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2020 | OriginalPaper | Chapter

“Parallel Convergences” in Free Trade Agreements on Financial Services: Select Issues

Author : Carlo M. Cantore

Published in: Coherence and Divergence in Services Trade Law

Publisher: Springer International Publishing

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Abstract

Are we experiencing convergence in preferential international trade rules on financial services? This paper tries to answer this question by comparing key obligations in the financial services chapters of five free trade agreements (FTAs): CPTPP; USMCA; KORUS; CETA; and JEFTA. The paper compares select aspects of the legal discipline introduced in the FTAs, with a view to testing whether (and to what degree) the financial services chapters in the chosen FTAs depart from the GATS template. Despite the possibility for parties to re-write substantially the rules of the game, this paper shows that the GATS template still represents the basis for bilateral and regional negotiations. In a few areas, however, the five FTAs examined in the article innovate substantially as compared to the text of the GATS. Specifically, innovative solutions concerning the discipline on prudential regulation are particularly relevant.

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previous chapter Telecommunications and Media Services in Preferential Trade Agreements: Path Dependences Still Matter

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For instance, the US financial services industry played an active role in the early 1980s in sensitising its government about the need for international rules on cross-border trade in services and freedom of establishment. Partly due to the pressure from its domestic suppliers, the US government made it clear to its trading partners that services (and in particular financial services) should become the key ingredient for the Uruguay Round. See Marchetti and Mavroidis (2011), pp. 692–694, and, more in general, Yoffie (1990).

Article V of the GATS refers to these agreements as Economic Integration Agreements. This paper uses the more common term FTAs, for ease of reference.

See http://rtais.wto.org.

Jarreau (1999), pp. 23–24.

See Marchetti (2011) concerning the identity of the negotiators of the GATS Annex. See Cameron and Tomlin (2000) for a similar account concerning the NAFTA negotiations.

Leblond (2016) reports how divergences on the introduction of a filter mechanism when the prudential carve-out is invoked in investor-state disputes led the negotiations of a trade pact between the European Union and Canada to a temporary stalemate.

To the extent that they are not excluded from the coverage of the GATS.

Importantly, Mexico and several Member States of the European Union (namely, Croatia, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, Romania, and Slovenia) did not subscribe to the GATS Understanding.

A standstill clause ensures that parties bind their restrictions to foreign services trade at the level existing at the time of the entry into force of the agreement. For example, if a government decides to further liberalize a specific subsector and then, following elections, a government with a different agenda decides to reverse the decision, the latter can at most fall back to the level of limitations and restrictions imposed by the party at the time of the entry into force of the agreement.

Paragraph A, GATS Understanding.

Article 11.10.1 (a) CPTPP; Article 17.10.1 (a) USMCA; Article 13.9.1 (a) KORUS; Article 13.10.1 (a) CETA; and Article 8.12.1 (a) JEFTA. Article 17.6 USMCA includes a standstill clause prohibiting the adoption of measures restricting “any type of cross-border trade in financial services by cross-border financial service suppliers” of another party that were permitted on 1 January 1994 (i.e., the date of entry into force of the North American Free Trade Agreement (NAFTA)).

Article 11.10.1 (c) CPTPP; Article 17.10.1 (a) USMCA; Article 13.9.1 (c) KORUS; Article 13.10.1 (c) CETA; and Article 8.12.1 (c) JEFTA.

Negotiations on investment protection between the European Union and Japan are still underway.

See para. 1(b) (i)–(iii) of the GATS Annex and Article 1.3(b) of the GATS.

See para. 1(c) of the GATS Annex.

Article 11.2.3 CPTPP; Article 17.2.3 USMCA; Article 13.2.5 CETA; Article 8.58.2 JEFTA; Article 13.1.3 KORUS.

Article 8.58.2(a) JEFTA.

Article 11.11.2 CPTPP; Article 17.11.2 USMCA; Article 13.10.2 KORUS; Article 13.17.1 CETA.

Article 11.2.4 CPTPP; Article 17.2.4 USMCA; Article 13.1.4 KORUS.

Article 13.10.7(a) CETA.

Article 8.12.5 JEFTA.

Article XV:1 of the GATS reads, in relevant part: “Members recognize that, in certain circumstances, subsidies may have distortive effects on trade in services. Members shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade-distortive effects.”

GATT Doc. MTN/GNS/164 of 3 September 1993, para. 9.

Ibid.

See e.g. Natens (2016), pp. 67–68 and the literature cited therein.

Mavroidis (2020, forthcoming) highlights a number of problems. Put briefly, he argues that the language of Article XV:1 is unambiguous and that the Scheduling Guidelines, being a Secretariat document, can never override the language of the Agreement, but can at most serve as supplementary means of interpretation under Article 32 of the Vienna Convention on the Law of Treaties (VCLT).

Article 11.2.5 CPTPP; Article 17.2.5 USMCA; Article 13.10.7(b) CETA; Article 8.12.6 JEFTA; Articles 12.1.4(d), 11.5.7 and 11.12.5(b) KORUS.

Only in principle, though. Several trading nations have listed reservations on the participation of foreign banks to domestic deposit insurance schemes. Furthermore, all FTAs clarify that they do not confer foreign entities access to lender of last resort facilities.

Article 11.1 CPTPP; Article 17.1 USMCA; Article 13.1 CETA; Article 13.20 KORUS.

See the interesting discussion in Delimatsis and Hoekman (2017).

Article 11.3.3 CPTPP.

Article 11.5 CPTPP; Article 17.5 USMCA; Article 13.4 KORUS; Article 13.6 CETA; Article 8.7 JEFTA.

Article 11.9.1 CPTPP; Article 17.9.1 USMCA; Article 13.8.1 KORUS; Article 13.8 CETA; Article 8.10 JEFTA. It should be noted, however, that most parties have made reservations on nationality requirements in their annexes to relevant agreements.

Article 11.9.2 CPTPP; Article 17.9.2 USMCA; Article 13.8.2 KORUS.

Article 11.15 CPTPP; Article 17.15 USMCA; Article 13.13 KORUS; Article 13.13 CETA; Article 8.61 JEFTA.

Article 11.14 CPTPP; Article 13.12 KORUS.

Article 8.62 JEFTA.

Article 17.14 USMCA; Article 13.12 CETA.

Article 11.17 CPTPP.

Article 11.7 CPTPP; Article 17.7 USMCA; Article 13.6 KORUS; Article 13.14 CETA; Article 8.60 JEFTA. Article 8.60.2 JEFTA specifies that a negative decision may not be rendered not solely because the service is not supplied by any financial service supplier in its territory. JEFTA is also the only FTA that does not make reference to a reasonable period of time to issue a decision.

Article 13.14.3 CETA.

Delimatsis (2017), p. 612.

In the aftermath of the 2007–2008 financial crisis, Paul Volcker, former Chairman of the Federal Reserve, is reported to have stated: “The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience” (https://nypost.com/2009/12/13/the-only-thing-useful-banks-have-invented-in-20-years-is-the-atm/).

Verdier (2013) discussed the political economy of international cooperation on financial regulation.

Paragraph 5 (Principles of regulatory cooperation), Annex 8-A JEFTA.

Paragraph 8(e), Annex 13-B CETA. One example might be the BCBS recommendations, although they are not explicitly mentioned in the Annex.

Annex 13-C CETA.

Annex 8-A JEFTA.

Article 11.13 CPTPP; Article 17.13 USMCA; Article 13.11 KORUS; Article 13.11 CETA; Article 8.64.1 JEFTA.

Marchetti (2020, forthcoming) has an extensive discussion on Article 11.13 CPTPP.

For example, this process is known in US administrative law as “notice and comment”.

Annex 11-B, Section B (Transfer of information) CPTPP; Article 17.17 USMCA; Annex 13-B, Section B (Transfer of information) KORUS; Article 13.15.1 CETA; Article 8.63.1 JEFTA.

Admittedly, it could be argued that other exceptions can compensate for this lack of specification.

Annex 11-B, Section B (Transfer of information) CPTPP; Article 17.17 USMCA; Article 13.15.2 CETA; Article 8.63.2 JEFTA. Gelpern (2016) argues, with regard to the relevant discipline in the CPTPP, that banks may still be required to keep data and servers in a particular territory and that this would entail an unnecessary duplication of data that is inconsistent with the business model of global financial firms (p. 99).

Annex 11-B, Section B (Transfer of information) CPTPP.

Paragraph 2(a) of the GATS Annex, final sentence, reads: “Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement”. See also Annex 11-B, Section B (Transfer of information) CPTPP; Article 17.17 USMCA; Article 8.63.2 JEFTA.

Article 17.18 USMCA. Pursuant to Annex 17-D USMCA, the provision does not apply to existing measures of Canada for one year after the entry into force of this agreement. The CPTPP contains a similar provision in its e-commerce chapter (Article 14.13), but it does not apply to financial services.

Footnote 9 clarifies: “For greater certainty, access to information includes access to information of a covered person that is processed or stored on computing facilities of the covered person or on computing facilities of a third-party service supplier. For greater certainty, a Party may adopt or maintain a measure that is not inconsistent with this Agreement, including any measure consistent with Article 17.11.1 (Exceptions), such as a measure requiring a covered person to obtain prior authorization from a financial regulatory authority to designate a particular enterprise as a recipient of that information, or a measure adopted or maintained by a financial regulatory authority in the exercise of its authority over a covered person’s business continuity planning practices with respect to maintenance of the operation of computing facilities”.

JEFTA does not have specific discipline on MRAs on prudential regulation, but it only has a general provision on MRAs in services akin to Article VII GATS (See Article 8.35 JEFTA).

Logically, bilateral agreements only regulate the consequences of the conclusion of recognition agreements with non-parties (See Article 13.14.1 KORUS; and Article 13.5.1 CETA), whilst FTAs signed by more than two parties regulate the consequences of recognition agreements with another party or a non-party.

Fn. 12 CPTPP; Article 17.12.4 USMCA.

Article 11.12.2 CPTPP; Article 17.12.2 USMCA; Article 13.14.3 KORUS; Article 13.5.2 CETA.

For a comprehensive discussion on MRAs under the GATS, see Marchetti and Mavroidis (2012).

Panel Report, Argentina – Financial Services, para. 7.814.

Panel Report, Argentina – Financial Services, para. 7.873.

Consider, for instance, the rules introduced on central counterparties or the FSB’s guidelines on systemically important financial institutions (SIFIs). These instruments and the regulatory objective pursued were not extensively debated at the time of the GATS negotiations.

In Cantore (2018), p. 114, we reported that only four FTAs containing discipline on financial services do not have a PCO: the European Economic Area (EEA); China-Hong Kong, China; China-Macao; and Iceland-Faroe Islands.

Article 13.16.1 CETA; Article 8.65.1 JEFTA.

Article 13.10.1 KORUS: “Notwithstanding any other provision of this Chapter or Chapter Eleven (Investment), Fourteen (Telecommunications), including specifically Article 14.23 (Relation to Other Chapters), or Fifteen (Electronic Commerce), and, in addition, Article 12.1.3 (Scope and Coverage) with respect to the supply of financial services in the territory of a Party by a covered investment …”

Cantore (2018), pp. 130–131.

Article 11.11.1 CPTPP; Article 17.11.1 USMCA.

Gari (2014), p. 434 discusses the limited scope of application of the GATS PCO to measures affecting trade in non-financial services, including capital controls.

Article 11.11.1 CPTPP; Article 17.11.1 USMCA; Article 13.10.1 KORUS; Article 13.16.1 CETA; Article 8.65.1 JEFTA. CPTPP and USMCA have a footnote that reads: “The Parties understand that the term ‘prudential reasons’ includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions or cross-border financial service suppliers as well as the safety, and financial and operational integrity of payment and clearing systems”. See Fn. 10 CPTPP; and Fn. 6 USMCA.

In line with the interpretation of the GATS PCO (which does not include the word “reasonable”) provided by the Panel in Argentina – Financial Services (para. 7.889).

Article 1410 NAFTA.

Fireman’s Fund Insurance Company v Mexico, ICSID Case No. ARB(AF)/02/01, Award (17 July 2006), para. 162.

Fireman’s Fund Insurance, para. 164.

See fn. 75 above.

Ex multis, Leroux (2002), p. 431. For a critique of the parallelism between the final clause of the GATS PCO and the chapeau of Article XIV of the GATS, see Cantore (2018), p. 182.

As a final remark, we note that Japan included language in its reservations annex to JEFTA reaffirming its right to adopt or maintain prudential measures. Although it may sound pleonastic, as Japan holds this right “in any event”, it is a rather recurrent feature in financial services schedules. In Cantore (2018), p. 77, we reported that the word “prudential” appears in the horizontal entries of twenty-one GATS schedules and reference to the GATS PCO is made in twenty-five GATS schedules. Adlung et al. (2013), p. 15, correctly minimize the importance of similar entries, as they refer to provisions that would apply in any event.

It is interesting to note how, in other trade domains, similar solutions (perhaps in a less proceduralized fashion) were advocated in the past. Of particular importance is Roessler’s critique to the Appellate Body Report in India – Quantitative Restrictions, with specific regard to the distribution of competences between adjudicators and the WTO Balance of Payments Committee. See Roessler (2000), pp. 325 and ff.

See Lupo-Pasini (2018), p. 9.

All the examined FTAs except for JEFTA.

See Article 1415 (Investment Disputes in Financial Services) NAFTA.

Mitchell et al. (2016), p. 795 report that Singapore and Australia amended their FTA in 2016 to include a similar filter mechanism in investor-state disputes.

Article 11.22 CPTPP.

Annex 17-C (Mexico-United States investment disputes in financial services) USMCA. Canada opted out from ISDS disciplines in USMCA.

Article 13.19 KORUS.

Article 13.21 CETA.

Article 11.22.2(a) CPTPP; Annex 17-C.5 USMCA; Article 13.19.1 KORUS; Article 13.21.3 CETA.

Article 11.22.2(b) CPTPP; Annex 17-C.5 USMCA; Article 13.19.1 KORUS; Article 13.21.4 CETA.

Article 11.22.4 CPTPP; Annex 17-C.5 USMCA; Article 13.21.6 CETA. KORUS does not have this clarification. CPTPP and USMCA add that the party to which the complaining investor belongs is presumed to support the invocation of the exception by the respondent unless it makes a submission to argue the contrary.

Article 11.22.2(c) CPTPP.

Article 13.16.2 CETA.

Article 13.16.3 CETA.

Echoing language from the WTO Agreement on Sanitary and Phytosanitary Measures (SPS Agreement).

Paragraph 8(a), Annex 13-B CETA.

Paragraph 8(b), Annex 13-B CETA.

100

Paragraph 8(c), Annex 13-B CETA.

101

Paragraph 8(d), Annex 13-B CETA.

102

Recent studies reveal that an increasing number of ISDS arbitration panels relies on WTO case-law in the interpretation of treaty provisions. Chevry (2020, forthcoming) provides a detailed account of this phenomenon.

103

Paragraph 8(e), Annex 13-B CETA.

104

Paragraph 9, Annex 13-B CETA. This paragraph also clarifies that the Annex may be amended. That is not innovative in and of itself, since any international agreement can be amended, in principle, with the consent of its parties.

105

See Mavroidis (2020, forthcoming).

106

Gelpern (2016), p. 96.

107

See, ex multis, Mattoo (2015) and Ortino (2016).

108

Verdier (2013). Note, however, that internationally agreed standards on banking supervision and regulation typically show high records of compliance, including in jurisdictions that are not Members of the relevant standard-setting bodies. Hohl et al. (2018) surveyed 100 jurisdictions (therefore including non-BCBS Members) and found evidence that all of them have adopted some iteration of the Basel risk-based capital regime.

109

See also Delimatsis (2017), p. 614 on this aspect.

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Title: “Parallel Convergences” in Free Trade Agreements on Financial Services: Select Issues
Author: Carlo M. Cantore
Publisher: Springer International Publishing
Book: Coherence and Divergence in Services Trade Law
Print ISBN: 978-3-030-46954-2

Electronic ISBN: 978-3-030-46955-9

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-46955-9_9