Abstract
This Chapter maps out how the liberalization of financial services in EU FTAs compares and contrasts with the multilateral trading system. The increasing importance of regional trade agreements in international economic law makes this exercise highly topical. This study assesses the liberalization depth of financial instruments’ clearing and settlement services in FTAs because of their prominence in the financial markets’ post-crisis reform. This Chapter’s findings indicate that the integration of financial services in EU FTAs goes beyond the threshold achieved at the WTO and that the EU strategically decides on what type of FTAs it pursues furthering the liberalization of financial services. In addition, the analysis reveals the existence of silos in WTO Member’s administrations between trade and finance teams.
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Notes
- 1.
See, for example, Martin Roy, Juan Marchetti and Hoe Lim, Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further than the GATS? (WTO Economic Research and Statistics Division, Staff Working Paper ERSD-2006-07, September 2006).
- 2.
WTO Members voluntarily enter commitments on market access (Article XVI), national treatment (XVII), and additional commitments (XVIII) in their GATS Schedules, which constitute treaty text, on the basis of their national preferences.
- 3.
Annex on Financial Services, par. 5(a)(xiv).
- 4.
Ibid, par. 5(a)(viii) which reads: All payment and money transmission services, including credit, charge and debit cards, travellers cheques and bankers drafts.
- 5.
Panel Report, WT/DS413/R, China – Electronic Payment Services, para. 7.163.
- 6.
For general literature on financial instruments clearing and settlement services in the European Union see Dermot Turing, Clearing and Settlement (Bloomsbury 2017).
- 7.
For a historical narrative of clearinghouses see Neal L. Wolkoff and Jason B. Werner, ‘The History of Regulation of Clearing in the Securities and Futures Markets, and Its Impact on Competition’ (2010) 30 Rev. Banking & Fin. L., p. 313.
- 8.
Such as interest rate swaps, foreign exchange, and credit default swaps among others.
- 9.
This regulatory trend can be identified in all major global economies, and its efficacy on the basis of the G-20 standards is measured by the Financial Stability Board (FSB) annually.
- 10.
As as main data collection source of this study, the WTO Regional Trade Agreements (RTAs) database has been used. All FTAs that are reviewed here, alongside with the text of the agreements, the annexes and other related documents can be found in the linked database <https://rtais.wto.org/UI/PublicMaintainRTAHome.aspx>.
- 11.
The 12 FTAs notified to the WTO that are not covered by this study are the following: EC (15) Enlargement, EC (25) Enlargement, EC (27) Enlargement, EC Treaty, EU (28) Enlargement, Eurasian Economic Union (EAEU), Eurasian Economic Union (EAEU) – Accession of Armenia, Eurasian Economic Union (EAEU) – Accession of Kyrgyz Republic, European Economic Area (EEA), European Free Trade Association (EFTA), Southern Common Market (MERCOSUR), Caribbean Community and Common Market (CARICOM).
- 12.
It is well-documented that the evolution of technological means that financial services are supplied transnationally has created a legal problem in the interpretation of undertaken commitments for modes 1 (cross-border supply) and 2 (consumption abroad), either under the multilateral trading system, through the GATS schedules, or under FTAs. For analyses on this issue, and the possible problematic implications see WTO, Council for Trade in Services, Committee on Trade in Financial Services, S/C/W/312, S/FIN/W/73, 3 February 2010, para. 36; George A. Papaconstantinou, 2019, ‘The GATS and Financial Regulation: Time to Clear-house?’ World Trade Review, 1–23. https://doi.org/10.1017/S1474745619000181.
- 13.
For thorough analyses with regards to the different approaches that parties to FTA use in opening their services sectors see Martin Roy, Juan Marchetti and Hoe Lim ‘The Race Towards Preferential Trade Agreements in Services: How Much is Really Achieved?’ in Marion Panizzon, Nicole Pohl, and Pierre Sauvé (eds), The GATS and International Regulation of Trade in Services (Cambridge University Press 2008); Cf Juan A. Marchetti ‘Do PTAs Actually Increase Parties’ Services Trade?’, in Kyle W. Bagwell and Petros C. Mavroidis (eds), Preferential Trade Agreements: A Law and Economics Analysis (Cambridge University Press 2011) pp. 214-220.
- 14.
Marilyne Pereira Goncalves and Stephanou Constantinos, Financial services and trade agreements in Latin America and the Caribbean: an overview (World Bank Policy Research Working Paper 4181, April 2007) p. 16.
- 15.
This has been observed in literature, especially with regard to the FTAs that the United States and the European Union have concluded, and it is brought into the spotlight empirically in the context of clearing and settlement commitments, in subsection 3.2.
- 16.
These agreements fall under the Stabilization and Association Agreements that the EU concludes in order to promote peace, freedom, stability, and economic prosperity through trade to the region. For more information, see <http://ec.europa.eu/trade/policy/countries-and-regions/regions/western-balkans/>.
- 17.
EU’s main objectives are to promote through trade, peace, stability, freedom and economic prosperity for Western Balkans, available at <http://ec.europa.eu/trade/policy/countries-and-regions/regions/western-balkans/>.
- 18.
For the Thessaloniki European Council of 2003 conclusions see here: <https://www.consilium.europa.eu/media/20847/76279.pdf?fbclid=IwAR2Ff5AgJM0MYftoxeJ9q79dPtdrxSzdTdnWnCauHlbhxFqVA-40WYBTAu8>.
- 19.
See for example Article 5 of the Stabilization and Association Agreement between the EU and FYROM, available at <https://eeas.europa.eu/sites/eeas/files/saa03_01_en.pdf?fbclid=IwAR2jBPKSsl4LUXvKeN4_eapYMOmrzBs 3jHvoOe5pqS6GnKh11YDnG9w1mso>.
- 20.
Ibid, Article 49-51.
- 21.
Ibid, Article 83(1).
- 22.
Ibid, Article 55.
- 23.
See European Commission, North Macedonia 2019 Report (Staff Working Paper SWD(2019) 218 final, Brussels 29 May 2019) pp. 65-66.
- 24.
See i.e. European Commission, Comunication on EU Enlargement Policy SWD(2019) 260 final, Brussels, 29 May 2019) p. 4.
- 25.
Clearing and settlement commitments for the purpose of this figure amount to at least either a national treatment or a market access commitment of a party to an FTA for one of the 3 modes of supply that constitute the scope of this study.
- 26.
The data of International Trade Center (ITC) on exports of financial services, computed on the basis of the balance of payments (BOPs), portray that the countries that were the principal financial services exporters for 2016 were the United States (approx. 97 billion USD), the United Kingdom (approx.. 71 billion USD), Luxembourg (approx. 55 billion USD), Germany, Switzerland, Singapore, Japan, Hong Kong, Ireland, France, Canada, India, China and Australia among others. For detailed data on the imports and exports of financial services see <https://www.trademap.org/tradestat/Country_SelService_TS.aspx?nvpm=1|||||||S07|1|3|1|2|2|1|2|1|>.
- 27.
See Constance Z. Wagner ‘The New WTO Agreement on Financial Services and Chapter 14 of NAFTA: Has Free Trade in Banking Finally Arrived?’ (Winter 1999) 5 NAFTA: Law and Business Review of the Americas, pp. 5-91.
- 28.
Since commitments can differ significantly from one another, infra the analysis specifically examines the type of commitments that have been undertaken in the realm of preferential trade agreements, and specifically measures their legal trade-liberalizing traits.
- 29.
The theory of the comparative advantage was conceptualized for the first time at the beginning of the nineteenth century by a British political economist, see David Ricardo, Principles of political economy and taxation (G. Bell, 1891). More recently the traditional economic approach to trade agreements has been criticized due to its unrealistic hypothesis on governments’ national welfare maximization. For the modern account, so called political-economy approach, that factors in the distributional consequences of trade policies, including rent-seeking, see Kyle Bagwell and Robert W. Staiger, ‘An economic theory of GATT’ (1999) 89 American Economic Review 1, pp. 215-248; Richard Baldwin, The Political Economy of U.S. Import Policy (MIT Press 1985); Kyle Bagwell and Robert W. Staiger ‘Reciprocity, non-discrimination and preferential trade agreements in the multilateral trading system’ (2001) 17 European Journal of Political Economy, pp. 281-325. Cf for a comprehensive account of the economic theories behind trade see Kyle Bagwell and Robert W. Staiger, The Economics of the World Trading System (MIT Press 2002) pp. 13-42.
- 30.
See Bernard Hoekman and Aaditya Mattoo, ‘Services trade and growth’ (2008) 17 International Journal of Services Technology and Management 2, pp. 21-58, and Juan A. Marchetti and Martin Roy, ‘Services liberalization in the WTO and in PTAs’ in Juan A. Marchetti and Martin Roy (eds), Opening Markets for Trade in Services: Countries and Sectors in Bilateral and WTO Negotiations (Cambridge University Press 2008) pp. 61-112.
- 31.
The difference between financial liberalization and the liberalization of financial services lies in the fact that the first constitutes a broader category that the second is a subset of. On the one hand, financial liberalization refers to the elimination of distortions in domestic financial systems which impede the efficient allocation of capital and the functioning of competition. On the other, the liberalization of financial services, as has been demonstrated in this chapter, pertains to the elimination of quantitative restrictions in the access of foreign financial services suppliers, in the form of the principle of market access, and to the elimination of discriminatory treatment, through the national treatment principle. For literature on financial liberalization see for example, Graciela Kaminsky and Sergio Schmukler ‘Short Run Pain, Long Run Gain: The Effects of Financial Liberalization’ (IMF Working Paper February 2003); Stijn Claessens and Marion Jansen (eds.) The Internationalization of Financial Services: Issues and Lessons for developing Countries (Kluwer Law International 2000).
- 32.
To be precise, computations based on the WTO RTA database reveal that 54,42%, until the 23rd of May 2018, have used their GATS level of liberalization for financial securities’ clearing and settlement services, whereas 45,58% have opted for deeper liberalization in the services sectors in question. It should be reiterated that the figures here represent the commitments that provide for this services liberalization in FTAs, and not the ones that do not(“Unbound” for example), although this lack of commitment would represent the same level of liberalization as the one inscribed in some countries’ GATS schedules.
- 33.
See Mavroidis & Marchetti supra note 13.
- 34.
GATS Article V, under the title “Economic Integration”, provides for the legal basis upon which regional trade agreements on services are concluded.
- 35.
For more details on the specific countries and the range of the commitments for the preferential trade agreements with the EU and the US, see George A. Papaconstantinou, Trade in Financial Services Regionalism: Derivatives Clearing and Settlement in Economic Integration Agreements (Robert Schuman Center for Advanced Studies Research Paper No. 2018/63) pp. 29-30.
- 36.
Ibid.fn. 14.
- 37.
The Chilean GATS Schedule explicitly excludes securities clearing and settlement from the scope of the assumed commitments (GATS/SC/18/Suppl.3, page 14, para. 4), whereas Chile’s Schedule of Specific Commitments on Financial Services offers mode 3 national treatment commitment for specific securities’ clearing and settlement services (Annex VIII to the EU-Chile FTA).
- 38.
Nicaragua in its GATS schedule does enter commitments for financial instruments clearing and settlement services by disregarding the subsector as such (GATS/SC/63/Suppl.1), whereby in the EU-Central America FTA it provides full commitment for these services to the EU (p. 2349 of the Agreement).
- 39.
For an explanation of the new regulatory role of clearing houses see Philip Stafford ‘How clearing houses aim to avert market disasters’ (2018) Financial Times <https://www.ft.com/content/01596fde-b805-11e8-b3ef-799c8613f4a1>.
- 40.
An outlier is Singapore, which seems to reflect to an extent the regulatory developments in some of its concluded FTAs For more details, see George A. Papaconstantinou supra note 35.
- 41.
For a critical analysis of the European regulatory framework and the examination of its consistency under WTO law see George A. Papaconstantinou, supra note 12.
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Papaconstantinou, G.A. (2020). Financial Services Liberalization Under EU FTAs: The Case of Clearing and Settlement Services. In: Weiß, W., Furculita, C. (eds) Global Politics and EU Trade Policy. European Yearbook of International Economic Law(). Springer, Cham. https://doi.org/10.1007/978-3-030-34588-4_4
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