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This memorandum provides a preliminary analysis of the leaked financial services chapter of the Trade in Services Agreement dated 14 April 2014. It makes the following points:
- The secrecy of negotiating documents exceeds even the Trans-Pacific Partnership Agreement (TPPA) and runs counter to moves in the WTO towards greater openness.
- The TISA is being promoted by the same governments that installed the failed model of financial (de)regulation in the WTO and which has been blamed for helping to fuel the Global Financial Crisis (GFC).
- The same states shut down moves by other WTO Members to critically debate these rules following the GFC with a view to reform.
- They want to expand and deepen the existing regime through TISA, bypassing the stalled Doha round at the WTO and creating a new template for future free trade agreements and ultimately for the WTO.
- TISA is designed for and in close consultation with the global finance industry, whose greed and recklessness has been blamed for successive crises and who continue to capture rulemaking in global institutions.
- A sample of provisions from this leaked text show that governments signing on to TISA will: be expected to lock in and extend their current levels of financial deregulation and liberalisation; lose the right to require data to be held onshore; face pressure to authorise potentially toxic insurance products; and risk a legal challenge if they adopt measures to prevent or respond to another crisis.
Without the full TISA text, any analysis is necessarily tentative. The draft TISA text and the background documents need to be released to enable informed analysis and decision-making.
- Unprecedented Secrecy Reverses WTO Trend of Disclosure
The cover sheet records that the draft text will not be declassified until 5 years after the TISA comes into force or the negotiations are otherwise closed. Presumably this also applies to other documents aside from the final text. This exceeds the 4 years in the super-secretive Trans-Pacific Partnership Agreement (TPPA)! It also contradicts the hard-won transparency at the WTO, which has published documents relating to negotiations online for a number of years. 1
Secrecy during the negotiation of a binding and enforceable commercial treaty is objectionable and undemocratic, and invites poorly informed and biased decisions. Secrecy after the fact is patently designed to prevent the governments from being held accountable by their legislatures and citizens.
The suppression of background documents (travaux preparatoires) also creates legal problems. The Vienna Convention on the Law of Treaties recognises they are an essential tool for interpreting legal texts. Non-disclosure makes it impossible for policy-makers, regulators, non-government supervisory agencies, opposition political parties, financial services firms, academics and other commentators to understand the intended meaning or apply the text with confidence.
- The states driving TISA were responsible for the WTO's pro-industry finance rules
The participants in the TISA negotiations are Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, Hong Kong China, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, South Korea, Switzerland, Turkey, the USA and the European Union, including its 28 member states.
The leaked text shows the US and EU, which pushed financial services liberalisation in the WTO, are the most active in the financial services negotiations on TISA. The third most active participant is the renowned tax haven of Panama.
To understand the implications of the TISA proposals on financial services it is necessary to understand the comparable WTO texts. What is commonly called the Financial Services Agreement is a composite of texts:
- the General Agreement on Trade in Services (GATS) sets the framework for rules that govern services transactions between a consumer of one country and a supplier of another;2
- the Annex on Financial Services applies to all WTO Members;3
- schedules of commitments specify which financial services each country has committed to the key rules in (i) and (ii), and any limitations on those commitments;4 and
- a voluntary Understanding on Commitments in Financial Services 5 sets more extensive rules and has an ambivalent legal status in the WTO. 6
Financial services are defined by a broad and non-exclusive list, which ranges from life and non-life insurance, reinsurance, retrocession, banking, trading derivatives and foreign exchange to funds management, credit ratings, financial advice and data processing (see Art X.2).
The rules apply to measures that 'affect' the supply of financial services through foreign direct investment (commercial establishment) or offshore provision by remote delivery or services purchased in another country (cross-border). They also aim to 'discipline' governments in favour of a light handed and self-regulatory model of financial regulation. The substantive rules target what the financial services industry sees as obstacles to its seamless global operations, including:
- limits on the size of financial institutions (too big to fail);
- restrictions on activities (eg deposit taking banks that also trade on their own account);
- requiring foreign investment through subsidiaries (regulated by the host) rather than branches (regulated from their parent state);
- requiring that financial data is held onshore;
- limits on funds transfers for cross-border transactions (e-finance);
- authorisation of cross-border providers;
- state monopolies on pension funds or disaster insurance;
- disclosure requirements on offshore operations in tax havens;
- certain transactions must be conducted through public exchanges, rather than invisible over-the counter operations;
- approval for sale of 'innovative' (potentially toxic) financial products;
- regulation of credit rating agencies or financial advisers;
- controls on hot money inflows and outflows of capital;
- requirements that a majority of directors are locally domiciled;
- authorisation and regulation of hedge funds; etc.
- States promoting TISA blocked critical debates in the WTO post-GFC
This combination of liberalisation of financial markets and light-handed, risk-tolerant financial regulation enabled the excesses of the powerful US and European finance industry and the growth of the shadow banking system. Various WTO Members called for a review of the rules after the financial crisis. For example, the WTO Ambassador from Barbados tabled a paper in the Committee on Financial Services in March 2011 that said:
the crisis has served to highlight flaws in the global regulatory and compliance environment which hamper the implementation of corrective measures and in some cases make them open to challenge. Unless it is assumed that such problems will never again recur, they point to a need to review some aspects of the global rules including WTO GATS rules within which countries operate, so as to permit remedial measures to be implemented without running the risk of having them viewed as contraventions of commitments. 7
Subsequent attempts led by Ecuador to secure a debate in the Committee were eviscerated to the point that the eventual discussion in April 2013 was meaningless. 8
Similar concerns were expressed outside the WTO. The commission established by the President of the UN General Assembly in 2009 to review the financial crisis (the Stiglitz Commission) wrote in its interim report that trade-related liberalisation of financial services had been advanced under the rubric of these agreements 'with inappropriate regard for its consequences on orderly financial flows, exchange rate management, macroeconomic stability, dollarization, and the prudential regulation of domestic financial systems'. 9 Their final report called for the agreements to be critically reviewed. The major players at the WTO, led by the US, Canada, Australia, Switzerland and the EU, consistently refused to accept there is any relationship between the WTO's financial services rules and the GFC. Instead, they have continued to negotiate bilateral free trade and investment treaties that lock governments more deeply into that regime and extend their obligations even further.