Trying to Inch the WTO Away from Extreme Financial Deregulation

As regulators and legislators have wrestled with reforming the financial system in the wake of the crisis, one quiet corner of the debate has received less notice.  As we have reported in past posts, The World Trade Organization’s General Agreement on Trade in Services limits the kinds of financial regulations countries can impose.

These rules were hashed out during the 1990s – before the lessons of the financial crisis, and when deregulation was in vogue. Documents we obtained under the U.S. Freedom of Information Act show that, in the late 1980s and 1990s, U.S. government officials worked closely with Wall Street executives to sell these rules to wary developing nations.

Unlike the re-regulation being discussed in the G-20 or the Bank of International Settlements, these rules at the WTO are highly enforceable. While the near-total absence of re-regulation over the last 15 years has presented few opportunities to road-test this services agreement, tax havens like Panama have already threatened to use them against the tax transparency initiatives of cash-starved countries like Ecuador.  The U.S. lost a high-profile services trade case related to its ban on Internet gambling. Regulatory bans – even of questionable services – are prohibited under the WTO. And a European Commission staff paper about a potential financial transactions tax noted that it would be necessary to assess whether such a tax might conflict with the EU’s WTO commitments.

But the U.S., EU and the WTO Secretariat have spent the last 18 months trying to quash any discussion of these problems, much less consideration of possible updates to the old rules.

WTO Member States Try to Raise Issue at Ministerial Conference

Last fall, a group of countries led by Ecuador tried to get this problem on the formal agenda.  Their modest objective was for Trade Ministers at last December’s  WTO Ministerial Conference to acknowledge the need to review the WTO rules covering financial services in light of the financial crisis and the efforts internationally and domestically to strengthen regulation.

 Ecuador presented its proposal at the WTO’s Committee on Trade in Financial Services (CTFS) in late October in order to get the item on the agenda for December’s meeting.  A powerful bloc of countries – including India, Argentina, Turkey, Brazil, and South Africa – supported the proposal. However, the skewed “consensus” process in the WTO allowed the U.S., EU and Canada to block the discussion from moving forward at the Ministerial Conference, where Ministers would have been forced to recognize that there is a potential conflict between the WTO rules and the global consensus toward financial re-regulation. 

As is often the case in flawed WTO processes, it appears that Ecuador’s proposal was unfairly downplayed, perhaps to ensure that it would not be noted in the Ministerial Conference.   Because the CTFS finalized its Annual Report at the beginning of their October 31 meeting (the last meeting of the Committee in 2011), the discussion on Ecuador’s proposal that occurred later in the meeting was not included in the Annual Reports of the Committee on Trade in Financial Services or of the Council on Trade in Services.  The minutes from the October 31 CTFS meeting state that the Chair of the Committee noted that there was “some” interest in discussing the substantive issues raised by Ecuador.  An observer in the meeting, however, shared with us that the Chair had actually said that there was “broad” support.  The minutes also failed to take note that China and Venezuela supported the proposal, though the representatives from both countries joined the many others present in expressing support for the proposal. 

Ecuador reserved its right to raise the issue at the General Council meeting where the Ministerial Conference’s agenda was finalized.  Despite the fact that there was not consensus on any agenda items for the Ministerial, Ecuador’s proposal was blocked from the agenda, while other agenda items proposed by developed countries remained on the General Council agenda.   Ecuador was forced to raise its proposal under the  “Other Business,” section of the agenda, which was dealt with after 11 pm.  Despite this marginalization, again, a number of countries – including Argentina and Turkey -  spoke in favor of Ecuador’s proposal, and no countries opposed.  In the end, a brief statement about Ecuador’s proposal was included in the General Council’s Annual Report to the Ministers in the documents circulated at Ministerial Conference, but, unfortunately, the summary only lists the countries that spoke, but does not note their support, nor the fact that no country spoke in opposition. 

Activities at the Ministerial Conference

Since the efforts of Ecuador and its allies to include this issue on the agenda of the Ministerial Conference were thwarted, the government of Ecuador hosted a side event “Future of Trade in Financial Services: Safeguarding Stability” to raise this issue during the Ministerial.

During the side event, the Honourable Francisco Rivadeneira, Ecuador’s Vice Minister of Trade and Integration, strongly made the case for why Ecuador proposed a review of the WTO’s financial services rules -  to ensure that WTO members, particularly small countries like Ecuador, have sufficient policy space to engage in the regulation needed to ensure stability of the financial system. Alfredo Calcagno from UNCTAD’s  Division on Globalization and Development Strategies described in detail the concerns raised by UNCTAD’s 2011 Trade and Development Report, particularly how the ambiguities in the WTO’s General Agreement on Trade and Services (GATS) could restrict policy space for capital controls and other financial regulatory tools. Lori Wallach, Director of Public Citizen’s Global Trade Watch division, laid out the potential conflicts between GATS rules and needed financial regulations, based on a review of the legal literature.  Finally, Kavaljit Singh Director of Public Interest Research Centre in India gave a rousing presentation about how the financial sector must be properly regulated to ensure financial stability and inclusion, using examples from the Indian context.  

Unfortunately, the official proceedings of the Ministerial Conference went on in Alice-in-Wonderland - style as if no financial crisis had ever happened.   Without anything real to deliver after more than ten years of negotiations on the Doha round, the WTO struggled to demonstrate its continued relevance by trumpeting the accessions of Russia and Samoa – even though accessions are rarely considered to be news at the Ministerial Conference level.  If the powerful countries in the WTO – and its Secretariat – continue to refuse to acknowledge that its extreme deregulation rules require revision, the WTO will continue to lose legitimacy on the international stage.

 The good news is that Ecuador’s efforts did raise the profile of the issue among important WTO countries and that the Chair of the WTO’s Committee on Trade in Financial Services has agreed to keep Ecuador’s proposal for a review of the rules on the agenda for the Committee in 2012.  It will be important to watch closely to make sure that the U.S. and EU allow a robust review of the rules to go forward.