Examination of Witnesses (Questions 300-319)
Mr John Cooke and Mr Roger Brown
1 JULY 2008
Q300 Lord Moser: That is what I am
implying.
Mr Cooke: And the data on services flows,
whether it is cross-border services, financial services via one
country to another, or whether it is financial services provided
at a retail level by a subsidiary of a firm from one country in
another country—there is a lot of intra-corporate transfers
and so on that get involved in the statistics. So, yes, for that
reason too, any country has a problem trying to make a calculation
of, if you like, what concession by another country will yield
what increased trade flow in services.
Q301 Lord Watson of Richmond: I am
interested, Mr Cooke, in the relationship as you see it practically
between trade negotiations and financial services negotiations.
You seemed to imply earlier on in your remarks that countries
may wish to use concessions or gains on financial services as
a bargaining counter within the wider trade negotiations; is that
the reality?
Mr Cooke: It is certainly the theory
of a WTO round in which there are many different bargaining chips
in many sectors. Whether it is the reality I think is a much more
difficult question, partly for the reasons that I have already
given that the different areas of negotiation—and indeed
as Roger Brown has said—have proceeded at different paces.
So it is not at all an easy question to answer. We thought, for
instance, when we had a negotiation that was confined to financial
services that led to the Fifth Protocol to the GATS how much easier
it would be if such a negotiation could take place as part of
a wider round. In practice it has not proved that much easier;
we have found ourselves held hostage to agricultural and non-agricultural
market access. So you are right, it is very difficult. I do not
know whether Roger Brown has more to say.
Mr Brown: I agree with that and also
the fact that you have two types of dialogues; you have the international
regulatory dialogues, which would be DG Markt and the trade with
DG Trade, and I think in fact it is fair to say that the Commission
are pretty joined-up, and that is clearly very important because
a lot of the ostensible trade barriers are in fact regulatory
barriers. But we work closely with the Commission and we think
that they are doing a good job there.
Q302 Lord Haskins: Following on from
Lord Watson's point, in goods we constantly measure the benefit
and dis-benefits of any movement in WTO and clearly there are
big trade-offs on that. In the case of services you have to go
through the same exercise; in other words, you have to demonstrate
the benefit or, a person who does not agree with you, a dis-benefit.
Would you like to summarise the sorts of benefits liberalisation
of services would apply right across the piece?
Mr Cooke: I think the arguments about
the benefits that come from liberalised trade apply as much to
services as to goods. The classic argument is about comparative
advantage range of choice for consumers, and the efficiency gains
that there are from freer trade in services. But I think it is
much more difficult to say that a particular result of a negotiation
is likely to lead to a particular increase or, for that matter,
decrease in services. In goods there tends to be a fairly well-established
economic theory—I am not an authority on tariffs and optimum
tariffs—there is a good body of theory that governs expectations
of whether if a tariff is reduced you can expect your exports
to the country reducing the tariff to rise. I think there are
two difficulties about services. One is that it is that it is
more difficult to be sure that you have actually removed a regulatory
barrier in services, partly because the removal of one regulatory
barrier may actually reveal another, such as tax or something,
which had not previously been taken so much into account (and
countries may find it very difficult themselves to judge whether
they have removed a barrier). The other is that it takes longer
to see a result; one is not just dealing with a trade flow across
the border, but also with commercial decisions of particular enterprises
as to whether to set up a retail subsidiary in another market,
or to offer wholesale financial services cross-border. So the
results take longer to show.
Q303 Lord Haskins: Is this not foot
dragging because in the EU itself in this particular area the
evidence on this is that actually getting a single market to work
in services has proved much more difficult than getting it to
work in goods; therefore, you almost despair of the WTO making
progress.
Mr Brown: If I could interject briefly?
One of the most important elements of the debate for us is getting
better access for European financial institutions, for example
in emerging markets, and we believe—and we think there is
a lot of evidence to support it—that having international
institutions in those developing countries is good for them domestically,
and the recent World Bank Report came to a similar conclusion.
It is things like increasing the access to finance to credit constrained
firms and households, expanding the range of services, providing
a spur to competition as domestic banks have to compete with foreign
entrants; and there is evidence that where international banks
are present that interest rates margins decline. I know it is
a long and complex debate but that is the thrust of where we are
coming from and we believe that there are major benefits for those
countries.
Q304 Chairman: Could I pick up a
quick supplementary? You said that 70 per cent of European GDP
is in services. Do you know how much of that is financial services?
Mr Brown: I think we will have to come
back on that.[1]
Q305 Chairman: I would be grateful
because it is one of those useful facts.
Mr Cooke: For the UK it is about 10 per
cent, not of the 70.
Q306 Lord Trimble: In your evidence
you note in the last decade there have been some 200 regional
trade agreements that have been notified and of the original trade
agreements that are currently in operation something like 140
are purely bilateral. How do you account for the growth in bilateral
and regional trade agreements? Are we going to see more of these
now than of the multilateral universal rounds?
Mr Cooke: It is a very good question.
There are three ways in which one could account for them. One
is the slowness of the multilateral process. Another great restraint
on the multilateral process is the unwillingness of a good number
of countries to give completely across-the-board Most Favoured
Nation concessions because of their fears of competition from
the most competitive of the hugely growing emerging markets: that
is the second reason. The third reason is the wish to establish
bilateral relationships: and that, I think, is more complicated.
On the one hand it is asserted that large and powerful trading
partners, for instance the United States, are moving countries
into having such agreements. On the other hand, there is a certain
amount of evidence that small countries actually wish to protect
themselves against the protectionism of larger trading partners
by taking the initiative in offering themselves for such agreements.
So I think there is quite a range of circumstances and motivations
at work.
Q307 Lord Trimble: With the difficulties
that were discussed a moment ago in just identifying barriers
and identifying the benefits that come, would they be another
factor too why people prefer to move on a more modest bilateral
or regional basis?
Mr Brown: Certainly the industry provides
the UK Government and European Commission country by country with
a list of the barriers that, de facto, make a difference.
So we feel that negotiators are aware of our concerns of, as I
said, what would make a difference.
Q308 Lord Trimble: You mentioned
earlier that what appear to be barriers are very often regulatory
matters. There does seem to be a certain convergence taking place
with regard to regulation; is that a way in which the problems
can be resolved?
Mr Brown: I think it can certainly help
and I draw a distinction between convergence and harmonisation
on the one hand and liberalisation. It is a fact that many international
banks do operate in a variety of jurisdictions which have different
rules; it would be better for them if they were more converged,
but the banks can cope with that. What the banks object to is
where there is overt discrimination in the treatment of the foreign
firms. So that is really the main barrier to get over, but certainly
more convergence would be nice to have.
Mr Cooke: Put another way, you could
have at a theoretical level total convergence of regulatory principles
and practices, while at the same time maintaining discrimination
against foreigners or not liberalising market access. That does
not often happen because the purpose of convergence is usually
to free up market access. But it points up the difference between
regulatory convergence and trade negotiations on market access.
Q309 Chairman: What, in both your
view, would "good" look like in terms of an outcome
to the Doha Round in relation to liberalisation of services? What,
as it were, would you regard as satisfactory to good?
Mr Brown: I think if we could get (a)
binding of existing market openings and (b) material new market
access opportunities. Essentially, I suppose, we are looking for
something that would be on a par with the sort of progress that
hopefully would be made in agriculture and NAMA.
Mr Cooke: Logically in some ways it has
to be on something of a par, because it is not easy to imagine
a settlement on agriculture being acceptable to certain countries
unless it is matched by some concessions on services at a level
that can be recognised as comparable. But I would agree with Roger
Brown that whatever level of ambition proves to be possible the
two elements would be binding of existing liberalisation plus
something genuinely new.
Q310 Chairman: The other question
that is close to my heart, which I wish to sweep up at this point,
is are we confident that the unique interests of the City of London
are being considered and discussed with trade partners and the
WTO?
Mr Brown: I think from our perspective
we do not think that enough attention has been devoted to services,
clearly. As I said before, services accounts for close to 80 per
cent of European GDP and employment and we think that this should
be reflected in the positioning of the EU in trade talks and that
has not happened. We recognise that it is a very difficult negotiating
environment, but nevertheless we would like to see a greater level
of ambition. That is not, let me add, a criticism of the European
Commission—I mentioned before that we work closely with
them and have a good relationship with them—it is rather
the broader European political situation and the, we would say,
excessive emphasis on agriculture.
Mr Cooke: I agree with everything that
Roger Brown has said. It is very regrettable that in the Doha
Round as a whole there has not been enough attention to what is
the biggest part of world GDP. If by your question you meant "Does
the EU pay enough attention to the interests of the City and recognise
them for all financial services in the UK as a whole?" I
think that within those constraints, yes, it does. I think we
have made a good deal of progress in getting it recognised in
the European institutions that the UK interest in financial services
is very important to the overall EU negotiating position, and
that the City of London and the financial services hub that it
is, is an EU resource. That is much more readily recognised than
it was, say, 10 years ago.
Q311 Lord Moser: In your written
evidence—this is from IFSL—you say that the primary
objective of European trade policy must be to promote economic
growth and prosperity, and then you refer to effects on domestic
welfare and so on, which is obviously incredibly important, and
in all the evidence we get it is always the macro judgment of
the benefits. Can you talk a bit about the benefits or otherwise
from the point of view of the labour situation, the labour markets?
Can one say, not from economic growth but from the point of view
of enhancing the situation of domestic labour markets it is always
good news for any kind of country? And also from the point of
view of migration? I do not know how much we know about the specific
effects on labour?
Mr Cooke: It is clearly a very difficult
question. At one level it is impossible, I think, to say that
the immediate effect of trade liberalisation on a domestic labour
market must be good. People may obviously lose jobs if sectors
become open to increased competition and have to find new jobs.
I do not want to sound unsympathetic at all about that; one of
the difficulties in this area, which is always reflected, I think,
in the domestic debate on international trade, is that the prospect
of job losses and the sectors in which they will occur is always
much more apparent in the short term than the prospect of job
gains in new sectors over the longer term.
Q312 Chairman: But some financial
services jobs must by their nature be new altogether. I suppose
I am trying to direct the question towards financial services.
Mr Cooke: It is a general economic question.
Q313 Lord Moser: Being a bit more
specific.
Mr Cooke: On financial services, yes,
there are a great number of new jobs. I think there are also jobs
that with globalisation move to other countries, in the form of
call centres and so on. Roger Brown may have more experience of
this from the banking side.
Mr Brown: Yes, one can point to examples
where having foreign firms in gingers up that industry—more
trading opportunities, et cetera. It is important to note, I think,
that many jurisdictions in Asia have ambitions to become international
financial centres or at least regional centres and to do that
they do need international firms to be based there.
Q314 Chairman: We do not know a lot
about levels of migration. There was a certain amount of evidence
at some earlier stage in this inquiry that financial services,
for instance, arriving in Africa enabled growth in a way that
probably nothing else did in the simple terms that people could
borrow money for the first time.
Mr Brown: Very much so, yes. A number
of our members have been instrumental in developing micro finance,
initially in Asia but also in Africa, and the more access they
get, the fewer restrictions on branches, the more of that they
can do.
Q315 Lord Moser: My interest as a
statistician is in what are the best criteria for judging whether
something is good news or bad news? So more trade, liberalisation
in financial services trade—good news, bad news? We are
assuming it is good news because, to quote you again, it is good
for economic growth; and is that the way you would want to leave
it with us? That is the way to judge it, which means GNP per head.
Mr Brown: It is a good proxy and there
are a variety of studies, a number of which were referred to in
the IFSL research, which show that the relationship between financial
services liberalisation and economic growth is positive. So one
could take various metrics but I think economic growth is a good
place to start.
Q316 Lord Watson of Richmond: Approaching
this from a slightly different angle, when people discuss globalisation
and where it is going and what its likely shape is to be, an important
part of that is the judgment as to where major new financial centres
will coalesce, and will they be rivals, what will the role be
that they play? So discussions about Shanghai and all sorts of
other places. Do you believe there is a relationship between multilateral
financial services agreements and the development of new financial
centres?
Mr Cooke: Gosh! Between multilateral
agreements and their development? I am really not sure about that.
I see a much stronger relationship between the development of
regional financial centres and the steps taken by the host countries
of those centres. I think it is interesting to look at India—
Q317 Lord Watson of Richmond: Relating
to tax and other things?
Mr Cooke: Relating to tax and particularly
to not having the kind of false segmentation between one financial
service and another. In India a lot of work has been done on this
in relation to Mumbai and its development as a financial services
centre. The Mistry Report and the Rajan Report have both in different
ways focused on this, and in particular I think they have focused
on the fact that if domestic regulation leads to segmentation
of what ought to be a seamless financial services market and range
of financial services instruments it is more difficult than otherwise—
Q318 Lord Watson of Richmond: Because
it is much harder to reach a kind of critical mass?
Mr Cooke: It is difficult to reach a
critical mass and also it is difficult for participating firms
to perhaps offer the full range of services they would wish to
offer.
Q319 Lord Watson of Richmond: The
controversial area inevitably is the role that financial services
in practice can play in the acceleration of economic development
with particularly rather poor developing countries being fearful
and others being more ambitious. So my first question under this
heading for you would be how rapidly in your view should less
developed countries be asked to open their markets to international
organisations? How much should the argument be made? In particular,
what about the position of the most vulnerable—the smallest
and the poorest?
Mr Cooke: I do not think there is any
one answer to "how rapidly?" It is clear, I think, that
market liberalisation of financial services has proved to be a
component in many successful developed and developing countries,
but everything depends critically on local circumstances. I do
not think that we would ever argue that in all circumstances liberalisation
has to be right. We, I think, would always take the view that
there needs to be what is called sequencing; that before a financial
services market can be opened—certainly a retail financial
services market for ordinary consumers as against a wholesale
one for business clients—there needs to be in place an efficient
law of contract, a reasonable law of property if people are taking
out a loan and offering property as a security on it. There needs,
of course, to be a level of financial sophistication among consumers—not
necessarily a high level, it depends on the kind of financial
service that is being offered. If it is micro-finance the contractual
relationship may be fairly easy to understand. If it is some very
complicated instrument it will be more difficult. So we do very
much see that all of those features need to be present or be developed,
and I think in the line that we have taken we have always tended
to be descriptive rather than prescriptive—we describe what
has worked for us, or in our IFSL research what appears to work
for certain countries, but we do not say, "You must do this."
1 Note by Witness: Financial Services' share
of EU GDP in 2006 was 5.8%. Back
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