IMF on Capital Controls: For Them Before It Was Against Them?

IMF logo Earlier this month the IMF published a working paper that examined the financial barriers between members of the East African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda).  The barriers could include the transaction costs inherent in the difficulty of finding a buyer, seller, or broker of a financial product, or the risk that a party to a financial transaction would default on a loan or otherwise fail to live up to contractual obligations.  The East African Community (EAC) economies are still maturing, so these barriers are expected.  However, the author of the paper chose to zero in on the controls placed on the international flows of capital in the EAC countries and urged that they be put on the chopping block:

Efforts can be made by EAC members to remove and lower their existing financial barriers. The fact that EAC countries have agreed to abolish existing capital controls [among themselves] by the year 2015 is a step in the right direction.

This paper comes just months after the IMF released a staff position note that suggested that “controls on inflows of foreign capital can be one tool in broad policy toolkit.”  In the paper, it noted that

policymakers are again reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon and that all financial flows are the result of rational investing/borrowing/lending decisions. Concerns that foreign investors may be subject to herd behavior, and suffer from excessive optimism, have grown stronger; and even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts.

To be fair, this paper criticizing capital controls in the EAC is an IMF “Working Paper”, which does not necessarily represent the views of the IMF like the previous “IMF Staff Position Note”.  Nevertheless, this paper on EAC suggests that the IMF may be drifting back to its old ways merely two years after the worst financial crisis since the Great Depression.

The EAC countries are no strangers to rapid flows of massive amounts of capital.  In June 2008, Kenya’s largest cell phone service provider Safaricom held an initial public offering (IPO) of its shares.  Strong demand from foreign and local investors alike pushed share prices high immediately following the IPO.  Many small Kenyan investors took out loans to purchase the stock.  When the global financial crisis came to a head in late 2008, though, the stock price collapsed as foreign investors sold their shares, and local investors were burned.

For a discussion of how capital controls could run afoul of WTO rules (how to fix WTO rules to prevent this) see our recent memo here.

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Your Tax Dollars Going to Foreign Banks? Lori Wallach Comments on CNN.

Cnn-logoThe Congressional Oversight Panel issued a report last week that showed much of the bailout money ended up going to foreign banks. Does that strike you as odd - or maybe even bad? If so, you should know that, under WTO rules, the U.S. has to give equal treatment to foreign and domestic banks.

As Lori Wallach put it, "Under the current World Trade Organization rules, the United States is pretty much required to take our tax dollars and, on the down side, bail out things that don't work. But the U.S. taxpayers don't get the profit for those risks on the upside when that globalization finance is profitable for the banks."

Click here to see Lori Wallach's comments on CNN's "The Situation Room."

Lori - CNN 8.12.10 small


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Economists Don't Count in Enron Attack on Argentina

Economists don't count. At least, that's the conclusion of the arbitral committee that was reviewing the annulment request in the Enron v. Argentina case.

Before I delve into their conclusion, I should mention a bit more by way of (dramatically simplified) history about this case.

As far as most folks are concerned, Enron fell well off the public radar screen when they lost the public's trust, the firm imploded and its leaders were imprisoned.But, almost ten years later, Enron survives as a walking corpse, and has persisted as a legal shell trying to shake down Argentine taxpayers for compensation related to that country's financial crisis in the early 2000s.

Take a step back even further. Argentina's right-wing government in the 1990s (led by Carlos Menem and Domingo Cavallo) pursued what locals called "carnal relations" with the U.S., and with U.S. capital. They privatized electric and gas utilities, auctioned these off (or contracted them out) to private U.S. and European companies, and then signed a series of "Bilateral Investment Treaties" (BIT) that gave these companies outrageous rights not even available to Argentine corporations.

The Menem-Cavallo plan to destroy Argentina's prospects for development succeeded, and the country faced a series of economic crises, culminating in the early 2000s. As part of this response, Argentina's post-Menem caretaker governments took a set of extraordinary measures, including changing the sweetheart terms that companies like Enron got through the privatizations (for instance, getting paid at a fixed dollar-peso exchange rate).

In Enron's morbid second life (now renamed Enron Credit Recovery Corporation - even less clear what Enron produces nowadays), the company took advantage of the U.S.-Argentina BIT to claim that their rights were violated, and Argentine taxpayers should compensate them for not shielding them from the economic and legal fallout of the crisis (fallout which, by the way, regular Argentines had to suffer through in the brutal experience of lost jobs, increasing poverty, and other social ills on the scale of a tragic Great Depression). Under the Bush-Clinton-Bush vision of international investment protection, however, corporations can claim a lifeboat for themselves in these situations, even when ordinary folks are left to drown.

Stunningly, the BIT tribunal sided with Enron in its May 2007 award, and ordered Argentine taxpayers to cough up $106.2 million. Argentina claimed that it should be allowed to use an "exception" in the BIT that (supposedly) allows for countries to deviate from the BIT when their essential security is at stake. The tribunal rejected Argentina's argument. (Believe it or not, five out of five US-Argentina BIT tribunals that examined the essential security claim made the same call on all or some of the government policies challenged by corporations.)

Continue reading "Economists Don't Count in Enron Attack on Argentina" »

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When does Wall Street get capped?

The Hill reported this morning that:

Rep. Paul Ryan (Wis.) and Sen. Judd Gregg (N.H.), the senior Republicans on the House and Senate Budget committees have praised a proposal by the fiscal panel’s Democratic co-chairman, Erskine Bowles, to limit government spending and revenue to 21 percent of gross domestic product.

As Dean Baker has written:

Most serious policy analysts believe that government should provide services that it does more efficiently than the private sector (e.g. defense), while leaving services it does less efficiently to the private sector. However Mr. Bowles apparently thinks that the government should instead adhere strictly to his magical 21 percent number. This means that Mr. Bowles would insist that the private sector provides services, even if it can be shown that the public sector is more efficient, because of his reverence for the number 21. In other words, Bowles is apparently prepared to slow growth and cost workers jobs out of his devotion to the number 21.

Actually, I'd love to see the financial sector get similarly capped. Oh wait, but that would run afoul of our trade agreements, which state:

In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as:

(a)        limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;

(b)        limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;

(c)        limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test...

Unlike some policies that propose to constrain the size of the the financial sector or individual financial institutions (like a firewall between investment and commercial banks), a 21 percent cap on any service sector would be more likely to meet the GATS' definition of being "in the form of a numerical quota."

If government services were per se bound to GATS, the Bowles proposal would almost assuredly be ruled a GATS violation. They're not, but financial services definitely are. Yet another way that neoliberals selectively apply their ideology in the service of corporate welfare.

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Korea FTA Needs Some Fixin'

Nonimmigrant Admissions to the United States: 2009

On Saturday, President Obama announced at the G-20 that his administration will move forward with the South Korea FTA and submit it to Congress for approval soon.  You can read the quick reaction from our own Lori Wallach here.  Today happens to be the three-year anniversary of the signing of the Korea FTA, and we know what that means: the FTA was negotiated by Bush for the benefit of his cronies in big business and before the financial crisis rocked the global economy.  The Korea FTA contains all the anti-democratic NAFTA and CAFTA investor-state lawsuit provisions that allow corporations to sue governments if the governments implement regulations that could reduce their profits (as we’ve seen recently with the El Salvador mining case). 

The Korea FTA also contains extremely deregulatory provisions in financial services which are in some ways more deregulatory than any other trade agreement to date.  This type of financial deregulation is completely inappropriate now that we have witnessed how financial “wizards” can devastate the economy with their wild, unregulated derivatives trading and risky gambling.  Furthermore, it contradicts the congressional efforts underway right now to re-regulate the financial sector.  The dangerous investor-state lawsuit provisions and financial services deregulation in the Korea FTA need to be stripped out before it is brought before Congress.

The Korea FTA, based on the flawed NAFTA model, could also be a disaster for working families.  Several studies on the Korea FTA as it is currently written illustrate the consequences of trying to pass the Korea FTA as it stands:

Dr. Robert Scott at the Economic Policy Institute (EPI) recently released a report on the probable employment impacts of the current version of the Korea FTA. His analysis found that the implementation of the Korea FTA would cost the U.S. about 159,000 net jobs over the next seven years due to a $13.9 billion increase in the U.S. deficit with Korea.

The U.S. International Trade Commission (USITC), an independent federal body that analyzes the likely effects of trade agreements for Congress, also found that the Korea FTA would result in an increase in the total U.S. trade deficit (see Table 2.3 in the report).  The structure of their model does not allow the total number of people employed to vary, so their report does not contain a net job loss estimate to accompany the estimate of the increased deficit. However, the USITC does have sector-by-sector estimates of employment changes, which show that workers in high-paying manufacturing industries will lose in the agreement (see Table 2.4 in the report).  The electronic equipment industry, for instance, will shed up to 0.4 percent of its workers.  The U.S. auto industry is projected to lose about 0.2 percent of its workforce due to the Korea FTA.

Of course, the corporate lobbyists have stepped up with their misleading models that predict job growth. One such study by the Chamber of Commerce predicts that hundreds of thousands of jobs would be created by the implementation of the Korea FTA.  A major problem with the report is that it only mentions the impact, under their model, of the Korea FTA upon exports.  Nowhere does it give an estimate of the increase in imports due to the FTA.  In a study on the economic impact of a trade agreement, you’d expect at a minimum to read estimates of the impact on both sides of trade flows, not just exports.  The Chamber study doesn’t give an estimate of the import impacts and is vague in its methodology section, which leaves the reader wondering if the Chamber study accounted for the effects of rising imports at all. A study failing to account for the rise of potentially job-killing imports would completely miss the mark on the jobs impact of an FTA.  The EPI and USITC studies, which explicitly account for changes in imports, are much more reliable than the Chamber study.

With his announcement to fix the Korea FTA, President Obama has a historic opportunity to chart a new course in trade policy that benefits workers, maintains democratic control over public policy, and promotes economic stability rather than handing more power to multinational corporations and big banks as trade policy over the last 20-plus years has done.  Let’s hope he seizes the moment.

 

Lori Wallach’s full statement on Obama’s announcement is after the jump:

 

Continue reading "Korea FTA Needs Some Fixin'" »

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Space to Watch for WTO Litigation

Graham Bowley had an interesting piece in the New York Times over the weekend about substantive and attitudinal differences in new bank regulation in the US and Europe. Here's what he wrote:

Germany has already initiated a partial ban on naked short-selling, and the European Union is formulating a much tougher crackdown than the United States on hedge funds and private equity firms, possibly even down to stipulating in precise terms how much leverage they can take on. It is also designing an ambitious pan-European financial supervisory authority that would create a common rule book for national banking supervisors but whose powers could also supersede them in some areas.

Kay Swinburne, a member of the European Parliament, said this step is “more dramatic” than the American supervisory reform, which foresees a council of regulators to watch for systemic risks, though oversight will continue to be divided between regulators.

Still, while in some specific areas Europe may be going beyond the United States, in broader areas European leaders are favoring much more limited action. There is likely to be no widespread European version of the Volcker rule, for example, according to Agnès Bénassy-Quéré, an economist and the director of Cepii, a research group in Paris — mainly because of the conviction that the cause of the financial crisis was risky trading by American institutions. In European eyes, European banks did not discredit themselves and so should not be meddled with.

For that same reason, while the United States favors requiring banks to set aside significantly more capital as a cushion against future losses, some European countries are fighting this. The move would be expensive, and German leaders, in particular, feel this would unfairly punish their banks for a problem caused by American banks — despite much evidence, according to analysts, that the European institutions, too, were involved in the free-wheeling culture that got the world economy into so much trouble.

While the WTO allows countries to have different regulations, it does require countries to limit the types of regulation they have in similar ways. And global banks despise different regulation, so they're likely to mine the policies that are different from one another for possible WTO violations. In fact, we've already seen rumblings of governments preemptively using the corporate talking points.

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TPP Talks: Second Round, Square One

Last week, the second* round of talks in the Trans-Pacific Partnership (TPP) negotiations were held in San Francisco.  Although generally the negotiators are tight-lipped about what is happening at the negotiating tables behind the closed doors, a few snippets of information have trickled out.  A big open question going into these first rounds of talks has been how to handle the tangled “spaghetti bowl” of existing trade agreements between the TPP negotiating partners. The U.S. alone has FTAs with four of the TPP countries already.  In total, there are 11 FTAs already in force between all the countries (to see a list of the 11 agreements, check out page 5 of our January comments on the TPP).  So, do you throw out these trade agreements and start from a clean slate, leave them intact and negotiate around them, or do something in between the two?

Well, we’ve already had two rounds of talks and the negotiators can’t yet decide on this fundamental issue, according to Inside U.S. Trade (subscription only).   The USTR favors keeping the existing agreements intact, but Australia, New Zealand and Singapore want to re-open all the old rules in those agreements for the TPP:

[Australia, New Zealand and Singapore] would all prefer plurilateral market access negotiations between all TPP members that would result in a single, unified market access schedule. Through this approach, it would be at least theoretically possible to establish common tariffs among TPP members, sources said.

Likewise, those countries would prefer to “reopen” existing FTA market access schedules. Under this approach, everything would be on the table, and Australia could look to increase its sugar market access into the U.S., even though sugar was excluded from the U.S.-Australia FTA.

Given these difficulties over even the basic structure of the TPP, it seems unlikely that a TPP will be signed before November 2011, which is when the lobbyists for big business want it finished. There may be a reason why the big business lobbyists want the negotiations to be finished so quickly.   They just want the old awful NAFTA text to be copied and pasted into the TPP, which won’t take long at all. However, if the Office of the U.S. Trade Representative (USTR) fulfills President Obama’s campaign promises and negotiates for an agreement based on a new pro-worker, pro-environment trade model, it won’t be as quick as the good old copy-paste that we’ve seen with the recent FTAs.

Meanwhile, the USTR has tried to tout the alleged economic benefits of the TPP, claiming that “The Trans-Pacific Partnership offers tremendous opportunities for U.S. exporters,”  but in reality the TPP is small potatoes economically. Of the seven countries that are chatting in San Francisco this week, four of them (Australia, Singapore, Chile, and Peru) already have an FTA with the U.S. in force.  The remaining three (Brunei, Vietnam, and New Zealand) constitute only 14 percent of the total GDP of the TPP negotiating partners (excluding the U.S.).  To put the economic consequence of these nations in sharper relief, these three countries combined account for less than one half of one percent of global economic activity. 

Given these facts, the USTR should recognize that the most important role of the TPP in U.S. trade strategy will be in changing the FTA model rather than having a big economic impact.  The USTR should ensure that any TPP text will include strong environmental and labor protections and exclude harmful invest-to-state lawsuit provisions, unreasonable drug patent restrictions, and financial service deregulation.

*In reality, the Bush administration participated in three rounds of TPP talks with Brunei, Chile, New Zealand, and Singapore in 2008, seeking to deregulate financial services – all the more reason for the USTR to start from scratch with a new trade model.

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Writing on WTO Deregulation Gradually Improving

For folks like myself who come from a social science background (not to mention those that come from a hard science background), one of the most striking aspects of writing on NAFTA-WTO style rules is the relative predominance of negotiators, former negotiators, paid arbitrators, WTO staffmembers (past and present) and corporate-backed research in the literature.

In most other fields, the answers to questions like "Should there be a GATS?", or "Should the GATS be written in a more clear fashion?" or "Whose interests does the GATS serve?" would be resolved via sound reporting techniques, a dialetical method, or at least an examination of a broad range of existing and opposing viewpoints and sources. In the social sciences, the conclusions of writers or publishers with an economic (not to mention ideological) interest in certain points of view would be discounted, rejected out of hand, or at least examined exhaustively against contrasting viewpoints.

As we argued here and here, recent interventions by the USTR, WTO Secretariat and several practitioners do not meet these standards for investigation. This is hardly a revolutionary insight, since Kalypso Nicolaidis and William Drake made the same conclusion back in 1992: the "academic" work of elaborating the notions of "trade in services" was conducted by ideological and corporate campaigners that favored the GATS, which broke sharply with established ways of thinking about the proper place of regulation.

Despite all this, some academics and practitioners are stepping up to the plate and asking some of the tough questions. Regis Bismuth, an international law expert at the Sorbonne, recently wrote a piece in the Journal of World Trade entitled: "Financial Sector Regulation and Financial Services Liberalization at the Crossroads: The Relevance of International Financial Standards in WTO Law."

Bismuth addresses a key question we pose in our memos: do WTO rules state - or have WTO tribunals made interpretations that assure - that any policy that is ruled kosher by the so-called “international financial regulatory bodies” (like the Basel Committee for Banking Supervision, the International Monetary Fund (IMF), etc.) is automatically allowable under the GATS, and that the WTO just imports the definitions and disciplines of these more knowledgeable bodies? Financial reform advocates - both in and out of Congress - would be given a lot of comfort if the answer to this question were yes.

But the Bismuth study shows that, to the contrary, the WTO has failed to incorporate these standards, and may indeed conflict with them.

There have been several attempts, as the study documents, to give the WTO stamp of approval to Basel standards, and several countries have apparently been pressured to adopt these standards as part of their accession process or trade policy reviews - even despite the shortcomings of the existing Basel approaches.

But some developing nations and offshore financial centers (also known as tax and regulatory havens) have resisted even the inadequate Basel standards being read into the GATS.

The first proposals of the Basel Committee members within the CTFS principally aimed to prevent large emerging economies such as China or Brazil from adopting prudential regulations with protectionist purposes and complicating the establishment of foreign fi nancial institutions in these countries. On the contrary, the underlying idea of Antigua’s proposal was to consider that the Basel standards, among others, were likely to constitute discriminatory and unjustified measures since, when transposed into domestic regulations, they would complicate the capacity of the financial institutions of these small developing countries to supply financial services abroad.

In fact, as Bismuth notes, the Basel standards might "not pass the test of Article VI:5 GATS", which requires that:

5.        (a)         In sectors in which a Member has undertaken specific commitments, pending the entry into force of disciplines developed in these sectors pursuant to paragraph 4, the Member shall not apply licensing and qualification requirements and technical standards that nullify or impair such specific commitments in a manner which:

(i)        does not comply with the criteria outlined in subparagraphs 4(a), (b) or (c); and

(ii)        could not reasonably have been expected of that Member at the time the specific commitments in those sectors were made.

(b)        In determining whether a Member is in conformity with the obligation under paragraph 5(a), account shall be taken of international standards of relevant international organizations(3) applied by that Member. [Footnote (3) reads: "The term “relevant international organizations” refers to international bodies whose membership is open to the relevant bodies of at least all Members of the WTO."]

Bismuth also notes that the WTO hasn't officially interpreted the meaning of the prudential measures defense language, but that various unofficial practitioners favor certain interpretations, although various delegations have opposed those favored interpretations.

He lays out one possible reform of GATS:

By no means, domestic regulations based on Basel standards should be regarded as illegal or deemed to pursue non-prudential objectives. While national measures based on IOSCO or IAIS standards should be irrebuttably presumed consistent with the GATS, the non-recognition of the Basel Committee only means that domestic regulations based on its standards do not enjoy the same ipso jure presumption of validity. Pushing the analysis one step further, this issue raises the delicate question of whether a WTO court owes any deference to the Basel Committee standards. Plurilateral regulatory strategies have been regarded in a more favourable light by the Appellate Body than strictly unilateral ones. In our view, there should be a rebuttable presumption that domestic regulations based on international norms devised in a plurilateral context involving the major economies and establishing the conditions of a level playing field in the banking sector are deemed adopted for prudential reasons and, consequently, consistent with the GATS.

Interesting idea. Should definitely go on the list of reforms up for debate.

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Ongoing WTO-Wall Street Snow Job Continues

In March, Sen. Ron Wyden (D-Ore.) - the chair of the trade subcommittee of the Senate Finance Committee - became one of the first members of Congress to call the U.S. Trade Representative (USTR) to account for its inclusion of financial services deregulation-promoting provisions in WTO agreements and various U.S. trade deals. These terms were included at the behest of lobbying of big Wall Street banks, and sharply limit the kinds of financial regulations countries can enact without facing WTO challenges and other claims for compensation.

Unfortunately, USTR continued to dodge these issues in their written response to Wyden's question, as we note in this brand spanking new memo that goes through USTR's response point by point.

In the meantime, financial interests have stepped up their accusations that smart regulations violate WTO commitments. Just last week, the European Union attacked U.S. regulations meant to check the behavior of offshore insurance firms, while a pro-WTO think-tank alleged that German efforts to rein in risky speculation could also run afoul of the country's GATS commitments. This comes shortly after a European Commission paper stated that taxes on Wall Street to help Main Street could violate the WTO, and after years of Panama alleging that anti-tax haven measures could violate the WTO.

If you're interested in putting economic stability and job creation ahead of deregulation-promoting trade deals, you could do a lot worse than to ask your member of Congress to get on the bipartisan TRADE Act, which specifically addresses these questions, and which is supported by a majority of House Democrats, committee chairs and subcommittee chairs, across diverse caucuses in Congress.

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ONI Debate Heats up...in Bermuda

BermudaYesterday, eight insurance lobbying groups released a letter opposing Senator Merkley’s amendment to the financial re-regulation bill that we discussed last week.   Merkley’s amendment would strip out a provision in the bill that allows a newly-established Office on National Insurance (ONI) to unilaterally negotiate and approve international insurance agreements that give foreign insurers broad new privileges.  The ONI could then preempt state laws that conflict with the agreements.

It’s not surprising that big insurers would launch an attack on the right of states to regulate their insurance markets. What is surprising is that one of the lobbying groups signing onto the letter is the Association of Bermuda Insurers and Reinsurers.  Yes, that’s right, insurance corporations that have benefited from the lax tax laws in Bermuda for years are now looking to tear down regulations through the ONI.

As small as Bermuda may be (only 68,000 people live on the island), Bermuda is second only to the U.K. as a home to foreign insurers in the United States. About 17 percent of foreign insurers in the U.S. are incorporated in Bermuda, compared to 18 percent that are incorporated in the U.K.

So, we must ask Senators who have not yet committed to supporting the Merkley amendment: Will you fight to preserve the right of states to regulate their insurance markets, or will you let tax-skirting insurance corporations in Bermuda erode crucial consumer protections?

(Thanks to Flikr user p_snelling for the photo)

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Office of National Insurance: Subverting Democracy?

Proponents of NAFTA-style trade agreements are trying to pull a fast one on us by sneaking some devastating provisions into the Senate financial reform bill.  Right now there is language in the bill that creates an Office of National Insurance (ONI) within the Treasury Department that would strike down state insurance policies if the ONI believes that they violate trade agreement rules.  The ONI would also be able to negotiate and approve new agreements that give foreign insurers greater rights without having to ask for approval from Congress first.  Senator Jeff Merkley is leading the charge with an amendment to the bill that would prevent this dangerous seizure of state and congressional authority. Click here to urge your Senator to support Merkley’s amendment.

Think this is something that only threatens states like New York, where there are lots of foreign companies? Think again. Consider the stakes for Sen. Susan Collins of Maine, where the following foreign-owned insurance companies could benefit from an international trade pact drive towards lower regulation:

Great-West Lifeco Inc., based in Canada

Cunningham Lindsey Group Inc., based in Canada

Willis Group Holdings Limited, based in the U.K.

In fact, there are foreign insurance companies in every state in the Union that could take advantage of any new rights that the ONI would give them.  Check out the chart below to see the number of foreign insurance firms operating in your state.  Keep in mind, however, that the presence of even one firm would be enough to create problems for state insurance regulations.

   Foreign insurance firms


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Europe Admits Speculation Taxes a WTO Problem

Earlier this month, the European Commission (EC) released a Staff Working Document that admits that the commitments that Europe made under the World Trade Organization's (WTO) General Agreement on Trade in Services (GATS) can hinder the Europe's ability to impose financial transaction taxes (FTT). (These taxes can help deter speculative activity that undermines the real economy and jobs.)

Here's what they said:

"the compatibility of such a levy with Article XI of the General Agreement on Trade in Services (GATS), which provides that WTO Members cannot apply any restrictions on international transfer and payments for current transactions relating to their specific commitments, would have to be further assessed. As the EU has taken specific commitments relating to financial transactions, including lending, deposits, securities and derivatives trading and these commitments relate to transactions with third countries, a currency transactions tax could constitute a breach of the EU's GATS obligations."

As I blogged about last month, countries are increasingly raising questions about the GATS / regulation conflict at various WTO meetings. But the WTO Secretariat, in its most recent study of the matter, refused to state that financial transaction taxes, policies aimed at limiting bank size, or many other sound prudential regulations would be protected from WTO challenge. In fact, they confirmed many of the worst fears of WTO critics.

But to my knowledge, the EC document marks the first time since the financial crisis that a government entity has been so explicit about the potential for GATS to conflict with sound financial regulation. That's why the EC study, which also admits that transaction taxes could run afoul of various internal European treaties and directives, is such a big deal.

And just days after the EC study was released, a report by Kevin Gallagher supported by the United Nations trade group (UNCTAD) was also published that examined the GATS conflict with other types of "capital management techniques." As that study concluded:

While the WTO’s financial services provisions remain untested in formal dispute settlement, they nonetheless represent the world’s only multilateral body with enforcement capacity to discipline capital controls, on terms that provide less policy space than the IMF Articles of Agreement. Capital controls may be disciplined under the WTO for approximately 50 of the WTO members.

What's the answer to the potential for GATS conflict with FTTs and other speculation taxes?

It's certainly not to bow to the WTO chilling effect, but instead to push for changes to the WTO.

Continue reading "Europe Admits Speculation Taxes a WTO Problem" »

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If Congress wants to rein in Wall Street...

If the Senate wants to create a strong financial regulation, there is still much to be amended in the current financial regulatory bill. One of these needed amendments concerns our nation’s trade policy and the World Trade Organization's involvement in financial deregulation. Check it out in Citizenvox's latest : If Congress Wants to Rein in Wall Street, It Must Strengthen Financial Reform Bill !


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10 out of 10 Economists Agree: We Were Wrong

After about a year of wrangling, we’re now into the final stretch of financial regulatory reform!  Sen. Dodd of the Finance Committee, Rep. Frank of the Financial Services Committee, and the White House have all said that a financial reform bill will likely be on the President’s desk by Memorial day.

As Global Trade Watch has extensively documented, the United States, in cooperation with other countries, must overhaul the WTO’s radically deregulatory financial services provisions if it wishes to enact meaningful financial regulatory reform.  Regulations specifying a maximum size of financial firms and prohibiting certain risky types of financial trading could be vulnerable to challenge under the WTO’s dispute settlement mechanisms.

Members of Congress must push back hard against those who are trying to remove the teeth from the reform proposals.  Wishful thinking about the capacity of financial services corporations to properly mange huge risks does not negate the fact that a tough regulatory framework is necessary.  This fact is illustrated quite clearly in the results of a 2004 survey of 84 finance professors conducted by the International Swaps and Derivatives Association. This survey would be a barrel of laughs if the consequences of these attitudes weren’t so disastrous.

Some of the highlights:

  • 100 percent of respondents agreed with the statement that “Derivatives help companies manage financial risk more effectively.”
  • 99 percent of respondents agreed that “The impact of derivatives on the global financial system is beneficial.”
  • 81 percent of respondents agreed that “The risks of using derivatives have been overstated.”

It’s disheartening that these “experts” could not fathom the role that derivatives would play in the 2008 financial meltdown.  In their extended comments, many of them claimed that derivatives helped promote financial stability:

“[Derivatives] allow the transfer of risk from parties that don't want to bear risk to parties that can. For example, credit derivatives make the banking system safer.”

- James Angel, Associate Professor of Finance, Georgetown University: McDonough

Continue reading "10 out of 10 Economists Agree: We Were Wrong" »

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That's All They've Got??!

On February 3, the WTO issued a document that many in Geneva call the “non-response” to over a year of growing questions from WTO member countries and others about the connection between the rules of the General Agreement on Trade in Services (GATS) on financial services and the global economic crisis.  Indeed, this was the Secretariat’s first major study  in nearly 12 years about the WTO’s financial service rules. This paper has been discussed in a hot debate on the IELP blog, and in a recent OECD-WTO study.

The new paper is a disappointment to anyone hoping for a convincing rebuttal to charges that the WTO’s General Agreement on Trade in Services (GATS) promotes financial services deregulation. The 76-page document includes a lengthy discursion on the GATS treatment of corporate branches versus subsidiaries, as well as a very defensive discussion of the causes of the crisis (bottomline, in their estimation: WTO rules are in no way implicated). The paper avoids altogether the question of WTO compatibility of the types of measures that member countries have implemented in response to the crisis. This is despite the formal demand via a paper tabled September 17, 2009 in the WTO’s Committee on Trade in Financial Services,  and via subsequent requests at the General Council in December. 

And, with respect to the question of how GATS rules promoted past financial deregulation and could conflict with reregulation, several points are especially worth highlighting:

1.    The Secretariat does not rebut any of the main concerns about the GATS rules’ deregulatory requirements raised in recent years.
2.    In fact, the Secretariat confirms many of these concerns.
3.    When dealing with a controversial issue where there is no record of official interpretation at the WTO, the Secretariat cites only unofficial sources making “don’t worry, be happy” arguments rather than reviewing all of the international law review and other analyses, or offering an official interpretation.

Here’s a Top 13 list of claims the WTO’s defenders would have liked the Secretariat to make, but which it did not, because it cannot: 

1.    That GATS rules only require that foreign firms be treated like domestic firms, and that a WTO panel would never rule against a non-discriminatory domestic regulation.
2.    That WTO panels have already established that countries are free to adopt non-discriminatory financial services regulations without risking GATS challenges.
3.    That any policy that is ruled kosher by the so-called “international financial regulatory bodies” (like the Basel Committee for Banking Supervision, the International Monetary Fund (IMF), etc.) is automatically allowable under the GATS, and that the WTO just imports the definitions and disciplines of these more knowledgeable bodies.
4.    That countries that fear that past governments overcommitted domestic financial service sectors to GATS rules at the height of the deregulation craze can withdraw those sectors without having to pay out compensation to other WTO members.
5.    That anytime a country adopts a financial services policy for prudential reasons, then there is no way that this policy can be challenged at / ruled against by a WTO panel.
6.    That the GATS has been determined by a WTO panel to not restrict countries from adopting firewalls between commercial and investment banks (as the United States did under the Glass-Steagall Act and later amendments).
7.    That the GATS has been determined by a WTO panel to not apply to policies limiting the size of individual firms.
8.    That countries can ban financial services they fear are toxic, even if past governments signed up these sectors (perhaps inadvertently) to the GATS.
9.    That GATS contains no disciplines for capital controls that many developing countries are now seeking to use, and that countries now desiring to restrict capital flows (through financial transaction taxes or other means) can simply add these as limitations to their schedule in the Doha Round negotiations.
10.    That the Doha Round does not entail deeper financial services commitments.
11.    That the bank bailouts of the last two years present no GATS conflicts.
12.    That the Standstill provision in the Understanding on Commitments on Financial Services does not amount to a lock in of the regulatory status quo in place in the 1990s.
13.    That policies of the Treasury Department or Federal Reserve are not subject to GATS disciplines.

Indeed, the Secretariat would not have been able to support the above points, even had it wished to.

If you want to delve more into the nuts and bolts of this study, check out a new memo that I just posted.

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USTR’s 2010 Trade Policy Agenda: The Good, The Bad, and the Bizarre

Statement of Lori Wallach, Director, Public Citizen’s Global Trade Watch Division

Relative to last year’s March 1 report, the 2010 Trade Policy Agenda released today by the Office of the U.S. Trade Representative (USTR) excludes some troubling elements, such as the call for rapid action on the leftover Bush trade pact with Panama, the demand that climate policy conform to trade rules and the reference to renewed presidential trade authority. But at the same time, the report unfortunately fails to deliver the new fair trade agenda that President Barack Obama promised during the campaign and that is needed for our country’s economic recovery.

It also continues to mimic the misrepresentations that the Bush administration borrowed from the U.S. Chamber of Commerce with respect to only considering the role of exports on U.S job creation, as if the U.S. did not have a massive job-killing trade deficit. An example is the hilarious statement about 10 million U.S. jobs being supported by exports in 2008 – a year we had a $696 billion deficit – without any reference to the net U.S. jobs effect of the flood of imports underlying that deficit. The report also fails to mention that 5 million net U.S manufacturing jobs – one out of every four – have been lost since the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) went into effect, or the downward pressure our current trade policies are putting on wages across the economy.

Continue reading "USTR’s 2010 Trade Policy Agenda: The Good, The Bad, and the Bizarre" »

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What a Difference a CAFTA Makes

IMF logoThe IMF just released a new research paper about the effect of the U.S. economic downturn on 
Central American countries entitled “Spillovers to Central America in Light of the Crisis: What a Difference a Year Makes.”  The main finding of the paper is pretty shocking: Each 1.0 percent decline in U.S. GDP during the most recent economic crisis caused a 0.7 to 1.0 percent decline in Central American GDP.  In total, the link between the Central American and U.S. economies lowered Central American GDP by 4 to 5 percent.

And guess what the culprit is? According to the paper,

Spillovers [from the U.S. economy] have typically been transmitted through both financial and trade links, while remittances were not found to play an important role in transmitting business cycles across borders.

The author of this paper also discusses a paper published in 2005 that “predict[ed] that CAFTA-DR would cause a significant increase in the effects of U.S. shocks on the region.” In other words, the implementation of CAFTA meant that Central American economies are now more sensitive to downturns in the U.S. economy.  So now even the IMF agrees that tearing down trade barriers willy-nilly can expose your country to stronger foreign macroeconomic shocks that have nothing to do with how well your domestic businesses perform.

Coincidentally, the IMF also just released a staff position paper that reversed the IMF’s longstanding opposition to controls on capital inflows that could reduce financial volatility. According to the New York Times,

The other paper, released Friday, said that in the aftermath of the crisis, officials were “reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon.”

“Concerns that foreign investors may be subject to herd behavior, and suffer from excessive optimism, have grown stronger; and even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts,” the fund’s deputy director of research, Jonathan D. Ostry, wrote, along with five other authors.

Are these two papers a sign that the IMF wants to turn over a new leaf and pull back from its insistence on excessive economic liberalization for developing countries?  Let’s hope so.

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Lori Wallach's In-Depth Interview with Joseph Stiglitz

UntitledOur very own Lori Wallach recently conducted and hour-long interview with Nobel Prize winning economist Joseph Stiglitz on C-SPAN's BookTV. They discuss his new book, Freefall, about the global economic crisis.

Watch the interview here.

Check out the exchange starting at 24:50 where they talk about the WTO locking in and pushing for more financial services deregulation as the world is scrambling to reregulate in response to the crisis.

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Obama Blocking Transparency at WTO?

Reuters is reporting that the U.S. has blocked the WTO from even looking into the compatibility of the bank bailouts with WTO rules:

At a meeting of the WTO's trade policy review body, the United States and Japan blocked proposals for future WTO analyses of trade measures to cover fiscal measures such as bailouts, according to an official who attended the meeting...

The WTO's regular protectionism reports, introduced in response to the financial crisis, have focused on conventional trade measures such as tariff increases and anti-dumping duties.

The call to include bailouts and stimulus packages was led by Argentina, backed by Ecuador, Cuba, Brazil, India and China.

These trade policy reviews are for transparency purposes only, and do not mean that the WTO is prohibiting countries from taking a certain course of action. As we've noted, the WTO limits on both domestic financial policy are expansive, and were developed by AIG, Citigroup, Larry Summers and Timothy Geithner. Might this latest move be an attempt to paper over their role in the WTO financial deregulation push? After all, if the WTO secretariat were to report that controversial policies like the bailouts were WTO violations, we'd have to fess up to the fact that a lot of popular proposals - like bans on risky financial products, or limitations on unlimited capital mobility - are also in conflict with various trade pact rules.

The U.S. has a sad history of pressuring developing nations to refrain from adopting policies that could prevent the deaths of millions (see here and here). Developing nations are going to see it as more than a little hypocritical that the U.S. doesn't even want to talk openly about its bailouts, which are also opposed by most Americans.

Unfortunately, this latest move in Geneva deals another blow against Obama's promise of greater transparency in the trade policy review making process, and a continuation of putting the big banks first.

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Latvia - what happens when the crazies run economic policy

My buddy and former boss Mark Weisbrot has gone on a trip to Riga, Latvia, and was he found was not pretty. According to his column for the UK's Guardian newspaper, there's massive unemployment, crashing GDP, and what the IMF and the country's basically libertarian government wants to do is go harder, faster, stronger in the same lunatic direction.

What's really tragic is that, even if Latvian reformers were to gain the upper hand, they would be limited from reversing deregulation by the country's expansive WTO financial services commitments. According to a study by the IMF, Latvia - along with most former Eastern Bloc countries - rank among the highest in terms of the depth of their WTO financial services commitments, which include shackles from imposing limits on bank size and more. What's worse, is that as a result of the country's accession to the EU, it will be bound by the Understanding on Commitments in Financial Services - an even more extreme deregulation document that binds the US and other rich nations.

Yet another sad case in point of the folly of the WTO getting in the business of propping up the banksters.

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Road Trip!

It looks like U.S. Trade Representative Ron Kirk will be tourinLoaded vang the country in a series of meetings this year.  He’ll tout the benefits of trade agreements generally, but he’ll focus on the Trans-Pacific Partnership (TPP) since its first negotiating session is slated for mid-March of this year. The potential TPP countries now include Vietnam, Australia, Peru, Chile, Singapore, Brunei, and New Zealand, though more countries might join the negotiations soon.

According to Inside U.S. Trade (subscription only), even big business is skeptical of the tour’s mission:

[T]wo business sources said they doubted a series of meetings across the country would do much to sway the public perception of trade.

The meetings should be a two-way street, however, if Kirk follows through on his promise to incorporate feedback from these meetings in the process of developing negotiating objectives for the TPP.  The Office of the USTR has said officially that they are still in the early stages of developing negotiating objectives, but the Bush administration’s trade model is still lurking under the surface:

Private-sector sources this week speculated that the negotiating objectives identified by the Bush administration in 2008 for the TPP Agreement may serve as a basis for the current administration, both because the objectives are so broad and because those original objectives were developed by career officials still in place at USTR.

These previously defined negotiating objectives include all the nasty provisions that we’ve seen in previous agreements like NAFTA and CAFTA such as intellectual property rules, financial services, foreign investor rights, and government procurement.  Right now the inclusion of these inappropriate issues in the TPP is a wide open question. Greater congressional involvement in the negotiating process could help ensure that we are negotiating for an agreement with higher standards.

(Thanks to Flickr user Focx for the image)

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Google It - Under Korea FTA, China Holds Your Data Privacy Future

If the Korea FTA is passed, get ready to have your private financial data handled in China.

What am I talking about? The Bush-negotiated U.S.-Korea "free trade agreement" (FTA), more than other bilateral agreements, has been justified for its explicit role in pushing financial services liberalization (read: deregulation).

According to the Bush administration’s U.S. Trade Representative’s office, “The Financial Services Chapter of the United States- South Korea Free Trade Agreement (“KORUS FTA”) is a groundbreaking achievement, providing more extensive provisions related to financial services than ever before included in a U.S. FTA.”  Citigroup’s Laura Lane, corporate co-chair of the U.S.-Korea FTA Business Coalition, stated that “it is the best financial services chapter negotiated in a free trade agreement to date.”

Indeed, the deal includes everything that's not to like about other Bush-negotiated FTAs, and then some. Like the WTO, CAFTA or the Peru FTA, the Korea FTA commits its signatory countries to refrain from limiting the size of financial institutions, banning toxic derivatives, or controlling destabilizing capital flights and floods. And it also includes similar "prudential measures" language which fails to protect financial stability measures.

But the Korea FTA doesn't stop there. In March 2006, prior to the formal U.S.-Korea negotiations, the Coalition of Service Industries (CSI) stated that one of its primary objectives in the negotiation related to data processing services:

“Korean laws make it difficult for foreign companies to outsource and offshore activities. These laws often relate to privacy (private data protection law and real name law). Under the Protection and Use of Credit Information Law and its Presidential Decree, foreign companies operating in Korea are prohibited from transferring any customer data whatsoever out of Korea, even for the purposes of processing data to their own affiliates. In addition, as a result of the revision of the Insurance Business Act in May 2003, it is mandatory for insurance companies to maintain in-house the basic human and non-human resources, including IT systems, necessary for insurance business. These restrictions seriously undermine the government’s goal of making Korea into a financial ‘hub’ by significantly increasing the cost of operating in Korea. These regulations should be modified to permit companies to follow their global operating models for outsourcing and offshoring provided they have existing practices to protect consumer information.”

This gripe was echoed in the USTR’s 2009 National Trade Estimate report:

“Korea’s strict data privacy rules require financial services providers to locate their servers physically in Korea, thus hampering foreign providers’ ability to take advantage of economies of scale in the region to perform data processing in their daily business activity.”

Corporations demanded, and corporations got. A brand spanking new provision was incorporated into the Korea FTA that reads:

"Transfer of Information: Each Party shall allow a financial institution of the other Party to transfer information in electronic or other form, into and out of its territory, for data processing where such processing is required in the institution’s ordinary course of business."

The text goes on to say that "The Parties recognize the benefits of allowing a financial institution in a Party's territory to perform certain functions at its head office or affiliates located inside or outside the Party’s territory."

Now, CSI is demanding the new Korea FTA provisions be considered the new template for financial services chapters, and be incorporated into future trade deals.

What does this mean for average Americans? This (and related provisions on data transfers in the Korea FTA) goes clearly counter to the demands in the TRADE Act to fix our own offshore privacy laws, so that white collar data jobs can be created and preserved here at home. As research by Alan Blinder and now White House economist Jared Bernstein has shown, data-related jobs are among those most vulnerable to offshoring. And the U.S. currently has weak to non-existent regimes in place to preserve those jobs.

The issue was controversial during the negotiations. According to the Korea Times from 2006,

“Korea's finance-related laws ban foreign financial service companies from remitting personal information of domestic customers to overseas markets. ... There had been a case in which U.S. Citibank's Korean operation was accused of transferring credit information of its Korean customers to its regional headquarters in Asia. The issue, however, is likely to be a bone of contention during the fourth round of FTA talks between Korea and the U.S. on Cheju Island opened yesterday for a five-day run. Once the U.S. demand is met, Korean financial firms in the United States can get private financial information on American companies, analysts said.”

Under the Korea FTA, Citigroup would not only get to transfer Americans' financial data to and from Korea, but transfer this information from Korea to its other offices in the region, like China, which has recently come under fire for cyberattacks and censorship, to the point where Google is considering pulling out of the country. The same would go for Korean banks like Woori Financial, which operates in China and the U.S. Indeed, financial institutions could send data processing to wherever white collar labor is cheapest, not necessarily where it is most safely handled.

To top it all off, Korean-domiciled investors will get rights to challenge U.S. regulations for taxpayer-funded cash compensation in an FTA-established tribunal that operates outside of the U.S. court system. If Woori America Bank built a business model around transferring its clients info to and from China and Korea and the U.S., it is not hard to imagine them launching a case against future regulations that hampered that flow.

In short, under Bush's Korea FTA, both consumer and white collar workers will take a hit. It couldn't come at a worse time, with concerns about both jobs and China's data practices at record levels. What's worse, it didn't have to be this way. In fact, the recently inked Korean trade deal with the European Union has better provisions, in deference to the EU's better rules on offshore data privacy.

Let's hope that President Obama's talk last year about the Korea FTA was just that. I can't imagine he would want to take up the Bush mantel on this one. And with a majority of House Democrats now supporting the TRADE Act, there is ample support for an alternative agenda which creates and preserves both good jobs and safety for your personal information.

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New Year’s Resolutions for the Obama Administration

With a number of important and high profile trade battles to be fought this year that will have far-reaching impacts on the U.S economy and domestic policy, we thought we’d suggest some New Year’s resolutions for president Obama to adopt on U.S. trade policy.

These resolutions are solutions that the administration needs to commit to in 2010, based on what's likely to move in the trade sphere this year. They hold President Obama to his campaign promise to deliver trade policy reform, and they’ll also help to fix the economy and keep good jobs in America.

The resolutions are:

  1. Push to modify World Trade Organization (WTO) limitations on domestic financial services regulation, in light of the economic crisis. Go here for details.
  2. Conduct a comprehensive review of trade agreement policy as promised during the campaign
  3. Announce formal new trade agreement approach that brings trade pacts into congruence with the administration’s domestic priorities and goals
  4. Pass climate legislation with meaningful border equality measures
  5. Pass second major stimulus bill with robust Buy America provisions to create jobs
  6. Pass food safety bill with serious import safety protections
  7. Use the Trans-Pacific Partnership talks to devise a replacement for the NAFTA model; we either need a new way or no deal
  8. Renegotiate remaining Bush trade agreements with South Korea, Colombia, & Panama to fix NAFTA model problems and bring them in line with the TRADE Act.
  9. Give the WTO’s “Doha Round” agenda a much needed burial and develop a new agenda related today's challenges aimed at fixing WTO problems, from financial services deregulation to limits on climate crisis redress space
  10. Fight for a China trade policy that supports jobs and also ensures product and food safety for both countries

Obama has already resolved to do a lot of these, but just as with most New Year’s resolutions, he’s somewhat fallen off the wagon.  We’re here to help him resolve anew and stick to it!

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DC's Bailing Out Them Bankers, as the Farmers Auction Ground

One of our favorite jam's around GTW this fall has been country artist John Rich's tune "Shuttin Detroit Down." Few songs capture better the anger that many in this country feel against the bankers that ruined the economy by infecting all sorts of institutions with toxic assets, and then going on to "take their bonus pay and jet on out of town."

But one issue that hasn't gotten a lot of attention is how our bank bailouts constitute subsidies that can be disciplined by the World Trade Organization.

The Scheduling Guidelines to the General Agreement on Trade in Services (one of 17 WTO agreements) state that the national treatment obligation “applies to subsidy-type measures in the same way that it applies to all other measures." This obligation targets policies that modify "the conditions of competition" in a way that - even inadvertently - favors domestic service providers.

There's been some uncertainty in policy circles as to how much bank bailouts might be carved out the subsidy obligations. Are these even subsidies, or are they just special programs for a special sector?

Looking back on over a decade of writing by the WTO Secretariat, it's pretty clear that - not only are bank bailouts considered subsidies - but they are some of the most frequent GATS-relevant subsidies. The WTO's Working Party on GATS Rules, over a set of five biannual reports, have targeted the following policies:

Continue reading "DC's Bailing Out Them Bankers, as the Farmers Auction Ground" »

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It’s 10 pm… do you know where your trade negotiators are?

For the last two years of financial crisis, the WTO’s Committee on Trade in Financial Services has not seriously addressed the crisis, or any role that the WTO might have played in bringing it on. This is curious, since the WTO financial rules both require deregulation and, unlike other international bodies, actually have binding and enforceable dispute settlement.

It’s not for lack of trying. In meetings on March 31, the Kenyan and Tanzanian delegation asked to ensure that LDCs have “adequate policy space in confronting development issues.” The Indian delegation to these talks “mentioned the issue of standstill in the Understanding on Commitments in Financial Services. Many Members had made commitments according to the Understanding with a standstill clause. He wondered about the implications of that standstill commitment in the context of the major developments that had taken place.” He went on to ask about one of the major deregulatory requests made by the U.S., Canada and other countries.

You would think that this would be a perfect opportunity for the delegates of the Obama administration to clarify that there was a new sheriff in town, and further deregulation through WTO requirements were not being considered. Instead, even when given such a golden opportunity to announce the change of regime, said they were unwilling to discuss these issues in a non-negotiating forum. In other words, countries wanting the answer to that question must be prepared to discuss committing more to the WTO rules. Canada backed the U.S. up, and that was the end of the discussion.

But on June 24, things got a bit hotter. (The notes for this meeting were only recently disclosed to the public.) The first part of the meeting was relatively stale. The issues of Islamic finance and microfinance were brought up – believe it or not, among the most oft-raised issues in recent talks, and about as far as you can get from the issues that nearly brought down Wall Street, not to mention the hordes of unemployed and evicted.

That was the first agenda item. The second agenda item was even more alarming. The delegation from AIG (oops, the U.S.) had the audacity to suggest that it be allowed to make a presentation on the virtues of further market access (read: deregulation) of the insurance sector. This dragged on for half the session. The other delegations were incredulous, and began aggressively questioning (well, by Geneva standards) why such a presentation was appropriate.

Then, the levee broke. South Africa made a pointed question about the compatibility of rich countries’ bailouts, and whether they were consistent with GATS, or allowed by the so-called prudential “carve out.” Chile, Kenya, Argentina and China backed up the proposal. (As we've written, this isn't much of a carve-out... much more of a carve-in.)

Canada – presumably trying to offer cover to the U.S. for the bailouts – said that any questions about whether the bailouts were GATS-consistent should be handled bilaterally. The U.S. thanked Canada, and agreed that it was not the time or place to have this discussion.

Other delegations quickly called the North Americans on their hypocrisy – Brazil and India in particular. After spending half the session calling for a discussion of further deregulation of the insurance sector, now the rich countries did not want to talk about their bailouts.

The delegate of Bolivia put it well: “it was … quite strange to realize that the only committee that was not dealing with issues related to the financial crisis was in fact the Committee on Trade in Financial Services.”

Strange indeed. When do we get to see the Obama administration's new proposals on financial services? You know, the ones where we re-enshrine the right to regulate our domestic economies to ensure stability and prosperity?

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Killing Regs, Not Just Applying them Equally

I wanted to share a bit more about the Citigroup Global Services Summit soiree, which I posted on last week.

On a substantive level, what was the tenor of the conference? First, a reluctant concession to the political-economic reality that more financial services regulation might be necessary and/ or likely to be imposed; and second, some positioning against over-regulation, with veiled references to WTO disciplines against domestic regulations.

At the same time, because this was a meeting of WTO boosters, many folks claimed that trade deals would not prevent reregulation - no matter how lacking these arguments were on the merits. (On a parallel track, Goldman Sachs has recently been showing how to do this two step, first here, and then here.)

Here was WTO Secretary-General Pascal Lamy:

"As you all know, in the world of the GATS, ‘liberalization’ is essentially about opening specified sectors to competition on a non-discriminatory basis. It does not mean deregulation. It has long been recognized that opening up certain services, such as financial and telecom services, may require a regulatory framework in order to protect consumer interests, and ensure competitive markets. At this point in the services negotiations, this is very important. Let me repeat it: opening markets is one thing, you can do it more or less. Regulation is another. You can open and regulate, open and not regulate, not open and regulate, or not open and not regulate. At this moment, it is important to understand this. If you open your market, you are saying you are regulating foreign and domestic in the same way. It is no coincidence that the GATS Annex on Financial Services preserves the right of Members to take measures for prudential reasons even if they do not conform to its obligations under the Agreement.”

It's rare to see the titular head of an organization so blatantly misrepresent its purpose. Do the international nuclear agencies claim they're really food groups? Does the UN claim to do stand up?

As a report we put out last month shows, Lamy disregards a coterie of hairy provisions in WTO texts that would limit countries' ability to reregulate: this includes the Annex provision cited by Lamy.

Also, the WTO's own Appellate Body ruled that non-discriminatory bans on the supply of services, in sectors where full market access commitments have been undertaken, are quantitative limitations covered by GATS Article XVI(2) - and thus must be removed.

GATS Article VI also creates a mandate to discipline "non-discriminatory" regulations. And, as I noted in a recent post, the WTO secretariat explicitly says that many consumer protections - let alone requirements that banks reinvest in their communities - would be disciplined by either Article VI, XVI or XVII of the GATS.

How can anyone say with a straight face that this is just liberalization, not deregulation?

(HT to Ellen Gould for many of these points.)

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Citigroup, Ward of State, Funds Conference Advising Bankers on Warding off State

Citigroup was birthed by the Clinton administration's financial deregulation proposals, and was most recently saved from total collapse by the Bush/ Obama administrations.

This is not a bank with an arms length relationship with government - in fact, so much not that Mexico may force Citigroup out of the country because of laws there against state-owned entities owning large banks like Banamex. (And, as if to prove that there's still no life beyond the nanny state, it seems that sources close to Citigroup are talking up the notion of further state assistance, this time via a NAFTA challenge.)

Apparently in Washington, having such a strong track record of dependence on taxpayer-funded policies like bailouts and trade pacts (not to mention government sign off for commercial banks to invest in toxic securities) does not disqualify you from funding a conference advising banks and other corporations how to get the guv'mint off your back.

Case in point. Last week, Citigroup helped put on the Global Services Summit here in DC. Many top corporations also lent a hand, such as Wal-Mart. Anyone willing to cough up at least $250 could go and be feted by the top brass in service-sector corporations and lobby groups, and enjoy a close personal audience with policymakers from around the globe.

Citi-inset-small

I decided to go and check things out, and not only because I love filet mignon kabobs, of which copious portions were served during the reception hour. (Oh, and did I mention the party favor that was handed out: the cutest, Made-in-China Citigroup pig bank?)

No, I was curious to see whether my taxpayer investment in Citigroup was helping them turn their act around, or whether they were simply pushing more race-to-the-bottom policies. Did Citigroup and their ilk tame their ambition to deregulate in the wake of the financial crisis? What I found was quite the opposite: corporate lobbyists and government officials busily exhorted one another to push expansion of the WTO, the rules of which explicitly require further financial services deregulation. Here's just some of what they had to say about their vision of the corporate-government partnership to push such controversial WTO rules:

Continue reading "Citigroup, Ward of State, Funds Conference Advising Bankers on Warding off State" »

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"Stiglitz Commission" Calls for WTO financial services reform

For folks that have not gotten a chance to look at the final United Nations "Stiglitz Commission" report on the financial crisis, it is will worth a read. Here are just some of the highlights:

  • "many developing countries have entered into (North-South) free trade agreements (FTAs), bilateral investment treaties (BITs), and World Trade Organization (WTO) commitments that prevent them from regulating the operations of financial institutions and instruments or capital flows. For example, if a developing country decides to nationalize some services such as banking, this can require compensation if the sector has been liberalized under the WTO GATS Financial Services Agreements (FSA) or under an FTA or BIT. When these agreements and commitments are enforced, developing countries have to pay compensation or suffer the imposition of tariffs on their exports to the complainant if they do not or cannot comply." (at 38-39)
  • "The framework for financial market liberalization under the Financial Services Agreement of the General Agreement on Trade in Services (GATS) under the WTO and, even more, similar provisions in bilateral trade agreements may restrict the ability of governments to change the regulatory structure in ways which support financial stability, economic growth, and the welfare of vulnerable consumers and investors (see Chapter 4, Appendix)." at 82.
  • "Capital and financial market liberalization, pushed not only by the IMF but also within certain trade agreements, exposed developing countries to more risk and has contributed to the rapid spread of the crisis around the world. In particular, trade-related financial services liberalization has been advanced under the rubric of the WTO’s General Agreement on Trade in Services (GATS) Financial Services Agreement with insufficient regard for its consequences either for growth or stability. Externalities exerted by volatility in the financial sector have severe negative effects on all areas of the economy and are an impediment to a stable development path. Chapter 3 and discussions earlier in this chapter emphasized how inadequate regulation in one country may harm others. Unfortunately, while the GATS Financial Services Agreement provides the only significant regulatory framework for international financial services, it was not conceived and negotiated with these broader considerations in mind but rather was driven by sectoral interests. These special interests often do not realize (or care about) the vulnerabilities that these commitments impose on other aspects of their economy or the international economy." (103)
  • "Policy space is restricted not only by a lack of resources but also by multilateral and bilateral agreements and by the conditionalities accompanying assistance. Many bilateral and regional trade agreements contain commitments that restrict the ability of countries to respond to the current crisis with appropriate regulatory, structural, and macroeconomic reforms and support packages. Developing countries have had imposed on them deregulation policies akin to those that are now recognized as having played a role in the onset of the crisis. In addition, they have also faced restrictions on their ability to manage their capital account and financial systems (e.g. as a result of financial and capital market liberalization policies). These policies are placing a heavy burden on many developing countries." (104)
  • "Agreements that restrict a country’s ability to revise its regulatory regime—including not only domestic prudential but, crucially, capital account regulations—obviously have to be altered, in light of what has been learned about deficiencies in this crisis. In particular, there is concern that existing agreements under the WTO’s Financial Services Agreement might, were they enforced, impede countries from revising their regulatory structures in ways that would promote growth, equity, and stability."
  • "More broadly, all trade agreements need to be reviewed to ensure that they are consistent with the need for an inclusive and comprehensive international regulatory framework which is conducive to crisis prevention and management, counter-cyclical and prudential safeguards, development, and inclusive finance. Commitments and existing multilateral agreements (such as GATS) as well as regional trade agreements, which seek greater liberalization of financial flows and services, need to be critically reviewed in terms of their balance of payments effects, their impacts on macroeconomic stability, and the scope they provide for financial regulation. Macroeconomic stability, an efficient regulatory framework, and functioning institutions are necessary preconditions for liberalization of financial services and the capital account, not vice versa. Strategies and concepts of opening up developing economies need to include appropriate reforms and sequencing. This is of particular importance for small and vulnerable economies with weak institutional capacities. But there has to be a fundamental change in the presumptions that have guided efforts at liberalization. As noted in previous chapters, one of the lessons of the current crisis is that there should be no presumption that eventually there should be full liberalization. Rather, even the most advanced industrial countries require strong financial market regulations." (105)
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LOLR Exception, LOL?

I got several comments and questions following yesterday's post on capital requirements and WTO obligations. One commenter asked about whether Federal Reserve actions are carved out of the GATS, and another pointed out that the WTO has put out a 1998 document further classifying regulatory measures into a taxonomy by GATS applicability. Both questions highlight the uncertainty surrounding overly intrusive WTO/ GATS obligations.

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New Report: G-20 Must Commit to WTO Reform to Build Financial Stability

This week, President Obama is meeting with other leaders for the G-20 Summit in Pittsburgh, a city ravaged by trade-related job loss.

Global justice advocates are also meeting up there to "push for more vigorous regulation of financial and credit markets, more stringent environmental standards and stronger commitments to human rights and the rights of workers to organize," according to the Steelworkers (whose home base is the 'Burgh). And John Sellers of the Ruckus Society told the New York Times that "crowds of demonstrators on Thursday and Friday would be significantly larger than the nearly nonexistent crowds that showed up for the last G-20 meeting in the United States, in Washington last November."

To help kick off the welcome party, we've released a new report that looks at the WTO's financial deregulation requirements. In particular, we examine a WTO provision on financial stability measures, and find that - contrary to the claim of some of the WTO's defenders - it doesn't offer a safe harbor for prudential tools.

That's the bad news. The good news is that the report makes a series of policy recommendations to fix this conflict. Some of them are surprisingly simple, and could be accomplished with a healthy dose of political will. Oh, and a bit more grounding in reality than the last two G-20 summits, which have called for reregulation on the one hand, and WTO-led deregulation on the other.

The public is echoing this call for financial and WTO reform. As we reported last week,

Over 50 organizations representing over eight million Americans released a letter today that they sent to President Obama urging him to "advocate a global regulatory floor, and oppose any efforts to impose a ceiling" on re-regulation in the upcoming G-20 Summit.

And the AFL-CIO has adopted a resolution, which says,

We should not adopt or negotiate new trade agreements until we review the record of existing trade agreements and build a comprehensive new trade policy that will support the creation of good jobs at home. The TRADE Act, introduced by Rep. Mike Michaud with more than 100 co-sponsors in the House, and soon to be introduced in the Senate by Sen. Sherrod Brown, lays out such a review and reform. Reform must apply both to bilateral agreements and to new talks at the World Trade Organization. We should use the strategic pause to review the performance of past trade agreements and recommend renegotiation where needed... WTO rules must accommodate trade-related measures to coordinate responses to global environmental challenges."

Now, you too can make your voice heard, in this petition to President Obama. Here's the pitch from my colleague Bill Holland:

Petition to President Obama: Turn Around the WTO!

World leaders at this week's G20 Summit will issue plans for reregulating the financial industry to help solve the economic crisis. Yet, bizarrely those same leaders will push for completion of the current WTO negotiations - called the Doha Round - which at its core calls for further financial services deregulation and pressures governments to limit their regulation of banks.

We need to stop this.

President Obama needs to hear from you that he must lead the renegotiation of existing WTO rules – like he said he would on the campaign trail. And, he must pull the plug on the lunatic idea of the WTO Doha Round requiring further financial service deregulation - which would only exacerbate the economic crisis. Sign our petition to the president telling him to turn around the WTO.

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Americans for Financial Reform Urges World Leaders to Change Course on Global Financial Deregulation

Over 50 organizations representing over eight million Americans released a letter today that they sent to President Obama urging him to "advocate a global regulatory floor, and oppose any efforts to impose a ceiling" on re-regulation in the upcoming G-20 Summit.

The event will bring the heads of the 20 leading economies to Pittsburgh, Pennsylvania from September 24-25, and "will be the next critical test of whether the United States can inspire the governments of the other major economies to join together to begin the vital work of creating a global economy that delivers a future of widely shared economic prosperity and security at home and abroad," said the labor, consumer and faith groups, which include Americans for Financial Reform – the coalition of 200 groups that is leading the efforts to reform and restore oversight, accountability, and transparency to the nation’s financial system.

The letter calls on President Obama and the G-20 to establish "a global regulatory floor for hedge funds, private equity funds, derivatives and off balance sheet activity."

The groups also urged the president "to lead an effort to ensure international agencies are pursuing policies that support global economic recovery." The letter notes that the International Monetary Fund (IMF) and World Trade Organization (WTO) impose deregulatory requirements that impede nations’ ability to resolve problems like "too big to fail" financial service providers and destabilizing capital flight.

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New FDIC Rules, Offshore Hedge Funds and WTO Rules

The AP reports on new FDIC rules that pose additional restrictions for hedge funds relative to bank holding companies when they acquire failed banks:

The Federal Deposit Insurance Corp.'s board voted 4-1 to reduce the cash that private equity funds must maintain in banks they acquire.

Private equity funds tend to buy distressed companies, slash costs and then resell them a few years later. They have been criticized for excessive risk-taking. But the depth of the banking crisis has softened the FDIC's resistance to them...

Under the new rules, a buyer would need to maintain the bank's capital reserves equal to 10 percent of the failed bank's assets, down from 15 percent under an earlier proposal. That compares with a 5 percent minimum requirement for banks that buy other banks. And the new policy limits the circumstances under which private investors must maintain assets that could be provided if needed to bolster banks they own.

But the FDIC sought to guard against private equity funds that might want to quickly buy and sell at a profit: It required the acquiring investors to maintain a bank's minimum capital levels for three years.

But as the WSJ reported:

Hedge-fund assets in offshore tax havens such as the Cayman Islands and Bermuda represent more than two-thirds of the roughly $1.3 trillion industry, according to Hedge Fund Research Inc.

Of those offshore assets, industry insiders estimate, between $400 billion and $500 billion belongs to U.S. investors, with tax-exempt foundations, endowments and pension funds accounting for about half of that. Investors from outside the U.S. make up the rest.

What implications might this have for our trade and investment rules? Changes in minimal capital requirements would probably not run afoul of WTO member countries' market access commitments, but they could impact their commitments on domestic regulations.

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NAFTA Case Shows Financial Rescue Measures Open to Trade Pact Attack

I'm just back from a relaxing vacation of kayaking, eagle-watching, gun-shooting and salmon-eating, and I've got a bit of a long post stored up in me. So, you've been warned.

Before there was the New Great Depression, or whatever the latest term of art is for the current economic meltdown, there was a series of financial crises that wracked developing countries in the 1990s. And there's one NAFTA case that followed from these government responses to crises that provides a unique insight into how trade and investment treaties limit policy space in response to financial crises.

Going back to 1994, we saw Mexico's Peso Crisis, which came mere months after NAFTA went into effect. As a response, the incoming Ernesto Zedillo administration launched the Programa de Capitalización y Compra de Cartera, a financial rescue plan very similar to the packet of policies launched by the U.S. government in response to our crisis: the government bought non-performing loan portfolios from troubled banks in return for interest-generating government notes redeemable 10 years later. As a condition for participation in the program, banks had to raise additional capital from outside sources.

One of the 11 banks that participated in the program was BanCrecer, a subsidiary of a bank-holding company called Grupo Financiero BanCrecer (GFB). One of the outside sugar-daddies GFB saddled up to for capitalization was the Fireman's Fund Insurance Company (FFIC) of Novato, California. FFIC is owned by Allianz of America, a Delaware corporation owned in turn by Allianz AG of Germany. Allianz of America also owns Allianz Mexico, which in the mid 1990s was trying to ramp up some insurance business in Mexico.

So, to get Allianz's foot in the door, FFIC lent (via dollar-denominated mandatorily convertible five-year subordinated debentures issued by GFB) $50 million to GFB in September 1995. But GFB continued to have financial difficulties, and by 1998-99 was working with JP Morgan and Allianz to find a foreign corporation willing to buy BanCrecer, in coordination with Mexican regulators.

Allianz throughout was looking out for its own financial position, and by summer of 1999 was looking for an emergency parachute from the crumbling BanCrecer empire. It's best possible option appeared to be a reimbursement for the debentures along the lines of what some Mexican investors had gotten for their peso-denominated debentures around the same time period. But in August 1999, the Mexican Central Bank denied one of FFIC/ Allianz's parachute plan, and over 2000-01, BanCrecer was auctioned off to another Mexican bank and GFB began to be liquidated, in coordination with Mexican regulators.

By October 2001, FFIC had launched a NAFTA investor-state case against Mexico, claiming that its investment was expropriated by Mexico, among other claims. There are lot of ins and outs to the case (which you can read about on Todd Weiler's website here), but there are a few points (which I draw primarily from the July 2006 award) that are instructive for anyone thinking about how trade and investment treaties limit governments' policy space in crisis situations:

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