncing on key questions by citing a series of non-official sources.

Mark then mentions that he participated in the Advisory Subcommittee on the Model BIT, and seems to suggest that Public Citizen did as well. Mark mentions that Treasury reassured him in these meetings that there’s nothing to be worried about. For the record, Public Citizen was not invited and did not participate in that Committee (beyond public testimony along with dozens of others). And, from Mark’s characterization of what was said in those supposedly confidential meetings, our concerns would not have been addressed.

In a colloquy with Miles Teg, Mark argues that some advocacy groups have gone overboard by suggesting the WTO Secretariat’s report was “secret.” I don’t know who Mark is referencing, but no one in Public Citizen made that claim, to my knowledge.

Mark then references that no WTO case has been filed on financial services issues, and that the investor-state record has been (slightly) more favorable to states. Well, financial re-regulation is only just now being attempted, and it is starting to bring out any number of WTO threats, notably from tax-haven nations like Panama, who would have little to lose in such a case.

Of course, it will take years for any of these cases to go through the entire dispute settlement process, and they may never go through. The point Public Citizen is making here is that it is irresponsible policymaking to outsource these considerations to foreign dispute and arbitral tribunals. This is particularly true since the threat of WTO cases shape the domestic political debate on nearly every topic under the sun, with concerns constantly being raised about the WTO legality of domestic regulatory measures. In the BITS, this problem is especially worrisome, since there is not even a so-called “diplomatic screen” before a foreign hedge fund could launch a case.

This gets to anon99’s cute point about wondering whether Public Citizen understands the Appellate Body mechanism’s role at the WTO. As we argue in all of our work on the GATS and financial services, there is an overriding public interest in having clear rules of the road when it comes to financial services regulation, and that pacts like the WTO should not undermine – either legally or politically – the prospect of strong reregulation. So, yes, anon99, the WTO can claim that it does not pronounce on members’ obligations outside of dispute settlement, and USTR can claim that it is looking out for U.S. offensive interests, and the Treasury Department can guard its institutional turf, and so on and so on. Meanwhile, those of us actually working to improve financial regulation are left with complete uncertainty about a critical public policy area.

Rather than coming up with reasons to keep everyone in the dark, let’s someone… anyone… shine some meaningful light on this important topic.

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Todd Tucker

Over at IELP, Mark criticizes me for not posting in all of Simon's comment. I thought the linking technology would allow the reader to see Simon's post and make up their own mind. But in case you're allergic to following a link, I post in Simon's entire comment here.

I think my point still stands: The fact that even highly informed readers like Simon have to make several analytical leaps to settle on an interpretation of Annex Article 2(a)that is sufficiently deferential to domestic regulation suggests that there is room for refining the language.

Simon's full post:

"Global Trade Watch on the Prudential Carve Out
In this recent memo, Global Trade Watch expresses concern about the GATS "prudential carve out" in the area of financial services regulation. The carve out is in Article 2(a) of the GATS Annex on Financial Services and reads as follows:

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.

Global Trade Watch puts its specific concern this way:

As the second sentence makes clear, prudential measures are only allowed under GATS rules if they don’t violate any of the GATS rules, which are very expansive.

I'm not sure that's quite right. Let me run through this provision briefly.

The first sentence suggests that Members can take measures for "prudential reasons," even if these measures would otherwise violate other GATS provisions. So, let's say you have a measure that violates GATS Article XVI (Market Access). If that measure is taken "for prudential reasons," including the ones listed, it is permitted despite the Article XVI violation. (Presumably there must be some objective determination as to whether the measure is actually "for prudential reasons," such as a means-ends test applied to the measure and the stated policy goal, rather than just accepting the Member's declaration of the purpose without further scrutiny.) This part looks like a pretty typical WTO "exception."

The second sentence narrows the scope of this "exception" to some extent. (In a sense, the debate here is over how much it has been narrowed). In this regard, the second sentence states that if the measures at issue do violate other GATS provisions, they are not completely off the hook when they are found to be "for prudential reasons" under the carve out, as there is a legal obligation that still applies: "[the measures] shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement." This language seems a bit like the GATT Article XX chapeau trying to root out "disguised restrictions." In particular, the requirement that such measures not be used as a "means of avoiding ... commitments or obligations" has a similar feel. "Avoiding" is not quite as strong as "disguised," but it's along the same lines. Basically, both the second sentence here and the Article XX chapeau indicate that the non-protectionist purposes offered to justify the measure must be authentic.

The problem is, the second sentence of the prudential carve out is worded a little more confusingly than the chapeau. The sentence starts with "[w]here such measures do not conform with the provisions of the Agreement." This language is somewhat duplicative of the "[n]otwithstanding any other provisions of the Agreement" language from the first sentence. Implicit in the "notwithstanding" language is that there was a violation of the other provisions. Restating this point in the second sentence as "[w]here such measures do not conform" makes it seem like this is an additional obligation not to violate the GATS which applies subsequent to the application of the first sentence. I think that's why Global Trade Watch takes such a broad view of the meaning of the second sentence: "prudential measures are only allowed under GATS rules if they don’t violate any of the GATS rules." I see how they get to that conclusion by focusing on the first clause of the second sentence, but I'm not sure that's right. Rather, as noted above, I think the better interpretation is that the second sentence corresponds to the chapeau, emphasizing that any measures taken for the stated policy reasons not be disguised trade restrictions (or here, measures taken to avoid commitments or obligations). The "[w]here such measures do not conform with the provisions of the Agreement" language just recalls the violation implicit in the "notwithstanding" language in the first sentence. To be more clear about it, the first part of the second sentence could have been written as "[w]here prudential measures that do not conform with other provisions of the Agreement have been used," or something along those lines. That's what the "such measures" refers to, in my view. It just doesn't do it very clearly.

Having offered that interpretation, I must admit that I do think the language is a bit vague and hard to pin down, and could be construed otherwise than I've suggested. It would be nice to have it stated more clearly. Along these lines, here's what Global Trade Watch suggests as a replacement provision:

2. Domestic Regulation

(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from adopting or maintaining measures relating to financial services it employs for prudential reasons, including for the protection of consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system. For greater certainty, if a Party invokes this provision in the context of consultations or an arbitral proceeding initiated under the Dispute Settlement Understanding, the exception shall apply unless the Party initiating a dispute can demonstrate that the measure is not intended to protect consumers, investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or is not intended to ensure the integrity and stability of the financial system.

As I see it, this is the same basic idea, just stated a little more clearly, and also the burden is placed on the complainant to demonstrate that the measure is not being used for the policy purposes the respondent says it is about."

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