Memorandum by International Financial
Services London (IFSL) on behalf of the IFSL Liberalisation of
Trade in Services (LOTIS) Committee
Question 1
IFSL believes that trade agreements are most
effective when negotiated on a multilateral basis, and that the
multilateral trading system needs to develop further. The current
Doha Round of negotiations has proved slow and difficult, for
well known reasons. But a multilateral approach to services liberalisation
remains important, particularly in relation to financial services,
a core UK trading interest. IFSL has been active in promoting
this view. At the same time, it is necessary to use all approaches
towards achieving liberalisation; and bilateral agreements offer
a significant alternative, which may be more acceptable for services
than for trade in goods.
Question 2
Trade policy, successfully applied, can stimulate
growth and job-creation in Europe. The openness of the UK financial
services market is an example of the success of a liberalising
approach. IFSL takes the view that trade liberalisation should
be at the heart of EU trade policy.
Question 3
IFSL believes that there can be positive relationships
between European trade policy and policies on development, climate-change
and depletion of natural resources, although (given its financial
services focus) IFSL claims no special expertise in these relationships.
Question 4
IFSL's research suggests that developing countries
can benefit from multilateral trade agreements and that financial
services liberalisation can bring particular benefits, especially
if developing countries open their financial markets to international
firms. But certain negative impacts need to be recognised and
addressed through "sequencing" and capacity-building.
Question 5
While preferring a liberal approach, IFSL has
little comment to make on the EU's use of trade defence instruments.
But IFSL is opposed to the idea of a GATS-based "Emergency
Safeguard Measure" for services, as proposed by a number
of WTO members. In the case of financial services, IFSL believes
this to be unnecessary, given other measures open to WTO members
under the GATS.
Question 6
IFSL has no specific comments to offer on intellectually
property rights, beyond drawing attention to the need for financial
services businesses to be able to protect and freely use internationally-known
business names.
Question 7
IFSL believes that multilateral mechanisms remain
the best mechanisms for removing barriers to trade in services.
But IFSL also draws attention to other means, such as regulatory
convergence. IFSL believes that the GATS remains fit for purpose.
Question 8
IFSL supports the view that there is still a
role for the WTO in the 21st century.
International Financial Services London (IFSL)
welcomes the opportunity to give evidence to the House of Lords
European Union Sub-Committee Inquiry into European Union Trade
Policy. IFSL is a member-based cross-sectoral organisation (collaborating
on a contractual basis with UK Trade & Investment and the
Corporation of London) representing the whole of the UK-based
financial services industry.
IFSL's Liberalisation of Trade in Services (LOTIS)
Committee was set up in the early 1980s when services were first
included in the GATT Uruguay Round. The Committee comprises senior
representatives from UK-based financial services sector and related
professions and businesses such as legal services and shipping.
It is the established cross-sectoral voice for UK financial services
in connection with both EU trade policy and WTO affairs. This
evidence reflects the LOTIS Committee's views, and focuses mainly
on EU trade policy as it affects the UK's financial and related
services.
IFSL believes that the work of the House of
Lords Sub-Committee is timely, coming at a point when the benefits
from freer trade have created unprecedented economic gains, and
yet when these gains are increasingly threatened. With protectionist
sentiment being expressed in a number of WTO members at a political
level, and with the current challenges facing the Doha Development
Round, it will be important for countries such as the UK to restate
strong support for trade liberalisation.
Question 1: What are the future prospects
for Multilateral Trade Negotiations? What effect will the rising
number of Bilateral Agreements have on the existence and further
development of Multilateral Agreements?
1.1 IFSL believes that trade agreements
are most effective when negotiated on a multilateral basis. Multilateral
accords offer the opportunity to lock-in genuine liberalisation
on the basis of Most Favoured Nation (MFN) provisions that apply
to all: examples are the Marrakesh Agreement (1994) which concluded
the GATT Uruguay Round and included the General Agreement on Trade
in Services (GATS) and the Fifth Protocol to the GATS (1997) on
financial Services. The existence of the GATT and the WTO, and
the multilateral rules-based system underpinning both, has brought
order and stability to international trade relations. The MFN
provisions in the GATT, and subsequent multilateral agreements,
allow all WTO members the opportunity of equal access to each
others' markets. The multilateral system has led to global economic
gains, with the Uruguay Round estimated to have increased world
GDP by more than $100 billion per annum.
1.2 The further development of the multilateral
trade framework will be a key factor in building global prosperity.
The existing level of liberalisation secured on a multilateral
basis is not sufficient, particularly in the area of services
(which account for more than 70% of both GDP and employment in
almost all European countries). At present large areas of trade
in services are not covered and there is a strong UK interest
in securing further liberalisation through the multilateral process.
Unfortunately however, progress in the Doha Round has been slow
and uneven, and the prospects for its successful conclusion remain
uncertain. This has been as true of negotiations on financial
services as in other areas. It is a matter of disappointment to
IFSL that the Doha agenda continues to be dominated by negotiations
over Agriculture and Non-Agricultural Market Access (NAMA), given
the world-wide economic significance of the services sector. IFSL
regards a successful conclusion to the current Doha Round—which
means a conclusion that adequately reflects the importance of
services—as being of the highest importance.
1.3 Within services, financial services
in particular are an area of especial interest for the UK. The
sector represents 10.1% of the UK economy, a far larger proportion
than that of any of the UK's EU counterparts. Much of this is
concentrated in the City of London: as a financial centre, London
provides a market for investors in the 692 international companies
listed in the UK. London also accounts for 79% of European hedge
funds assets, 75% of worldwide Eurobond trading, 70% of the global
secondary bond market, 66% of global turnover in internationally
traded insurance and reinsurance services, 53% of cross-border
equity trading, 50% of private equity in Europe, 43% of over-the-counter
(OTC) derivatives trading, 34% of global foreign exchange turnover,
and 20% of cross-border bank lending. It is estimated that, if
London's financial services cluster did not exist, EU GDP would
suffer an immediate reduction of €33 billion. The true significance
of the sector is almost certainly greater still when related professional
and support services are taken into account. No other EU Member
State has a financial services sector (wholesale or retail) which
is close to being as prominent or successful as that of the UK.
1.4 Against that background, IFSL attaches
high importance to the WTO as providing a sound basis for financial
services liberalisation. As an instrument for financial services
liberalisation, the GATS and related texts provide a framework
of interlocking provisions including the GATS Annex on Financial
Services, the Understanding on Commitments in Financial Services,
and the "prudential carve-out"; and the GATS also functions
(under Mode 3) as an investment agreement for financial services.
IFSL has therefore sought to promote negotiations on financial
services in the WTO framework, pressing the case for these to
be carried out on the basis of the "model schedules"
of commitments wherever possible. The "model schedule"
approach sets high market access benchmarks for financial services
suppliers to be able to establish a commercial presence and supply
on a cross-border basis. Particular features reflect the most
liberal approaches found in schedules of commitments under the
GATS or in free trade area agreements (FTAs). In support of this,
IFSL has consistently stressed the need for good offers under
the request/offer process which is at the core of the GATS negotiating
process. At the start of the WTO Plurilateral Negotiations on
Financial Services (early 2006) between some 20 countries (the
EU counting as one), IFSL pressed for a broad-based Collective
Request. Regrettably, none of these efforts has yet borne fruit.
However, now that there have been Reports by the Chairmen of the
WTO Committees concerned with Agriculture, NAMA and Services (February
2008) IFSL believes that, despite the slow progress so far, there
remain prospects for reinvigorating the Doha Round and concluding
it with a balanced liberalisation package bringing substantial
opening of financial services markets. IFSL welcomes the European
Commission's efforts to pursue that objective.
1.5 As for the effect of the rising number
of bilateral agreements on the existence and further development
of multilateral agreements, IFSL accepts that this is a matter
of debate but believes that it may be less deleterious in services
than in goods. This is because global trade in services is less
affected by the so-called "spaghetti bowl" of rules
of origin, rules governing inward and outward processing, and
other matters affecting goods. However that may be, regional trade
agreements (RTAs) have now to be accepted as a central feature
of the world trading system. In a recent decade (1995-2005) some
200 RTAs were notified to the WTO. More importantly, the share
of world trade accounted for by RTAs has grown by some 25% in
recent years, from some two-fifths to over half of world trade.
Bilateral trade arrangements are becoming more common: of some
185 RTAs currently in operation, no less than some 140 are bilateral.
One of the striking features of the recent growth of regionalism
is the extent to which Asian countries that had previously eschewed
regional deals are now engaged in the process.
1.6 There is a growing view that regionalism
is a viable alternative to the WTO-based system. This view has
been particularly propounded by the United States. It is difficult
to measure the results of US policy in terms of commercial advantages
accruing to the US. But—to take one example—it is
noteworthy that, in wholesale financial services, the US accounts
for 39% of world wholesale finance services, whilst the EU accounts
for 28%. The EU's wholesale financial sector averaged 4.9% annual
growth between 1997 and 2005; the US 7.0%. In the early 1990s,
the two were on a par but a larger, more integrated services market
and faster economic growth have helped the US pull away. Some
of this differential may be the result of the US strategy for
RTAs: it is a question requiring further examination. IFSL therefore
sees little option but to acknowledge that while the multilateral
approach may be far preferable, alternative avenues need to be
explored, particularly when progress on the multilateral track
is slow. This was recognised by the European Commission in its
"Global Europe" communication, which set the agenda
for a new suite of negotiations towards Free Trade Agreements
(FTAs) with third markets. As long as it remains necessary to
seek further liberalisation to unlock the full economic potential
of the UK financial services sector, it would be irresponsible
not to seek all avenues where progress can be made, and IFSL therefore
sees an important role for bilateral negotiations.
Question 2: What role can European Trade Policy
play to stimulate growth and create jobs in Europe?
2.1 The primary objective of European trade
policy must be to promote economic growth and prosperity, both
in Europe and amongst the EU's trading partners. The continued
liberalisation of trade in goods and services is essential to
this objective, particularly in areas such as financial services
where Europe maintains a strong comparative advantage.
2.2 The classical Ricardian economic arguments
for the role of a liberal external trade regime in promoting domestic
welfare and wealth-creation are well-known. The recent expansion
of UK financial services through an open market is emblematic
of practical effect of these arguments when they are allowed free
play to operate. As has already been mentioned, financial services
comprise an important part of both the UK and wider European economies.
In the UK, the financial services sector constitutes a principal
component of economic growth, contributing disproportionately
to the expansion of the UK economy over the past decade. London
is now the world's premier financial services centre, and the
location of choice for multinational companies seeking to raise
capital for global business. Its financial services cluster is
open to cross-border business and inward investment, and is especially
attractive for enterprises relying on recruiting and retaining
international staff. UK financial services suppliers have a value-added
of over £100 billion per annum, and play a critical role
in allowing the UK to meet its targets for employment, tax revenues
and balance of payments. This has been achieved, since "big
bang" in the mid-1980's, by conscious recourse to liberal
and open policies for trade and investment in financial services.
2.3 In IFSL's view, the pursuit of trade
liberalisation must be at the centre of European trade policy,
with an eye to the growth and employment implications for the
European economy as a whole. There will undoubtedly be divergent
views on the best way to achieve this. Most important however
is to place the liberalisation principle itself at the heart of
European trade policy, and to assess the extent to which different
multilateral and bilateral activities aid the pursuit of these
objectives. It remains important to address the protectionist
instincts that can emerge as the result of economic readjustment,
and which may sometimes attract EU policy-makers. Whatever its
short-term attractions, protectionism undermines long-term economic
performance by postponing change, eroding competitiveness, and
leading to poor resource allocation and to a distorting focus
on areas where economies are losing natural advantages. By the
same token, it is critically important for European policy-makers
to identify areas where the most significant progress can be made.
Given that agriculture represents less than 3% of employment in
most European economies, it seems perverse that so much of the
EU's negotiating efforts are concentrated on this area. To gain
maximum economic impact, European trade policy needs to focus
on the liberalisation of trade in services, given that the services
sector is now the primary contributor to economic scale, growth,
employment and competitiveness.
Question 3: What should be the relationship
between European Trade Policy and policies on development, climate
change and depletion of natural resources?
3.1 IFSL recognises that the relationship
that exists (or ought to exist) between European trade policy
and policies on development, climate change and depletion of natural
resources is a matter of wide debate. IFSL claims no special expertise
in this area, beyond taking the view that trade and development
are inherently interlinked, given that long-term, sustainable
development in poorer countries is virtually impossible to secure
without effective access to the global trading system (a linkage
to which the Government has responded my making trade policy a
shared responsibility of the Department for Business, Enterprise
& Regulatory Reform (BERR) and the Department for International
Development (DfID)). IFSL believes that a European trade policy
promoting an open trading system, through which emerging markets
can both trade and have access to the supply of financial services
(whether cross-border or through commercial presence) will be
beneficial to development. The key benefits will be access to
capital at competitive rates and the spread of banking, insurance
and other forms of financial intermediation capable of mobilising
personal savings. This view is explained in greater length under
Question 4.
Question 4: Have developing countries benefited
from Multilateral Trade Agreements? What steps should European
Trade Policy take to help less developed countries reap the benefits
of global trade?
4.1 It is commonly said that developing
countries have benefited substantially from previous multilateral
agreements, and stand to accrue disproportionate benefits should
the Doha round be successfully concluded. Following the conclusion
of the Uruguay Round in 1994-95, developing countries' share of
global goods and services exports increased from 36% in 1996 to
43% in 2006. Countries in East and South Asia have seen the greatest
benefits, but there has also been substantial growth in developing
Latin America. Growth outcomes have of course been varied (as
the experience of sub-Saharan Africa demonstrates only too clearly)
and are critically affected by factors ranging from quality of
infrastructure and degree of necessary reform to natural catastrophes
and war.
4.2 In its Research Report "Benefits
to Emerging Economies of Liberalising Financial Services &
Promoting Access to Finance" (2006) IFSL noted that "Financial
services have a crucial role to play in accelerating the development
of emerging economies. This is because properly functioning financial
markets help to connect businesses with lenders and investors
with funds to put into ventures along with sharing of risks. However,
inadequacies in finance create barriers to opportunity and increase
costs for small and large enterprises. According to the World
Bank "Government interventions frequently have made matters
worse, as financial markets have been repressed and distorted
by state ownership, monopolies, directed or subsidised credit
and other policies appealing to the short-term interests of politicians
and favoured groups'". The IFSL Report highlighted a number
of arguments in support of the positive relationship between financial
liberalisation, financial development and economic growth:
— Higher interest rates on deposits
are generated through introduction of market principles and competition
in financial markets.
— Tighter margins contribute to a lower
cost of capital which facilitates investment and growth.
— Lower overhead costs, improved risk
management and development of new financial services contribute
to improved efficiency, higher returns on investment and to faster
growth.
4.3 The Report also noted a literature review
indicating that 15 out of 23 studies had found a positive relationship
linking financial liberalisation with growth; four found a neutral
relationship and four a negative relationship. The disadvantages
of liberalisation in the minority of studies showing a negative
relationship included:
— Lack of information on borrowers,
with a potential reduction in relationship lending, which reduces
the efficiency of lending.
— Banks becoming less risk averse as
profit margins come under pressure, leading to excessive risk
taking under pressure of greater competition.
— Capital flows becoming more volatile
with capital market liberalisation.
4.4 IFSL concludes that, as far as financial
services are concerned, the best way for EU trade policy to help
developing and least developed countries reap the benefits of
global trade is seek to encourage them to make their financial
markets more open to international firms. But any such policy
must be accompanied by alertness to possible negative impacts
and to the need for "sequencing" (matched by capacity-building)
aimed at developing adequate regulatory regimes as the financial
services market expands.
4.5 The European Union should also ensure
that there are no unnecessary restrictions on financial services
businesses from less developed countries doing business in the
EU.
Question 5: Is there still a need for Trade
Defence Instruments, and if so, how can these be designed to ensure
that their effects are targeted and proportionate?
5.1 IFSL has little comment to make since
the EU's use of trade defence instruments is not of particular
relevance to the financial services sector (although in principle
IFSL believes that economic openness is almost always the most
effective policy option).
5.2 That said, IFSL takes this opportunity
of stating its opposition to the concept of a GATS-based "Emergency
Safeguard Measure" (ESM) which certain WTO members are seeking
to develop for services, analogous to the trade defence instruments
for goods that are permitted, subject to conditions, under the
WTO Agreements. IFSL's reservations apply particularly in the
case of financial services. The "Prudential Carve-Out"
in Article 2 of the GATS Annex on Financial Services already allows
a WTO member to take emergency measures for prudential reasons
(which include the protection of investors, depositors, policyholders
and others, or to ensure the integrity and stability of the financial
system). Given the wide ambit of this provision, IFSL does not
believe that there is any need for a further trade defence instrument
in the field of financial services, and believes that the EU should
oppose any such proposal.
Question 6: What is the best approach for
ensuring that Intellectual Property Rights are protected? Do these
rights hinder development goals—and, if so, how can an appropriate
balance be struck?
6.1 IFSL has no specific comment to offer
on this question, narrowly interpreted. IFSL takes this opportunity
to note that many of its largest international member-companies
have business names that carry worldwide brand recognition and
which they need to be able to protect. In certain countries they
are not permitted to proclaim their commercial presence using
these worldwide names, being required instead to use a less well-known
local name (eg the name under which they first operated in the
country concerned). In IFSL's view, a globally-known brand name
is an important asset, and its members should be permitted to
use, in any market, their chosen name under which they are generally
known.
Question 7: Services represent 77% of European
GDP and employment. What are the best mechanisms to remove barriers
to trade in services? Is the GATS still fit for purpose?
7.1 As the question notes, services account
for over three-quarters of European GDP and employment—which
should make the services sector a top priority for the EU in international
trade negotiations. The fact that little progress appears to have
been made on services in the Doha Round is therefore a matter
for concern. Whilst appreciating the difficult negotiating environment
and the obstacles facing services negotiations, IFSL believes
that EU negotiators must continue to press for a materially higher
level of ambition towards liberalising services. IFSL endorses
their efforts to do so, and welcomes the steps recently taken
by the Commission, as the EU's negotiator, in the wake of the
publication (12 February 2008) of the Report on the WTO Negotiations
on Services by the Chairman of the WTO Committee on Trade in Services
in special Session.
7.2 As has been said, IFSL strongly supports
multilaterally negotiated approaches to liberalising services.
They are admittedly difficult and time-consuming. They involve
changes to countries" domestic laws and regulations. There
are a number of other avenues that should also be considered.
In the field of financial services, these include:
— OECD Codes, related instruments
and working groups: the Organisation for Economic Cooperation
and Development (OECD) has long been a force for financial services
liberalisation. Its longstanding work has been concerned with
Codes on Capital Movements and Current Invisible Operations. More
recently it has been active in the pensions field, where its International
Network of Pensions Regulators and Supervisors gave rise to the
International Organisation of Pension Supervisors (IOPS). Further
work is being undertaken by the OECD's Insurance and Private Pensions
Committee (IPPC, in which Israel and Russia are observers) and
its Working Party on Private Pensions (WPPP, in which Brazil,
Colombia, Estonia, Israel and Russia are observers, with Chile
and India requesting observership). Since at least 2004 OECD enlargement
has been under consideration, with the prospect of raising OECD
membership from the current 30 to about 40 countries. If there
is agreement within OECD on new accessions, an expanded OECD could
give scope for greater use of OECD Codes, particularly if these
were broadened to incorporate forms of mutual recognition agreements
among financial services supervisory authorities.
— Regulatory convergence and regulatory
dialogue: there are already moves towards an enhanced degree
of regulatory convergence through the work of all the main international
regulatory bodies (the Basel Committee, the International Organisation
of Securities Commissions (IOSCO), the International Accounting
Standards Board (IASB) and the International Association of Insurance
Supervisors (IAIS)). There is also a growing degree of regulatory
dialogue between different countries and groups (examples are
the EU/US regulatory dialogue and the US/China Financial Services
Dialogue) which provide opportunities for finance ministries and
regulators to discuss regulatory treatment of financial services.
In the UK case, such processes might be used to promote specific
UK interests such as distinguishing clearly between wholesale
and retail financial market regulation, or the disapplication
of certain kinds of regulation between markets with "sufficiently
equivalent" standards of regulation.
— Mutual recognition agreements:
given their potential usefulness, these have been relatively little
discussed. But mutual recognition agreements between regulators
have an obvious role in freeing flows of financial services business,
the more so as underlying convergence between regulatory approaches
permits them to become an increasingly realistic option
— More coherent collective approaches
to capacity-building: there is no shortage of current work
on financial services capacity building by national and international
agencies, as well as by private sector projects. There have been
huge projects (including the EU-China financial services project
of a few years ago, worth some €8 million), the Chancellor's
Financial Sector Scheme and a plethora of small training projects
and consultancies (some, in the UK case, involving the Financial
Services Authority (FSA) and the Department for International
Development (DfID)). There perhaps needs to be more evaluation
or follow-through to determine both their usefulness and the extent
to which they have alleviated market-failure and created conditions
for economic growth. They are a key part of the process for developing
healthy financial services markets, and the outlay on them means
that they should be critically appraised for their coherence and
effectiveness.
IFSL welcomes steps taken to bring greater coherence
to UK efforts in these fields, such as the creation in the UK
of the International Centre for Financial Regulation.
7.3 As to whether GATS is still fit for
purpose, IFSL takes the view that it is. Even if negotiations
in the Doha Round have been slow and difficult, in other areas
negotiations in the GATS framework have produced some substantial
gains during the GATS' its relatively short life. The Fifth Protocol
on Financial Services (1997) is one example in the financial services
field: another is the commitments to financial services liberalisation
secured in accessions to the WTO (China, Vietnam and, most recently,
Ukraine). Outside the financial services area, the Basic Telecommunications
Agreement (1998) is a significant testimony to the success of
the GATS negotiating process. The GATS system of commitments is
moreover peculiarly well suited to the financial services sector:
financial services providers, perhaps more than most other service
sectors, attach importance to binding commitments under the GATS.
Uniquely among services sectors, the financial services sector
provides products that may continue as long as forty years or
more, particularly in the case of life and pension products. Financial
services providers therefore need the guarantees of a stable environment
that bindings in the GATS are designed to provide. In these terms,
IFSL has no doubt that the GATS is still fit for purpose, even
if it may need to be supplemented by other, parallel approaches
to securing the full potential of financial services liberalisation.
Question 8: Is there still a role for the
WTO in the 21st Century?
8.1 The essential role of the WTO lies in
its long-standing legitimacy as the guardian of the multilateral
rules-based system for international trade, backed by a dispute
settlement mechanism that has few if any equals among international
treaty organisations. There will continue to be a need for this
role in the 21st century.
8.2 For financial services, the GATS is
the key component of the WTO's architecture. As a route to high-quality,
long-term, liberalisation on a universal basis, the multilateral
GATS process will remain a keystone of the financial services
liberalisation edifice. It brings an unequalled range of advantages—both
practical and in terms of welfare economics—both to the
countries involved in GATS negotiations and to businesses in the
sector under negotiation. In particular it offers:
— reference principles and rules, concerning
market access for foreign market-entrants and non-discriminatory
equality of treatment ("national treatment") once the
market has been entered;
— a system of binding commitments which
allows a government to augment domestic reforms (designed to encourage
growth and development) with international undertakings to maintain
its level of liberalisation;
— a standard of comparison by which
the degree of liberalisation in different markets can be compared;
— a negotiating process, allowing governments
the reassurance that negotiated liberalisation will maintain a
degree of parity between trading partners; and
— a clear system of liberalisation
undertakings in a framework that is understood by commercial enterprises,
providing business with a guarantee that commitments, once scheduled
under GATS, will not be rescinded.
In IFSL's view, these advantages should give
the WTO an abiding role in the current century.
29 February 2008
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