The WTO's Raw Deal on Services

Desperate to clinch a new global trade deal, World Trade Organization chief Pascal Lamy is planning to convene a "mini-ministerial" meeting in the third week of July. The aim of the meeting is to come up with agreements to liberalize trade in agriculture, industry, and services. These sectors have been the focus of the so-called Doha Round of WTO negotiations that have dragged on since 2001.

Developing country governments have been rightly concerned about agreeing to texts that promise illusory reductions in agricultural subsidies in the European Union and United States and require them to cut their industrial tariffs proportionally more than the developed countries. They should also not allow themselves to be snookered into a bad agreement on services, which include such vital activities as the provision of water, energy, and financial intermediation.

Insistence on Services

While global attention has focused on the talks on agricultural subsidies and industrial tariffs, the United States and EU have made it clear that they will not settle for a trade package that does not include services.

As U.S. Trade Representative Susan Schwab bluntly stated in a recent opinion piece, Washington "will not support a Doha package unless it includes an ambitious outcome on services that delivers commercially meaningful results."

While Schwab portrays the services talks as the poor cousin of the agriculture and industry negotiations, an equally possible outcome is a services agreement unaccompanied by deals in industrial tariffs and agriculture. With the North-South polarization in agriculture and industry, salvaging Doha with a deal in services, which are said to account for 50-60% of economic activity in most developing countries, might be an attractive option for the EU and United States.

The General Agreement on Trade in Services (GATS) requires countries to grant foreign service providers the same treatment as local firms. Developing countries are reluctant to do this, however, because of their current lack of capacity to regulate transnational businesses. Their fears have been fanned by troubles now in the global financial system, which are traceable to the absence of global regulation of developed country financial operators.

While financial services are just one of many services covered by GATS, the United States and EU have made a liberalized financial sector their main demand on developing countries. It has been revealed, for instance, that the EU has demanded that some developing countries eliminate regulations that cover the activities of hedge funds, the financial groupings that are said to have triggered the collapse of the baht in 1997. The EU has also demanded that Mexico open up its market to trade in derivatives, the slippery financial instruments that have played such a key role in the current financial chaos.

In the Absence of Regulation

Most developing countries welcome foreign capital, but they have learned the hard way that a strong foreign financial presence demands a strong regulatory regime tailored to a particular country's needs and capacities. Indeed, the indiscriminate elimination of capital controls across the region at the behest of the International Monetary Fund and the U.S. Treasury Department brought on the devastating Asian financial crisis. With practically all capital controls lifted and investment rules liberalized, $100 billion flowed into the key Asian economies between 1993 and 1997, with the money gravitating toward areas of high and quick return, like the stock market and real estate.

With few controls on where the funds went, over-investment soon swamped the stock and housing markets, causing prices to collapse and triggering follow-on dislocations in the exchange rate, the balance of payments, and the balance of trade. Gripped by panic, speculators scampered toward the exit. With both entry and exit rules liberalized, there was no way for governments - except for Malaysia, which defied the IMF and imposed capital controls - to stop the stampede, and the $100 billion that fled the region in a few short weeks in the summer of 1997 brought economic growth to a screeching halt from Korea all the way down to Indonesia.

After the Asian financial crisis, the Argentine financial collapse, and the crash of 2000-2002, all of which were caused by speculative bubbles that developed because of a lack of financial regulation, one would have thought that developed country authorities would put the emphasis on seriously regulating the activities of global financial actors.

Global finance, however, resisted any move toward effective regulation. Calls for controls on proliferating financial instruments such as derivatives went nowhere. Assessment and regulation of derivatives were to be left to market players who supposedly had access to sophisticated quantitative "risk assessment" models.

Having been burned by the consequences of financial deregulation, many developing country governments were not surprised when "self-regulation" led to the massive housing bubble whose bursting has brought the global financial system to the edge of collapse.

The Coming Train Wreck

One of the stock scenarios of the old western movies was that of a train picking up speed toward a collision with another train as the lifeless hand of the engineer, already shot dead by outlaws, remained pressed on the accelerator. Current developments in global finance are reminiscent of this scene.

A global consensus is forming around strongly re-regulating the financial sector. But in disregard of this emerging consensus and the financial chaos around them, developed country negotiators at the WTO, much like the dead hand of the engineer, continue to press developing countries for a services agreement that would drastically liberalize their financial sectors.

Developing countries should steer clear of the train wreck that will certainly ensue from the U.S. and EU's determination to pursue global financial liberalization at any cost. They must not agree to a services deal that would compromise their ability to effectively regulate financial and other services.

Just as they must say no to agricultural and industrial tariff agreements loaded down with inequitable conditions, they must also not be party to a services agreement that would have no other effect but to continually drag them into the terrifying maelstroms of unregulated global finance.

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