Comment: Better Forum Needed To Negotiate Terms of Foreign Competition

The World Trade Organization's recent services deal in Geneva was a partial victory for the multilateral liberalization of banking, securities, and insurance markets.

The temporary accord, due to expire in 1997, prevented a total collapse of the decade-long effort. For its duration Washington will informally allow free access to European Union and Japanese financial firms in recognition of their foreign-friendly home regimes, while holding new entrants to a bilateral reciprocity standard.

The U.S. absence from the agreement raises questions about the extension of the trade organization's mandate to include financial markets and reflects a continued divide between industrial and developing nations on openness to international competition. Canada, Europe, and Japan supported much deeper inroads than the rest of the world under the treaty.

Indirect trade-related gaps are also pronounced. Regulatory convergence, as in the Basel Committee and the International Organization of Securities Commissions, where progress has been slow, escaped attention.

To break the cycle of half-success, responsibility for future financial service negotiation should be transferred to a joint public- and private- sector expert forum chartered to address these issues in their full business and geographic scope.

Global financial transactions - including commercial and investment banking, securities brokerage and underwriting, mutual and pension funds, and insurance and reinsurance - amount to $500 billion annually. The Geneva trade talks involved 80 nations representing 90% of these flows and lasted beyond the conclusion in 1993 of the General Agreement on Tariffs and Trade Uruguay Round, which had first sponsored them.

At that time the United States was unwilling to grant most-favored- nation and national-treatment status, which would have accorded all overseas companies the same opportunities as their domestic counterparts. The Treasury Department demurred unless barriers in Japan and dozens of emerging economies were removed.

Congress endorsed this stance with the introduction of the Fair Trade in Financial Services and National Treatment in Banking bills, which permitted retaliation against closed markets.

A breakthrough with Japan occurred in late 1994, and protests subsequently focused on Central Europe, the Far East, and Latin America.

A Treasury study detailed restrictions on foreign financial institutions in these regions. Examples included a constitutional ban on establishment in Brazil, excessive capitalization requirements and minority ownership limits in Indonesia and Korea, and prohibition on local currency dealing in Russia. Pacific Rim and South Asian nations were further criticized for proposing multilateral commitments even more strict than existing practice. For instance, Philippines law accepts up to 60% foreign equity in local banks, but at the WTO its government offered only a 40% guarantee.

Many of the so-called big emerging markets, in Commerce Department jargon, attributed their caution to fear of repeating the course of Mexico after the devaluation. They also pulled back in anger at not being consulted by the Group of Seven industrial nations over the terms of the Mexican rescue, which set an important precedent for emerging-market difficulties.

A similar pattern of exclusion has prevailed at the Basel group and IOSCO. The United States, European Union, and Japan control these panels, which cooperate only marginally across hemispheric and product lines.

Basel capital adequacy rules do not cover the developing world or investment houses that compete with banks, and they assume the use of computerized risk assessment systems that are unavailable in less advanced financial sectors.

The U.S. walkout at Geneva and pursuant fence-mending led by the Europeans have produced uneven and incomplete results. The diplomatic parrying has obscured the basic inability of the World Trade Organization and other groups to handle financial services collaboratively and comprehensively.

The Clinton administration has pledged to remain engaged in the multilateral process, and it should spearhead creation of a World Financial Services Organization to unify trade regulation and crisis approaches. Floundering efforts elsewhere can be phased out, and accounting, auditing, and professional support services added to its purview.

Mr. Kleiman is a senior partner of Kleiman International Consultants, Inc., Washington.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER