24-11-2009 What is the role of WTO services rules in the context of the current financial crisis? – Transnational Institute

The WTO’s General Agreement on Trade in Services (the “GATS”) has very much underpinned expansion without regulation and supervision, so the financial corporations had the guarantee that their expansion would be underpinned. But financial services are not the same as other services – they need special supervisory structures.

Has the WTO’s services agreement contributed to the crisis or is it a tool which can help create a more stable environment for international financial services? Myriam Vander Stichele, TNI Fellow and senior researcher at the Centre for Research on Multinational Corporations, and Sergio Marchi, senior fellow at the International Centre for Trade and Sustainable Development, discuss this topic with Keith Rockwell, WTO Spokesperson.

Transcript
Chair, Keith Rockwell: Hello and welcome to WTO Forum.

The WTO’s General Agreement on Trade in Services (the "GATS") is designed to open trade in services like transportation, telecommunications and financial services. Proponents of the GATS say that by increasing competition we spur innovation and efficiency in markets around the world. Services comprise more than 50 per cent of total global output, so enhancing efficiency in these sectors can raise economic growth and improve prospects for development. Critics of more open services markets, however, have said that opening markets, particularly in finance, can raise risks and may have contributed to the global financial crisis that has sent shock waves around the world. Has the WTO’s Agreement on Services created greater risks or does it offer prospects for stability and innovation that can actually create a more stable environment for trade in services, particularly financial services. With us today are two experts on this question. Myriam Vander Stichele, the Senior Researcher at the Amsterdam based Centre for Research on Multinational Corporations, and Sergio Marchi, formerly Canada’s trade minister, the Chairman of the General Council here at the WTO, and currently a Senior Fellow at the International Centre for Trade and Sustainable Development.

Welcome to you both.

Myriam, your thoughts.

Myriam Vander Stichele:
My thoughts are that the GATS Agreement has very much underpinned this expansion without regulation and supervision, you know the innovation was being allowed. And because of the expansion – and the underpinning was happening, for instance, one of the GATS rules saying you should not allow the limitations on foreign ownership – so the companies, the financial corporations had the guarantee that their expansion would be underpinned. But we also see, and it’s now recognized, that this competition was then putting pressure on the regulators to kind of relax the regulations and the supervision, which is called this "light touch regulation". Because of the negotiations being in that atmosphere, these were also being included in the GATS rules.

Don’t forget that GATS liberalization is not about tariffs. It’s basically looking at the measures that restrict the trade. And one of those measures is, for instance, to say that you can’t limit the size of the operation or the value of the operation. So this is like, too big to fail, was being underpinned by those rules. And at the same time, now, it also becomes more difficult to kind of look at the new reforms because there wasn’t a kind of model in the GATS which is called the "Understanding", but it also says, well, you shouldn’t regulate further, it’s a standstill regulation, or you have to allow any new financial services. So especially the rich countries, which abided to them. So in that sense it seems that what is now on the table, and which is in the Rules, is underpinning the old model, and I think it’s about time for the GATS negotiators to recognize the lessons that need to be learned, and not to go on as they have been doing in the
past.

Chair: Sergio Marchi, do you agree with that?

Sergio Marchi: There is always lessons to be learnt, but we also need to learn what the lesson was, principally. And clearly in the United States constituency, in terms of the housing bubble, and what went wrong, and the lack of oversight, clearly, obviously people looking the other way. But I would not make the jump or the correlation that liberalization means no regulation. That’s clearly not true. It’s complementary. For instance, in Canada, once that financial storm from America hit the world, it had more to do with the integration of that world rather than its regulations, because in Canada, we did not suffer, then or now, any financial crisis. Our crisis was when the world economy slowed down, when trade slowed down, when consumership moved back, that’s when we got the crisis. We got an economic crisis which then transformed itself into an unemployment crisis or challenge that we’re dealing with. But our banks, in Canada – touch wood – and other financial institutions, have remained as healthy after the crisis than they were before. And that was because of regulatory oversight. So I don’t think we should simply make the simplistic argument that liberalization means no regulation. Of course liberalization should be accompanied by astute overhanging oversight and regulation.

Source: Transnational Institute, 24-11-2009