The General Agreement on Trade in Services (GATS) - new markets for the financial services industry

The General Agreement on Trade in Services ("GATS") is an agreement entered into by the Members of the World Trade Organisation to develop a framework for trade in services among the Members, with the ultimate aim of liberalising such trade and promoting economic growth, both for developed and developing economies. GATS is intended to provide legally enforceable rights allowing its Members to trade in other countries. This includes the right for a service provider based in one Member to set up a commercial presence in the territory of another Member.

GATS is based on three fundamental principles:

• All services, except those provided in the exercise of governmental authority, are covered;
• Members of the agreement are prohibited from dis-criminating in favour of national service providers; and
• A 'most-favoured nation' principle, which prohibits a Member from applying discriminatory measures which are more advantageous for service providers originating from some countries than for those who are based in other countries.

Exemptions to these principles are allowed in specified circumstances. For example, as part of the negotiation process, Members have been able to apply for exemptions from the most-favoured nation principle, for a period of up to ten years, on grounds of reciprocity. Many of the exemptions which were originally requested have now been either withdrawn, or limited in their scope.

GATS does not, however, prevent the Members from enforcing their own regulatory measures internally, and requiring entrants into their markets to comply with any such regulations, provided that internal regulation is not used as a barrier to prevent new service providers from entering the market. It also does not prevent a Member from taking whatever measures it deems necessary to ensure its own stability in the event of serious balance of payments problems or other external financial difficulties, or from imposing measures to ensure its national security.

• The Fifth Protocol The provisions relating to financial services will only come into force when the Fifth Protocol, which incorporates the Members' commitments into the GATS agreement, is signed or ratified by the Members. The target date for acceptance is 29th January 1999. If all the Members accept the Fifth Protocol by then, these provisions will be legally enforceable from 1st March 1999. If any Members fail to accept the Fifth Protocol by the January 1999 deadline, then those Members who have accepted it will have to decide whether or not to proceed with implementing GATS.
• Financial services All financial services, including insurance, insurance-related services and banking are specifically included within the scope of GATS. Members are not prevented from imposing internal regulatory measures on service providers to protect investors, deposit holders, persons to whom the provider of the service owes a fiduciary duty, and to ensure the integrity and stability of the financial system. Any such measures cannot, however, be used as a means of side-stepping the overall aim of the agreement, which is to allow greater freedom of trade. Members are free to recognise the authorisations, licences, or certifications of other Members, either unilaterally, by means of a reciprocal arrangement, or through planned harmonisation, as long as this does not result in the creation of a 'most favoured nation' situation.
• Members' commitments Under the agreement, the Members have made commitments as to the way in which they will implement the terms of the agreement, and the extent to which they intend to make use of available exceptions. At the beginning of the negotiation process, many Members had indicated that they would require wide ranging exemptions, particularly in respect of the most-favoured nation principle, but most had narrowed the scope of these by the time agreement was reached in respect of financial services in December 1997. It is intended that these commitments should be legally enforceable.
• Dispute settlement mechanism Panels with the relevant expertise to are to be created to resolve disputes between service providers and Members on financial services issues. The aim is to be able to settle differences between Members peaceably, thus enhancing the stability of the market, and to provide a mechanism for avoiding trade wars between Members.
• Implications for regulated service providers The opening up of global markets means greater opportunities for the providers of financial services.

Service providers based within the European Union already benefit - in theory and increasingly in practice - from the partial harmonisation of the financial services sectors of the member states. For the purposes of GATS, Europe is treated as a single market. The EU has made a single submission to the World Trade Organisation, instead of each EU member making individual submissions. This means that the harmonisation of financial services within the EU is effectively an internal matter, and is not affected by GATS. However, GATS will affect any measures imposed by the EU which act as a barrier to service providers based in non-EU countries, and limits the scope for the EU to protect its internal market from outside competition.

Conclusion

The financial services aspect of GATS will give service providers greater to scope to operate in markets which may have previously been more difficult to enter, or even closed to them, although it will limit the extent to which any Member can protect its internal market. It is anticipated that the liberalisation of the market globally will result in the development of a more efficient international financial services sector, which in turn will benefit the economies of both developed and developing countries. The dispute resolution provisions are intended to provide a resolution forum for organisations which experience difficulty in exercising their right to exploit new markets which should limit the potential for trade disputes between Members.