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Financial Services and Trade Agreements in Latin America and the Caribbean: An Overview

Working paper by Goncalves, Marilyne Pereira; Stephanou, Constantinos /World Bank, 2007

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The authors review the international framework governing trade in financial services, describe the treatment of financial services in recent trade agreements involving Latin America and Caribbean countries, and analyze the liberalization commitments made in three selected country case studies-Chile, Colombia, and Costa Rica. They give emphasis to free trade agreements because of the generally deeper level of liberalization and rule-making achieved to-date. The authors discuss some of the causes and potential implications of their findings.

Financial Services and Trade Agreements
in Latin America and the Caribbean:


An Overview






by


MARILYNE PEREIRA GONCALVES AND CONSTANTINOS
STEPHANOU∗









Abstract: The objective of this paper is to briefly review the international framework
governing trade in financial services, to describe the treatment of financial services in
recent trade agreements involving Latin America and Caribbean countries, and to analyze
the liberalization commitments made in three selected country case studies (Chile,
Colombia and Costa Rica). Emphasis is given to free trade agreements because of the
generally deeper level of liberalization and rule-making achieved to-date. The authors
discuss some of the causes and potential implications of their findings.

Keywords: Chile, Colombia, Costa Rica, trade agreements, financial services, GATS.



World Bank Policy Research Working Paper 4181, April 2007


The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the
exchange of ideas about development issues. An objective of the series is to get the findings out quickly,
even if the presentations are less than fully polished. The papers carry the names of the authors and should
be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely
those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors,
or the countries they represent. Policy Research Working Papers are available online at
http://econ.worldbank.org.



∗ Marilyne Pereira Goncalves (mgoncalves2@worldbank.org) is a consultant in the World Bank’s Financial
Market Integrity department and Constantinos A. Stephanou (cstephanou@worldbank.org) is a Financial
Economist in the World Bank’s Latin America and the Caribbean Region. This paper forms part of a
broader project on trade in financial services in Latin America and the Caribbean Region. The authors
would like to thank Pierre Sauvé for his excellent guidance, and express their gratitude to Augusto de la
Torre, Carsten Fink, Juan Marchetti and Latifah Osman Merican for helpful comments and suggestions.


WPS4181


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Table of Contents


I. INTRODUCTION ...............................................................................................4


II. OVERVIEW OF TRADE IN FINANCIAL SERVICES .......................................5
Liberalization of Trade in Financial Services Vs. Financial Liberalization .................. 5
Multilateral Framework for Trade in Financial Services .............................................. 6
GATS Commitments in Financial Services ................................................................... 12


III. FINANCIAL SERVICES IN LCR TRADE AGREEMENTS ............................15
Overview of Preferential Trade Agreements in LCR .................................................... 15
Treatment of Financial Services ................................................................................... 19


Coverage in PTAs ................................................................................................... 19
Competing Liberalization Models (NAFTA versus GATS)................................ 23


Financial Services-Related Rules and Disciplines ....................................................... 26


IV. ANALYSIS OF FINANCIAL SERVICES COMMITMENTS ...........................31
Comparison to GATS .................................................................................................... 31
Comparison to the Status Quo (Unilateral Liberalization) .......................................... 35


V. CONCLUSION ...............................................................................................39


REFERENCES ...................................................................................................42


APPENDIX I: GATS DEFINITION OF FINANCIAL SERVICES.........................45


APPENDIX II: LIBERALIZATION COMMITMENTS IN FINANCIAL SERVICES
FOR SELECTED LCR COUNTRIES..................................................................47




3


List of Tables

Table 1: GATS Framework on Financial Services ............................................................. 9
Table 2: Sample Schedule of Financial Services Commitments ...................................... 11
Table 3: Coverage and Treatment of Financial Services in LCR PTAs (as of mid-2006)17
Table 4: Coverage of Financial Services (FS) by Type of FTA in LCR .......................... 39
Table II-1: Chile – Financial Services Trade Liberalization Commitments..................... 47
Table II-2: Colombia – Financial Services Trade Liberalization Commitments.............. 49
Table II-3: Costa Rica – Financial Services Trade Liberalization Commitments ............ 50



List of Figures

Figure 1: Composition of Financial System Assets (1995-2005)..................................... 13
Figure 2: ‘Map’ of Financial Services-Related Trade Commitments in LCR (mid-2006)20
Figure 3: Financial Services Trade Balance for Selected LCR Countries (1997-2004)... 22
Figure 4: Foreign Bank Penetration in Selected LCR Countries...................................... 22
Figure 5: Proportion of Financial Services Sub-Sectors Committed by Chile, Colombia


and Costa Rica in the GATS and in Subsequent FTAs ............................................ 34
Figure 6: Market Share of Foreign Financial Institutions in the Domestic Financial


Systems of Chile, Colombia and Costa Rica at the Time of FTA Negotiations....... 37
Figure 7: International Financial Integration of Chile, Colombia and Costa Rica (1997-


2004) ......................................................................................................................... 37



List of Boxes

Box 1: Collective Request in Financial Services.............................................................. 14




4



I. Introduction


International trade in financial services represents an increasingly important
dimension of domestic financial activities and a manifestation of recent trends in
globalization and the application of information technology that have vastly increased the
integration of markets worldwide. There are typically three ways in which the
liberalization of financial services trade can be achieved. First, it can be done unilaterally
when countries decide to open their financial systems to international competition,
typically in the context of far-reaching autonomous domestic reform efforts. Secondly, it
can take the form of specific trade commitments at the multilateral level under the
auspices of the World Trade Organization (WTO). Finally, countries can enter in
preferential trade agreements (PTAs), either bilateral or plurilateral, where the removal of
barriers to trade and investment is negotiated on a reciprocal and preferential basis.



The objectives of this paper are threefold: (1) to briefly review the international


framework governing cross-border trade and investment in financial services; (2) to
describe the treatment of financial services in PTAs by countries in the Latin America
and Caribbean region (LCR); and (3) to analyze and compare the liberalization
commitments made in the financial services chapters of selected PTAs for three LCR
countries (Chile, Colombia and Costa Rica). Although PTAs in the LCR comprise free
trade agreements (FTAs, e.g. NAFTA) and customs unions (e.g. MERCOSUR), the paper
devotes particular attention to the former because of the generally deeper level of
financial services liberalization and rule-making achieved to-date under such agreements.
Given the broad scope of this exercise, the paper does not provide an in-depth analysis of
the multilateral trading framework and of non-financial services-related aspects of PTAs,
or speculate on the implications of the proliferation of such trade agreements for the
multilateral trading system and on their impact on domestic financial systems.



The paper is structured as follows:
• Section II briefly describes trade in financial services and the framework of rules


governing such trade at the multilateral level;
• Section III provides an overview of PTAs in LCR and their treatment of financial


services in terms of coverage, template and disciplines;
• Section IV compares financial services commitments in selected PTAs to LCR


countries’ prior multilateral commitments and to unilateral liberalization efforts;
• Section V summarizes the paper’s main findings and related policy implications,


and identifies potential follow-up research topics going forward.




5


II. Overview of Trade in Financial Services


Liberalization of Trade in Financial Services Vs. Financial Liberalization


In contrast to trade in goods, the main barriers to international trade in financial
services are “behind-the-border” domestic non-tariff measures (i.e. laws, regulations and
administrative procedures) that impede access to markets by, or take the form of
discriminatory treatment of, foreign financial service providers. As regards the domestic
presence of foreign service providers, examples of potential impediments include
differential taxation rates and unduly onerous prudential regulations (e.g. licensing
requirements), as well as restrictions on their entry and on foreign equity participation in
existing domestic financial institutions, restrictions on the location of branches and the
scope of operations, or on the value of transactions or assets1. Barriers to cross-border
trade in financial services include the prohibition for consumers to purchase financial
services abroad and on services being supplied remotely by non-established foreign
providers. The lifting of such barriers, which impede the ability of foreign financial
services providers to be placed on an equal competitive footing with domestic suppliers,
is what is typically understood by the liberalization of trade in financial services.


In addition to the direct barriers to international trade in financial services that are
usually explicitly discriminatory, there also exists a continuum of non-discriminatory
barriers whose adverse effects are typically implicit and unintentional. Such indirect
barriers include those related to the co-existence of diverse national laws and regulatory
standards and practices which – in the absence of regulatory harmonization or mutual
recognition – may raise the cost of regulatory compliance and of doing business for
foreign providers (home and host country regulatory burden). The latter measures are
often justified on the basis of the overarching objective of protecting the stability and
integrity of domestic financial systems, even though the development and adoption of
international standards and codes (‘soft laws’) by multilateral organizations2 have
facilitated the process of regulatory convergence with respect to the prudential oversight
of financial markets. Indeed, some commentators have argued that the gains arising from
trade liberalization in financial services greatly depend on the quality of domestic
regulation and of the broader institutional environment (e.g. disclosure and transparency
practices, rule of law etc.)3. As discussed later in the paper, there is some uncertainty as
to where discrimination ‘stops’, i.e. where the line is (or should be) drawn between trade-
distorting measures and domestic regulation. It should be noted that international trade
agreements (‘hard law’) have primarily focused to-date on market access-impeding and
discriminatory barriers to trade in financial services, although they have also contributed
to the reduction of non-discriminatory barriers via, for example, greater regulatory
transparency and commonly accepted dispute settlement mechanisms.


1 See Sauvé P. and Steinfatt K. (2001) for country-specific examples of barriers to financial services trade.
2 International standard-setters include, among others, the World Bank, the IMF, the Basel Committee on
Banking Supervision, the International Association of Insurance Supervisors, the IOSCO and the OECD.
3 See, for example, Claessens S. (July 2002).




6


An important conceptual distinction needs to be drawn between trade policy reform in
financial services and financial liberalization4. The purpose of the former is to increase
financial market access and remove discriminatory and other access-impeding barriers to
foreign competition. By contrast, the chief purpose of financial liberalization is to remove
distortions in domestic financial systems – for example, interest rate and capital account
controls, directed lending policies, restrictions on intra-sectoral activities, preferential
treatment of publicly-owned banks, entry barriers for new operators – that impede
competition and the allocation of capital to its most productive and profitable uses.
Financial liberalization can be further divided into domestic financial reform and capital
account opening, and there is a broad literature on its appropriate speed and sequencing5.
In that context, the liberalization of trade in financial services is a subset of the broader
financial liberalization agenda. A country may thus not directly discriminate against
foreign financial service providers while still operating a repressed financial system.
Conversely, a country may decide to engage in partial, pro-competitive regulatory reform
in its domestic financial market, but keep it closed to foreign competition.


In practice, however, there are typically strong overlaps between the two types of
policy reforms described above. Trade in financial services is often linked to capital
movements, notably in the context of the establishment of a commercial presence which
requires inward direct investment. Certain types of cross-border financial transactions
may also involve capital movements and hence require some measure of capital account
opening as an inherent part of the service provision6. In addition, countries often seek to
promote greater policy coherence by opening up domestic financial markets to foreign
competition in the context of broader financial reform efforts. Finally, it bears noting that
neither the liberalization of trade in financial services nor financial liberalization imply
the complete deregulation of the domestic financial system per se. Quite the contrary,
experience shows that stronger regulatory and supervisory frameworks are key
complements to market opening measures so as to ensure that consumers and depositors
are properly protected and that the integrity of the financial system and its ability to
discharge its critical economy-wide functions are properly preserved.


Multilateral Framework for Trade in Financial Services



The WTO’s General Agreement on Trade in Services (GATS) represents the only


legally binding framework of rules governing trade in services at the multilateral level7.
The Agreement consists of three core elements (see Table 1 below):

4 See Claessens S. and Glaessner T. (April 1998), and Claessens S. and Jansen M. (2000) for a
comprehensive discussion.
5 See, for example, Demirguc-Kunt A. and Detragiache E. (June 1998), Johnston B. (July 1998) and
Kaminsky G. and Schmukler S. (February 2003).
6 See OECD (March 2000) and Tamirisa N. et al. (February 2000) for a classification of financial service
transactions into those that are not accompanied by underlying capital movements (e.g. consulting,
advisory and information services), those that are inseparable from capital flows (e.g. cross-border
lending), and those that may involve a capital movement (e.g. asset management, insurance).
7 Strictly speaking, the OECD’s Code of Liberalization of Capital Movements (which also covers direct
investment and establishment) and Code of Liberalization of Invisible Operations (which covers services),




7


• The GATS framework, which spells out the Agreement’s substantive disciplines
• The schedules of commitments of WTO Members that describe the nature, extent


and timing of market opening undertakings, including any limitations or
exceptions thereto


• 12 Annexes, which include additional or clarifying rules on specific sectors,
including financial services.



The GATS specifically excludes any “services supplied in the exercise of


governmental authority”8 and defines trade in services – including financial services – as
consisting of four modes of supply:


• cross-border supply (mode 1), e.g. foreign providers supply a domestic market
remotely


• consumption abroad (mode 2), e.g. domestic consumers purchase financial
services abroad (e.g. while traveling abroad)


• commercial presence (mode 3), e.g. the physical establishment of a foreign
provider via a subsidiary, branch or representative office for purposes of selling
services in a host country market


• temporary presence of natural persons (mode 4), e.g. the temporary entry of
foreign individuals for purposes of selling financial services to host country
consumers or as key personnel working for a foreign-established firm in the host
country market (so-called intra-company transferees).



Even though commercial presence (mode 3) is considered to be the principal means


of financial services delivery, especially for retail customers where physical contact is
generally required9, the cross-border provision of services is becoming increasingly
important in view of increased worldwide travel and e-commerce developments. In fact,
the advent of e-finance has introduced additional complications to the above framework,
since it is not always clear whether the online provision of financial services by foreign
providers belongs to modes 1 or 210. By contrast, mode 4 is relatively less important in
financial services as it is severely constrained by receiving countries’ migration policies
and chiefly relates to highly-skilled experts or intra-company transferees in managerial
positions. It should also be noted that the above nationality-based definition of services
trade is significantly broader than the one used for balance of payments purposes, which
is based on the principle of residency; this difference arises primarily from the fact that
trade in services under GATS includes the movement of both capital and labor.



which have been in existence since the 1960’s, are earlier examples of binding legal instruments for
promoting progressive liberalization among OECD Member governments. However, they are not a treaty
or international agreement in the sense of international law, as is the case for WTO agreements.
8 The definition of governmental authority for financial services is described later in this section.
9 According to Harms P., Mattoo A. and Schuknecht L. (March 2003) who estimated the relative size of
different modes and sub-sectors in financial services based on US data, “establishment trade is three-and a
half times greater than cross-border trade for imports and more than twice as large for exports.”
10 Although there are no universally agreed upon criteria, some WTO Members have based the distinction
between modes 1 and 2 on whether there are one or two jurisdictions involved in the provision of a
financial service and whether the service was provided as a result of direct online, cross-border solicitation.




8


The GATS framework features a set of general obligations applicable to all services
sectors regardless of the level of specific commitments of individual WTO Members. The
most important ones are:


• most-favored-nation (MFN) treatment (Article II), which requires extending
liberalization measures in a sector to all WTO Members equally on the principle
of non-discrimination11


• transparency (Article III) with respect to the prompt publication, notification and
inquiries response by Members of relevant measures12 (and their changes) and
international agreements that affect trade in services covered by their GATS
commitments


An important exception to GATS principles is found in article XII of the GATS
concerning restrictions on trade in services commitments in order to safeguard the
balance of payments. The latter are allowed under the GATS so long as they are
proportional in scope, non-discriminatory, consistent with the IMF’s Articles of
Agreement and temporary in nature.


The GATS stipulates that Members undertake specific commitments in their
schedules on market access (i.e. elimination of quantitative or juridical barriers to entry;
Article XVI)) and national treatment (i.e. non-discrimination between domestic and
foreign providers; Article XVII)13. While the Agreement does not define market access, it
lists six types of restrictions that a Member cannot impose (unless inscribed in its
schedule): on the number of service suppliers, the value of service transactions or assets,
the number of operations or quantity of output, the number of natural persons supplying a
service, the type of legal entity, and the participation of foreign capital. By contrast, there
is no comparable typology for national treatment restrictions, so it is up to individual
Members to ensure that all potentially relevant measures are listed in sectors where
commitments are scheduled. Members may also schedule additional commitments under
Article XVIII, such as those regarding qualifications, standards or licensing matters.



Finally, with regards to institutional provisions, covered measures are subject to both


a consultation and a dispute settlement mechanism common to both goods and services
trade under the WTO. Members may use the latter to initiate an arbitration procedure to
enforce the (legally binding) commitments undertaken by another Member, which can
ultimately result in trade sanctions equal to the commercial loss arising from the
continued maintenance of a measure found in breach of the violating country’s
commitments.


The GATS contains specific provisions on financial services, which are included in
the Financial Services Annex (FSA). The FSA defines financial services as “any service

11 Permissible departures from MFN obligations include one-time exemptions (usually based on pre-
existing reciprocity provisions) taken upon entry into force of a country’s initial schedule of commitments,
economic integration agreements (to the extent that they do not result in a more restrictive market access
situation for services suppliers from countries outside such agreements) and prudential standards.
12 Such measures include laws, regulations, rules, procedures, decisions and administrative actions.
13 In contrast to the trade agreement on goods (GATT), national treatment is not a general obligation in the
GATS because it would have meant that granting market access would be the equivalent of establishing
free trade, while governments wanted to proceed more gradually in opening up their services markets.




9


of a financial nature offered by a financial service supplier14 of a Member. Financial
services include all insurance and insurance-related services, and all banking and other
financial services (excluding insurance)” (see Appendix I for a detailed description). The
Annex specifically excludes “(i) activities conducted by a central bank or monetary
authority or by any other public entity in pursuit of monetary or exchange rate policies;
(ii) activities forming part of a statutory system of social security or public retirement
plan; and (iii) other activities conducted by a public entity for the account or with the
guarantee or using the financial resources of the Government”15. This implies that
macroeconomic management and a potentially significant part of the financial sector (e.g.
development banks, mandatory pension funds that form part of the social security system
in many LCR countries etc.) are not subject to WTO disciplines.



Table 1: GATS Framework on Financial Services



GATS agreement (general provisions on services)



Modes of supply


• Cross-border supply
• Consumption abroad
• Commercial presence
• Temporary presence of natural persons



General obligations and disciplines


• Most-favored-nation (MFN) treatment
• Transparency
• Recognition of services suppliers
• Restrictions to safeguard the balance of payments



Specific commitments


• Market access
• National treatment
• Additional commitments



Consultation, dispute settlement and enforcement


Financial Services Annex (FSA)


Coverage and definition of financial services
Prudential carve-out
Financial services expertise in dispute settlement
Recognition of prudential measures


Schedules of Commitments


Hybrid list approach
Scheduling by sector/sub-sector and by mode of supply
Market access and national treatment limitations


Source: Adapted from Key S. (1997).

14 A financial service supplier is defined as “any natural or juridical person of a Member wishing to supply
or supplying financial services”, excluding public entities.
15 If a Member allows any of activities (ii) or (iii) to be conducted by its financial service suppliers in
competition with a public entity or a financial services supplier, “services” shall include these activities.




10



The Annex is also important because it includes a “prudential carve out” clause that


recognizes the right of WTO Members to introduce and maintain prudential measures
“including for the protection of investors, depositors, policy holders or persons to whom
a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and
stability of the financial system”. Such a right is not absolute under GATS, as such
measures are subject to dispute settlement if they are used as a disguised restriction to
trade or investment with a view to nullifying and/or impairing the scheduled
liberalization commitments of WTO Members16. However, the FSA provides no
definition or indicative list of prudential measures, affording domestic financial
regulators broad discretion in their choice of prudential conduct so long as measures are
not applied for protectionist purposes. It need be recalled that in its Preamble, the GATS
explicitly recognizes the right of member states, and especially of developing countries,
to regulate the supply of services within their territories in order to pursue national policy
objectives, as well as to conduct negotiations on the basis of progressive liberalization. In
fact, the GATS does not preclude any particular form of government involvement in the
domestic financial system, such as directed or preferential lending schemes, as long as it
is non-discriminatory in nature and is administered transparently and objectively.



Following protracted negotiations held after the Uruguay Round’s conclusion, a new


set of specific commitments on financial services was incorporated to the GATS in the 5th
Protocol of December 1997. Such commitments entered into force in March 199917. Over
100 WTO Members undertook legally binding commitments on market access and
national treatment in the FSA18. The specific commitments of WTO Members take two
forms – horizontal (i.e. applicable to all sectors in a schedule) and sector-specific – and
relate to any of the four modes of supply. Specific commitments range from full
liberalization (meaning that no limitations to market access and/or national treatment are
maintained in a particular sector/sub-sector or mode of supply) to full discretion to apply
new restrictive measures in the future; under GATS, the latter may take the form either of
no commitments or, in sectors or sub-sectors subject to specific commitments, to
“unbound commitments” affecting individual modes of supply (see Table 2 below).



GATS commitments are scheduled on the basis of a so-called “hybrid” list approach,


which combines elements of ‘positive’ or ‘bottom up’ listing (i.e. identifying the sectors
and/or modes of supply concerned) and ‘negative’ or ‘top down’ listing (i.e. identifying
the limitations and restrictions attached to specific commitments)19.







16 This prudential clause has not yet been tested in dispute settlement and its coverage is still uncertain,
especially since countries may have different perceptions on this issue for historical reasons. For example,
European countries with a universal banking tradition could argue that traditional line-of-business
restrictions (i.e. separation of banking, securities and insurance) cannot be justified on prudential grounds.
17 For a summary of this framework, see Kireyev A. (August 2002) and Tamirisa N. et al. (February 2000).
18 Within LCR, Brazil and Jamaica have not yet ratified the fifth protocol to the GATS, so their current
commitments are those dating back to the Uruguay Round.
19 See section III for a fuller description of scheduling techniques.




11


Table 2: Sample Schedule of Financial Services Commitments
Sector or sub-sector Limitations on market access Limitations on national treatment


Additional
commitments


I. HORIZONTAL COMMITMENTS


All sectors included in
this schedule


(4) Unbound, other than for
temporary presence, as intra-
corporate transferees, of essential
senior executives and specialists


(3) Foreign investors may
transfer their capital
abroad three years after
from the date of entry




II. SECTOR-SPECIFIC COMMITMENTS
FINANCIAL SERVICES
Banking and Other Financial Services (excl. Insurance)


Acceptance of deposits
and other repayable


funds from the public


(1) Unbound.
(2) None.
(3) Foreign equity participation


limited to 51 percent.
(4) Unbound, except as indicated


in horizontal section.


(1) Unbound.
(2) Unbound.
(3) None.
(4) Unbound, except as


indicated in
horizontal section.




Note: (1) – (4) above refers to limitations on liberalization commitments in the 4 modes of supply. “None”
and “unbound” refer to full and no liberalization commitment respectively for a specific mode.


In addition to the general and specific commitments undertaken in the GATS and the
FSA, a group of mostly developed WTO Members20 agreed to subscribe to a higher level
of commitments on trade in financial services by making use of the Understanding on
Commitments in Financial Services, an alternative ‘formula’ schedule that was developed
during the negotiations but remains voluntary in character. Members making use of the
Understanding opt for an alternative approach to scheduling commitments that aims to
achieve deeper liberalization across a wider menu of issues in financial services by
relying exclusively on a negative list approach. Some of the main provisions of the
Understanding are the following21:


• standstill obligation, i.e. Members cannot introduce any new non-conforming
measures that are incompatible with their liberalization commitments


• specific (and more liberal) market access commitments by mode of supply,
including for cross-border trade


• extended scope of market access commitments to include monopoly rights,
new financial services22, and financial services purchased by public entities


• extended scope of national treatment commitments to include access to
payment and clearing systems operated by public entities, to “normal” official
funding and refinancing (but not lender-of-last-resort) facilities, and to any
self-regulatory body, securities or futures exchange or market etc.


• a “best efforts” commitment by Members to “endeavor” to remove or limit
any adverse effects stemming from non-discriminatory measures (e.g. those



20 No LCR countries have yet signed on to the Understanding, which represents one of the most frequent
requests made by developed countries in the current round of multilateral trade negotiations.
21 See OECD (November 2003) for a detailed description.
22 This is defined as “a service of a financial nature, including services related to existing and new
products or the manner in which a product is delivered, that is not supplied by any financial service
supplier in the territory of a particular Member but which is supplied in the territory of another Member”.




12


related to differences in regulatory regimes) that might impede the ability of
other Members’ suppliers to operate, compete or enter the Member’s market.





GATS Commitments in Financial Services


In terms of the overall number of scheduled commitments, financial services ranks
second in importance in the GATS behind tourism23. Commitments tend to be of three
types when compared to Members’ regulatory situation prevailing at the time of the
agreement’s entry into force. Firstly, a few countries made use of the GATS to pre-
commit to future liberalization in order to lend credibility to and ‘lock in’ recent reform
measures, as well as to allow domestic firms to prepare for future competition. Secondly,
a large number of Members, particularly OECD Member countries, have bound the
regulatory status quo in their GATS schedules, consolidating the actual degree of
openness (or restrictiveness) prevailing at the time of the FSA’s entry into force24.
Finally, anecdotal evidence suggests that many Members, particularly developing
countries, opted to bind commitments below the regulatory status quo25. Of course, these
three types of commitments are not mutually exclusive and individual countries may have
pursued different approaches depending on the sub-sector and mode of supply.



Although binding commitments can be argued to help ‘lock in’ reforms and enhance


their credibility while also improving host country investment climates,26 a number of
reasons can be offered to explain the reluctance of some WTO Members to take on
binding commitments in financial services. These include macroeconomic and regulatory
weaknesses as well as strategic motivations (e.g. membership of preferential trade
groups). In addition, the fact that the FSA was completed after the end of the Uruguay
Round turned financial services into a single-sector negotiation and may have provided
incentives to developing countries with limited export interests in financial services to
limit policy bindings in order to use them as future negotiating chips.



With respect to market access and national treatment commitments in different modes


of supply, various studies have shown that commitments in modes 1 and 2 have been
relatively timid compared to those for mode 3, while developing countries have generally
made fewer overall commitments27. Compared to other regions, LCR countries were
among the most reluctant to open their financial services sectors and made relatively few
commitments. The latter were mostly focused on mode 3 (see Figure 1), but with market



23 See Marchetti J. (September 2004) for more details.
24 However, some countries – including Colombia, Honduras, Peru and Venezuela in LCR – maintained
MFN exemptions in their financial services schedules, which state that (additional) market access may be
granted on a reciprocal basis.
25 In those countries – including Brazil in LCR – where policy regimes could or had become more
restrictive compared to the time when foreign firms first entered, grandfathering provisions were used to
guarantee the privileges of incumbents while making below ‘status quo’ commitments on commercial
presence for new entrants.
26 This, for example, seems to have been the case for Argentina’s (extensive) financial services
commitments in the GATS – see Bouzas R. and Soltz H. (December 2005).
27 See Mattoo A. (September 1999) for an analysis of liberalization commitments in financial services.




13


access restrictions such as the maintenance of an economic needs test or limitations on
the juridical form of establishment. The lack of commitments in mode 1 (as well as in
mode 2 for some countries) predominantly relates to prudential concerns, i.e. the
reluctance of Members to take on legally binding commitments that might require
concomitant capital account opening measures (thereby introducing volatile capital
flows)28. Such reluctance may also reflect concerns over jurisdictional uncertainties that
could complicate regulatory control and financial supervision, although there may have
been some consumer protection concerns as well.


Figure 1: Composition of Financial System Assets (1995-2005)


0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


0.8


Mode 1 Mode 2 Mode 3


G
A


T
S


-
F


in
an


ci
al


S
er


vi
ce


s
C


om
m


it
m


en
t


Sc
or


es


South Asia LCR Sub-Saharan Africa
Middle East-North Africa East Asia-Pacific Eastern Europe-Central Asia
Western Europe-North America


Source: Adapted from Valckx N. (October 2002).
Note: These represent average market access commitments by regional groupings (unweighted by size of
country). See Valckx N. (October 2002) for a description of the methodology used to assign scores.


An analysis of liberalization commitments in financial services undertaken by
countries in the GATS should be viewed with caution for at least two reasons: (1)
commitments do not always reflect the actual degree of liberalization prevailing at that
time; (2) modes and sub-sectors differ substantially in size within and across countries,
which limits the usefulness of tables or liberalization indices that – without including any
weights of relative importance – compare the number of sub-sectors in which



28 GATS commitments do not directly oblige Members to open up their capital accounts. However, if a
Member undertakes a market access commitment for mode 1 and if the cross-border movement of capital is
an essential part of the service itself, then that Member is thereby committed to allow the relevant capital
flow; the same applies for mode 3 commitments, but only for related capital inflows. Members do not have
any obligations with respect to capital flows related to consumption abroad (mode 2). See Kono M. and
Schuknecht L. (November 1998) for empirical analysis in support of proceeding more cautiously with
mode 1 liberalization commitments in countries with weak financial systems.




14


commitments were made. In fact, the measurement of both trade in financial services and
of the actual level of restrictiveness remains an important on-going challenge29.



A new round of services negotiations began in January 2000 alongside those on


agriculture as mandated by the Uruguay Round’s built-in agenda. Both sets of
negotiations were subsequently woven into the Doha Development Agenda (DDA)
launched in November 2001. Some of the financial services-related issues under
discussion in the DDA include the clarification in the scope of the FSA’s prudential
carve-out clause and of distinctions across modes relating to the electronic delivery of
financial services, the expansion and strengthening of commitments on national treatment
and market access across modes, as well as improved regulatory transparency and
procedural fairness, particularly in matters of licensing30. Although the negotiations have
been suspended, a collective request in financial services coordinated by Canada and co-
sponsored by several countries31 was lodged in early 2006 and could become a focal
point going forward, assuming that negotiations resume (see Box 1 for a summary).


Box 1: Collective Request in Financial Services



• Definitions: Use the agreed definitions in the GATS Annex on Financial Services for scheduling
commitments.
• Mode 1: undertake commitments for marine, aviation and transport insurance; reinsurance;
insurance intermediation, insurance auxiliary services; financial advisory services and financial
information and data processing services.
• Mode 2: undertake commitments for marine, aviation and transport insurance; reinsurance;
insurance intermediation, insurance auxiliary services; and all non-insurance financial services
(sub-sectors v-xvi).
• Modes 1 and 2: there can be advantages of additional liberalization, especially where the
consuming agent is sophisticated, for example, an institutional consumer of securities services.
• Mode 3: for all financial services sectors, undertake commitments encompassing rights to
establish new and acquire existing companies, in the form of wholly-owned subsidiaries, joint
ventures and branches.
• Modes 1, 2 and 3: remove discrimination between domestic and foreign suppliers regarding
application of laws and regulations ("national treatment").
• Modes 1, 2 and 3: remove limitations such as monopolies, numerical quotas or economic needs
tests and mandatory cessions.
• Transparency in development and application of laws and regulations, transparent and speedy
licensing procedures, and other regulatory issues should be addressed in the negotiations.

Source: Coalition of Service Industries (http://www.uscsi.org/publications/papers/collective/financial.pdf)



29 Conventional trade statistics generally cover cross-border financial service transactions (mostly mode 1)
but do not adequately capture commercial presence (mode 3). In addition, countries use different sub-
sectoral classifications of financial services, such as the so-called W/120 classification based on the
provisional UN Central Product Classification (CPC), the FSA classification, or a national classification –
see World Trade Organization (December 1998) for a discussion.
30 See Sauvé P. and Steinfatt K. (2001), Dobson W. (August 2002), Key S. (2003) and Cornford A. (June
2004) for a discussion.
31 It bears noting that only one LCR country – Ecuador – ranks among demandeur countries, whereas three
countries from the region – Argentina, Brazil and Costa Rica – are targeted by this request.




15



III. Financial Services in LCR Trade Agreements

Overview of Preferential Trade Agreements in LCR



There are different types of preferential trade agreements based on their level of


economic integration, ranging from FTAs to custom unions and common markets. These
agreements all have in common the objective of reducing or eliminating most duties and
other barriers to trade and investment among Members. However, compared to FTAs,
Members to customs unions also adopt common external tariffs and more generally a
common trade policy vis-à-vis non-Members, while Members to common markets allow
for the free movement of all factors of production between them. The highest degree of
economic integration is found in economic unions that, in addition to a common trade
policy and the free movement of factors of production, aim for the unification of
economic policies and the adoption of a common currency among participating members.



Since the 1990s, the world economy has witnessed an unprecedented proliferation of


PTAs. The WTO expects the number of such agreements to soon reach 300 if all
negotiations currently underway are concluded; this compares to only 50 such PTAs
worldwide as recently as 199032. Although trade rules on services are more recent, WTO
notifications for services agreements have grown at a very fast pace. Almost every WTO
Member is party to at least one PTA, while some regions – including LCR – have been
particularly active in this regard. According to the Organization of American States’
(OAS) trade information database33, LCR countries have entered into 33 PTAs since
1994, primarily with trading partners within the Western Hemisphere, but also with the
European Union and increasingly with countries in the Asia-Pacific region.



The entry into force of the NAFTA between Mexico, the US and Canada in 1994 is


widely considered as a defining event in developing countries’ attempts to engage in
PTAs with a view to securing greater access to key markets and consolidating recent
domestic reforms. Two LCR countries in particular – Mexico and Chile – have been the
initial driving forces behind the proliferation of PTAs in the region over the last decade,
although other countries or sub-regions (e.g. Central America) have also recently joined
the fray – see Table 3 below for a chronological list of all recent PTAs in LCR. PTAs
concluded in the last decade have introduced important new features such as the
treatment of intellectual property rights as well as trade and investment in services
(including financial services), reflecting their rising importance in economic development
and world trade. However, the co-existence and proliferation of different PTA types has
led to concerns about an emerging “spaghetti bowl” that creates administrative
complexity among trading partners due to different and overlapping commitments and



32 See Crawford J. and Fiorentino R. (2005), the World Bank (2005), and Roy M., Marchetti J. and Hoe
Lim A. (September 2006) for a description of recent trends and potential drivers.
33 See http://www.sice.oas.org/tradee.asp




16


rules of origin. Such a proliferation carries the additional risk of potentially hampering
the development of the multilateral trading system34.



The proliferation of PTAs in recent years can be explained by political, strategic and


economic reasons that may differ depending on the level of development of participating
countries. In general, these agreements are considered relatively easier and faster to
negotiate, particularly in markets where geographic or cultural proximity matters, and
they may allow for progress in areas where multilateral reforms are less advanced35.



“North-South” PTAs, i.e. trade agreements (typically FTAs) between developing and


developed countries, had traditionally been based on unilateral preferential treatment
granted to the weakest trading partner(s), but have steadily given way to agreements that
grant advantages on a reciprocal basis. Economic benefits may arise from complementary
resource endowments, knowledge spillovers and foreign direct investment (FDI)
attraction. Apart from these benefits, political motivations for developed countries may
include security issues and the creation of incentives to arrest or reverse the flow of
illegal (unskilled) migration by raising standards of living in the lower income partner. In
addition, developed countries may view PTAs as a tool to expand and experiment – as
well as set a precedent – with new trade agenda items beyond what is currently feasible at
the multilateral level (e.g. labor rights, environmental standards, investment, and
competition policy). By contrast, for most developing countries, seeking entry in a PTA
with a larger and richer trading partner is mainly linked to securing more predictable and
greater access to key export markets (i.e. as an insurance instrument against possible
future policy reversals) and attracting FDI. A related objective is the possibility for PTAs
to help consolidate domestic regulatory reforms through credible external obligations.
The positive “signaling” properties of trade commitments (which include the WTO) are
typically used with a view to enhancing host countries’ investment climate.



“South-South” PTAs, i.e. trade agreements between developing countries, have long


aimed at supporting national development strategies (e.g. infant industries) and broader
political objectives, such as fostering better regional ties and increasing bargaining power
in trade negotiations vis-à-vis third countries. Such agreements are today viewed as
development tools to enhance competition domestically and better integrate participants
into regional or global production networks and supply chains. In contrast to North-South
agreements, South-South PTAs also often include arrangements designed to achieve a
higher level of economic (and potentially political) integration at a sub-regional level via
the establishment of customs unions and common markets. The four main South-South
PTAs in LCR are the Southern Cone Common Market (MERCOSUR, established in
1991), the Andean Community (CAN, established in 1969), the Caribbean Community
and Common Market (CARICOM, established in 1973) and the Central America
Common Market (CACM, originally established in 1960 and reinstated in 1991)36.



34 See Bhagwati J. and Panagariya A. (1997). The World Bank (2005) also reports that the average LCR
country belongs to eight different PTAs, which is the highest number among developing countries.
35 See Salazar-Xirinachs J.M. (October 2002) for a description of the “new regionalism” in LCR.
36 A separate project to establish the Free Trade Area of the Americas (FTAA), a hemisphere-wide free
trade zone, has stalled in recent years.




17


Table 3: Coverage and Treatment of Financial Services in LCR PTAs (as of mid-2006)
Trade Partners Date of Signature


Date of Entry into
Force Coverage of Financial Services (FS) FS Model


FREE TRADE AGREEMENTS
NAFTA (US-


Canada-Mexico) August 1992 1 January 1994 Specific FS chapter NAFTA


Mexico-Costa Rica April 5, 1994 January 1, 1995
No specific chapter on FS


Excluded from the Cross-Border Trade in
Services chapter




Group of Three
(Mexico- Colombia-


Venezuela*)
June 13, 1994 January 1, 1995 Specific FS chapter NAFTA


Mexico-Bolivia September 10, 1994 January 1, 1995 Specific FS chapter NAFTA


Chile-Canada December 6, 1996 July 5, 1997


No specific chapter on FS
Excluded from the Cross-Border Trade in


Services chapter;
Covered in the Investment chapter




Mexico-Nicaragua December 18, 1997 July 1, 1998 Specific FS chapter NAFTA


Central America-
Dominican Republic April 16, 1998


Costa Rica-DR: March 7,
2002; El Salvador-DR:


October 4, 2001;
Guatemala-DR: October 3,


2001; Honduras-DR:
December 19, 2001


No specific chapter on FS
Covered under the chapters on Investments and


Trade in Services
NAFTA


CARICOM37-
Dominican Republic August 22, 1998 Not yet implemented


No specific chapter on FS
Covered under the Trade on Services Annex NAFTA


Mexico-Chile October 1, 1998 August 1, 1999


No specific chapter on FS
Excluded from the Cross-Border Trade in


Services Chapter
Covered under the Investment Chapter




Central America-
Chile October 18, 1999


Costa Rica: February 15,
2002, El Salvador: June 3,


2002


No specific chapter on FS
Excluded from the Cross-Border Trade in


Services chapter


Mexico-Israel April 10, 2000 July 1, 2000 Services not covered by the FTA
Mexico-Northern


Triangle
(El Salvador-


Honduras-
Guatemala)


June 20, 2000


El Salvador and Guatemala:
March 15, 2001; Honduras:


June 1, 2001; Mexico:
March 14, 2001


Specific FS chapter NAFTA


Mexico-European
Community October 2000 March 2001 Specific FS chapter


GATS (+
Understanding and


NAFTA)
Mexico-EFTA38


(European Free Trade
Association)


November 2000
Mexico, Norway and


Switzerland: July 1, 2001;
Iceland: October 1, 2001


Specific FS section
GATS (+


Understanding and
NAFTA)


Canada-Costa Rica April 23, 2001 November 1 2002 FS excluded, but obligation to develop provision for trade in services and investment in the future


Panama-El Salvador March 2002 April 2003 Specific FS chapter NAFTA


Chile-EU November 2002 February 2003 Specific FS chapter GATS (+ Understanding)


Chile-Rep. of Korea February 15, 2003 April 1, 2004


No specific chapter on FS
Excluded from the Cross-Border Trade in


Services chapter;
Covered under the Investment chapter




Chile-US June 6, 2003 January 1, 2004 Specific FS chapter


NAFTA (+
Understanding and


FSA)



37 CARICOM Member countries are Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica,
Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Lucia, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname, and Trinidad and Tobago.
38 EFTA Member countries are Iceland, Norway, Switzerland and Lichtenstein.




18


Chile-EFTA June 26, 2003 December 1, 2004 Not covered by the chapters on Investments and Services


Panama-Taiwan
(China) August 21, 2003 January 1, 2004 Specific FS chapter NAFTA


Mexico-Uruguay November 2003 July 15, 2004


No specific chapter on FS
Excluded from the Cross-Border Trade in


Services chapter; Covered under the chapter on
Investments




CARICOM-Costa
Rica March 9, 2004


Barbados, Suriname,
Trinidad and Tobago: 2006 Services not covered by the FTA


DR-CAFTA
(US-Costa Rica- El


Salvador-Guatemala-
Nicaragua-


Dominican Republic)


August 5, 2004


El Salvador: December
2004; Honduras and


Guatemala: March 2005;
Nicaragua: October 2005;


US: July 2005


Specific FS chapter
NAFTA (+


Understanding and
FSA)


Mexico-Japan September 17, 2004 April 1, 2005 Incorporates GATS Annex on FS GATS


Chile-New Zealand-
Singapore-Brunei 2005 Not yet implemented


Obligation to negotiate a FS chapter 2 years after
entry into force of the agreement


Guatemala-Taiwan
(China)


September 22,
2005 July 1, 2006


No specific chapter on FS; excluded from the
Cross-Border Trade in Services and Investment


chapters


Chile-Panama 2006 Not yet implemented FS may be incorporated 2 years after entry into force of the agreement


Chile-China 2006 Not yet implemented Services not covered by the agreement
Panama-Singapore 2006 Not yet implemented Specific FS chapter NAFTA
Nicaragua-Taiwan 2006 Not yet implemented N/A


Peru-USA April 2006 Not yet implemented Specific FS chapter
NAFTA (+


Understanding and
FSA)


Chile-Peru August 22, 2006 Not yet implemented


No specific chapter on FS; excluded from the
Cross-Border Trade in Services and Investment
chapters; obligation to negotiate a FS chapter 1


year after entry into force of the agreement




Colombia-USA Not yet signed Not yet implemented Specific FS chapter
NAFTA (+


Understanding and
FSA)


CUSTOMS UNIONS AND COMMON MARKETS
MERCOSUR’s


Protocol of
Montevideo


(Argentina, Brazil,
Paraguay, Uruguay,


Venezuela*)


December 17,
1997 7 December 2005


Protocol of Montevideo covers services generally
(Annex on FS includes only specific


commitments)
GATS


CAN’s
Decision 439


(Bolivia Colombia,
Peru, Ecuador,
Venezuela*)


December 1997 Not yet implemented Decision 439 covers services generally NAFTA


CARICOM’s
Protocol II July 1998 Not yet implemented


Protocol II covers services generally; drafting of
a specific FS chapter in progress


CACM’s
Treaty on Investment
and Trade in Services


(El Salvador,
Guatemala,
Honduras,
Nicaragua)


March 2002 Not yet implemented Specific FS chapter in Treaty on Investment and Trade in Services NAFTA


Source: Own analysis, OAS SICE database.
Note: The Table only includes Customs Unions/Common Markets and post-NAFTA FTAs up to mid-2006;
non-reciprocal and partial scope agreements are excluded. The dates of signature and implementation for
Customs Unions/Common Markets refer to the financial services-related aspects of the relevant protocols.
The Central America-Panama FTA (2002) has not been included since only the normative part of the trade
agreement has been concluded to date. N/A means that the trade agreement is not currently available.
* Venezuela notified its intention to withdraw from the Andean Community and the G3 FTA and, as of July
4, 2006, has acceded to MERCOSUR.




19


Treatment of Financial Services

Coverage in PTAs



Compared to most other service sectors subject to the trade disciplines of PTAs,


financial services are typically governed by provisions included in a separate, self-
contained chapter. Strictly speaking, however, this chapter does not always fully capture
all domestic financial system activities, such as:


• foreign investment in domestic non-financial securities
• activities of non-regulated financial institutions (only NAFTA-type agreements)
• provisions on payments and capital movements
• elements of a country’s ‘financial infrastructure’ (e.g. accounting services) and of


financial institutions’ functions (e.g. data processing, telecoms, legal and taxation
services).


However, for analytical purposes, the paper assumes that the financial services chapter is
the principal vehicle for influencing the operations of the domestic financial system.



The coverage of financial services by PTAs in LCR has tended to follow 3 main


approaches (see Table 3 for a detailed description):
• no coverage because of the specific exclusion of services in general, or of


financial services in particular, from the scope of a particular trade agreement
(e.g. CARICOM-Costa Rica FTA, Chile-EFTA FTA)39


• direct coverage via the introduction in the agreement of dedicated provisions in a
separate chapter or annex dealing exclusively with financial services, which
modifies or complements core general provisions in order to account for the
special characteristics of the financial services sector (e.g. NAFTA)40


• indirect coverage via provisions of a more generic character covering services
and/or investments generally that partly apply to financial services as well (e.g.
Mexico-Uruguay FTA, Chile-Rep. of Korea FTA).



PTAs that do not feature a specific chapter on financial services can nonetheless


contain rules and disciplines that are indirectly applicable. First, financial services can be
covered by sector-specific disciplines of a very general nature within an FTA’s chapters
on services and/or investment. Second, in some FTAs (e.g. Dominican Republic-
CARICOM FTA, Central America-Dominican Republic FTA) as well as in
MERCOSUR, the disciplines developed for services generally apply to financial services
without any degree of sectoral specificity. Reference to financial services is only found in
language exempting the application of general principles for purposes of regulatory
carve-outs for prudential measures, balance of payments or exchange control reasons etc.



39 Some of these FTAs include an obligation to negotiate a financial services chapter some time after the
entry into force of the agreement.
40 A variant of this approach can be found in the Mexico-Japan FTA, which deals with financial services by
incorporating the GATS Annex on Financial Services. By doing so, parties to the agreement do not
undertake any additional commitments on financial services among themselves from what they have
already committed at the multilateral level, and do not make available the dispute settlement mechanism of
the FTA to disputes related to GATS commitments between the parties.




20


Figure 2: ‘Map’ of Financial Services-Related Trade Commitments in LCR (mid-2006)




























Source: Own analysis, SICE database.
Note: Lines indicate the existence of a financial services chapter/Annex in a PTA between the relevant countries (dashed lines indicate that the agreement has
not yet been ratified or implemented), while the ovals indicate the presence of a trade agreement for the creation of a common market or customs union.


MEXICO


VENEZUELA
(2006)


USA


CHILE


COLOMBIA


CANADA


EC


BOLIVIA


PERU


COSTA RICA


DOM. REP.


EL SALVADOR


GUATEMALA


HONDURAS


PARAGUAY


URUGUAY


ARGENTINA


BRAZIL


ECUADOR


NICARAGUA


EFTA


PANAMA


TAIWAN
(CHINA)


JAPAN


G3


DR-CAFTA


MERCOSUR


ANDEAN
COMMUNITY


(CAN)


Mexico –
Northern


Triangle


CARICOM
countries


CACM


SINGAPORE


NAFTA


VENEZUELA
(prior to 2006)




21


The proliferation of PTAs in LCR, as well as their explicit coverage of financial
services in recent years, is leading to the emergence of an increasingly complicated
‘commitments map’ of financial services (see Figure 2) akin to the aforementioned
regional “spaghetti bowl” of PTAs. However, as Roy M., Marchetti J. and Hoe Lim A.
(September 2006) note, concerns about complexity in services agreements do not relate
as much to rules of origin as to the differing market access granted under various PTAs.



In general, the use of one type of coverage over another can be seen as relating to the


importance given to financial services by participating countries. As can be seen in Table
3, North-South FTAs primarily tend to cover financial services directly – in fact, virtually
all trade agreements involving the US and the EU have developed financial services
chapters. This is a strong indication of the importance of ‘offensive’ interests by a trading
partner’s financial services industry41 that, coupled with potentially strong (and
asymmetric) bargaining power, can force these services to be explicitly and
comprehensively covered in a FTA. This is also confirmed by the fact that – with the
exception of Central American countries42 – most foreign bank assets in LCR countries
belong to banks that are headquartered in a developed country (typically the US, Canada
or Europe), as can be seen in Figure 4 below43; a similar picture would emerge if this
exercise was undertaken for foreign insurance companies.



The NAFTA was the first FTA by a LCR country that included trade in financial


services within its scope and devoted a specific self-contained chapter to such trade.
Subsequently, Mexico has been a key player in incorporating financial services in its
preferential trade agreements; of the twelve PTAs (all are FTAs) entered into by Mexico,
seven contain a financial services chapter. However, it is worth noting that the majority
of these agreements date back to the immediate post-NAFTA period, i.e. before Mexico’s
domestic financial services industry – which was significantly weakened by the 1995
tequila crisis – was (to a large extent) acquired by foreign investors.



Panama, which is an offshore financial center, is the only other LCR country that has


included a financial services chapter in its South-South agreements. This is not
surprising: as can be seen from Figure 3 below, most LCR countries are net importers of
financial services (at least in mode 1)44, have few – if any – perceived ‘offensive’
interests linked to a “demandeur” or domestic constituency, and there is therefore limited
scope for – or interest in – reciprocal exchanges of concessions in the sector.



41 Establishing a framework of principles for financial services trade and achieving national treatment and
greater market access for US financial institutions in key markets has been a goal of US trade policy since
the early 1990s – see Wagner C. (Winter 1999). This is corroborated by data from the Bureau of Economic
Analysis (http://www.bea.gov/bea/di/1001serv/intlserv.htm) showing that the US has a trade surplus with
Latin American countries in insurance and other financial services.
42 This ‘contrarian’ trend in Central America is likely to change going forward as a result of the recent
purchase of some of the main regional banking groups by HSBC and Citigroup.
43 Although not shown in this paper, an exercise using indices of revealed comparative advantage á-la-
Balassa yielded similar results for most LCR countries.
44 As previously mentioned, balance of payments data is insufficient to adequately capture the size and
direction of financial services trade, particularly for mode 3. A crude measure for the latter can be derived
from net financial services FDI or the market share of foreign players in different financial sub-sectors.




22


Figure 3: Financial Services Trade Balance for Selected LCR Countries (1997-2004)


-900


-700


-500


-300


-100


100


300


1997 1998 1999 2000 2001 2002 2003 2004


U
S$


M
ill


io
n


Argentina Brazil Chile Colombia Costa Rica Jamaica Panama Uruguay
Source: Own analysis based on the IMF’s Balance of Payments Statistics (2005).



Figure 4: Foreign Bank Penetration in Selected LCR Countries


Venezuela


Uruguay


Trinidad
Peru


Paraguay


Panama


Nicaragua


Mexico


Jamaica


El Salvador


Ecuador


Dom. Rep.


Costa Rica


Colombia


Chile
Brazil


Bolivia


Barbados


Argentina
Antigua


Honduras


0.00


0.10


0.20


0.30


0.40


0.50


0.60


0.70


0.80


0.90


1.00


0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00


Foreign Bank Assets as % of Total Bank Assets


So
u


th
-o


w
n


ed
B


an
ks


a
s


%
o


f
F


or
ei


gn
B


an
k


A
ss


et
s



Source: Own analysis based on Van Horen N. (May 2006).
Note: A foreign bank is defined to have at least 50 percent foreign ownership. Figures reported represent
averages over 2000-2004 in each country. South-owned banks are foreign banks headquartered in a
developing country.




23



Liberalizing trade in services (including financial services) has also been of concern


within sub-regional trading blocks, but progress has been timid. CACM is the only block
that has developed specific rules and disciplines for financial services via a financial
services chapter in its 2002 Treaty on Investment and Trade in Services, although it has
to-date only concluded the normative part of the text. Members of the CAN adopted
Decision 439 (“General Framework of Principles and Rules for the Liberalization of
Trade in Services”) in 1997, which states the objective of achieving a market with “freely
circulating services” and sets forth the modalities to be followed in pursuing
liberalization. The original 2005 deadline for attaining sub-regional services trade
liberalization was postponed such that the current deadline is September 2007, albeit
without Venezuela. CARICOM adopted Protocol II on “Establishment, Services, and
Capital Movement” in 1998 with the objective of achieving the complete elimination of
restrictions to the movement of goods, services, people and capital within the sub-region;
the Caribbean Single Market and Economy (CSME) initiative is supportive of these
objectives. Both CARICOM and CAN members are currently developing specific text on
market opening in financial services.



MERCOSUR member countries adopted the Protocol of Montevideo on Trade in


Services in 1997, with the objective of achieving full liberalization of trade in services
and an open regional market for services through periodic rounds of negotiations. Six
such rounds have already taken place45. Uruguay, Argentina and Brazil have so far
ratified the Protocol, which entered into force in December 2005. However, the lists of
binding specific commitments for all three countries are relatively limited since they date
back to the late 1990s, either as commitments included at the time of the Protocol’s
adoption (Argentina and Uruguay) or in the first round of negotiations (Brazil).

Competing Liberalization Models (NAFTA versus GATS)


PTAs that have developed disciplines on services in general (including financial
services) have traditionally followed two ‘architectural’ models: one based on the GATS
and the other based on the NAFTA. As previously mentioned, the liberalization of
financial services under the GATS is based on a hybrid list approach. By contrast,
NAFTA-type PTAs use a negative-list or top-down approach in which trade (cross-
border and investment) in financial services is assumed to be free from discriminatory
treatment except for those non-conforming measures that are explicitly included in
annexes containing reservations. This approach obliges countries to list all non-
conforming measures prior to an agreement’s entry into force (or subject to mutually
agreed longer timeframes in some instances), otherwise they are deemed to be fully and
automatically liberalized (a so-called “list it or lose it” approach).



The choice of modality used to negotiate and schedule liberalization commitments


can be an important contributor to the actual level and quality of liberalization attained.
Although both the negative and hybrid list approaches can achieve the same level of
liberalization, the former is considered in theory to be more conducive to liberalization as

45 See Gary G. (summer 2004) for more details.




24


it introduces a strong element of regulatory transparency and a potentially higher level of
commitments to the extent that it typically locks in the regulatory status quo, except in
those sectors where Members are explicitly allowed to retain the power to introduce new
non-conforming measures. The detailed inventories of non-conforming measures that are
appended to PTAs following a negative list approach, while technically more onerous to
prepare, allow foreign investors and trade negotiators alike to obtain a comprehensive
picture of a country’s regulatory landscape46. By contrast, only the measures that apply to
the sectors, sub-sectors and modes of supply entered in a country’s schedule are listed
under the hybrid approach, which often differ from the regulatory status quo prevailing at
the time that the commitment is scheduled (so-called “status-quo minus” commitments).



While neither of the two approaches above inhibits the ability of host countries to


preserve “policy space”, the hybrid approach has the advantage of affording greater
latitude in determining the overall level of commitments and related regulatory
conditions which, as noted above, might differ from actual practice, allegedly making it
more flexible or “development-friendly” than the negative list approach47.



In terms of scope and coverage, the approaches used under NAFTA- and GATS-type


PTAs differ. GATS-type agreements cover the supply of financial services through the
aforementioned four modes of supply, whereas NAFTA-type agreements feature separate
chapters dealing with cross-border trade in services (modes 1 and 2 of GATS),
investment (mode 3) and the temporary entry of business people (mode 4), the latter two
being horizontal in character and applying to all subject areas covered by the PTA.



An important distinction in NAFTA-type agreements is that between regulated


financial institutions that are covered by the financial services chapter, and financial
services providers (which might include non-regulated financial institutions) that are
subject to the investment chapter of such agreements. This implies different standards of
treatment and protection for financial services providers in different countries depending
on whether the country regulates their activities or not, a potentially important
consideration for certain lending activities that can take place outside a bank (e.g.
factoring, leasing, consumer financing). Such a distinction, and the risk of differentiated
rule-making, does not arise under GATS-type agreements.



As can be seen from Table 3, the vast majority of PTAs with financial services


chapters that were negotiated by LCR countries have followed the NAFTA model. This is
partly explained by the role played by Mexico in using the NAFTA template in its own
subsequent PTAs. In its FTAs with the Group of Three, Bolivia, Nicaragua, and the



46 This is not always the case: certain negative-list FTAs in LCR during the 1990s have not developed
inventories of reservations but, given the existence of standstill clauses, commit to the actual liberalization
level; the development of lists in such cases becomes primarily a matter of transparency. In addition, the
superior transparency properties of negative listing and the ability of PTAs adopting such a negotiating
modality to generate (at least) status quo commitments can be undermined by sweeping reservations (for
example, of all sub-national measures) or by allowing PTA parties to maintain the right to introduce new
non-conforming measures in some sub-sectors. See also Marconini M. (May 2006) for a refutation of the
commonly-held view that the NAFTA approach to liberalization is more ambitious than the GATS.
47 See Sauvé P. (forthcoming) for more details.




25


Northern Triangle (El Salvador, Honduras and Guatemala), Mexico included financial
services chapters that were almost identical to the rules and disciplines found under
NAFTA. These agreements all opt for the negative list approach to scheduling
commitments in financial services, with lists of reservations included in separate
Annexes. Because of the experience acquired in negotiating this type of FTA and the
influence of the US, other LCR countries have developed templates similar to NAFTA in
their own FTAs. Panama, for instance, used the NAFTA template in negotiating its
FTAs with Taiwan, Singapore and El Salvador.



Illustrating the iterative, learning-by-doing, interaction between regional and


multilateral negotiations in services, recent agreements between the EU and Mexico and
the EU and Chile, as well as agreements negotiated recently by the US, have introduced
some innovations to the traditional NAFTA and GATS templates48. FTAs concluded by
the EU with Mexico and Chile mix in elements of the GATS (i.e. positive-list approach),
NAFTA (i.e. provisions on the right of establishment and cross-border trade, standstill
obligation for the EU-Mexico FTA), and of the GATS Understanding on Commitments
in Financial Services (i.e. provisions on new financial services and on data processing).
In the case of FTAs negotiated with the US, the relevant NAFTA chapter template still
serves as the basis for the treatment of financial services, but provisions from the GATS
were also incorporated49.



In the case of MERCOSUR, the Montevideo Protocol is modeled after the GATS in


following a positive list approach with respect to national treatment and market access,
and Members undertake specific commitments in national schedules that are found in the
Protocol’s Annex on Financial Services. New national schedules of commitments in
services, including financial services, were adopted in July 2006 by Members but have
not yet entered into force. In addition, MERCOSUR Members agreed in 2001 to a
transparency exercise consisting of the listing of all existing restrictions in services trade
with a view to their progressive removal50; this transparency exercise is complemented by
a “status quo” provision prohibiting the adoption of new restrictions. However, little
progress has been achieved to-date in listing these restrictions.



In the Andean Community, Decision 439 adopts the NAFTA’s negative list approach.


The Andean liberalization process is also based on the adoption of country inventories of
non-conforming measures with regard to the market access, MFN and national treatment
principles (Article 14 of Decision 439). Once inventories are adopted, Decision 439
requires CAN Members to progressively eliminate listed measures through annual
negotiations coordinated by the General Secretariat. The Andean Community
Commission adopted Decision 510 (“Adoption of the Inventory of Measures Restricting



48 See Contreras P. (2005) for more details.
49 Examples include the adoption of a positive-list approach for the cross-border supply of financial
services, the treatment of potentially sensitive information, as well as the introduction of a binding – as
opposed to “best endeavors” as in NAFTA – market access provision listing the types of restrictive
measures that Parties cannot adopt or maintain with regard to investors or providers of another Party.
50 See Stephenson S. (2002) for more details.




26


Trade in Services”) on October 31, 2001, and the lists of member countries were made
publicly available.



Protocol II of CARICOM does not establish a specific approach to services


liberalization, but it mandates the elaboration and exchange of national inventories of
measures affecting trade in services. Listed restrictions pertaining to measures impeding
the provision of services, the movement of capital and the right of establishment are to be
progressively eliminated through a program to be established upon entry into force of the
Protocol. CARICOM Members’ inventories were completed in 2002. The Protocol also
contains a “status quo” or standstill provision, prohibiting Members from adopting new
measures restricting the provision of services by CARICOM nationals.



Finally, with respect to the CACM, the Financial Services Chapter of the Treaty on


Investment and Trade in Services is modeled on NAFTA and is very similar to that
agreement’s financial services chapter in terms of coverage.



Financial Services-Related Rules and Disciplines



This sub-section provides a general overview of some of the main rules and


disciplines applicable to financial services in LCR PTAs, but does not enter into the
specificities of each agreement (see the following section for a detailed analysis of the
financial services liberalization commitments found in specific trade agreements).



The rules and disciplines contained in PTAs with regards to financial services have


two main objectives: (1) to liberalize trade in financial services through the removal of
discriminatory and market access-impeding measures affecting foreign financial services
suppliers; (2) to promote better regulatory practices (e.g. on transparency),51 while also
allowing countries to regulate their financial services markets on prudential grounds. In
particular, trade liberalization under the different PTAs entered into by LCR countries is
based on the non-discriminatory principles of MFN and national treatment, on granting
foreign financial services suppliers the right to provide financial services through
investment and cross-border trade, and on the elimination of market access barriers.



National treatment: All PTAs include a provision on national treatment requiring that


parties to the agreement grant to financial services and financial services suppliers from
another party treatment no less favorable than that accorded to like financial services and
financial services suppliers of national origin. The national treatment provision applies to
both cross-border trade and investment in financial services, and is either of general
application (as in NAFTA-type agreements) or only for scheduled sectors, sub-sectors
and modes of supply (as in GATS-type agreements). The obligation does not require that
measures applicable to foreign and national suppliers be identical – rather, the focus is on
the effective results of the treatment (i.e. de facto rather than de jure national treatment).
NAFTA and NAFTA-type agreements foresee that host country measures, whether

51 Marconini M. (May 2006) defines four main aspects of domestic regulation in PTAs: transparency
(contact points, publications, notifications etc.), governance (tribunals, prior comments, reviews and
appeals, authorization etc.), requirements and recognition.




27


providing different or identical treatment, must offer “equal competitive opportunities” so
that foreign services or service providers are not placed at a competitive disadvantage
relative to domestic services and services suppliers deemed to be in like circumstances.



MFN: The MFN obligation is included in most of the PTAs entered into by LCR


countries and is of general application under both NAFTA-type and GATS-type
agreements. It requires that parties to the agreement grant immediately and
unconditionally to financial service suppliers from another party the most favorable
treatment accorded to any of their trading partners. Since national treatment and MFN are
of general application in NAFTA-type agreements, the better of the two treatments needs
to be granted to financial services and service suppliers from the other party. The MFN
provision in most NAFTA-type agreements also guarantees that any additional advantage
flowing from an agreement subsequently entered into by a Member with a third country
is fully and automatically extended to all other Members.



Market access: Market access provisions refer to the conditions under which a foreign


financial services supplier is allowed to enter and operate within a domestic market, and
typically list a set of specific measures that parties cannot maintain or adopt without
reserving them. Under GATS-type agreements, countries undertake specific market
access commitments in relation to the four modes of supply. By contrast, NAFTA-type
agreements traditionally often did not contain a provision on market access per se, but
included a general provision on the right of establishment applicable to cross-border trade
and investment, together with disciplines on non-discriminatory quantitative restrictions
as well as the right to non-establishment (local presence) meant to encourage the cross-
border supply of services. However, more recent agreements entered into by the US
include a market access provision applicable to trade and investment in financial services
along GATS lines.



In NAFTA-type agreements, the right of establishment provision grants investors of a


party the right to establish a financial institution in the territory of another party. Such a
right is normally supplemented with the ability for investors to choose the juridical form
of establishment that best serves their needs, subject to reservations. The cross-border
trade provision states that parties should allow the supply of financial services and permit
persons located in their territory to purchase financial services from suppliers located in
the territory of another party, but does not automatically allow such suppliers to do
business, carry on commercial operations, solicit, market or advertise their activities. All
measures in place that do not conform to the rules on the right of establishment and cross-
border trade need to be listed in Annexes if Parties wish to maintain them after a PTA’s
entry into force.



NAFTA-type agreements – in common with the GATS Understanding on


Commitments in Financial Services – sometimes include a “standstill” rule on existing
non-conforming measures, which prohibits parties from adopting any law or regulation
that would increase the level of non-conformity of its listed measures. The importance of
the standstill relates to the depth of commitments undertaken by parties as it involves
‘freezing’ the existing regulatory regime by undertaking a commitment not to make




28


measures more non-conforming in the future. The existence of a standstill provision may
have motivated countries in recent PTAs to bind their commitments at the level of the
regulatory status quo. In addition, these agreements typically go a step further than
standstill by adding a “ratcheting” clause under which, when a Party unilaterally amends
a listed non-conforming measure, it automatically locks in the new liberalization and is
prohibited from ‘backsliding’ towards the original non-conforming measure.



New financial services: PTAs contain language requiring Parties to permit financial


services suppliers to offer new financial services of a type similar to services allowed for
national suppliers under domestic law. The purpose of this provision is to allow
innovative products introduced by financial institutions in their countries, and approved
by their home country authorities, to be introduced and sold abroad. However, host
countries may, on prudential grounds, refuse to allow a particular service or a particular
type of entity to provide any “new financial services” in its territory.



Transparency: All trade agreements entered into by LCR countries contain general


disciplines on transparency requiring the prompt notification or publication of measures
affecting trade and investment in the sector. Transparency provisions also require that
the authorization application process be transparent and not unduly burdensome. In
addition, more specific and detailed disciplines are also developed in financial services
chapters, such as the obligation to notify other parties of measures of general application
that a Party proposes to adopt (under NAFTA-type agreements); some agreements extend
such a prior notification obligation to “interested persons” with an opportunity for
comments (e.g. Chile-US FTA). Some financial services chapters also include the
obligation to inform applicants of the decision concerning the application within a fixed
period of time (for example, within 120 days in the case of NAFTA) and to provide them
with information concerning the status of their application.



Recognition: Several PTAs contain provisions relating to the harmonization of


standards applicable to financial activities and the setting up of arrangements designed to
encourage mutual recognition of licensing and prudential standards. Indeed, NAFTA-
type agreements consider the possibility for Parties to recognize prudential measures
adopted by another party or by a non-Party. As in the GATS, any such mutual
recognition can be extended on a preferential basis, i.e. it is an accepted derogation from
MFN treatment. PTAs entered into with the EU require parties to “endeavor” to
implement and apply non-binding international standards for regulation and supervision
in the financial services sector and the fight against money laundering. For example, the
EU-Mexico FTA indicates that Parties should implement international standards set by
the Basle Committee, the IAIS, and IOSCO.



Prudential safeguards: PTAs covering financial services typically feature provisions


securing the right of governments to pursue domestic regulatory and macroeconomic
policies. The prudential carve-out contained in these chapters recognizes the right of
countries to adopt or maintain prudential measures for: (1) the protection of investors,
depositors, financial market participants, policy-holders, policy-claimants, or persons to
whom a fiduciary duty is owed by a financial service supplier; (2) the maintenance of the




29


safety, soundness, integrity or financial responsibility of financial service suppliers; (3)
ensuring the integrity and stability of a Party's financial system. As with the GATS,
prudential measures remain subject to dispute settlement under PTAs.



In terms of macroeconomic policies, another common feature of PTAs is the


introduction of a provision guaranteeing the rights of countries to take actions in order to
carry out non-discriminatory monetary, credit and exchange rate policies. Moreover, as
under the GATS, activities or services forming part of a statutory system of social
security or public retirement plan, as well as activities conducted by a public entity for
the account or with the guarantee or using the financial resources of the Government (e.g.
an export credit agency), are typically excluded from the scope of the financial services
chapter.



Capital flows: PTAs incorporate provisions requiring governments to allow transfers


of profits, interest and other payments associated with an investment. GATS-type
agreements also require governments to allow capital flows when undertaking a
commitment, but only to the extent that the movement of capital is an essential part of the
service itself. Moreover, most agreements allow governments to impose restrictions on
current or capital transactions in the event of serious balance-of-payment and external
financial difficulties, or the threat thereof. In NAFTA-type agreements, parties may
prevent or limit transfers through the equitable, non-discriminatory and good faith
application of measures relating to the maintenance, safety, soundness, integrity or
financial responsibility of financial institutions or cross-border financial service
providers. However, the broad definition of investment adopted in recent agreements,
which has tended to include both FDI and short-term portfolio flows, has led to some
friction when negotiating provisions on the use of pre-existing measures for ‘speculative’
capital flows52.



Denial of benefits: Provisions on denial of benefits – also known as rules of origin –


allow parties to a PTA to deny the benefits of the agreement to a financial services
supplier that is not owned or controlled by nationals of the other party. These provisions
can be important because their restrictiveness helps determine the extent of preferential
treatment entailed in market opening commitments undertaken by the parties53. While the
WTO framework defines service suppliers as a legal entity under majority ownership and
effective control, denial of benefits provisions in NAFTA and NAFTA-type agreements
(usually ‘imported’ into the financial services chapter from the investment chapter)
establish a double criterion of “domestic ownership or control” and “substantial business
activities or operations”. This strengthens the preferential nature of the commitments
made by preventing the establishment of ‘shell’ companies in the territory of a party by
suppliers from third countries to take advantage of benefits arising from the agreement.



52 For example, in the case of the US-Chile FTA, the two parties agreed in an Annex that measures adopted
by Chile (such as applying a restriction on payments and transfers) could be subject to dispute settlement
by US investors. Different types of claims were identified in order to distinguish between short-term and
longer-term capital flows, with restrictions on the latter being more penalizing for Chile.
53 See Sauvé P. and Beviglia-Zampetti A. (2006), as well as Fink C. and Nikomborirak D. (forthcoming),
for an analysis of rules of origin in services.




30



Dispute settlement: All PTAs include provisions submitting disputes arising from the


agreement to arbitration thereby allowing for an increased degree of legal certainty for
investors. An important feature of PTAs, also found under the FSA, relates to the
obligation that panelists appointed to dispute panels have the necessary expertise relevant
to the specific financial service under dispute, as well as expertise in financial services
law or practice. Moreover, NAFTA-type agreements tend to include both investor-to-
state and state-to-state dispute settlement mechanisms in financial services54, and require
that countries establish a roster of financial services experts that are willing to serve as
panelists, some of whom may be non-Party nationals.



The application of trade policy disciplines in financial services can facilitate better


regulatory practices (e.g. transparency) and constrain the arbitrary abuse of ‘policy space’
by the authorities (e.g. via standstill or ratcheting clauses). However, the latter issue
remains somewhat of a paradox. On the one hand, policymakers, especially in developing
countries, need to maintain policy flexibility and some regulatory discretion in order to
properly balance financial stability, economic efficiency and social equity considerations
that go beyond trade liberalization per se. On the other hand, they also need to provide
credible assurances to foreign investors of a stable business environment by committing
to increasingly liberalized (and costly to reverse) policy regimes55. It is possible that the
regulatory status quo in financial services might not be the most appropriate level for
countries to bind and that the right answer might depend on countries’ level of financial
development, but there is little research or empirical analysis on this topic56.



54 This can potentially be an important consideration as investors can launch cases themselves in investor-
to-state arbitration, while they would need the support of their home government for state-to-state disputes.
55 As the recent example of Venezuela shows, there are also political limits to the commitment value of
trade agreements.
56 This inherent contradiction is also the subject of the current round of multilateral trade negotiations;
however, as Marconini M. (May 2006) notes, the emphasis on development there means that “the
overriding objective is to preserve the space to make policy – development policy – and to avoid any
possible further encroachment into the domestic regulatory realm”.




31



IV. Analysis of Financial Services Commitments

Comparison to GATS


Have recent PTAs led to increased financial services liberalization commitments for
relevant LCR countries when compared to those made under the GATS? This question
can only be answered empirically by reviewing the market access and national treatment
commitments scheduled in the financial services chapters of LCR PTAs for individual
countries. This analysis has been undertaken for a sample of LCR countries that have
recently participated in PTAs (Chile, Colombia and Costa Rica) and is described below,
while the comparative country tables are shown in Appendix II.


Chile57: The majority of Chile’s financial services commitments under the GATS
related to mode 3 (commercial presence), although an economic needs test and
limitations on juridical form of establishment were also maintained. Mode 4 (movement
of natural persons) commitments were only limited to intra-company transferees relating
to mode 3 operations, while only liberalization commitments for reinsurance and
retrocession services were undertaken in mode 1 (cross-border trade). National treatment
provisions were generally consistent with market access commitments across sub-sectors
and modes of supply, although there were additional restrictions on the proportion of
local staff employed within foreign financial institutions and on the ability of foreign
investors to repatriate capital. A market access limitation for all supply modes was
introduced in order to maintain the Central Bank’s broad powers to impose exchange
controls and capital restrictions, especially the unremunerated reserve requirement on
short-term foreign capital inflows (“encaje”). Since no commitments related to the social
security system were undertaken, mandatory defined contribution pension funds were not
subject to any liberalization undertakings.



Both the US-Chile FTA (2004) and the EC-Chile Association Agreement (2003) have


led to significant, “GATS+” liberalization commitments. The economic needs test for
commitments in specific sub-sectors was abolished under both agreements58, while mode
3 commitments were made for the first time in regard to certain auxiliary financial
services, management of voluntary pensions savings plans, provision and transfer of
financial information and financial data processing. The cross-border brokerage and sale
of MAT (marine, aviation and transport) insurance was also allowed. The US-Chile FTA
went further by allowing the consumption abroad (mode 2) of all financial services by
Chilean nationals59, by liberalizing factoring services under mode 3 and the cross-border
management of collective investment schemes, and by permitting insurance branching



57 See Saez R. (2006) for more details.
58 As a result of the different ‘architectural’ models, the abolition of the economic needs test applies to
establishment in all financial services (unless a reservation is made) for the US-Chile FTA, but only in
those financial services where market access commitments were made for the EC-Chile FTA.
59 The liberalization of consumption abroad does not include mandatory insurance services or those related
to the social security system. In addition, Chile is not required to permit cross-border suppliers to do
business or solicit in its territory, while their registration may also be required.




32


(subject to Chilean regulations) no later than 4 years after the entry into force of the
agreement. Moreover, the US and Chile established dispute settlement provisions that
permit the submission of claims by US investors in case Chile breaches an obligation by
applying specific restrictions on payments and transfers; unlike GATS, no safeguard
provisions in case of balance of payments problems were included in the agreement.



Colombia60: As with Chile and most WTO Members, Colombia’s financial services


commitments under GATS were primarily undertaken with regard to mode 3, although an
economic needs test and limitations on juridical form of establishment and prior
government authorization were maintained for some financial services. No mode 2
commitments were made in any financial services sub-sector, while mode 4 commitments
were limited to natural persons who are managers, legal representatives or specialists.
Only liberalization commitments for reinsurance and retrocession services, and for
foreign trade-related direct insurance, were undertaken with regard to mode 1. National
treatment provisions were similar to market access commitments across sub-sectors and
supply modes, although there were additional restrictions on the proportion of local staff
employed and on the privatization of state-owned entities. Finally, Colombia took an
MFN exemption that conditioned access to its domestic market (including for financial
services) through commercial presence on a reciprocity basis.



The US-Colombia FTA (concluded but not yet ratified as of end-2006) includes


important additional liberalization commitments in financial services. Numerical and
juridical restrictions on establishment (including an economic needs test) are abolished
except when existing legislation mandates a specific juridical form, while entry in
insurance and banking via direct branching are to be permitted (subject to Colombian
regulations) no later than 4 years after the entry into force of the agreement. Additional
commitments include certain investment advice and portfolio management services for
collective investment schemes (modes 1 and 3) and mandatory pension funds (mode 3),
and all remaining banking and other financial services that were not already covered
under mode 3 in the GATS (e.g. settlement and clearing services for financial assets). For
the first time, Colombia agreed to commitments on consumption abroad of all financial
services by Colombian nationals61 (no later than 4 years after the entry into force of the
agreement), as well as commitments on the cross-border supply of MAT insurance sales
and brokerage, services auxiliary to insurance and provision and transfer of financial
information, financial data processing and certain auxiliary financial services.



Costa Rica62: Costa Rica did not schedule any GATS commitments in insurance due


to the existence of a state monopoly in the sector (Instituto Nacional de Seguros). With
regards to banking and other financial services, Costa Rica liberalized the provision and
transfer of financial information and financial data processing for all cross-border modes
of supply, while mode 4 commitments were limited to the entry and temporary stay of



60 See Arbeláez, M. A., Flórez A. and Salazar N. (August 2006) for more details.
61 This does not include mandatory insurance services or those related to the social security system or when
the policy holder, insured or beneficiary is a State entity. In addition, Colombia is not required to permit
cross-border suppliers to do business or solicit in its territory, while their registration may also be required.
62 See Echandi R. (2006) for more details.




33


senior executives of an enterprise. Other mode 3 commitments included basic banking
and financial leasing services, although limitations on juridical form of establishment
(e.g. no entry via branching) were maintained. National treatment provisions were similar
to market access commitments across sub-sectors and supply modes.



The DR-CAFTA (not yet ratified by Costa Rica as of end-2006) introduces


significant new liberalization commitments in financial services. The most important
ones relate to insurance, where the right of establishment is gradually liberalized by 2011,
with the exception of compulsory auto, occupational risk and social security-related
insurance63. The cross-border sale and intermediation of MAT insurance, reinsurance and
retrocession, and of services auxiliary to insurance are also included in Costa Rica’s
liberalization commitments. For the first time, consumption abroad of all banking and
other financial services by Costa Rican nationals64 is permitted, while advisory and other
auxiliary financial services excluding intermediation are liberalized for modes 1, 2 and 4.
Additional commitments include the cross-border provision of certain investment advice
and portfolio management services for collective investment schemes, and all remaining
banking and other financial services that were not already covered under mode 3 in the
GATS (e.g. guarantees and commitments, trading for own account or for account of
customers, securities participations, money broking etc.).



Figure 5 below provides a visual representation of the market access liberalization


commitments undertaken by all three countries in modes 1, 2 and 3; mode 4 is excluded
given its highly restrictive nature that makes it relatively unimportant for financial
services, while national treatment provisions are also excluded since they are generally
similar to those governing market access. Although a very crude approximation since it
does not weigh different modes and sub-sectors by their relative size and does not
incorporate horizontal restrictions, Figure 5 reveals that commitments are more extensive
across all modes for PTAs involving the US, particularly for mode 2. In general, given
that GATS obligations already cover ‘core’ banking services, the bulk of additional
commitments for these countries were made in insurance, securities-related activities
(e.g. trading, underwriting, asset management) and other financial services (e.g. transfer
of financial information, data processing, advisory services etc.).





63 Costa Rica also committed to establish an independent insurance regulatory authority by January 2007.
64 Costa Rica is not required to permit cross-border suppliers to do business or solicit in its territory, while
their registration may also be required.




34


Figure 5: Proportion of Financial Services Sub-Sectors Committed by Chile, Colombia and Costa Rica in the GATS and in
Subsequent FTAs


0%


10%


20%


30%


40%


50%


60%


70%


80%


90%


100%


Mode 1 Mode 2 Mode 3


%




o


f




F


i


n


a


n


c


i


a


l




S


e


r


v


i


c


e


s




S


u


b


-


S


e


c


t


o


r


s


GATS - Chile US-Chile EC-Chile GATS - Colombia US-Colombia GATS - Costa Rica DR-CAFTA


Source: Authors’ interpretation based on WTO and USTR information, Contreras P. and Yi S. (December 2003), Contreras P. (2005), Saez R. (2006), Arbeláez
M. A., Flórez A. and Salazar N. (August 2006) and Echandi R. (2006).
Note: Three levels of market access commitments are applied in the above analysis by financial services sub-sector and mode: none (value of zero), partial
(value of 0.5) and full commitment (value of 1). Mode 4 commitments, as well as all national treatment commitments and horizontal restrictions, are excluded.
All pre-commitments to liberalize additional sub-sectors and/or modes in future years are included.




35


Comparison to the Status Quo (Unilateral Liberalization)


Have recent PTAs led to actual liberalization of financial services as opposed to
merely binding the status quo? Once again, this question can only be answered by
reviewing individual LCR country experiences, although this is much more difficult to
address because of insufficient information on the regulatory status quo (both in terms of
standards and actual practice) prior to, during and after the implementation of such trade
agreements. A review of the existing literature for the aforementioned countries (Chile,
Colombia and Costa Rica) provides some clues and may be deemed indicative (though
not necessarily representative) of other LCR countries participating in PTAs.



After a long process of unilateral trade and investment liberalization, Chile’s first


significant financial services commitments were made in the GATS where, as Saez R.
(2006) explains, “Chile followed a very conservative and cautious approach in
negotiating its financial services schedule… and did not consolidate the status quo”. In
spite of the aforementioned additional liberalization commitments in the EU-Chile and
US-Chile FTAs, there is minimal de novo liberalization. Chile’s reservations mainly
relate to existing provisions in its financial services legislation, the only envisaged legal
change being the establishment of branching in insurance (not introduced as of end-
2006). However, virtually no significant commitments were made in the management of
mandatory pension funds, which form part of Chile’s social security system, in spite of
that sector’s importance in the domestic financial system (assets of around 60 percent of
GDP) and its openness (see below).



Colombia’s first liberalization commitments in financial services stem from the G3


agreement with Mexico and Venezuela that was implemented in 1995 and, as Arbeláez,
Flórez and Salazar (2006) describe, “the commitments undertaken by Colombia (and
Venezuela) in financial services did not exceed what was already covered by existing
legislation”. Subsequent commitments under GATS merely consolidated what was
already covered in existing domestic legislation, thereby binding at or below the status
quo. Colombia is also a member of the Andean Community but, as previously mentioned,
services commitments have yet to be made by its Members.



In contrast to previous trade agreements, Colombia’s recently-concluded FTA with


the United States introduces modest liberalization in financial services when compared to
the status quo. Foreign bank and insurance company branching represents a new juridical
form of establishment, while new cross-border liberalization commitments (particularly
for consumption abroad of insurance services by Colombian residents) are substantial. In
addition, the permission to partially outsource some investment advice and portfolio
management services granted to domestic collective investment schemes and mandatory
pension funds is an important difference with current practice and will likely impact the
structure of that market segment. As with Chile, however, virtually no significant
liberalization commitments were made with respect to mandatory pension funds in spite
of that sector’s de facto openness (see below)65.

65 In the case of Chile and Colombia, protection for (at least some) existing pension funds that are owned
by foreign investors comes from the bilateral investment treaties that these countries have signed.




36



Costa Rica’s international commitments in financial services first took place in the


GATS, and they consolidated unilateral liberalization reform efforts that had been
recently implemented (e.g. the dismantling of the State monopoly over sight deposits). In
spite of signing FTAs with several Western Hemisphere countries over the last decade,
no financial services chapter was included until the advent of DR-CAFTA. In fact, as
Echandi R. (2006) notes, “until the DR-CAFTA was negotiated, no international
agreement entailed for Costa Rica any obligation beyond the level of liberalization
already granted by the domestic legal framework applicable to financial services”. Even
though DR-CAFTA did not lead to further liberalization of Costa Rica’s banking sector
or resolve other types of non-discriminatory treatment (e.g. non-level playing field
between private/foreign and state-owned banks), its insurance liberalization provisions
represent an important example of a new trade commitment that goes significantly
beyond the country’s previous level of openness of the domestic financial system66. In
that respect, the FTA appears to have been used as a means of advancing the
government’s (stalled) domestic reform agenda in the financial sector.



The three case studies appear to indicate that FTAs in the LCR region have in general


contributed relatively modestly so far to further market opening (de novo liberalization)
in financial services. In addition to Costa Rica’s insurance sector, real liberalization
appears to have taken place in the cross-border provision of some insurance services, as
well as in asset management and auxiliary financial services. Although there is limited
available data on the actual market size of these sub-sectors and modes, anecdotal
evidence suggests that they are relatively less important than ‘core’ banking- and
securities-related services. However, the abolition of numerical quotas (e.g. economic
needs test) and certain juridical restrictions on forms of entry (e.g. insurance branching67)
might also contribute to further liberalization in other sub-sectors under mode 3.



The above finding provides a strong indication that PTAs are primarily used to


consolidate and ‘lock in’ existing unilateral liberalization efforts rather than engage in
new market opening68. However, this conclusion is based on a limited sample of
countries used in the analysis and more work is needed to corroborate such findings. In
addition, the relatively high unilateral openness of these countries’ financial systems
might also be partly responsible for such a finding. As can be seen from Figure 6, with
the exception of Costa Rica’s insurance sector, foreign financial institutions already had
sizeable market shares in most domestic financial system segments at the time of the
relevant FTA negotiations. The international financial integration of these countries –
when judged on a de facto basis (see Figure 7)69 – also appears relatively high in an



66 Echandi R. (2006) states that all other Central American countries in DR-CAFTA also undertook
commitments that entailed real liberalization (i.e. reform to their domestic legislation) such as, for example,
in insurance branching and portfolio management services.
67 However, it should be noted that domestic authorities retain the right to regulate such branches as they
deem necessary for prudential purposes, including via the establishment of local capital requirements.
68 This is also compatible with the World Bank’s (2005) finding that autonomous liberalization accounts for
the lion’s share of trade liberalization in goods since the 1980s.
69 See Kose A. M., Prasad E., Rogoff K. and Wei S. (August 2006) for a discussion of de facto versus de
jure (i.e. exchange restrictions, capital controls and certain prudential measures) financial integration.




37


international context, implying that important cross-border financial linkages already
existed prior to the negotiation of PTAs.



Figure 6: Market Share of Foreign Financial Institutions in the Domestic Financial


Systems of Chile, Colombia and Costa Rica at the Time of FTA Negotiations


0%


10%


20%


30%


40%


50%


60%


Chile (2002) Colombia (2005) Costa Rica (2005)


Banks Securities Firms Insurance Companies Pension Funds
Source: Own analysis based on de la Cruz and Stephanou (2006), Echandi (2006) and Saez (2006).
Note: Percentages are based on total assets for banks (credit institutions in the case of Colombia), number
of foreign firms registered in the domestic stock market (Costa Rica) and total trading volumes (Chile and
Colombia) for securities firms, total premiums (Chile) and life/non-life assets (Colombia and Costa Rica)
for insurance companies, and total mandatory pension assets under management for pension funds (the
Costa Rica figure is an estimate). The foreign market share in the securities sector is likely underestimated
since many securities activities – such as trading – are actually provided (offshore and on-shore) by banks.


Figure 7: International Financial Integration of Chile, Colombia and Costa Rica
(1997-2004)


0%


50%


100%


150%


200%


250%


1997 1998 1999 2000 2001 2002 2003 2004


%
o


f
G


D
P


Chile Colombia Costa Rica
Source: Own analysis based on data from Lane P.R. and Milesi-Ferretti G.M. (March 2006).
Note: International financial integration is measured as the gross stock of a country’s foreign assets and
liabilities to GDP.




38



Has actual liberalization been preferential in nature? In theory, liberalization


commitments made under PTAs tend to be for the exclusive and preferential benefit of
PTA partners. However, a review of the aforementioned PTAs and their rules of origin
for financial services (especially those for Colombia and Costa Rica) suggest that the
benefits of regional integration will not necessarily accrue solely to PTA counterparts
(i.e. the US). While some real liberalization commitments – for example, the abolition of
an economic needs test – are country-specific, most of them require new ‘horizontal’
regulations or laws that would presumably apply to the entire industry and could actually
benefit financial established third country suppliers – for example, opening up Costa
Rica’s insurance market, or permitting branching and certain outsourcing services for
collective investment schemes in Colombia. This would seem to suggest that there might
not be important first-mover advantages or serious economic distortions created by using
PTAs to promote market opening in financial services, although much depends on the
specific nature of liberalization commitments per se.



Is a GATS- or NAFTA-type ‘architectural’ model preferable for liberalization


purposes? As mentioned previously, the choice of modality used to schedule
liberalization commitments can be an important contributor to the actual degree of
liberalization attained. GATS- and NAFTA-type models both have their advantages and
drawbacks, and can theoretically generate the same liberalization outcome. A simple
review of the PTAs analyzed in this study would seem to favor the negative list approach
and broader rules and disciplines embedded in NAFTA-type agreements on transparency
grounds. However, this result can be largely attributed to the involvement of the US in
such agreements, which tends to distort the results in favor of the NAFTA model. In
addition, one could argue that the direction of causality between scheduling approaches
and levels of liberalization commitments can run both ways – for example, a country with
a very open financial system would feel more comfortable using a negative list approach
(and vice versa). Finally, even some NAFTA-type agreements tend to use a hybrid lists
for financial service commitments. For example, the US-Chile FTA comprised a positive
list for commitments in insurance and insurance-related services and a negative list for
commitments in banking and other financial services; a hybrid approach was also used
for different supply modes. In fact, both models have introduced new features in recent
years that borrow from each other, showing some signs of convergence around a more
hybrid-type approach.






39




V. Conclusion


A number of conclusions can be reached from the above analysis. First, the
proliferation of PTAs in recent years, which is an on-going phenomenon with global
proportions, has contributed to greater financial services liberalization
commitments for many LCR countries and led to an increasingly complex regional
‘commitments map’ (or financial services ‘spaghetti bowl’). Most progress in
financial services rule-making and market opening – typically via a stand-alone financial
services chapter – has been achieved via FTAs; by contrast, LCR countries that have
relied on the multilateral framework and on sub-regional customs unions for trade
commitments in financial services have not made much progress to-date.



Second, the inclusion of financial services in LCR PTAs depends greatly on


whether it is a North-South or South-South agreement. As can be seen below in Table
4, the main proponents of including financial services have been developed countries in
North-South agreements. This is not surprising: most LCR countries are net importers of
financial services, have few – if any – perceived ‘offensive’ interests linked to a
“demandeur” or domestic constituency, both of which lessen the scope for striking
reciprocal bargains within the sector. Conversely, the inclusion of financial services in
most North-South agreements likely reflects the fact that the majority of foreign financial
institutions in LCR countries are headquartered in developed countries, as well as the
relative bargaining powers between the negotiating counterparts. Only two LCR
countries have tended to include financial services chapters in South-South agreements –
Mexico (primarily in the immediate post-NAFTA period) and Panama (which is an
offshore financial center and a net exporter of financial services). A more detailed
comparison of financial services chapters under North-South and South-South PTAs,
particularly when they involve the same country, would be an interesting follow-up
research topic.



Table 4: Coverage of Financial Services (FS) by Type of FTA in LCR



North-South South-South


Inclusion of FS Chapter 9 7
No FS Chapter 4 14


Source: Table 3.
Note: All LCR FTAs (including those not yet implemented), starting with NAFTA, have been categorized
either as a North-South (i.e. including at least one developed country) or a South-South trade agreement.



Third, an analysis of a sample of LCR countries that have recently participated


in PTAs yields evidence of significant additional liberalization commitments when
compared to the GATS70. This is not unusual given the time elapsed and the (unilateral)
market opening undertaken by these countries since the mid-1990s. Additional
commitments tend to span all financial sub-sectors, including those that were not well



70 Roy M., Marchetti J. and Hoe Lim A. (September 2006) undertake this analysis for a broader set of PTAs
and sectors (as well as compare PTA commitments to recent WTO offers) and reach the same conclusion.




40


covered in the first GATS round, such as insurance, securities-related and other financial
services. The same is true in modal terms, with significant new commitments particularly
in mode 2 (consumption abroad). Commitments are in general more extensive across all
modes for FTAs involving the US, particularly for mode 2. By contrast, mode 1
commitments, while better than what has been harvested to date under the GATS, remain
relatively more timid and are generally based on those found in the Understanding on
Commitments in Financial Services.



Fourth, de novo liberalization – which has chiefly taken the form of pre-


commitments to future market-opening – is relatively modest for the sample of LCR
countries under review. Apart from Costa Rica’s insurance sector, real liberalization
appears to have mostly taken place in the cross-border provision of some insurance
services, as well as in asset management and auxiliary financial services. Although there
is limited available data on the actual market size of these sub-sectors and modes,
anecdotal evidence suggests that they are relatively less important than ‘core’ banking
services. However, the abolition of numerical quotas (e.g. economic needs test) and
certain juridical restrictions on forms of entry (e.g. insurance branching71) might also
contribute to further liberalization in other sub-sectors under mode 3.



The above finding is a strong indication that, with a few exceptions, PTAs are


primarily used to consolidate and ‘lock in’ existing unilateral liberalization rather than as
means to actively promote further market opening and the process of domestic regulatory
reform. The fact that the LCR countries under review appear to have already largely
liberalized their domestic financial systems on a unilateral basis prior to their engagement
in PTA negotiations has also contributed to this outcome. In fact, there could well be an
inverse relationship between de novo liberalization and a country’s initial conditions in
terms of actual market openness – as evidenced when comparing Chile and Costa Rica –
but this study’s sample is too small to draw any firm conclusions. More work needs to be
done in this area, both in terms of expanding the number of countries under review and in
collecting relevant data on actual market size by sub-sector and mode, in order to fully
confirm the above assertions.



Fifth, consolidation of the regulatory status quo and the application of certain


disciplines in trade agreements remain important because they can limit the
arbitrary use (and abuse) of ‘policy space’ by the authorities. New disciplines such as
those on regulatory transparency, as well as the locking-in of the current policy regime
via commitments, standstill and ratcheting clauses, enhance predictability, prevent
potentially costly policy reversals, and can thus benefit both domestic and foreign
financial services providers and local consumers. It is therefore conceivable that a PTA
could exert significantly positive impact on the business environment (including for
financial services) even if real liberalization commitments remain limited to the status
quo. However, the issue of policy space is a double-edged sword, and policymakers need
to decide on the level of policy flexibility and regulatory discretion (which might not be
the current one) that properly balances policy considerations that go beyond trade

71 However, it should be noted that domestic authorities retain the right to regulate such branches as they
deem necessary for prudential purposes, including via the establishment of local capital requirements.




41


liberalization objectives per se. Linked to this issue is the need for policymakers
negotiating the financial services provisions of PTAs to be cognizant of the
aforementioned important nuances in disciplines and commitments72 that might create
unintended consequences or limit policy space beyond what was envisaged.



Sixth, many de novo liberalization commitments in FTAs are actually not


preferential in nature. While some commitments are country-specific and benefit the
financial services providers of the FTA counterpart, others require new ‘horizontal’
regulations or laws that would presumably apply to the entire industry and could actually
benefit financial service providers from third countries. This would seem to suggest that
there might not be important first-mover advantages or serious economic distortions
created by using PTAs to promote market opening in financial services, although much
depends on the specific nature of liberalization commitments per se. This somewhat
counter-intuitive finding needs to be further corroborated by additional research.



Seventh, it is unclear whether GATS- or NAFTA-type ‘architectural’ models


actually lead to greater liberalization in financial services. A simple review of the
FTAs analyzed in this paper would seem to favor the negative list approach and broader
rules and disciplines embedded in NAFTA-type agreements (the most widely used in
LCR), primarily on grounds of heightened regulatory transparency, but this can be largely
attributed to the involvement of the US in them. In addition, one could argue that the
direction of causality between scheduling approaches and the level of liberalization
commitments can run both ways. Finally, even NAFTA-type agreements have tended to
use a hybrid list for financial service commitments – in fact, both models have introduced
new features in recent years that borrow from each other, revealing signs of convergence
around a more hybrid-type approach.



Finally, it is likely too early to judge the outcomes of PTAs on domestic financial


systems and overall welfare in LCR countries. The lack of relevant data and analysis
available to assess their ex post impact – or to support the decision-making process ex
ante – remains an important constraint. However, even if a commonly accepted
methodology for quantifying impact was established, the short time span since the
negotiation or entry into force of PTAs under review means that their contribution –
whether anticipated or unanticipated – still cannot be fully assessed. In particular,
financial services commitments and disciplines, including dispute settlement
mechanisms, have not been put to the test during a market downturn or a significant
revision of domestic financial system policy priorities, which is typically when
constraints on ‘policy space’ kick in.



72 These include, for example, the definition and coverage of financial services supplier versus (regulated)
financial institution in NAFTA-type agreements; the relationship between financial services and other
chapters; the denial of benefits clause, which is the trade in services-equivalent of rules of origin;
restrictions on the imposition of capital controls or payments restrictions, which become particularly
important in times of crisis; existence of ratcheting and/or standstill clauses; and the use of a negative list
approach, with its concomitant need to include all reservations in an Appendix (“list it or lose it”).




42


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45


Appendix I: GATS Definition of Financial Services

Article 5 of the Annex on Financial Services


a) A financial service is any service of a financial nature offered by a financial
service supplier of a Member. Financial services include all insurance and
insurance-related services, and all banking and other financial services (excluding
insurance). Financial services include the following activities:



Insurance and insurance-related services


i. Direct insurance (including co-insurance)
A. Life
B. Non-life


ii. Reinsurance and retrocession
iii. Insurance intermediation, such as brokerage and agency
iv. Services auxiliary to insurance, such as consultancy, actuarial, risk


assessment and claim settlement services


Banking and other financial services (excluding insurance)


v. Acceptance of deposits and other repayable funds from the public
vi. Lending of all types, including consumer credit, mortgage credit,


factoring and financing of commercial transactions
vii. Financial leasing
viii. All payment and money transmission services, including credit,


charge and debit cards, travelers cheques and bankers drafts
ix. Guarantees and commitments
x. Trading for own account or for account of customers, whether on


an exchange, in an over-the-counter market or otherwise, the
following:
A. Money market instruments (including cheques, bills,


certificates of deposits)
B. Foreign exchange
C. Derivative products including, but not limited to, futures and


options
D. Exchange rate and interest rate instruments, including products


such as swaps, forward rate agreements
E. Transferable securities
F. Other negotiable instruments and financial assets, including


bullion
xi. Participation in issues of all kinds of securities, including


underwriting and placement as agent (whether public or privately)
and provision of services related to such issues


xii. Money broking




46


xiii. Asset management, such as cash or portfolio management, all
forms of collective investment management, pension fund
management, custodial, depository and trust services


xiv. Settlement and clearing service for financial assets, including
securities, derivative products, and other negotiable instruments


xv. Provision and transfer of financial information, and financial data
processing and related software by suppliers of other financial
services


xvi. Advisory, intermediation and other auxiliary financial services on
all the activities listed in subparagraphs v) through xv), including
credit reference and analysis, investment and portfolio research
and advice, advice on acquisitions and on corporate restructuring
and strategy.





b) A financial service supplier means any natural or juridical person of a Member
wishing to supply or supplying financial services but the term “financial service
supplier” does not include a public entity.





c) “Public entity” means:
i. A government, a central bank or a monetary authority, of a


Member, or an entity owned or controlled by a Member, that is
principally engaged in carrying out governmental functions or
activities for governmental purposes, not including an entity
principally engaged in supplying financial services on commercial
terms.


ii. Or a private entity, performing functions normally performed by a
central bank or monetary authority, when exercising those
functions.





47


Appendix II: Liberalization Commitments in Financial Services for Selected LCR Countries


Table II-1: Chile – Financial Services Trade Liberalization Commitments


IMPROVEMENT IN COMMITMENTS COMPARED TO THE GATS MAIN COMMITMENTS UNDER GATS
(1999) US-CHILE FTA (2004) EC-CHILE FTA (2003) SECTOR


Market Access National Treatment Market Access National Treatment Market Access National Treatment
HORIZONTAL (only those most relevant for financial services)


All Sectors
/ Financial


Services


(3): limitations on juridical
form of establishment and
authorization criteria (this
includes an economic needs
test for financial services
suppliers)
(4): no commitments, except
for transfers of natural
persons related to (3) and
subject to various criteria



(3): foreign investors
may transfer abroad
their capital after 3
years from entry*; at
least 85% of staff
employed locally by
enterprises with more
than 15 employees must
be Chilean
(4): no commitments,
except for natural
persons listed in market
access


(3) lifting of numerical restrictions
(including an economic needs test) on
establishment of financial institutions
(including mandatory pension funds);
some juridical form restrictions on
financial institutions that are mandated by
existing legislation are also removed (see
below)


(3): at least 85% of staff employed
locally by enterprises with more
than 25 employees must be
Chilean


(3): no economic needs test
for suppliers in financial
services sub-sectors where
commitments were made


(3): at least 85% of staff
employed locally by
enterprises with more
than 25 employees must
be Chilean


FINANCIAL SERVICES-SPECIFIC


Insurance
and


Insurance-
Related


Services


(1): no commitments except
for foreign reinsurance
providers (including
brokers), subject to
enrollment with, and
requirements of, domestic
supervisor
(2): no commitments
(3): liberalization of direct
life and non-life insurance
and of reinsurance and
retrocession (including
brokerage) subject to
restrictions on form of
establishment and on
enrollment with domestic
supervisor
(4): only commitments of
horizontal schedule


(1): same as for market
access except that


reinsurance premiums
are subject to tax of 6%
(2): no commitments
(3): same as for market
access
(4): only commitments
of horizontal schedule


(1): liberalization of sale and brokerage of
MAT insurance (no later than one year


after entry into force of agreement) and
consultancy, actuarial and risk assessment
services
(2):liberalization of all insurance and
insurance-related services except


mandatory insurance services or those
related to the social security system
(3): liberalization of insurance branching
(no later than 4 years after entry into
force of agreement) subject to regulation,


and of services auxiliary to insurance


(1): same as for market access
(2): same as for market access
(3): no more than a minority of the
Board of Directors of a US-owned
financial institution may be
composed of Chilean nationals
and/or residents (except for
insurance brokerage and claims
settlement)



(1) + (2): liberalization of
sale and brokerage of
MAT (one year after entry
into force of agreement)
subject to supervision in
the country of origin
(3): liberalization of sale
and brokerage of MAT
(subject to enrollment
with, and requirements of,
domestic supervisor),
voluntary pension savings
plans by life insurance
companies (as of 3/1/2005)
subject to supervisory
authorization, and of claim
settlement and auxiliary
insurance services


(1) + (2): same as for
market access
(3): same as for market
access




48


Banking
and Other


Financial
Services


(3): liberalization of
acceptance of deposits,
lending (except factoring),
financial leasing, issue and
operation of credit cards,
guarantees and
commitments, participation
and custody of securities,
some advisory,
intermediation and other
auxiliary financial services,
and asset management
(except for collective


investment schemes and
pension funds), subject to
restrictions on form of
establishment, transfer of
control and on operations
(particularly for non-bank
securities services providers)
(4): only commitments of
horizontal schedule


(3): same as for market
access
(4): only commitments
of horizontal schedule



(1) + (2) + (4): liberalization of provision
and transfer of financial information,
financial data processing (subject to prior
authorization as required), advisory
(subject to regulatory and registration
requirements as required) and other
auxiliary financial services except


intermediation and credit reference and
analysis (the latter service can be
provided in the future)
(1): liberalization of investment advice
and portfolio management services
(excluding custodial and trustee services)
by financial institutions (except trust


companies) for domestic collective
investment schemes when they invest in
securities traded abroad
(2): liberalization of all banking and other
financial services
(3): liberalization of factoring, all
payment and money transmission
services, trading, money broking,
management of collective investment
schemes (subject to regulations on form
of establishment), voluntary pension
savings plans (as of 3/1/2005), settlement


and clearing services, financial
information transfer and data processing,
and all advisory, intermediation and other
auxiliary services


(1) + (2) + (4): same as for market
access
(1) + (3): same as for market
access
(2): same as for market access
(3): same as for market access; no
more than a minority of the Board
of Directors of a US-owned
financial institution (except
stockbrokers and securities agents)
may be composed of Chilean
nationals and/or residents; NT for
US investors in mandatory pension
funds


(3) liberalization of
voluntary pension savings
plans (as of 3/1/2005)


subject to supervisory
authorization, banking-
related advisory and other
auxiliary services,
provision and transfer of
financial information and
data processing, securities
risk rating activities subject
to supervisory
authorization, and various
trading operations and fund
management activities by
non-bank securities
services providers


(3) same as for market
access; NT for factoring


Source: Authors’ interpretation based on WTO and USTR information, Contreras P. and Yi S. (December 2003), Contreras P. (2005) and Saez R. (2006).
Note: (1) – (4) above refers to the 4 modes of supply. The Table does not include other disciplines or provisions on payments and capital movements. MAT refers
to international maritime transport, international commercial aviation and goods in international transit. NT refers to National Treatment.


* The limitation is 2 years in the case of foreign investors who participate in the financial services sector.




49



Table II-2: Colombia – Financial Services Trade Liberalization Commitments



MAIN COMMITMENTS UNDER GATS (1997) IMPROVEMENT IN COMMITMENTS UNDER US-COLOMBIA FTA SECTOR


Market Access National Treatment Market Access National Treatment
HORIZONTAL (only those most relevant for financial services)


All Sectors
/ Financial


Services


(3): economic needs test might be required
for domestic and foreign financial entities;
limitations on juridical form of
establishment; supply of financial services
requires prior government authorization
and is subject to relevant regulations
(4): no commitments except for natural


persons who are managers, legal
representatives or technical specialists


(3): special conditions on privatization of
state-owned entities shall be exclusively
offered to Colombian nationals; at least
80% and 90% of ordinary and specialist
staff respectively, which is employed
locally by enterprises with more than 10
employees, must be Colombian
(4): no commitments except for natural


persons listed in market access


(3): lifting of numerical restrictions and of an economic needs test on establishment
of financial institutions (including mandatory pension funds); some juridical form
restrictions on financial institutions that are mandated by existing legislation are also
removed (see below)


(1): foreign investors may make portfolio
investments in securities only through a
foreign capital investment fund
(3): no more than a minority of the Board of
Directors of a foreign-owned financial
institution may be composed of nationals
and/or residents


FINANCIAL SERVICES-SPECIFIC


Insurance
and


Insurance-
Related


Services


(1): liberalization of reinsurance and
retrocession, and of direct insurance
concerning foreign trade operations
(2): no commitments
(3): liberalization of all insurance and
insurance-related services except life


insurance
(4): only commitments of horizontal
schedule


(1): NT for reinsurance and retrocession
(2): no commitments
(3): NT for all insurance and insurance-


related services
(4): only commitments of horizontal
schedule


(1) + (4): liberalization of sale and brokerage of MAT and space launching and
freight insurance subject to registration requirements (no later than four years after
entry into force of agreement), sale and brokerage of reinsurance and retrocession,
and sale of services auxiliary to insurance
(2): liberalization of all insurance and insurance-related services except mandatory


insurance services or those related to the social security system or when the policy
holder, insured or beneficiary is a State entity (no later than four years after entry
into force of agreement);
(3): establishment of insurance branches subject to regulatory requirements (no later
than four years after entry into force of agreement); liberalization of life insurance


(1) + (4): same as for market access except
a foreign national resident in Colombia for
less than one year may not supply insurance
agency services
(2): same as for market access
(3): same as for market access


Banking
and Other


Financial
Services


(1): no commitments
(2): no commitments
(3): liberalization of all banking and other
financial services except asset


management, payment and money
transmission services, settlement and
clearing services for financial assets, and
trading for own account or for account of
customers of money market instruments,
foreign exchange, and exchange and
interest rate instruments
(4): only commitments of horizontal
schedule


(1): no commitments
(2): no commitments
(3): same as for market access
(4): only commitments of horizontal
schedule


(1) + (2) + (4): liberalization of provision and transfer of financial information,
financial data processing, and of advisory and other auxiliary financial services
except intermediation and credit reference and analysis (the latter service may be


provided in the future)
(1) + (3): liberalization of investment advice and portfolio management services
(excluding custodial and trustee services) by financial institutions for domestic
collective investment schemes subject to registration requirements (no later than four
years after entry into force of agreement)
(2): liberalization of all banking and other financial services subject to registration
requirements (no later than four years after entry into force of agreement)


(3): establishment of bank branches subject to regulatory requirements; liberalization
of investment advice and portfolio management services (including execution and
custodial services for foreign investments) by financial institutions for domestic
mandatory pension funds subject to regulatory requirements (all of the above no later


than four years after entry into force of agreement), and of all remaining banking and
other financial services not already covered in the GATS


(1) + (2) + (4): same as for market access
(1) + (3): same as for market access
(2): same as for market access
(3): same as for market access


Source: Authors’ interpretation based on WTO and USTR information, Arbeláez M. A., Flórez A. and Salazar N. (August 2006).
Note: (1) – (4) above refers to the 4 modes of supply. The Table does not include other disciplines or provisions on payments and capital movements. MAT refers
to international maritime transport, international commercial aviation and goods in international transit. NT refers to National Treatment.




50


Table II-3: Costa Rica – Financial Services Trade Liberalization Commitments


MAIN COMMITMENTS UNDER GATS (1997) IMPROVEMENT IN COMMITMENTS UNDER DR-CAFTA SECTOR
Market Access National Treatment Market Access National Treatment


HORIZONTAL (only those most relevant for financial services)


All Sectors
/ Financial


Services


(3): Limitations on juridical form of
establishment for financial services providers
(4): no commitments except for entry and


temporary stay of (at most two) senior
executives and supervisors of an enterprise


(4): same as for market
access


(3): no more than a
minority of the Board of
Directors of a foreign-
owned financial
institution may be
composed of nationals
and/or residents


FINANCIAL SERVICES-SPECIFIC


Insurance
and


Insurance-
Related


Services


(1) + (2) + (3) + (4): no commitments (1) + (2) + (3) + (4): no commitments


(1): liberalization of sale and intermediation of MAT and space launching and freight
insurance, sale and intermediation of reinsurance and retrocession, sale and intermediation of
services necessary to support global accounts (for multinationals), and sale of services
auxiliary to aforementioned insurance lines (no later than date of entry into force of the


agreement); liberalization of all remaining insurance intermediation and services auxiliary to
insurance, and of surplus lines* (no later than July 2007)
(3) establishment of insurance rep offices (no later than July 2007); liberalization of all
insurance and insurance-related services (no later than January 2008) except compulsory auto


and occupational risk insurance (to be liberalized no later than January 2011) and social
security-related insurance services
(4): liberalization of all insurance and insurance-related services (except compulsory auto,


occupational risk and social security-related insurance services) subject to registration
requirements


(1): same as for market
access
(3) same as for market
access
(4): same as for market
access


Banking
and Other


Financial
Services


(1) + (2): liberalization of provision and
transfer of financial information and financial
data processing
(3): liberalization of acceptance of deposits,
lending of all types, financial leasing (except
for commercial banks and non-bank financial


companies that are legally prohibited to
undertake this activity), credit card services,
provision and transfer of financial
information and financial data processing


(4): only commitments of horizontal
schedule


(1) + (2): same as for
market access
(3): same as for market
access
(4): only commitments
of horizontal schedule


(1): liberalization of investment advice and portfolio management services (excluding
custodial and trustee services) by foreign financial institutions (except trust companies) for


domestic collective investment schemes (which includes mandatory and voluntary pension
funds) subject to registration requirements
(1) + (4): liberalization of advisory and other auxiliary financial services excluding
intermediation
(2): liberalization of all banking and other financial services subject to registration
requirements
(3): liberalization of all remaining banking and other financial services not already covered in
the GATS
(4): liberalization of provision and transfer of financial information and financial data


processing


(1): same as for market
access
(1) + (4): same as for
market access
(2): same as for market
access
(3): same as for market
access
(4): same as for market
access


Source: Authors’ interpretation based on WTO and USTR information, Echandi R. (2006).
Note: (1) – (4) above refers to the 4 modes of supply. The Table does not include other disciplines or provisions on payments and capital movements. MAT refers
to international maritime transport, international commercial aviation and goods in international transit. NT refers to National Treatment.


* Surplus lines are defined (as of January 2008) as” insurance coverage not available from an admitted company in the regular market”.




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