While the financial crisis and its consequences spreads around the world and even the most erstwhile ‘free market’ governments discuss how to re-regulate the financial sector, ‘free trade’ agreements continue the extreme deregulation of the financial industry. Terms of these agreements prohibit countries from reforming their financial sector so as to remedy the financial, economic, environmental, food and social crises now growing, and to ensure finance is directed to the transformation into sustainable societies.

Deregulation and liberalisation of financial services is part of the many bilateral and regional free trade agreements (FTAs) that are currently being negotiated or have been implemented over the last years. For instance, the EU-Caribbean Economic Partnership agreement (EPA) exemplifies the model that the EU seeks to impose during all current FTA and EPA negotiations. Some FTAs include a ‘review clause’ which is a commitment to (further) deregulate and liberalise (financial) services through new negotiations at a certain point in time, without public or parliamentary scrutiny.

FTAs deregulate more than GATS

FTAs extend what was agreed in the services agreements (General Agreement on Trade in Services or “GATS”) in the World Trade Organization (WTO). For instance, all countries that signed NAFTA or an FTA with the EU (Chile, Mexico, Caribbean countries) are required to allow any new foreign financial services within the signatory country’s territory, including the introduction very risky financial products such as speculative derivative trading – a practise which contributed significantly to the financial crisis. Although agreements often contain some exception for ‘prudential’ regulation, it is left to trade tribunals what policies this undefined term protects. FTAs therefore make it very difficult for countries to ban food price speculation through derivative trading in food commodities, which has contributed to the food crisis.
Moreover, the EU seeks to impose through its FTAs the obligation for developing country signatories to adopt legally many non-binding international norms for financial regulators. Yet, these norms have completely failed to prevent the financial crisis, and most developing countries have had no say in their design.

FTAs stop capital controls

During a financial crisis, or in order to prevent it, it is important that countries can control capital inflows and outflows, which mainly move through banks. Yet, the FTA model employed by both the EU and the US requires countries to remove limits on capital movement and facilitate cross-border capital flows. In the EU-Caribbean EPA, no restrictions on capital transfers between residents of the signatory countries are permitted, not even on capital account transfers related to investments. Only in very “exceptional circumstances“ can such transfers be stopped, and prudential regulation on capital flows may not be “more burdensome than necessary” !

Expansion of financial conglomerates

Under the GATS rules, developing countries can choose whether or not to liberalise or deregulate financial services. But a GATS rule determinates that countries who sign an FTA must make quite substantial financial service sector deregulation and liberalisation commitments although developing countries can liberalise somewhat less than developed countries. EU and US negotiators – in close coordination with their financial service industries - have been very keen to secure access into a deregulated market for their once profitable financial conglomerates (Citigroup profit in 2004 was US$ 17bn). Some existing FTAs have almost 10 pages of commitments and rules on financial services. These rules require that developing countries must admit the presence of all kind of foreign banks, insurance companies and other financial operators and their services…regardless of whether regulation and supervision, or consumer protection, is established or not.

Deregulation of foreign banks

While requiring that countries admit more foreign banks and other financials services, the FTA simultaneously impose the same restrictions on how governments may regulate financial services and their providers as in GATS, unless exemptions were made at the time of negotiation:
allowing 100% ownership of financial operators;
no restrictions on the size and number of financial operators, nor on the volume of their financial transactions;
foreign financial operators have to be treated at least as favourable as domestic financial operators.
As a result, many regulations aimed at preventing a financial crisis violate these rules. Take the example of a policy being considered in many countries: limiting the size of a bank and the volume of its financial transactions so that it cannot become “too big to fail” – and thus does not need to be bailed out by tax money.
FTA rules also disregard that foreign financial operators behave differently. Foreign banks tend to target the more profitable, rich clients and provide less - credit to farmers and small producers --especially in times of a financial crisis. This undermines food production and economic development.
FTAs do not allow host governments to pre-screen foreign financial service investors – for instance to exclude foreign banks that mainly finance socially- and environmentally-destructive projects or companies, and to only admit those banks that serve their societies.

The dangerous mix of FTAs and BITs

What is often forgotten is that foreign financial investors that enter a country under an FTA, can use already existing bilateral investment agreements (BITs) to sue host governments that introduce new social or environmental regulations. For instance, Argentina has been sued by more then 30 companies for its measures taken during its financial crisis (2000-2001). Foreign investors have already used a BIT to sue South Africa for its policies to reverse the legacy of apartheid and increase black ownership in the mining sector, which could also happen in the financial sector.

FTAs forgotten during financial reforms

None of the current official discussions about reforms of the financial sector take into account how FTAs and the WTO’s GATS further liberalise and deregulate the financial sector. Nor do these reform discussions focus on establishing rules to shift finance to productive rather than speculative ends or to halt investment in companies and projects that are socially and environmentally disruptive. In order to stop the financial sector’s contribution to the world’s food, climate/environmental and social crises, the extreme deregulation and market opening by FTAs and GATS must be reversed.

WHAT WE DEMAND:
All negotiations in financial services in GATS and FTAs have to be stopped.
Countries should be permitted to reverse their existing GATS and FTA liberalisation commitments of financial services (roll back).
Countries are allowed to take all necessary measures to prevent financial, social and environmental crises without retaliation threats of GATS and FTA rules.
Financial services and capital liberalisation are out of the WTO and all FTAs.
Financial services need to be regulated so as to urgently support the shaping of sustainable societies – including by serving the poor first.

For more information, see <http://www.ourworldisnotforsale.org>, <http://somo.nl/dossiers-en/trade-investment/gats>, or contact mvanderstichele@somo.nl