Could US-Korea trade agreement deter enhanced regulation of financial services?
According to the Financial Services Forum’s John Dearie, though, the financial crisis has actually enhanced the value of the agreement. “One of the lessons of the recent crisis is the tremendous need for greater cross-border communication and cooperation among financial authorities,” he said in an email.
The KORUS would do that, he said, by establishing regular dialogues between the two countries’ regulators. “The agreement should be ratified, not renegotiated,” he added.
And the lesson that the USTR official said had been taken from the financial crisis was that, “Trade commitments did not cause the financial crisis nor inhibit in any way our ability to respond appropriately to it.” As such, no changes in the approach or language of the FTA’s financial services chapter were made when the 2010 negotiations gave the parties the opportunity to take account of the financial meltdown.
What might another path look like?
Manuel Pérez-Rocha, associate fellow at the Institute for Policy Studies, said that the U.S. should have used its leverage to push for greater international regulation of some aspects of the financial services sector.
Prospects for ratification
Proponents and opponents alike agreed that the agreement has a good chance of being ratified this year.
Currently, the U.S. also has FTAs pending with Columbia and Panama, both of which follow the same model as the KORUS FTA, and both of which include very similar language regarding market access for financial institutions and prudential exceptions.
Indeed, the prudential carve-out in the Columbia FTA is almost identical to the one in the KORUS FTA.
President Obama has expressed interest in reviving these other Bush-era FTAs, as well.
“There is no current [international] framework for the regulation of financial products,” said Pérez-Rocha. “Obama could have used the re-negotiations to establish one, at least for Korea and the U.S., with this agreement.”
Pérez-Rocha’s candidates for such regulation in the context of an FTA include greater oversight of the derivatives market, and measures that lessen the risk of world economies being saddled with financial institutions that are “too big to fail.”
Pérez-Rocha did not specify the particulars of the regulations he would incorporate, but domestic efforts to tighten regulation of the derivatives market have focused on moving “over the counter” trading to regulated exchanges and central clearing houses, where it would be easier to monitor. Domestic proposals to reduce “too big to fail” risk have included measures that would cap bank size by asset and market share, and others that would re-enact the Glass-Steagall firewall between depository and investment banking.
Martin Hart-Landsberg had a different perspective. Rather than perpetuating the current FTA model, or moving immediately to incorporate provisions that enhance financial sector regulation into trade agreements, the U.S., he said, would do well first to take a long, hard look at its overall economic goals and priorities.
“It’s hard to say ‘Well, what would a good free trade agreement look like?’ because [the question] abstracts from all the problems in the U.S. economy,” Hart-Landsberg said. “You have to start and say ‘What would a healthy industrial policy look like? How would we want to rethink transportation? How would we want to rebuild an infrastructure? How would we want to ensure adequate investment in economic activities that would connect to new growth poles?’”
“Only then,” he added, “can you ask, ‘what would a trade strategy look like that would flow from that?’”