labor must be a goal that is sought by government with the same vigor that corporations have sought private financial gain. If we are going to hail the Constitution as a "beacon of freedom" human and environmental justice must be made an integral part of any trade agreement. Instead of following the corporate lead of “pitting the poor against the poor" to keep wages down; corrupting currencies of other nations to disrupt their struggling economies and forcing nations into unfavorable trade positions, we should be building up sustainable economies worldwide. The concentration of wealth and power into the hands of a few, at the expense of the many, must also be addressed. As Ghandi once said, "The earth will supply all of man's needs, it will not supply all of man's greed." Each nation should be able to pass laws to protect their natural resource assets, and to set high standards of worker and human rights protections. All nations should be encouraged to do so for the health of the planet and for the benefit of world peace. No trade organization should be able to set up a court system that looks only at trade barriers and profits and ignores the people and the natural world that they must live in. Corporations should not become "co-sponsors of government," or achieve an equal status with government. Nations that refuse to cooperate should be excluded from all trade. All subsidies, including tax loopholes for corporations, should end. This is consistent with "free trade" and consistent with the thinking and philosophy of Adam Smith, the father of "free trade." Smith did not want to see the hand of government involved in free trade. We do not want to see the hand of transnational corporations involved in government affairs and directing public policy, or in our pockets. This committee will be deciding more than U.S. policy in foreign trade. Its decision will illuminate, for the world, what is the greatest concern of our government representatives: The health and welfare of the people and their environment, or the health and welfare of the world's richest individuals and the corporations from which they direct public policy. This vote will determine whether members of Congress are to be seen as "straw bosses" for transnational corporations, or representatives of the people. While our forefathers did not practice what they wrote or preached in drafting up and approving our Constitution, they did provide a foundation upon which to build a true government, of the people, by the people and for the people. We ask this committee to put some truth and action behind the words of this noble document, and end U.S. support for the WTO and its present policies. Sincerely, BILL WELSCH Statement of Steve Judge, Senior Vice President, Government Affairs, Securities Industry Association Mr. Chairman and Members of the Subcommittee, my name is Steve Judge and I am senior vice president, government affairs, of the Securities Industry Association ("SIA").1 Thank you for giving me this opportunity to present the securities industry's views on U.S. preparations for the World Trade Organization (WTO) Ministerial Meeting in Seattle. SIA strongly supports the inclusion of financial services in the Year 2000 Round because it will build on the important progress achieved in the 1997 negotiations. My testimony will address the following key points: 1) the existing framework for open and fair markets; 2) the importance of financial services to the U.S. economy; 3) the need to further market liberalization; and 4) the securities industry's objectives for the Year 2000 Round. DEVELOPING A FRAMEWORK FOR OPEN AND FAIR MARKETS The World Trade Organization (WTO) Financial Services Negotiations were successfully concluded December 12, 1997. The agreement was the first of its kind for 1 The Securities Industry Association brings together the shared interests of more than 740 securities firms to accomplish common goals. SIA member-firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. The U.S. securities industry manages the accounts of more than 50 million investors directly and tens of millions of investors indirectly through corporate, thrift, and pension plans. The industry generates approximately $270 billion in revenues yearly in the U.S. economy and employs more than 380,000 individuals. financial services, resulting in the creation of a MFN-based global framework for the provision of financial services, and, more importantly, specific commitments by the 102 parties to the agreement to reduce and eliminate many discriminatory barriers. The financial services sector, including the U.S. securities industry, secured meaningful benefits from this agreement, including: • creation of international rules for all financial services firms; • reduction and removal of many discriminatory restrictions; ⚫ institution of a dispute settlement system for agreement violations; • specific liberalizing measures to be taken in emerging markets; and • establishment of a "floor" from which to build future liberalization. Despite these advances, we believe there is more to be done to secure open and fair markets for U.S. providers of financial services. Remaining barriers to entry and discriminatory treatment stifle the innovation and creativity of the securities industry, thus making the Year 2000 Round (the "Millennium Round") of tremendous importance. U.S. negotiators will have another opportunity to eliminate obstacles from foreign markets that hamper the competitiveness of U.S. firms and reduce U.S. economic growth and job creation. Moreover, liberalization will result in real benefits in key developing markets, enhancing and strengthening capital market efficiency, and increasing financial sector stability. THE FINANCIAL SERVICES Sector is a CATALYST FOR U.S. ECONOMIC GROWTH The U.S. financial services sector is a key component of the U.S. economy. Importantly, its continued strength is dependent on unfettered access to foreign markets. Whether firms are raising capital for a new business, extending credit for a corporate acquisition, managing savings for a retail customer, or supplying risk management tools to U.S. multinationals, this sector touches all aspects of the U.S. economy. In light of the financial service sector's unique role in the U.S. economy, its health is essential if the U.S. economy is to continue to show rates of economic growth and job creation it has during this decade. The U.S. financial services industry's impressive strength is best illustrated by these numbers. Financial services firms contributed $626 billion to U.S. Gross Domestic Product (GDP) in 1998, about 7.7 percent of total GDP. A record six-million employees 2 support the products and services these firms offer. Perhaps most impressive is how this industry has increased its relative importance to the U.S. economy. From 1980-1997, the U.S. securities industry's contribution to total output of the U.S. economy increased by 8.4 times-three times the increase of the overall economy.3 It is important to underscore that financial services firms are also exporters. In 1998, exports totaled $15.8 billion, with a trade surplus of $5.9 billion. Clearly the cutting edge services and products U.S. financial services firms offer are eagerly sought by foreign individuals, institutions and governments. The continued well being of this sector is directly linked to its ability to sell its products in foreign markets. The reason for the U.S. financial services sector's increasing commitment to foreign markets is clear. Over the last decade, the U.S. economy and securities markets-while still the largest in absolute terms-have seen their share of the global pie shrink. Approximately 80 percent of the world's GDP and half of the world's equity and debt markets are located outside the U.S. Indeed, many of the best future growth opportunities lie in "non-U.S." markets. U.S. investors and corporations have already tapped these new markets, with U.S. securities firms establishing substantial foreign operations to serve the growing international focus of their clients. The graph below illustrates this point. 2 Approximately six percent of total non-farm employment. 3 U.S. Department of Commerce. 65-092 D-00--12 EXPANDING BUSINESS OPPORTUNITIES FOR U.S. FINANCIAL SERVICES FIRMS The 1997 financial services agreement reflects a commitment by both developed and developing countries to enforce international rules in financial services. Since increasing levels of securities transactions are occurring on a global basis, and foreign firms are establishing operations abroad, there was a clear need to establish an infrastructure on which to build an open and fair global market for financial services. From SIA's perspective, the WTO financial services agreement was a critical development in global trade policy because it not only "locked-in" current levels of access, but also produced commitments by countries to eliminate and reduce some of the most egregious and discriminatory practices. Moreover, in developed countries-many of which already have open and fair markets-the accord guarantees the current level of access which foreign financial services firms enjoy. The central purpose of the 1997 negotiations was to remove the barriers foreign firms and their clients face in the world's developing markets (see chart below). In that regard, the pact will lead to the reduction and elimination of some onerous barriers foreign firms face, and a correspondent increase in business opportunities. For example, U.S. securities firms are now permitted to have majority control of a domestic securities company in nearly all WTO countries. U.S. consumers will also benefit because these commitments expand the ability to acquire foreign securities in the local market. Most important, this agreement is the base from which the Year 2000 Round will begin. Benefits of the 1997 WTO Financial Services AGREEMENT FOR THE SECURITIES INDUSTRY Indonesia Existing investments of foreign firms protected • Elimination of portfolio investment limitations Philippines • Foreign majority ownership permitted • Existing investments of foreign firms protected South Korea • Increased foreign access to listed stocks • Expanded foreign access to existing securities companies 4 It should be noted that many countries left certain activities "Unbound"; that is the country may introduce a measure inconsistent with market access or national treatment, and may grow more restrictive in the future. Thailand • Foreign ownership limits lifted for ten years SIA'S OBJECTIVES AND GOALS FOR THE UPCOMING ROUND SIA strongly supports the inclusion of financial services in the Year 2000 Round. SIA's objective is to achieve substantial liberalization of financial services markets in developing and developed countries. As the negotiations progress, we will recommend that negotiators reject deficient offers, such as those that codify the status quo without any progress; enshrine existing discriminatory practices; or, do not fully grandfather existing investments and operations. While SIA is still formulating its objectives for the upcoming talks, and will develop a specific list of country priorities, we believe a successful financial services trade agreement must incorporate the following core principles: 1. Binding Commitments to Open Markets In the last Round, many of the commitments made were to “lock-in" current practice. While some progress was made on efforts to reduce and eliminate existing barriers, much work remains to be done. For example, in the case of Malaysia, foreign ownership of local securities firms is limited to minority ownership. To meet the GATS goal of "Progressive Liberalization" (Appendix A) the Year 2000 Round negotiations must result in substantial binding commitments by countries to remove specific financial services barriers. Unless specific barriers are lifted, the agreement will provide little tangible benefits to the U.S. Importantly, any agreement reached during the Year 2000 Round must grandfather existing investments and not create new restrictions. This is particularly important given that during the past two years, many countries have opened their markets beyond the commitments they made at the conclusion of the last Round. Current access must be made part of any final agreement. 2. Freely Established Commercial Presence Establishing and developing relationships are critical elements in providing financial services. Increasingly, services must be delivered by having a business presence in the host country. Despite the progress made during the last Round, many developing nations still deny foreign investors the right to structure their businesses efficiently, or prevent them from establishing a commercial entity at all. In many cases, establishment is limited to minority joint venture, or hindered by an "economicneeds test." The ability to operate competitively through a wholly-owned commercial presence or other form of business ownership must be a fundamental element of an agreement. Non-residential financial services companies must be given every opportunity to establish a viable business presence outside their home country. Once established, companies in foreign markets should receive the same (i.e., national) treatment as domestic companies. 3. Elimination of Investment and Equity Limitations U.S. institutional and retail investors hold nearly $1.2 trillion of foreign stocks. Increasingly, U.S. investors are looking to securities from developing markets to diversify their holdings. However, U.S. investors are often constrained by ceilings and limitations on the purchase of these securities, which artificially raise their costs. Additionally, these limitations also have costs to the local markets, reducing liquidity and increasing volatility. These restrictions should be reduced and, eventually, eliminated. 4. Transparent Laws and Regulations In negotiating greater access for goods, reductions in tariffs provide a readily available way to reduce barriers to trade; i.e., tariffs on widgets can be reduced from 50 percent to ten percent over a five-year period. Financial services firms, however, are confronted with non-tariff barriers. These barriers come in two forms-regulatory shortcomings and lack of transparency in the implementation and application of regulations- and prevent access in the same way as tariffs. However, unlike tariffs, no quantitative mechanism exists to reduce regulatory barriers. We would urge negotiators to work on provisions that would, inter alia, eliminate preferential access to regulatory proposals; require public availability of proposed regulations; provide an adequate public comment period on new regulations; and mandate the enforcement of regulations in a non-discriminatory manner. From a business standpoint, ensuring a high level of transparency is as essential to a successful financial services agreement as tariff cuts are to an agreement on trade in goods. Lack of transparency in the implementation of laws and regulations—including limited public comment periods on proposed regulations, non-transparent approval mechanisms for firms and financial products, or other practices which are not dealt with pursuant to written regulations-can seriously impede the ability of securities firms to compete fairly. Regulatory prohibitions also limit the ability of U.S. firms to compete in foreign markets. In some cases, the sale of specific products requires regulatory approval. In other instances, the ability to establish is impaired in light of restrictions on new licenses. Elimination of these barriers is complicated, especially in light of the ability of countries to claim that they are "prudential” in nature; that is, they exist to protect the safety of consumers and soundness of the marketplace. However, we believe that many of these restrictions go beyond any legitimate prudential objective. 5. Reasonable Transition Periods The securities industry understands that local financial services firms in developing markets will need time to adapt to new competitive pressures. In this regard, reasonable transition periods should be considered, with remaining restrictions progressively eliminated throughout the transition. The transition time frames, however, must be accompanied by an initial down payment that results in immediate liberalization. Permanent restrictions on market share, activities or geographical location are unacceptable. NAFTA's sector specific transition periods is a useful model to study. For illustrative purposes, the transition periods for the securities industry in NAFTA are in Appendix B. 6. Increased Cross-Border Access The cross-border provision of financial services should be an important element of a WTO financial services agreement. Cross-border provisions should, for example, include the right to buy and sell financial products cross-border and the right to participate in and structure transactions. We believe this can be accomplished while addressing appropriate prudential concerns. CONCLUSION Mr. Chairman, we believe these negotiations offer Congress and the Administration another opportunity to secure open and fair access to foreign markets for U.S. firms and their clients. The start of the 21st century will find the U.S. securities industry on the leading edge of international technology, finance and innovation. If it is to remain there, however, it must be able to meet the demands of both its U.S. and foreign clients. Congressional leadership will be a critical factor in making sure that the Seattle WTO Summit produces a negotiating framework for the Year 2000 negotiations for that reduce and eventually eliminate barriers to trade. SIA stands ready to work with you as an active participant in these important trade talks. Appendix A Part IV Progressive Liberalization ARTICLE XIX NEGOTIATION OF SPECIFIC COMMITMENTS 1. In pursuance of the objectives of this Agreement, Members shall enter into successive rounds of negotiations, beginning not later than five years from the date of entry into force of the WTO Agreement and periodically thereafter, with a view to achieving a progressively higher level of liberalization. Such negotiations shall be directed to the reduction or elimination of the adverse effects on trade in services of measures as a means of providing effective market access. This process shall take place with a view to promoting the interests of all participants on a mutually advantageous basis and to securing an overall balance of rights and obligations. 2. The process of liberalization shall take place with due respect for national policy objectives and the level of development of individual Members, both overall and individual sectors. There shall be appropriate flexibility for individual developing country Members for opening fewer sectors, liberalizing fewer types of transactions, progressively extending market access in line with their development situation and, when making access to their markets available to foreign service suppliers, attach |