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WTO takes on credit card regulations

The WTO issued its first ever ruling on a dispute over financial services earlier this morning. The case was brought in 2010 by the Obama administration against China's credit card policies.

This sprawling case - which alleged that a myriad of diverse Chinese policies operated collectively to violate WTO rules - failed on most counts.

But even the partial U.S. success raises more questions than in answers. U.S. credit card companies were reportedly less than enthusiastic about the case, and even the most optimistic U.S. job impact of China's credit card policies represent only a drop in the bucket relative to the considerable job displacement caused by Chinese industrial policies in U.S. manufacturing.

The greater significance of the ruling is in the precedent that it sets of a WTO member being willing to tackle another member's financial policies. Those of us who have raised the alarm about the conflict of the WTO's services agreement with financial regulation have often been told not to worry... that diplomatic restraint would keep a case from ever being launched. Even if launched, the WTO's institutional interests would keep it, the argument went, from ruling against a nation's policies.

Today's ruling totally undermines both aspects of this argument.

So what did the ruling - authored by Virachai Plasai (Thailand), Elaine Feldman (Canada) and Martin Redrado (Argentina) - say?

We've just waded through the 210-page ruling, and it's a real doozy. Much of the first 166 pages relate solely to analyzing the existence of China's credit card policies, and how they fit into (or not) the WTO's complicated scheduling system for financial services commitments.

The major U.S. argument was that China was according monopoly rights to the electronic payments services (EPS) company China Union Pay (CUP, established in 2002), and that other service suppliers were precluded from getting banks, ATMs and "points of sale" from using alternative logos and networks. The WTO panel did not buy this U.S. argument under Article XVI, noting that no one had proven that non-CUP payments services were being kept out of the market (para. 7.579).

The U.S. did prevail on one aspect of its complaint under "market access" (Article XVI). Namely, the

mandate that CUP and no other EPS provider handle the clearing of certain RMB bank card transactions that involve either an RMB bank card issued in China and used in Hong Kong or Macao, or an RMB bank card issued in Hong Kong or Macao that is used in in China in an RMB transaction. These bank card transactions concern payment for expenses including shopping, meals and accommodation, or small cash withdrawals from ATMs. (para. 7.606)

The panel ruled that this policy constitutes a monopoly under GATS Article XVI(2)(a).

I see two problematic aspects to this part of the ruling. First, the U.S. is arguing did not successfully argue that China was maintaining an overall monopoly on "All payment and money transmission services" - which is the actual GATS sector at issue. Instead, the U.S. is complaining about a narrow slice of that sector - the RMB-denominated, trans-China/Macao/Hong Kong segment. The implications are worrisome, even if not immediately apparent. Say that a country banned offshore naked short-selling. If that country had taken a full commitment in securities trading, it would not be able to apply such a ban, even though it were tailored to a narrow and risky segment of that service sector.

Secondly,it would seem to be the first GATS ruling against a capital control. The panel report doesn't include a lot of information about this policy. From the smell of it, I would say that this is related to enforcing China's capital controls in the peculiar context of its citizens conducting tourism within Chinese territory but in between different customs zones / regulators. After all, it would be difficult to maintain a fixed exchange rate if your citizens could circumvent it through making withdrawals in a casino in Macao.It's possible that, by requiring such payments to go through CUP - which I'm imagining regulators keep on a tight leash - circumvention of the controls can be minimized.

Now, some of this is speculation, and in any case, won't generate a lot of tears on the part of the many commentators who worry that China's capital controls are destroying manufacturing in many countries. However, the implications for regulatory sovereignty in any WTO member nonethless are troubling. (If any of our readers know more about the complexities of RMB capital controls, please do chime in!)


The other major GATS clause invoked by the U.S. was Article XVII, i.e. national treatment. The U.S. successfully argued that the Chinese requirements that payment card issuers and ATMs include the CUP logo (para. 7.714, 7.725), and that so-called "acquirers" use the logo and accept CUP (para. 7.736), modified the conditions of competition in favor of CUP and against foreign firms.

Essentially, the government was giving "free branding" to CUP (para. 7.710), while foreign payments companies "have to convince issuers to join their networks. They might be unsuccessful in that endeavour, or at least they might fail to achieve the same level of membership of relevant issuing banks. And even if they could achieve the same level of membership, unlike CUP, EPS suppliers of other Members would need to expend time and effort in the process." (para. 7.714)

There's a few troubling implications to this argument as well. First,to the extent that the "branding" policies affected competitive opportunities, this was not just between CUP and U.S. firms, but between CUP and other Chinese firms that didn't enjoy the branding. The panel acknowledged this at one point (para. 7.696), but didn't seem to let it affect its overall conclusion on Article XVII.

Second, could this line of argument be used to create an affirmative obligation for governments to level the costs of doing business for new entrants as against incumbent enterprises? This teeters on the edge of nanny-state-ism. New companies should fully expect to have to invest time and money to create a clientele.

Moreover, as the panel noted elsewhere, the U.S. had not presented "economic analyses of profitability, price-cost margins, or demand elasticity, including in comparison with other markets, that would allow us to assess whether indeed the instruments at issue make it economically unviable for other EPS suppliers to establish themselves and operate in China."(para. 7.504) Moreover, a crux of the U.S. argument was the CUP was being built up as a national champion through the mandated collection of fees from other financial firms. But the panel found that the U.S. could not even substantiate that fees were required.(para. 7.292) Lacking such data, it seems difficult to say whether the "branding" produced significant protectionist impacts.


One final takeaway from the ruling, in addition to what we've laid out above: this case fails to resolve the major controversies about financial services regulation and the GATS. The panel did not meaningfully delve into the so-called prudential measures defense, or the provisions that explicitly deal with capital controls. As such, the allowable policy space for financial re-regulation is still a major question mark.

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the argument went, from ruling against a nation's policies.

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WTO promises a diplomatic resolution, huh? China is ever faster becoming the worlds industry and financial powerhouse. With rulings like this on finance and credit that favor China, watch out in the future.

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I agree with you, China is also the subject of a WTO case involving export of so-called rare earth minerals.

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Thanks for comprehensive post...China’s credit card sector has been witnessing major growth from the previous few decades with robust expansion in its economy. The credit cards are being progressively utilized in a lot of shopping malls and numerous online portals that carry luxury or world class manufacturers of consumer goods. This is mostly due to the improvement of technologies in bank card sector, which is bringing transparency, ease, and safety in the use of these cards.

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The number of question were more regarding the answers for the U.S. credit card companies, but the reach for stopping of China’s credit card was in a drop box as the things moved on as it were. The enthusiasm was over-flowed but the results were in favor of China’s credit card market. And some biggest obligations for the U.S. government were to stop dealing with the Chinese markets, but how they are performing well in the markets and with the economy too.

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The argument is not likely to be stopped on financial service regulation as well a big question mark has been implemented. It’s all about U.S. disapproving the China’s monopoly into the international market, as gradually things are being favoring the Asian Countries.

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