Trade Negotiations Insights • Volume 8 • Number 4 • April 2009

EPA Provisions may impact the ability of some developing countries to respond to the crisis

by Sanya Reid Smith

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The global financial— and now economic— crisis is having serious impacts on developing countries. (1) These countries are experiencing decreasing government income due to declining commodity-related tax revenue, (2) crowding out of developing country sovereign debt issuers, (3) and pro-cyclical aid. Unfortunately, this is occurring at a time when increased government revenue is required for stimulus packages and social safety-nets, (4) such as those implemented by industrialised countries. (5) Moreover, certain provisions in the EPAs may impact the ability of some countries to respond to the crisis; this article examines selected EPA provisions on trade in services.

Services provisions

Including services commitments in an EPA beyond co-operation is likely to trigger Article V of the General Agreement on Trade in Services with which the EPA services chapter will have to comply to be WTO compatible. The EU could interpret Article V as requiring liberalisation of 80% of services sectors. If this occurs, developing countries may not be allowed to exclude essential services and financial services. Once liberalised, it will no longer be permitted for companies in this sector to be nationalised (for example, a financial institution) if needed. Furthermore, the likelihood of account deficits in developing countries as a result of the crisis are liable to be exacerbated by such extensive services liberalisation, because foreign service suppliers generally do not generate export revenue but repatriate their profits.

The CARIFORUM-European Commission EPA title on services and investment appears to be a template for the European Commission EPAs for all regions so it will be used as the basis for this analysis. With respect to financial services in particular, there are a number of provisions that may make it difficult to prevent future crises and to effectively deal with the current crisis.

There is an explicit provision that requires CARIFORUM countries to permit EU financial services suppliers to supply a new financial service if that CARIFORUM country allows its own financial institutions to do so, and if it has committed to liberalise that particular financial service in the EPA. (6) This is in a situation where, according to the IMF, the emergence of new types of financial instruments and the inability of regulators to keep up was one of the causes of the current crisis. (7) Thus, if a CARIFORUM country allowed hedge fund activity domestically, it would have to allow hedge funds from EU countries to enter and introduce similar services. Since the European institutions are much larger than domestic ones, the risks to the economy by this liberalisation would increase manifold. Given that ‘financial services’ are broadly defined, (8) the same applies to derivatives and other risky new financial instruments. There is a prudential carve out, (9) however; it is narrower in some respects than the WTO equivalent (10) and even use of the WTO one has been challenged, especially by the European Commission. (11)

In addition, if market access commitments are made in financial services, parties to the EPA cannot set limits on the size or form of financial institutions, unless exceptions are listed. (12) This is problematic for a number of reasons. First, when financial institutions that are very large collapse, they must be bailed out in order to avoid causing systematic problems for the whole economy. However, articles 67 and 76 of the CARIFORUM EPA make it difficult to limit the size of financial institutions if they are liberalised under the EPA. These provisions also prevent firewalls that separate deposits from risky investment banking. Second, given the recent evidence of lack of solvency of banks, countries may wish to require them to establish as subsidiaries (which must have their own capital reserves) rather than mere branches. (13) However, the CARIFORUM EPA does not appear to allow this unless it is listed as an exception. (14) When this is combined with the requirement to allow new financial services, it would appear to enable a branch to supply these risky new financial products, unless the European Commission and CARIFORUM agree on the form these financial institutions should take (or unless it is listed as an exception).

Finally, the G20 (15) agrees that one of the drivers of the current turmoil was that financial innovation outpaced the ability of regulators to effectively monitor it; there is therefore a need for better regulation. (16) However, it is also clear from the G20 that they are still learning about the causes of the crisis and how best to regulate them. The group notes that they will still be developing prudential and other regulations even in 2010. (17) Given this, it would seem premature to agree to legally binding provisions in EPAs that may prevent the implementation of the G20’s own recommended regulations to deal with the current crises and prevent future crises.

Call for caution on EPA negotiations

Beyond the EPAs, provisions in free trade agreements with other industrialised countries, bilateral investment treaties and WTO agreements may also prohibit the increased regulation of financial institutions and other measures that would help countries effectively deal with this crisis now and prevent catastrophes in the future. Given this, in February 2009, President Jagdeo of Guyana called for the suspension of the implementation of the CARIFORUMEuropean Commission Economic Partnership Agreement until the global financial crisis is resolved so that the region can source the funds necessary. Certainly countries should be cautious and consider implementing a moratorium on existing negotiations or on the initialling, signing, or implementation of EPAs until a comprehensive study has been conducted.

Author
Sanya Reid Smith is a legal advisor and senior researcher at Third World Network. She can be contacted for further information at sanya@thirdworldnetwork.net. The author would like to acknowledge Professor Jane Kelsey.

Notes
1. See for example: “Swimming against the tide: how developing countries are coping with the global crisis,” Background Paper prepared by World Bank Staff for the G20 Finance Ministers and Central Bank Governors Meeting, Horsham, United Kingdom on March 13-14, 2009, siteresources.worldbank.org/NEWS/ Resources/swimmingagainstthetide-march2009.pdf
2. See International Monetary Fund report on the significantly worsening economic outlook for sub-Saharan Africa: www.imf.org/external/pubs/ft/survey/so/2009/CAR030909A.htm
3. See footnote 1.
4. Impact of the Global Financial Crisis on Sub-Saharan Africa, IMF, 2009; See: www.imf.org/external/pubs/ft/ books/2009/afrglobfin/ssaglobalfin.pdf
5. See footnote 1.
6. Article 106.
7. See footnote 1.
8. Article 103.2.
9. Article 104.
10. See: www.lawstaff.auckland.ac.nz/~ekel001/Pacific_Trade_files/CARICOM_cf%20Pacific_EPA.pdf 11. See: www.policyalternatives.ca/documents/National_Office_Pubs/2008/Financial_Instability_and_ GATS.pdf
12. Article 67 and 76.
13. See footnote 11.