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Science Technology and the Economic Future edited by Susan Raymond
Summary of remarks delivered at the New York Academy of Sciences
Financial Services and Open Trading Markets
F. William Hawley
Director International Government Relations, Citicorp/Citibank
The seeds of involvement in the Global Agreement on Tariffs and Trade (GATT) by financial services industries were sown many years ago.
A History of Protectionism
The financial services industry, which includes banking, insurance, securities, and diversified financial services companies, began to observe the emergence of various types of sophisticated barriers to outside trade in financial services. The effect was to protect the small community of local financial institutions by placing restrictions on the activities of foreign financial companies.
This pattern was problematic for the U.S. financial industry. But equally it was inimical to the economic growth of countries who practiced protectionism. In effect, the growing financial protectionism was denying these economies access to the competitive capital sources that they needed to continue to develop.
Hence, the financial industry attempted to persuade GATT negotiators to include financial services within the framework of GATT negotiations. Although services had been left out of the structure of GATT at its inception in 1947, today the services sector represents a majority of jobs and GNP in the United States, and is increasingly important throughout the world.
Why GATT as the Solution?
With the onset of the Uruguay Round of GATT negotiations, four key reasons for including financial services appeared.
For many years, the U.S. Treasury Department had negotiated financial disputes through bilateral agreements. This approach was increasingly ineffective. The United States does not have constant bilateral trade consultation with most countries of the world. So as the protectionism trend spread, the bilateral mechanism could not be expected to keep pace.
A second problem was that focusing exclusively on financial services in existing bilateral talks provided too narrow a base for negotiations. By its very breadth, the GATT held the potential to provide an enormous range of "carrots and sticks" across the complex of economic sectors in the negotiations. Hence, accommodation on service sector issues could be matched with negotiations in other sectors or on other issues so that the entire package of compromises, taken as a whole, would be more broadly acceptable.
Third, the result of a successful broader approach to negotiations would be more than the sum of its parts. The result would not simply be a set of rules to stop proliferation of trade restrictions, it would also be an impetus toward real market liberalization around the world. In turn, this would be advantageous for both U.S. industry and for overseas economies of all stages of economic development.
Finally, including services industries in the GATT would keep GATT itself relevant to the composition of today's global economy. With the increasing importance of trade in financial services, it is essential to include services if the GATT is to play a trade expansion role into the 21st century.
Why Financial Services Negotiations Failed
Despite the general success of the Uruguay Round of the GATT the negotiations did not achieve their agenda in the area of financial services. The failure can probably be traced to a series of early mistakes.
Initial negotiating emphasis was placed on creating a frame-work agreement for financial services with airtight definitions. The agreement was to be based on the concept of "national treatment —i.e. equal treatment of both foreign and domestic firms. With such strict language in place, those who signed the ultimate agreement would be bound to obey its principles and provisions.
But it quickly became clear that virtually no one would even talk about such an agreement. The fallback approach was to develop a non-binding set of principles. In this mode, each signatory merely created a separate annex that specified those areas in which they were willing to specifically apply the general principles. In effect, the approach was transformed from one in which there are specified exceptions to the agreement (a "negative list," in trade parlance), to one in which nothing is binding beyond a list of exceptions (a "positive list").
Much of the hesitancy to engage in specifics in financial services was a fear that such trade negotiations would interfere with the traditional rights and responsibilities of national banking regulators to do their jobs, and national financial institutions to affect overall fiscal and monetary policy.
As a result, the framework agreement resulted in no country being committed to any specific list of binding actions.
Hard Lessons from Hard Experience
The Uruguay Round experience illustrated the complexity of conducting financial services negotiations. A number of key lessons emerged.
First, it is critical that financial services negotiations be placed within a larger context of negotiations from the outset. The broad sectoral array of wide-scale negotiations is needed to force compromises on financial services issues because it is such a sensitive area of national interest.
Also, flexibility and creativity is needed to accommodate the various levels of development of financial sectors across a range of countries. In the North American Free Trade Agreement (NAFTA), for example, such a flexible approach was successfully taken. The opening of financial markers implicitly recognized that Mexico was just beginning to privatize its financial sector, and hence the trade liberalization was phased in and placed under the clear control of the Mexican government. This type of structured flexibility may prove critical in the next phase of financial services negotiations globally.
The Elusive Scope of the Financial Services Industry
Stephen A. Herzenberg
Office of Technology Assessment, United States Congress
The service sector accounts for over 80 percent of the U.S. economy and has long deserved more attention than it has received in both economic and trade circles. The Office of Technology Assessment has been looking at a variety of issues in this area.
With specific reference to financial services, a number of difficult questions must be answered if the full role of this industry is to be understood and its importance guarded.
Problems in Productivity Measurement
If productivity growth in services industries is hard to measure in general, it is particularly difficult in financial services. The proliferation of new products and improvements in service quality made it extremely hard to track output in a constant, meaningful way. It is fair to say that we are certainly underestimating productivity growth in most of the financial services industry.
Flattening the Service Job Hierarchy
A second difficulty is the broadening of jobs at the bottom of the employment hierarchy, a trend that is common to the financial services and telecommunications industries. Line workers are tied into sophisticated data bases and now can provide a wide range of services to a large number of customers. The merging of job responsibilities within the employment hierarchy affects the organization of work. It may also affect employment levels. These changes in employment organization can increase industrial competitiveness and enhance the importance of service industries in global trade negotiations
The International Mobility of Service Sector jobs
The international mobility of manufacturing jobs has long been a subject of global economic debate. Such mobility may also become an increasingly important issue in service industries. With innovations such as electronic data interchanges and 24-hour centralized loan application centers, questions of job mobility in the financial services industry arise. How mobile are these functions now within the United States?
And how mobile are they internationally? Indeed, the export of low-wage clerical jobs in service industries may prove to be one of the motivations for less developed countries to retain liberal trade policies in service sectors such as finance. While international out-sourcing of clerical jobs is more of a trickle than a flood at the present point in time, the issue may grow as technology innovation-such as the proliferation of optical character readers-changes the nature (and perhaps the international mobility) of many jobs.
Learning from NAFTA
Our growing understanding of the trends in financial services industries suggests that one of the elements of trade negotiations in services will encompass labor rights. Under the NAFTA negotiations, of course, the issue of labor rights became very controversial. The controversy spills over into issues both of economics and of social standards. Hence, it can be very explosive and greatly contribute to national tendencies toward protectionism.
It is clear that productivity and quality in the service work force in the United States is rising. It is also clear that there is a disparity in the work force that increasingly cleaves along skill and education lines. Less educated workers in this country today suffer much higher rates of unemployment and underemployment than historically has been the case. This same trend, although less pronounced, can be seen in other parts of the world.
In many instances, it is this fear of being left behind that has driven protectionism, whether among French farmers protesting the European Union or U.S. unions confronted with the NAFTA negotiations. If new agreements in trade liberalization are the objective, then financial services industries and technology-based companies would be well advised to recognize the wage and employment concerns that have driven protectionism in manufacturing and agricultural sectors and be prepared to address these concerns in service negotiations.
Telecommunications: The Nervous System for Open Financial Markets
Walter I. Rigkard
Group Vice President, NYNEX
The financial services and telecommunications industries are tightly linked. Discussions of financial services policy cannot be usefully undertaken without also discussing telecommunications policy.
The Promise of New Technologies
The world is entering an unprecedented age of integrated communications between people, between enterprises, across organizations, and among all nations. Digital, fiber, radio, and satellite transmission will combine, and accessibility of all types of communications for all types of purposes will pervade global communications.
These advances will permit significant gains in the speed with which financial services are provided. Worldwide financial transactions will take place in less than six seconds. Advances will also affect the location of financial transactions. Consumers will be banking via their television sets, personal computers, or data phones. This is a new information architecture that will be able to seamlessly interconnect everyone anywhere in the world.
Eight Principles for Expanded Trade
For a global architecture to work, however, open market access throughout the world will be essential. In moving technological innovation toward such an open system, eight key principles must form a clear core of the trading system.
First, open market access must be assured. Telecommunications enterprises must have the ability to build, own, operate, and re-sell technology networks worldwide.
Second, national treatment standards must be applied. Foreign telecommunications companies should be treated just as their domestic counterparts in any country in the world. This principle should be applied equally to the United States market.
Third, safeguards must be established. Telecommunications services must be unbundled, interconnections among services encouraged, and a common set of cost accounting rules applied.
Fourth, standards must be open and integrated. The market place is moving forward much faster than our international standard setting process. This is certain to impede investment and trade.
Fifth, deregulation is essential. If technological innovations are to be maximized in the market place, investment must be encouraged. And investment requires a much more encouraging regulatory environment in many countries.
Sixth, trade regimes should encourage international partner ships. The architecture can and should be seamless, and that means that interconnection arrangements must be open.
Seventh, national telecommunications networks must be open to foreign participation. If the architecture is to be globally seam less and take advantage of new technological innovations, then national networks must be able to merge.
Eighth, public subsidies must be rethought and retargeted. Telecommunications pricing per minute is always higher if it must support public subsidies. In New York State, for example, a pro gram called "lifeline" provides subsidized telephone service to people on public assistance. The subsidy is paid by higher rates on other customers. The permutations and combinations of such pro grams in nations around the world are myriad. The result, however beneficial in terms of social policy, is a crazy-quilt in the competitive market place. Trade policy which focuses on telecommunications and financial services will need to address this issue.
Reasons for Hope
The Uruguay Round of the GATT provided several reasons for optimism. Service industries are now seen as a key part of global trade negotiations, and, within these considerations, telecommunications will receive considerable attention.
Moreover, precedents in bilateral arrangements are now serving as prototypes of multilateral negotiations. NYNEX, for example, has an arrangement with the telecommunications agent for Bangkok to build, operate, and own a 2 billion line network in Thailand. NYNEX also has the largest cable franchise in the United Kingdom. Knowledge of successful bilateral efforts in telecommunications will provide considerable guidance to multilateral trade negotiators as to the critical elements necessary to liberalize global telecommunications trade.
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