The General Agreement on Trade in Services

The General Agreement on Trade in Services (the GATS) is binding on those who enter the agreement establishing the World Trade Organization. It came into effect in 1995. It comprises two main parts, the general framework with annexes, and the individual schedules of commitments of member countries. Important obligations of the general framework apply only when a party makes a specific commitment. The GATS has implications for banking.
The definition of trade in services in Article 1 includes the cross-border provision of services, and their delivery through a commercial presence in the host jurisdiction.
     Determining the origin of a foreign service or supplier is provided for elsewhere. As we have seen, the GATS includes dejure steps along with laws, regulations, administrative actions, and so on, as the 'measures' of members against which the GATS is directed. Notwithstanding the provisions of the Agreement, the Annex on Financial Services enables members to take prudential measures for investor protection and the integrity of the financial system. This exemption must not be used, however, as a means of avoiding a member's commitments.

     There are three key concepts in the GATS most-favoured nation treatment, market access, and national treatment. Most-favoured nation treatment is central to the GATS, as it has been to the GATT (the General Agreement on Tariffs and Trade). In the context of banking it obliges a country to accord no less favourable treatment to the banks of one for eign country than that accorded to the banks of any other foreign coun try. In the case of banking most-favoured nation treatment is not a major problem. If countries exclude, or limit, foreign banks, they generally do so indiscriminately.
     Exceptions to the general obligation include regional economic arrangements, such as the European Community, and reciprocity provisions.Secondly, market access. This is concerned with the different types of limitations on foreign banks identified above the numbers, assets, types of legal entity through which banking services may be offered, andso on. Many countries do not agree with the view, especially associated with the United States, that a very liberal regime of market access is desirable. Consequently, the market-access provision of the GATS is a fudge: each member simply agrees to accord access under the terms, limitations, and conditions agreed and specified in its schedule. If, however, a member state does agree to market access for foreign banks, then it is committed to allow any necessary transfers of capital.

     Thirdly, there is national treatment. This operates once a bank obtains market access. It commits members to treat foreign banks in the same way as domestic banks, although, as with market access, it is a fudge and, under the GATS, members can make treatment subject to conditions and qualifications. The approach to national treatment which the OECD countries would on the whole want is embodied in an 'Understanding', attached to GATS, but with no legal force. It is designed to obtain more ambitious liberalization commitments from those who schedule in accordance with it, although it is fair to say that almost the same degree of liberalization could be obtained under the general approach.

     The process of liberalization to which the GATS has given an impetus will not be fast. Many emerging and developing countries have legiti mate concerns about the spread of foreign banks. Article XIX recognizes that the GATS is a halfway house: it commits members to enter successive rounds of negotiation, beginning not later than five years from the date of the Agreement, with a view to achieving progressively higher lev els of liberalization.

ArticleSource: proeconomics.com

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