In recent years, national financial markets have become more interdependent in response to technological innovations, shifting institutional strategies, and the reduction of exchange controls. In consequence, financial sector issues have become the subject of intensive intergovernmental collaboration, and, in particular, multilateral negotiations on norms and rules to guide more extensive international trade and investment in financial services have become prominent. This section outlines the scope of these negotiations after placing them in their broader context.
International Collaboration on Financial Market Issues
The fostering of more open conditions for trade and investment in banking markets emerged as an issue of public policy in the 1960s when major banks from the United States and Europe, sometimes following and sometimes leading their multinational clients, began to seek access to their competitors’ home markets. In the 1970s, policy coalesced around the principle of national treatment—which guarantees foreign banks the right to be treated for regulatory purposes in a manner identical to like-situated domestic banks. This principle was applied in the International Banking Act passed by the U.S. Congress in 1973, the First Banking Coordination Directive approved by the European Community in 1977, and, more recently, in the section on financial services in the Canada-U.S. Free Trade Agreement, which came into force in January 1989.62
By contrast, the European Community’s plans to create a single European market in financial services by the end of 1992 are based on the principle of mutual recognition, which requires that member states recognize the legal, regulatory, and administrative practices of other member states as sufficient for the purpose of regulating the cross-border activity of banks from other member countries. As described more fully in Section IV, these plans are underpinned by efforts to establish minimum prudential standards in each of the member countries.
Since 1969, efforts have been made in the forum of the OECD to foster international collaboration on financial market issues. In this regard, various OECD instruments have been developed to specify agreed standards in this area. In particular, the Code of Liberalization of Capital Movements and the Code of Liberalization of Current Invisible Operations constitute binding legal agreements among the member states of the OECD aimed at fostering mutual and progressive policy liberalization.63 Under these codes, policy changes are to apply without differentiation between local residents and the residents of other member countries. An amendment to the Capital Movements Code agreed to in April 1984 comes close to codifying a right of establishment particularly relevant for enterprises aspiring to provide financial services in foreign markets. By making it clear that member countries contravene their obligations under the Code when they permit foreign investment in any particular sector but then subject it to special rules that have the effect of impeding such investment, the amendment serves to reinforce related obligations entailed in what the OECD refers to as its National Treatment Instrument. That agreement, included in the 1976 Declaration and Decisions on International Investment and Multinational Enterprises, seeks to guarantee to foreign enterprises governmental treatment no less favorable than that given to similarly situated domestic enterprises.
The Fund also played a role in this area, arising from the potential impact of financial sector liberalization on international capital movements and exchange rates, and therefore on the efficient functioning of the international monetary system as a whole. This role has traditionally been connected with the Fund’s mandate under Article VIII of its Articles of Agreement to ensure that member states avoid restrictions on current payments, discriminatory currency arrangements, or multiple currency practices. Article XIV enjoins the Fund further to promote a stable international payments system by monitoring transitional exchange restrictions maintained by members that are ultimately inconsistent with such a system.
Services in the Context of Multilateral Trade Talks
In the final agreements coming out of the Tokyo Round in the late 1970s, precedents for future intergovernmental negotiations on services were established by the inclusion of services associated with the production of goods in three nontariff codes of conduct—the Government Procurement Code, the Standards Code and the Subsidies Code.64 A few years later, when trade ministers began to consider a new round of formal talks of the General Agreement on Tariffs and Trade (GATT), the services issue had become even more important. Thus, in 1986 when the Uruguay Round was launched, the Contracting Parties to the GATT also agreed to begin concurrent negotiations on services. Although formally distinct from negotiations on traded goods, the Group of Negotiations on Services (GNS) is being guided by GATT procedures and practices, and the GATT secretariat is providing technical support. The aim of the GNS is to establish a framework of principles and rules for trade in services, including elaboration of possible disciplines for individual sectors.
While progress has been slow, during the mid-term ministerial review of the Uruguay Round begun in Montreal in December 1988 and completed in Geneva in April 1989, the national delegations participating in the GNS reached a consensus at the level of principle.65 They essentially agreed that in future negotiations on service sector issues, including negotiations during and beyond the Uruguay Round, the following concepts were relevant: (1) Transparency (i.e., all laws, regulations, administrative guidelines, and international agreements related to services trade should be transparent in their purpose and effect on such trade); (2) Progressive liberalization (i.e., negotiations should seek agreement on rules and, in particular sectors, specific procedures for liberalizing market conditions and promoting effective market access for foreign service providers, with due regard for other national policy objectives); (3) National treatment (i.e., treatment for service exports or exporters should be no less favorable than that accorded domestic services or service providers in the same market); (4) Most-favored nation non-discrimination; (5) Market access; (6) Increasing participation of developing countries; (7) Safeguards and exceptions (e.g., for balance of payments, security, or cultural policy purposes); and (8) Regulatory situation (i.e., in view of asymmetries with respect to the development of particular services, the right of countries, especially developing countries, to introduce new regulations should be recognized).
This initial articulation of guiding principles was widely seen as a step toward eventual multilateral agreement on general rules that might govern future trade in various service sectors, although it was understood that specific procedures may be required in particular subsectors. The agreed wording left scope for liberalization measures in various subsectors to go beyond minimal levels ultimately agreed for services in general. Moreover, the consensus achieved thus far apparently leaves open the possibility of bringing some measure of reciprocal calculation into specific questions of access to service markets. The consensus also does not preclude the right to take actions designed to enhance the competitiveness of domestic firms and to soften, possibly by way of regulation, the impact of liberalization in particular sectors.
With respect to financial services, negotiators have yet to agree on detailed goals for a multilateral agreement, or even on whether this sector would be included under the GNS. Among the factors behind the slow pace of negotiations are misgivings that public negotiations may disrupt financial markets as well as concerns over possible contradictions between a narrow approach to reciprocity and the maintenance of sound supervisory practices that must necessarily rely on continued authority for discretionary action. Also, some parties have articulated concerns with the need to maintain national control over financial and other service sectors considered essential to national sovereignty and to development strategies. It is possible that adaptation of the general guidelines may be needed to allow a reconcilation of generic trade principles with the purposes of existing regulatory policies. For example, long-standing supervisory practices that depend upon confidentiality and administrative discretion will have to be reconciled with the transparency principle. Delicate questions also may arise with respect to the equilibrium financial regulatory authorities seek to maintain between their responsibilities to stabilize markets during periods of crisis and their desires to obviate any attendant moral hazards among market participants. The establishment of a dispute settlement mechanism will need to address possible concerns that unrelated trade disputes could disrupt financial markets.
For more detail, see International Monetary Fund, International Capital Markets: Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, 1989), Sections I and IV.
See Organization for Economic Cooperation and Development, Introduction to the OECD Codes of Liberalisation (Paris: OECD, June 1987).
See Geza Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations (Cambridge, Massachusetts: Ballinger, 1988), appendix.
Focus, GATT Newsletter No. 61 (May 1989).