Current Legal Issues Affecting Central Banks, Volume V

Chapter 18 Financial Services in the General Agreement on Trade in Services: Framework and the 1995 Negotiations

Robert Effros
Published Date:
May 1998
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The financial services sector—defined in the context of the General Agreement on Trade in Services (GATS)2 as encompassing all banking and other financial services, and all insurance and insurance-related services3—is one of the largest and most significant sectors taken up for negotiation since trade in services became an integral part of the multilateral trading system. The European Commission has estimated that international financial services comprise some $40 trillion in terms of banking assets and deposits, $10 trillion in stock market capitalization, $10 trillion in the market value of bonds, and $2 trillion in insurance premiums.4 This vast industry is significant not only for its size, but also since financial services are a basic input in virtually every other economic activity, whether in the field of goods or services.

More and more governments recognize that the inability of traders and investors to enjoy ready access to a competitive and efficient supply of these services represents a severe obstacle to growth and development. This realization is reflected in an increasing deregulation and liberalization of the sector. Although in many ways only a first step, the multilateral negotiations on financial services that took place in the Uruguay Round are indicative of this market-opening trend.5 The internationalization of financial services has grown rapidly over the past two or three decades. This is not only a reflection of liberalizing tendencies in many countries. New technologies (especially in telecommunications), the expansion of foreign direct investment, and financial innovation have all played a part.6

This chapter addresses the context of the GATS financial services negotiations that resulted in an interim agreement in July 1995 and briefly assesses the results. It starts by explaining the GATS framework within which the negotiations took place. The following section then considers the relationship between commitments to liberalize trade in financial services under GATS and policies relating to prudential regulation and to financial flows on the current and capital accounts of the balance of payments. The penultimate section traces the outcome of the financial services negotiations in 1995 and examines the interim results, while the last section offers some conclusions.

GATS as a Framework for Negotiations

The GATS consists of a framework of rules and country schedules containing specific market access commitments. The rules are based on many of the concepts originally developed in the context of the General Agreement on Tariffs and Trade (GATT), but significant differences also exist, arising from the fact that the GATT deals with trade in goods and the GATS with trade in services. Two particular features of service activities that distinguish them from production and trade in goods deserve mention at the outset. First, production and consumption of a service may occur simultaneously, since no possibility exists of storing certain services produced now for consumption later. Hair cutting and shoe shining are obvious examples of this class of service. In the case of many services, including those just mentioned, arm’s-length supply is impossible because the service is not transportable. A physical presence is therefore necessary. Thus, either because of the “nonstorability” and/or “nontransportability” of certain categories of services, if a government grants market access rights to foreign suppliers, it may have to accept either that foreign enterprises can establish a commercial presence in its territory or that the service suppliers in question may enter its territory on a temporary basis.

The delivery of many financial (and other) services is not so intrinsically restricted, and arm’s-length delivery across frontiers is feasible, although not always desirable from the point of view of the supplier and the consumer. Where repeated transactions are required, such as in retail banking, a continuing local presence may be more desirable than long-distance supply. The quality of a service may also be influenced by the ability of a service supplier to locate in close proximity to consumers. Thus, even where establishment or temporary presence is not essential to an exchange, a preference may exist for the physical presence of the producer in the territory of the consumer or vice versa. On the other hand, modern information technology7 has greatly increased the scope for arm’s-length delivery. The essential point here is that either through force of circumstance or because of the nature of an activity, trade in services cannot be promoted without a willingness on the part of governments to contemplate multiple modes of delivery, involving the movement across national jurisdictions of the services themselves, or of producers or consumers. As mentioned further in this chapter, these realities are reflected in the GATS.

The second important distinguishing feature of services activities is that they tend to be subject to a greater degree of regulatory supervision than are physical goods. In part, this reflects concerns about consumer protection, or in the case of financial services, prudential issues. Because fraud, sharp practice, and substandard output are often more difficult to detect than in the case of goods, or perhaps even impossible to detect and prevent, before the damage is done, governments feel obliged to control their supply ex ante rather than their output on an ex post basis. Another consideration is that some service sectors, such as banking, have economy-wide externalities, such that regulation erring on the side of caution is considered necessary to avoid the widespread damage that would be caused by specific sectoral failures.8 On the other hand, heavy regulation may also reflect nothing more than protectionist policy, where for one reason or another governments are unwilling to countenance foreign competition. Either way, the relative intensity of regulation in many service industries contributes to the complexities of promoting trade liberalization.

Inevitably, the focus of negotiations in trade in services will tend to be upon sectors, although there is undoubtedly room to do more by way of developing principles applicable to all services trade, regardless of the degree of sector-specific liberalization that governments are willing to undertake. Given the greater necessity of regulation from a consumer protection perspective in the sphere of services, progress in trade liberalization should not be judged merely by reference to the pace and degree of deregulation. Conversely, deregulation does not always mean the same as liberalization. The role of regulation loomed large in the Uruguay Round negotiations, and an implicit tension exists between some elements in the GATS general framework and the specifics of scheduled sectoral access commitments.

A final point worth making at the outset concerns the severe dearth of information available to policymakers and analysts about service transactions. For the most part, governments have not collected data on international service transactions in a systematic fashion, save in a highly aggregated and not always internationally comparable form in the balance of payments accounts. As one observer, Richard Cooper, has stated, “we are wallowing in ignorance when it comes to international transactions and services.”9 Attempts are being made by the Organization for Economic Cooperation and Development (OECD), Eurostat, and the International Monetary Fund (IMF) to improve the standard of data collection in services,10 but these efforts will take several years to bear fruit. Moreover, problems will still arise because of a growing range of intrafirm electronic service transactions that are not recorded in conventional balance of payments statistics. A further limitation of data on services transactions is that so-called establishment trade—the sales of foreign-owned enterprises in the host country—is not recorded under existing statistical methodologies with the notable exception of the United States.11 Finally, as another observer, Jagdish Bhagwati, pointed out over ten years ago, services statistics will be influenced by economic structure.12 For example, where a manufacturing firm maintains in-house advertising services, advertising will be recorded as goods production; however, a manufacturer who buys advertising from an agency triggers a transaction that will be recorded in national output statistics as advertising services. Specialization that leads to outsourcing of service inputs into manufacturing is referred to as “splintering.”

Basic Concepts

Part I of the GATS sets out the scope of the agreement, the definition of trade in services, and sectoral coverage. Trade in services is defined in Article I in terms of four modes of supply. The first mode involves the cross-border (arm’s-length or long-distance) supply of a service from one jurisdiction to another.13 This mode of delivery is analogous to international trade in goods, in that a product crosses a frontier. Many different kinds of electronic information flow occur across national borders, and this mode is particularly relevant in many financial service activities. The second mode of supply requires the movement of consumers to the jurisdiction of suppliers.14 Tourism is a good example of this mode, involving the movement of (mobile) tourists to (immobile) tourist facilities in another country. The third mode of supply is through the commercial presence of a supplier in the jurisdiction of consumers.15 This is the investment mode, where for one reason or another a service supplier must be, or wishes to be, close to the market being supplied. Finally, the fourth mode entails the movement of natural persons from one jurisdiction to another. The fourth mode relates both to independent service suppliers and to employees of juridical persons supplying services.16 This mode is particularly relevant to suppliers of professional services. The conceptual approach underlying these modes was first developed in the academic literature17 as a heuristic device to explain the nature of international transactions in services. Differentiation by modes of supply later formed the basis on which governments defined market access commitments under the GATS, permitting a choice to be made from among alternative modes.

A second feature of the definition of services covered by the GATS is the exclusion of services supplied in the exercise of governmental authority.18 The definition of a service supplied in the exercise of governmental authority is “any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers.”19 The intention of this provision is to permit governments to exclude basic infrastructural and social services that they supply their populations on an exclusive basis from the purview of the agreement.

As far as sectoral coverage is concerned, the GATS is intended to cover all services. The only exclusion to what would otherwise be universal sectoral coverage arises in the Annex on Air Transport Services, which excludes traffic rights and services directly related to the exercise of traffic rights.

The GATS, similar to the GATT, is based on the most-favored-nation principle, which requires that members of the GATS accord to “services and service suppliers of any other Member treatment no less favorable than that it accords to like services and service suppliers of any other country.”20 While governments were able to accept practically universal sectoral coverage in the GATS, not all of them were willing to apply the most-favored-nation principle across the board, and so Article II of the GATS permits members to list in an annex most-favored-nation exemptions relating to specified measures.21 These exemptions could only be taken at the time of entry into force of the GATS and the initial GATS commitments. They cannot be added to in the future; they are subject to review; and, at least in principle, they are supposed to be of limited duration.22 The most-favored-nation exemption provisions reflected in part the desire of members to preserve existing preferential arrangements that were not broad based enough to be covered by the GATS Article V provision permitting departures from the most-favored-nation principle in the name of economic integration.

The pressure for most-favored-nation exemptions was also a reflection of the concern on the part of some larger countries that, by granting most-favored-nation access to their markets, they would be losing the opportunity to exchange their relatively open access for further liberalization in other markets. In other words, these countries were arguing that “free riding” would occur in the absence of an effective instrument to ensure reciprocity. The issue was raised most explicitly in the telecommunications and financial services negotiations. Some 60 countries took most-favored-nation exemptions, affecting most significantly the audiovisual, financial, basic telecommunications, and transport services sectors. As explained in more detail further in this chapter, the most-favored-nation exemption in the financial services sector was suspended, pending the outcome of the post-Uruguay Round negotiations in this sector.

A fundamental feature of the GATS is the principle of progressive liberalization. It reflects the reality that governments were neither willing nor able simply to open up their services markets to international competition from one day to the next. Progressive liberalization implies a gradual approach, and the structure of the GATS accommodates such gradualism.

The most-favored-nation principle in Article II and the transparency commitments in Article III are the main general obligations of the agreement. In addition, the obligation to establish appropriate judicial, arbitral, and administrative complaint procedures23 is of a general nature, as are the rules on economic integration,24 certain provisions dealing with recognition of qualifications,25 monopolies and exclusive suppliers,26 and business practices.27 Other provisions contained in the GATS apply to, or are only relevant to, sectors where specific commitments are undertaken by members in their schedules of specific commitments.28 (See example of a GATS schedule of commitments.)

As previously noted, members were required in the services negotiations to specify the sectors and activities in which they were willing to undertake specific commitments, and these are listed in country schedules appended to the GATS. Articles XVI, XVII, and XVIII of the GATS are the core of the Agreement as far as specific sectoral commitments are concerned. Article XVI deals with market access, which is defined in a very specific manner. Having established that signatories will accord services and service suppliers treatment at least as favorable as that provided for in the schedules, the article goes on to define six types of market access restrictions that will not be adopted in respect of sectors where market access commitments are undertaken, unless there is a specification to the contrary in the schedule of specific commitments. In other words, disciplines on market access impediments will apply to scheduled commitments, unless a reservation is registered to the contrary. The six impediments or limitations on access are defined as (i) limitations on the number of suppliers, (ii) limitations on the total value of service transactions or assets, (iii) limitations on the total number of service operations or on the total quantity of service output, (iv) limitations on the total number of natural persons that may be employed, (v) measures that restrict or require specific types of legal entity or joint venture, and (vi) limitations on the participation of foreign capital. Article XVI limitations are exhaustive in the sense that these are the only limitations on market access that members are permitted to inscribe in their schedules.

Article XVII contains the national treatment provision. The approach here is very similar to that of market access, with national treatment applicable only to scheduled commitments, and only then if reservations are not made to the contrary. National treatment is defined in the traditional GATT manner29 as treatment no less favorable than that accorded to domestic homologues, in this case services and service suppliers. Article XVII recognizes, however, that the attainment of national treatment may involve treatment that is not formally equivalent. As with market access, the greatest number of sectoral commitments subject to national treatment limitations is associated with the commercial presence and movement of natural persons modes of delivery. A significant difference between national treatment in the GATT and in the GATS is that, in the former case, national treatment is established as a principle to be applied across the board,30 whereas in the latter case, national treatment has been given negotiating currency—it is something to be granted, denied, or qualified, depending on the sector and signatory concerned.

Example of a GATS Schedule of Commitments
Service ActivitiesMode of SupplyLimitations on Market AccessLimitations on National TreatmentAdditional Commitments
Part I - Horizontal commitments
All sectors1.Cross borderNoneNone
2.Consumption abroadNoneNone
3.Commercial presenceNoneSubsidies for R& M
4.Temporary presence of natural personsUnbound, except for intra-corporate transfers of executives and senior managers for initial stay of four years; extensions or stays subject to economic needs testUnbound, except as indicated in market access column
Part II - Sector-specific commitments
Accounting services1.Cross borderNoneNone
2.Consumption abroadNoneNone
3.Commercial presenceOnly natural persons may be registered as auditorsAt least one equity partner in a firm must be a permanent resident
4.Temporary presence or natural personsUnbound, except as provided in the horizontal sectionUnbound, except as provided in the horizontal section
Electronic data interchange1.Cross borderNoneNone
2.Consumption abroadNoneNone
3.Commercial presenceNoneNone
4.Temporary presence of natural personsUnbound, except as provided in the horizontal sectionUnbound, except as provided in the horizontal section

Article XVIII offers the possibility for signatories to negotiate additional commitments not dealt with under the market access and national treatment provisions of Article XVI and Article XVII. These commitments could apply to such matters as qualifications, standards, and licensing, and would be inscribed in members’ schedules. Limited use was made of this option in the Uruguay Round negotiations. The most important aspect of Article XVIII measures is that they must express commitments favoring more open access and not additional market barriers. Some members have used the additional commitments column to indicate future measures without a fixed date of implementation.

Commitments in Financial Services and Measures Relating to Prudential Regulation and Balance of Payments

Specific commitments in financial services are made in accordance with the Annex on Financial Services in addition to the provisions of Part III (Articles XVI, XVII, and XVIII) of the GATS. The Annex complements the basic rules and definitions adopted in the GATS, taking into account the specificities or the sector-specific characteristics of financial services.

The most important of the sector-specific provisions included in the Annex is paragraph 2(a) on the so-called prudential measures in domestic regulation. From the start of the negotiations on financial services during the Uruguay Round, negotiators recognized the need to maintain measures for protecting investors, depositors, and policyholders, and for preserving the integrity and stability of the financial system when making commitments to liberalize the supply of financial services to competition from foreign financial institutions. With the inclusion of this paragraph in the Annex, members are allowed to take such prudential measures. These measures need not be inscribed in the schedules of specific commitments of members, regardless of whether they are in conformity with Articles XVI(1) (market access) and XVII(1) (national treatment), so long as they constitute prudential measures as defined in the Annex. Where such measures do not conform with the provisions of the GATS, they shall, however, not be used as a means of avoiding the members’ commitments or obligations under the GATS.

Although no further detail is given in the Annex as to what specific measures would actually constitute prudential measures, capital and reserve requirements, as well as licensing criteria imposed on financial institutions that are not more burdensome than necessary to ensure the solvency and the smooth operation of those institutions, would normally be considered consistent with this provision. The evolving process of regulatory harmonization and enhanced cooperation between financial regulators and supervisors in the context of the Bank for International Settlements and the International Organization of Securities Commissions, as well as in other international forums, provides useful background in maintaining discipline in the introduction and implementation of prudential measures based on this provision.

Other sector-specific provisions in the Annex include a provision to protect individual customer information and other confidential or proprietary information,31 a provision on the recognition of prudential measures of other countries,32 and a paragraph on dispute settlement stating the need to secure relevant expertise on panels for disputes in the area of financial services.33 The part on definitions in the Annex provides a list of financial services used in the schedules of members.34

Many countries35 have opted to undertake commitments in financial services using the Understanding on Commitments in Financial Services.36 This document, which forms a part of the schedule of a member adopting it as a basis for making commitments, provides a standardized list of liberalization commitments in financial services. Most notably, it includes a general standstill commitment for financial services and the granting of the right to establish commercial presence to foreign financial service suppliers. It also contains a commitment to permit an established foreign financial service supplier to offer any new financial service. Other important provisions include a commitment not to take measures that prevent transfers of information or the processing of financial information, and provisions that elaborate on nondiscrimination with respect to market opportunities and national treatment for foreign financial service suppliers.

Except under Article XII, the GATS does not allow members to “apply restrictions on international transfers and payments for current transactions relating to its specific commitments.”37 The footnote to Article XVI also states that if a member undertakes a market access commitment in relation to the cross-border supply of a service and if the cross-border movement of capital is an essential part of the service itself, that member is committed to allow such a movement of capital.38 If a member undertakes a market access commitment in relation to the supply of a service through commercial presence, that member is committed to allow related inflows of capital into its territory.39

Although these provisions apply to all services, they are particularly relevant in the context of financial services, since a commitment to liberalize market access in financial services would be virtually worthless without a concomitant obligation to liberalize associated capital flows.

On the other hand, Article XI(2) provides that nothing in the GATS affects

the rights and obligations of the Members of the International Monetary Fund under the Articles of Agreement of the Fund, including the use of exchange actions which are in conformity with the Articles of Agreement, provided that a member shall not impose restrictions on any transactions inconsistently with its specific commitments regarding such transactions, except under Article XII or at the request of the Fund.

Although the full implications of this provision have never been tested, it sets the conditions under which a member is allowed to take exchange actions.

In the event of serious balance of payments and external financial difficulties or threat thereof, a member might wish to introduce restrictions of a temporary nature on trade in services for which it has undertaken specific commitments. In financial services, this might take the form of restrictions on international payments or transfers. Article XII lays down the conditions40 and the procedures for invoking such measures, which involve notification and consultation with other members, with the IMF playing a crucial role in the process of establishing the legality of such measures under the GATS. More specifically, in the consultations with members,

all findings of statistical and other facts presented by the International Monetary Fund relating to foreign exchange, monetary reserves and balance-of-payments shall be accepted and conclusions shall be based on the assessment by the Fund of the balance-of-payments and the external financial situation of the consulting Member.41

Financial Services 1995 Negotiations


At the end of the Uruguay Round in December 1993, some 82 countries (counting at that time individually the 12 member states of the European Union) had commitments in financial services listed in their schedules of specific commitments. However, there was a view among some members that the commitments in a number of schedules were not sufficient to conclude the negotiations. In particular, the United States announced in 1993 that it would take a broad most-favored-nation exemption in financial services unless the schedules of other countries were improved. This resulted in other countries also taking similar measures or withdrawing their previous best offers.

In order to avoid a breakdown of the negotiations, ministers agreed at the Marrakesh meeting of April 1994 that negotiations on commitments in financial services should be continued after the World Trade Organization (WTO) Agreement came into force.42 The Second Annex43 on financial services and a ministerial decision44 provided members with the freedom to improve, modify, or withdraw all or part of their commitments in the financial services sector at the conclusion of a period ending six months after the entry into force of this Agreement. Members were also required to finalize their position relating to most-favored-nation exemptions in this sector at the same time.45 It was agreed that, during the six-month period, any existing most-favored-nation exemptions that were conditional upon the level of commitments undertaken by other participants would be suspended. Although this period expired on June 30, 1995, it was subsequently extended by a decision of the Council for Trade in Services (the Council) until July 28, 1995.46

It was also specified in the ministerial decision that the Committee on Trade in Financial Services (the Committee) should monitor the progress of any negotiations undertaken under the terms of the decision to extend the most-favored-nation exemptions and should report thereon to the Council for Trade in Services.47 Pending the creation of the Committee in January 1995, it was agreed that negotiations should be monitored by an Interim Group on Financial Services (the Interim Group), which met on three occasions until February 1995. After the creation of the Committee, it held ten formal meetings, from March until the end of July 1995 when the negotiations were concluded with an interim agreement.

Negotiations on the basis of the ministerial decision began on a bilateral level shortly after the Marrakesh meeting of ministers. These negotiations continued in capitals over the intervening period. Six rounds of intensive bilateral negotiations were held in Geneva until the end of June 1995, after which the deadline of the negotiations was extended by four weeks as mentioned. The bilateral negotiations were arranged in association with the meetings of the Interim Group or the Committee.

Outcome of the 1995 Negotiations

Participants agreed from the outset of the multilateral process that the objective of these negotiations should be to achieve a higher level of commitments on financial services on a most-favored-nation basis, and not to withdraw or scale down existing commitments. However, a number of participants made it clear that their ability to offer comprehensive commitments, or to maintain their existing commitments, would depend on the quality and extent of the commitments made by others. On several occasions, the point was made that the outcome of these negotiations could not be seen in isolation from progress in concurrent negotiations on other subjects, in particular, the negotiations on the movement of natural persons.

In order to encourage the progress of the negotiations, it was agreed that those members who wished to do so should submit on a conditional basis their written intentions or conditional offers to the Secretariat. At the first meeting of the Committee on Trade in Financial Services held on March 28, 1995, several delegations that had submitted their written intentions stressed the need for further contributions by other participants and the urgency of rapid progress. At this meeting, the Committee agreed on a timetable for the concluding phase of the negotiations, in which delegations were requested to submit draft final schedules and draft final positions on most-favored-nation exemptions by June 15, 1995.

During the course of the negotiations, many countries reported on recent developments and liberalization measures in their financial services regimes in the meetings of the Interim Group or the Committee. These reports were considered extremely useful in improving the transparency of developments in regulatory regimes of members.

In the context of these reports, it was announced that Japan and the United States had decided to take measures regarding insurance in October 1994 and further measures regarding other financial services in February 1995. The measures taken by Japan were reflected in its revised schedule, and it was further confirmed that all the benefits of the measures taken were to be applied on a most-favored-nation basis consistent with WTO rules, and that Japan would provide any member, upon request, with information obtained for assessing the implementation of the measures.

Concluding Phase of the 1995 Negotiations

A senior-level meeting of the Committee on Trade in Financial Services was held on June 7, 1995. In this meeting, some new offers and intentions expressed were welcomed, but strong concern was also expressed that not enough progress had been made and that the offers of many countries contained absolute bars to new entry in important sectors or contained elements of discrimination against foreign financial service suppliers.

According to this view, several offers stopped short of protecting the so-called acquired rights of foreign firms that were established and operating in some of the markets. This was a case in which a foreign financial institution enjoyed a certain level of access into a country, such as having a branch or a majority-owned subsidiary, but the host country did not make a commitment in its schedule to protect or grandfather the present level of access, thus retaining the right to lower that level of access. It was not always possible, due to various domestic reasons, for countries to bind the status quo in a multilateral context, and it was also not true that bindings below present access levels had no value; nonetheless, efforts were thought necessary to resolve this issue in many countries.

Based on the view that not enough commitments had been put forward by other participants, the United States announced in the meeting of the Committee on June 29, 1995 that it had decided not to bind open the United States market nor guarantee national treatment for new entrants and new activities of foreign financial services suppliers. With the withdrawal of its best offer and the submission of a revised schedule and most-favored-nation exemption on June 30, 1995, the United States did not assume a most-favored-nation obligation that covered new activities in banking, securities, insurance, fund management, and other financial services. However, the U.S. delegation added that the United States had a long history of offering full market access to its financial markets, and this would remain its normal practice. The delegation also noted that the United States had no intention of imposing new restrictions on foreign financial services firms already established in the United States.

A large number of delegations expressed disappointment at this U.S. decision and stated their hopes that the situation would be reversed and that the United States would reconsider its position and come back to a firm and permanent most-favored-nation-based commitment. A risk emerged that the commitments negotiated during the course of the Uruguay Round and in the extended negotiations in the past year might be downgraded, effectively meaning a breakdown of the negotiations.

Given this situation at the end of June 1995, which was the initial deadline for the negotiations, the Committee sought a way for providing time to find a multilaterally acceptable solution and, therefore, agreed in its sixth meeting on June 30, 1995 to extend the period in which countries were allowed to make changes to their schedules of commitments and most-favored-nation exemption lists until July 28, 1995. This was made legally possible by a Decision by the Council for Trade in Services taken pursuant to paragraph 3 of the Second Annex on Financial Services, which gave the Council the power to establish any procedures necessary for the application of the provisions of the Annex.

In an attempt to reach an agreement on a multilateral basis despite this situation, the delegation of the European Community proposed that all participants maintain their best offers on a most-favored-nation basis for a limited period of time. The time period of this agreement was proposed to be until December 1997. A great majority of countries expressed support for this proposal, and the Committee decided to adopt this interim solution. With the exception of a few countries, the best offers negotiated in the Uruguay Round and in the extended negotiations would be implemented on a most-favored-nation basis to all members for a period of two and a half years. To this end, the Committee, at its eighth meeting on July 21, 1995, adopted the text of the Second Protocol to the GATS48 (the Protocol) and the Decision Adopting the Second Protocol to the GATS49 and recommended to the Council for Trade in Services to adopt the Decision on Commitments in Financial Services50 and the Second Decision on Financial Services.51 The Council adopted these decisions in a meeting held on the same day.

As mentioned previously, some members had made their offers in financial services conditional on improved offers of other members in the area of movement of natural persons. The Negotiating Group on Movement of Natural Persons held its meetings in parallel with the meetings of the Committee, and a total of six countries made offers to improve their schedules in the movement of natural persons. These offers were subsequently confirmed. This development contributed to the conclusion of the negotiations on financial services in 1995.

Results of the 1995 Negotiations

The results of the financial services negotiations in 1995 were actually extensions to the results of the Uruguay Round negotiations concluded in December 1993. They revised or supplemented the national schedules and most-favored-nation exemptions submitted then, which need to be read together with the previous schedules and most-favored-nation exemptions. In all, 32 countries (counting the European Union as one) decided to revise or supplement their schedules or most-favored-nation exemptions in 1995.52

Of the 32 countries, all except Colombia, Mauritius, and the United States, agreed to accept the Second Protocol.53 Among the 29 countries accepting the protocol, 20 made improved commitments in insurance, 24 in banking, 17 in securities, and 25 in other financial services. Thirteen countries revised most-favored-nation exemptions in financial services, of which 8 deleted, 2 suspended, and 3 reduced their scope or made other changes. These revisions or supplements were annexed to the Protocol and took effect when the Second Protocol entered into force, as explained further in this chapter.

The three countries not accepting the Protocol submitted revised commitments or most-favored-nation exemption lists or both. These revisions or supplements took effect on their respective dates of submission before the end of July 1995. Although they were not annexed to the Protocol, they formed an integral part of the results of the negotiations. No country withdrew its commitments in the financial services sector as a result of the negotiations.

It is not always easy to judge the value of the numerous entries in a country schedule or most-favored-nation exemption list. However, it can be said that many Asian, Latin American, and East European countries made significant improvements in their schedules and most-favored-nation exemptions in 1995 compared to those at the end of the Uruguay Round. Other countries maintained their best offers made at the end of the Uruguay Round.

The Protocol entered into force on September 1, 1996 for a large majority of countries. For the remaining countries, the Protocol entered into force 30 days after each acceptance. Two countries (Belgium and Brazil) were not able to ratify the Protocol because of procedural delay. During the period prior to the entry into force of the Protocol, members had undertaken not to take measures that would be inconsistent with their undertakings resulting from the negotiations, to the fullest extent consistent with their existing legislation.

Beginning November 1, 1997, WTO members again had the possibility during a period until December 12, 1997 to modify or withdraw the commitments in their financial services schedules and/or to take most-favored-nation exemptions in the sector.54 If the Protocol had not entered into force, such a possibility to modify or withdraw commitments and/or to take most-favored-nation exemptions would have arisen during a period of 60 days beginning on August 1, 1996. These possibilities to modify or withdraw the commitments applied to all members of the WTO, not just to the 29 members that agreed to accept the Second Protocol.

With the accession of least-developed countries, as well as a number of other countries, and with one country (Kuwait) submitting for the first time a schedule of specific commitments in financial services as a result of the negotiations, the total number of countries with commitments in financial services was 95 as of end-December 1996. Upon the enlargement of the European Union to 15 member states, the number of schedules stood at 81, counting the EU as one. As more new members are acceding to the WTO, the number of members with financial services schedules is increasing continuously.

In the WTO Singapore Ministerial Declaration of December 13, 1996, it was agreed that financial services negotiations would resume in April 1997, with the aim of achieving significantly improved market access commitments with a broader level of participation in the agreed time frame. (See Addendum.)


Innovation in information technology and the use of such technology in financial transactions have integrated world financial markets. Liberalization of limitations on financial services trade can be seen as simply endorsing what market forces might already have achieved or are about to achieve. However, in order to remove existing distortions and create a truly efficient and functioning global marketplace for financial services, further work is necessary in a multilateral context. The GATS provides a unique tool to accomplish such a goal to provide the foundations for a liberal trading system for financial services from which all countries would benefit.

The process for liberalizing financial services trade under the GATS is still in a relatively early stage. Future negotiations will be required to accomplish free trade and guaranteed rights of establishment in all of the major and emerging financial markets around the world. This being said, what has already been achieved is no small step toward this ultimate goal. Members of the WTO are benefiting from improved commitments, resulting from the financial services negotiations. Together with the results of the Uruguay Round, they already form a vast array of undertakings by countries to promote liberalization in financial services trade. The commitments bring new opportunities and greater security for investors in banking, securities, insurance, and other financial services. They help promote merchandise trade and other services trade, where access to efficient financial markets and services is critical. They facilitate capital flows to developing and transition economies. The commitments contribute to the development of financial markets that are necessary for economic development and growth.


The above chapter explained the history of the financial services negotiations at the WTO in 1995, which resulted in an interim agreement until December 1997.

As a result of the negotiations concluded on December 12, 1997, a new and improved set of commitments in financial services under the GATS was agreed upon on a permanent basis. A total of 56 schedules of commitments, representing 70 WTO members has been annexed to the Fifth Protocol to the GATS, which will be open for ratification and acceptance by governments until January 29, 1999. The new financial services schedules are expected to enter into force by March 1, 1999.

Five countries (Bolivia, Costa Rica, Mauritius, Senegal, and Sri Lanka) offered to make commitments in financial services for the first time in the course of the most recent negotiations, increasing the total number of WTO members with commitments in financial services to 102 upon the entry into force of the Fifth Protocol. With the addition of Bulgaria, Hungary, New Zealand, Nigeria, and Sri Lanka (excluding insurance for this country), 32 countries (counting the EU member states and Aruba individually) have now adopted the Understanding on Commitments in Financial Services as the basis for their commitments.

The United States, India, and Thailand withdrew their broad most-favored-nation exemptions based on reciprocity as a result of the negotiations. Several countries, including Hungary, Mauritius, the Philippines, and Venezuela, reduced the scope of their most-favored-nation exemptions. A small number of countries submitted limited most-favored-nation exemptions or maintained existing broad most-favored-nation exemptions. The United States submitted a limited most-favored-nation exemption in insurance, applicable in a circumstance of forced divestiture of U.S. ownership in insurance service providers operating in WTO member countries.

The new commitments contain significant improvements in allowing, inter alia, commercial presence of foreign financial service suppliers by eliminating or relaxing limitations on foreign ownership of local financial institutions; limitations on the juridical form of commercial presence (branches, subsidiaries, agencies, representative offices, etc.); and limitations on the expansion of existing Operations, Important progress was also made in “grandfathering” existing branches and subsidiaries of foreign financial institutions that are wholly or majority-owned by foreigners.

A nonattributable summary of the main improvements included in the newly agreed-upon commitments is available from the WTO Secretariat at the WTO’s website:

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