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Claude Barfield and Harry Freeman - Comments and Discussion - Brookings-Wharton Papers on Financial Services 2000 Brookings-Wharton Papers on Financial Services 2000 (2000) 453-463

Comments and Discussion

[Financial Services and the GATS 2000 Round]

Comments by Claude Barfield: At the American Enterprise Institute we have been part of the Brookings Institution and the Kennedy School group of studies. As part of that effort, we have commissioned a series of studies on individual sectors, including two in the financial services area. It may be the wave of the past or the wave of the future, but we divided financial services into two areas: (1) banks and securities and (2) insurance. We also have papers on energy services, entertainment, accounting, and transportation. Our work complements the kind of analysis that Sauvé and Gillespie have done in this paper. In our case, we pushed the authors to think beyond the particular years of the upcoming trade round, because we thought that the round was going to be a holding action anyway and that it was important to think beyond it.

I would like to commend Sauvé and Gillespie on their paper. It is a clear discussion of the complicated negotiating process that is occurring in services right now in the World Trade Organization (WTO). The paper makes a very complicated structure as understandable as possible.

In my own mind, sooner or later, the so-called modes of commitment are going to have to be collapsed, because I think that ultimately they are too complicated. I also think that, with the Organization for Economic Cooperation and Development (OECD) countries, the negotiations in the near term are going to be related to modes 1 and 2--cross-border delivery of services and consumption abroad--vis-à-vis the developing countries, where the real pressure is going to continue to be on the questions of establishment.

I have two comments. First, Sauvé and Gillespie push, particularly for the non-OECD countries, what they call experimentation with formula-based [End Page 453] approaches to liberalization across types of barriers. They also list examples of ownership, tests of economic necessity, the range of service offerings, and geographic expansions. This may be a failing of mine, but I have never understood how one can use formula-based approaches in the negotiating process. I do not know how you get equivalence as to whether or not some package of ownership or range of services that is offered by one country equals another package offered by the other. So when Sauvé and other trade negotiators or trade economists talk about this, I am not in sympathy. I do not understand how the approach would work in practice.

Second, the paper could use some more detail on the point about phasing in liberalization. The authors imply that there is an optimum phase-in of liberalization. Again, I would like to know what this means. The paper suggests that there is a best way or a better way of doing this. I am not sure that either the trade side or the financial institutions side knows what that is.

I would like to spend the rest of my time discussing one of the papers that we have at the American Enterprise Institute because it goes beyond the next three years. Let me give you a little background as to where we are in these negotiations. Certainly, the U.S. business community, and I think this is probably true with many elements of the services sector in the European Union, has become, if not transfixed, certainly quite interested in what happened in the WTO telecommunications agreement. Business appears to see the telecommunications agreement--which consists of a set of rules and principles concerning competition that nations have to sign--as the model for the services agreement. To the astonishment even of our own negotiators, a number of countries also have signed the annex to the agreement and are in the process of liberalizing their telecommunications sectors. The annex contains very detailed and fairly precise rules about dealing with monopolies and about entering markets in which there is either a monopoly or one or two dominant firms.

U.S. firms, including financial services firms, ultimately have made it clear that they would like to see something similar in their sector. I think that is true in a number of sectors. There is a question as to whether there really is a point of diminishing returns. Whether the WTO goes forward or not, you have this whole series of regulatory principles that are specific to sectors. Many sectors would like to see an annex at some point--maybe not in the three-year period, but at some point down the road--if not for insurance, at least for financial services. [End Page 454]

The paper that we did on insurance lays out some of the details to give some sense of what would be on the table. Basically, the document would be called a competition document in relationship to regulatory principles. There would be four traits: adequacy, impartiality, minimum intrusiveness, and transparency.

Under the rubric of adequacy, nations would enact and enforce laws that provide a framework for competition within their own nation and insurance markets. They would enforce laws that establish reasonable solvency standards and regulations that protect the public. Beyond this, government should establish, make public, and enforce appropriate and consistent rules and procedures for identifying financially troubled insurers. They should have an insurance regulatory agency that is independent and can partially enforce insurance laws. Those are the kinds of things that fall under adequacy.

Under impartiality, nations would establish a kind of national treatment. That is, the government should ensure that insurance regulation and enforcement are applied with consistency and impartiality between competitors irrespective of nationality.

Regulation would be minimally intrusive. And here the point is that, subject to regulatory oversight essential to protect the public, government should allow the market to determine what financial services (for example, insurance products) are developed and sold, the methods by which they are sold, and the prices at which they are sold.

The other side is that government should also have consumer protection laws that allow the consumer to have adequate information to make informed and independent judgments.

And then, finally, in terms of transparency, what is put forward is essentially an administrative procedures act. Insurance laws should allow comment on proposals and time for interested parties to appeal, and insurance regulatory agencies should provide justification for their decisions, which themselves could be appealed.

In effect, the insurance industry in the United States would like a competition policy or regulatory policy document, for which nations would sign up and be responsible. Ultimately, this would be a set of rules by which nations could be brought to the bar, as it were, in the WTO.

Comments by Harry Freeman: I am an advocate of trade in services from the point of view of organizing private sectors around the world. I am [End Page 455] the head of the Mark Twain Institute, which is a virtual institute with about fifteen consultants on the payroll looking at the future of some economic scenarios.

In 1975 Pan American, which was still there, and American International Group (AIG) took a shot at trade in services. In 1979, I was in New York with the American Express Company and was in charge of strategic planning and acquisitions. We were having problems, which we now call market access problems (we did not have this kind of terminology at that time), in thirty or forty countries. We had no remedy under the trade laws or under the General Agreement on Tariffs and Trade (GATT), which only covered goods.

To make a long story short, we decided that we would have to change that, which meant starting a new round of trade negotiations including services. My boss, Jim Robinson, chief executive officer (CEO) of American Express, asked me to start a new trade round as soon as possible. He asked, "How long will it take?" I said, "I don't know, ten years maybe. I don't know. I have never done it. I am just reading this book by Ken Dam called the GATT." 1 He said, "Well, do it as soon as you can." I said, "I need some money." He said, "Don't worry about money. This is so important, you will have an unlimited budget." If there was one phrase that really pushed trade and services, that was it. We put a person in Brussels, a person in Tokyo, two or three people in Washington, three people in New York, and so forth.

We enlisted the aid, which was really important, of Citicorp and also AIG. John Reed came along a few years later as CEO. We had an alliance in which Jim Robinson of American Express, John Reed, and Hank Greenberg of AIG were working together. I was the go-between.

Having those three men with a lot of staff was the key. We went from zero probability of success to having a chance. We went to the ministerial meeting in 1980, 1982, 1984, and 1986, and the Uruguay Round started. The negotiations lasted an awfully long time. My colleagues in financial services groups and advocacy groups here are calling for a three-year round. They should remember that if the Uruguay Round had ended on time, services would have been dropped. The round almost collapsed in 1990, and we finally got services in right before 1993, at the end of the Uruguay Round. [End Page 456]

The notion of "let's do this quickly" is fine. It is desirable. All kinds of things are desirable. But it is very unrealistic, and it may be detrimental to the interests of services.

Another thing that we had to deal with very, very early on is the meaning of financial services. The first thing we did in 1979 was to coin the phrase. You will not see the term "financial services" before 1979. We did that by asking everybody in the company to talk about financial services particularly with the media, and in about two years the term financial services was part of the lexicon.

It is always difficult to determine the meaning of financial services company. What does that mean? Everybody talks about banks, insurance companies, and securities companies, and they are part of it. But what about H&R Block, which is one of the largest accounting firms in the United States and operates in about twenty countries? That is a financial services company, I think. EDS, which does back-office work for American Express Bank, Citibank, and others around the world, also is a financial services company. Credit card processors, such as MBNA, Reuters Information, Standard & Poor's, which operates in 100 countries or something like that, and asset management companies are all financial services companies. That is a partial list. We were quite successful in the Uruguay Round in defining financial services as "any service of a financial nature." This allowed us to have more and more allies, and you have to take care of your allies.

Incidentally, as you read the media and other papers, you always see the phrase "goods and services." That phrase came about in the early 1980s when I wrote at least 1,600 letters. Every time they would say the phrase "goods," I would give the clip to my office manager and say, "Write this reporter, sign my name, and say that he left out the term 'services.'" And that worked. It was a simple, but laborious, thing to do. Fortunately, those were the days of Wang, so it was not so bad.

Our greatest problem in trade and services is that most people do not know what we are talking about. How do you compute the export of services? At American Express, three teams spent one day each examining the annual report and computing the company's exports. One came back with something like $1 billion, one came back with $2 billion, and one came back with $4 billion. Pick one!

It is one thing for a lawyer to send the bill to do some work for, say, Deutsche Bank. He sends the bill, and money comes back. Lawyers are [End Page 457] in the service sector. That is an export. It is much harder to think about banks. This has been a major conceptual difficulty.

We have statistics on services being exported by the United States but also on services being imported by the United States. There is some excellent information on U.S. majority-owned affiliates operating abroad, like IBM U.K. or EDS U.K., and selling to Germany. Those services are not U.S. exports, but the amount of services being sold by majority-owned U.S. firms abroad is almost the same as the amount of services being exported by the United States: $240 billion to $250 billion a year.

I will not belabor the point about understanding trade in services, but it is probably our biggest problem. Most people do not understand what we are talking about.

Sauvé and Gillespie's paper is outstanding, and I commend them for drawing the road map for where we should go. Let me make some points on it. We have yet to convince most of the countries of the world, particularly developing countries--the hundred-plus countries of the 136 countries of the WTO--that services are part of the necessary infrastructure for development. That is the essential theme. We are trying to advance that theme in all kinds of ways, but we are not doing very well at it. It will take perhaps another five or ten years before we can accomplish this.

Our argument is that this is good for developing countries. They do not always agree. They are not so happy sometimes with the American Express offices, or Bank of America, or Chase in their countries. They do not know why they need these foreign banks and foreign financial experts. To us, free competition helps development. They do not always agree. We will win this battle, but it will take many, many years of discussion, scholarly writing, and all kinds of communication.

The U.S. private sector on trade in services is probably the most powerful trade lobby, not only in the United States but also in the world. I would tend to disagree with Sauvé and Gillespie somewhat regarding the amount of work that has been done by our transatlantic partners, particularly the European Union. They only recently formed any kind of organization and pitched in.

At the close of the Uruguay Round, we lobbied and lobbied. We had about 400 people from the U.S. private sector. There were perhaps four Canadians and nobody from any other private sector. The private sector advocacy operations in the U.S. government are radically different from those in every other government in the world. [End Page 458]

You have working relationships, and you see these people, and you see the U.S. Trade Representative and the Treasury Department, and the relationships are good. U.S. government trade negotiators went to Seattle knowing exactly what they wanted in financial services. I do not think that is true in other countries. Sauvé said that we have to deliver the trade negotiators. That is true, but it is not applicable to the United States. We have a fifty-page wish list, and we meet with our trade negotiators as often as weekly.

The ultimate problem with the prudential carve-out for financial services trade is that it can mean anything. There is no remedy. You cannot go to the courts under the U.S. Administrative Procedures Act and file a lawsuit, and say, no, you are wrong. You could go to the WTO, and they will study it for a couple of years and say that they do not know. It is a wide-open concept. The problem, as I say, is to adjudicate a controversy over a prudential carve-out. That is a very serious problem.

Three years constitute a good negotiating time frame with which to start.

One of the things that distinguish the American private sector from the rest of the world again is its relationship to the media, which is very good. All kinds of events are held with the U.S. media and sometimes the foreign media in attendance. This is very, very important. We do not see this anywhere else in the world.

I would like to make a minor point. I wrote a letter to the editor of the Financial Times a few weeks ago saying that the idea of a Millennium Round is sort of stupid. I do not plan to live that long. I suggested that people might like to have a Development Round instead.

Let me mention another point. I call this stamina. Will the negotiators in the U.S. private sector and their transatlantic partners stay the course, and who are going to be the CEO type of leaders? I would be surprised if John Reed came back after having spent so much time in negotiations. We desperately need prominent leaders, whether they are CEOs or senior management in private sector corporations, to come and say that we won the battle over the North American Free Trade Agreement (NAFTA) with allies. Larry Bossidy, who is a great guy, said, "Okay, in NAFTA, this is what we are going to do; follow me." And Robinson and Reed and Greenberg did that in the Uruguay Round. I do not see anybody in leadership right now. Maybe some leadership will develop. Without that type of leadership, we will not get far. We need stamina. We need to say that this may [End Page 459] take ten years, but we are going to spend the ten years. I am very worried by the apparent lack of business leadership. There is no battle right now, but if a battle were imminent, perhaps leaders would emerge.

We need to say what we want. We want absolute free trade in services around the world, and we think that is good for everybody. But this is a negotiation, so most of the developing countries will say, "We will phase in free trade and financial services in all of our countries. What are you going to give us for that?"

In services, there is not much to give: perhaps another 10,000 U.S. visas to Indian software experts. We do not have much to give. In 1993 agriculture was sold down the river. Recently, agriculture people came to me and said, "Are you going to sell us out again?" I do not have the answer, but I would not say yes or no, absolutely. The developing countries want agriculture. They want market access for agriculture, and some of them want it for textiles. So the services people may have to go over and get some of their allies in other industries to give up something so that services can be liberalized. This is not an easy task.

We are going into a round for the first time in which we have 136 countries. The Uruguay Round started with something like sixty countries and grew to seventy or eighty. I do not know how to run a negotiation with this number of people. I hope it works. But the WTO of today is very different from the GATT of ten years ago in the number of countries involved, their different economies, and their method of negotiating. It is a whole new ball game without firm rules yet.

I would like to recommend a recent article written by Peter Drucker. 2 He is ninety years old now, and it is a fabulous piece. It is not very optimistic. It describes the decline and fall of the financial services industry. He believes that e-commerce, information technology, and all of this technology are making it possible for a business to locate anywhere and that bank and insurance companies' products will become commodities. Banks and other insurance companies will start having lower and lower profit to earnings ratios and, hence, become takeover targets. Banks will begin to think that they are in the position of acquiring other companies, because of the Glass-Stegall legislation, and may find themselves to be the acquiree rather than the acquirer. [End Page 460]

Another book is worthy of mention. The Institute for International Economics recently published a book by Catherine Mann that is really startling. 3 She alleges that the service sector consumption of imported services goes way up as incomes rise in countries other than the United States. However, the U.S. percentage of consumption remains the same as U.S. income rises. There is an asymmetry in demand for services between the United States and other countries.

As the economies of those other countries grow, if we had total liberalization of trade and services, our trade deficit would probably be in balance, and there would be 3 to 5 percent growth of gross domestic product in the world. This is a startling piece and looks to be well researched with a lot of the data from the Organization for Economic Cooperation and Development.

General Discussion: Daniel Tarullo disagreed with the authors' implicit proposition that the optimal way to achieve liberalization of financial services necessarily is through the WTO. He anticipated that there will be disputes between national trade representatives and financial regulators on the question of how to arbitrate what is and what is not a permissible activity by domestic supervisory authorities, as was seen in the case of food safety. Tarullo also questioned whether those interested in financial services liberalization will always be in favor of harmonization.

Tarullo added that another reason why the WTO may be ineffective in facilitating the liberalization process in financial services is the fact that trade negotiations tend to be premised on reciprocal exchange of concessions. The very nature of the negotiation process may therefore undermine efforts to gain acceptance of unilateral liberalization of the financial services regime in many developing countries. He cited as an example the unexpected failure to facilitate the acceptance of the international banking standards that Morris Goldstein and others have developed. Tarullo explained that the main reason for the failure was that developing countries did not want to agree at the time to something that they might be able to give away as a reciprocal concession in the future. He concluded by posing the dilemma of how it might be possible for trade negotiations to apply pressure on financial regulators to move collectively toward more liberalization [End Page 461] and more market access without having the trading system supplant the role of the regulators themselves.

Sauvé responded by clarifying that the WTO is not supplanting the Bureau for International Settlements (BIS) or the International Organization of Securities Commissions (IOSCO) in determining the global standards of regulatory conduct. The main interest of those participating in WTO is ensuring that prudential regulations satisfy the core principles of nondiscrimination, transparency, and fairness to facilitate the promotion of businesses in the international marketplace. Sauvé does not see the WTO negotiations as constituting a hostile takeover of finance by the trading system, but rather as a limited additional contribution of the trade negotiation system toward ensuring that the growth of new technologies and markets is accompanied, if not underpinned, by some basic civilizing forces that add fairness to the international marketplace. Furthermore, the fact that disputes may arise from time to time about prudential regulation of financial services should be welcomed because these arguments confront policymakers with the need to move toward regulatory convergence. Policymakers also should draw comfort from the fact that these disputes will be arbitrated by financial services experts, not by trade negotiators with no knowledge of the issues at stake.

Michael Pomerleano agreed with the paper's emphasis on the importance of a sound financial sector to economic growth. He pointed to the East Asian economies as an example where, despite an apparently healthy real sector, restructuring has been slow because of weaknesses in the financial sector, specifically in deep and fluid markets for distressed assets. Pomerleano added that financial policymakers in developing countries need to realize that the penetration of foreign finance companies is beneficial both for the domestic economies as well as for the foreign competitors, because foreign participation facilitates the development of financial services industries in the developing countries.

Robert Litan and others expressed serious concerns regarding the treatment of U.S. insurance regulations in any future trade talks. They noted that if the issue is brought to the WTO negotiating table, a debate is likely to ensue between trade negotiators, who will want both liberalization and deregulation of insurance rates to facilitate entry, and consumer groups in some countries, which now oppose insurance rate deregulation. A further problem, noted one participant, is that the European Union so far has been quite negative toward more liberalization of the insurance sector--both [End Page 462] property casualty and life--primarily because its members view the primary aim as being to open markets in developing countries, where governments traditionally have not looked kindly on open competition. Tarullo also confirmed that it may be very difficult to convince other countries to change their domestic regulation of the insurance industry. Sauvé expressed a different view, suggesting that, to his knowledge, the European countries have been quite supportive of pursuing liberalization and open competition in this sector.

Peter Russell commented that one of the great gains of the Financial Services Agreement following the Uruguay Round was the platform and the base it established for all ascension candidates. China is a prime example. He also speculated that the focus of the next round of negotiations will shift from emerging markets to issues relating to cross-border supervisory coordination involving the Organization for Economic Cooperation and Development countries. Sauvé agreed, but noted that this will complicate the next round enormously despite the goodwill that exists in the financial sectors across the Atlantic. He therefore thought that a three-year negotiating horizon on issues such as mutual recognition, minimal harmonization, or movement on regulatory issues is too short and unrealistic.

Harry Freeman remarked that the biggest problem in trade and financial services negotiations for the United States is that the domestic politics surrounding trade liberalization in general are not likely to be conducive to much action for some time. Trade negotiators are accustomed to having very clear political guidance. However, Freeman noted, there is no consensus on Capitol Hill as to how trade negotiations ought to proceed.

Notes

1. Dam (1970).

2. Peter Drucker, "Drucker on Financial Services: Innovate or Die," Economist, September 25, 1999, p. 25.

3. Mann (1999).

Additional Information

ISSN
1533-4430
Print ISSN
1098-3651
Launched on MUSE
2000-01-01
Open Access
No
Archive Status
Archived 2004
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