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March/April 2011
Vol. 36, No. 2

Trade: FTAs undermine financial reform efforts

Congress and the Obama administration's efforts to implement strong financial reforms could be undermined by the trade agreement recently renegotiated with South Korea, as well as other pacts such as the General Agreement on Trade in Services (GATS). A recently released study shows that the administration renegotiated key sections of the agreement with South Korea after the financial meltdown, yet did not take advantage of the opportunity to reform the agreement to allow for necessary new financial regulations. Another study shows how the GATS, a part of the World Trade Organization, can also undercut financial reforms in any of its more than 150 member countries.

Since 1994, the Maryknoll Office for Global Concerns consistently has challenged U.S. trade agreements due to their devastating effects on farmers and rural communities, on access to medicines and public services, and on the ability of other governments to implement policies to protect health and the environment. The agreement with South Korea includes the same problematic aspects, and goes even further by providing additional benefits to transnational corporations.

The office of U.S. Trade Representative Ron Kirk has called the financial services chapter (chapter 13) of the agreement "a groundbreaking achievement, providing more extensive provisions related to financial services than ever before included in a U.S. FTA (free trade agreement)." According to John Dearie, Executive Vice President for Policy at the Financial Services Forum, a coalition of the 20 largest financial services institutions in the U.S., "The agreement has been referred to as a 'gold standard agreement,' meaning that South Korea went far beyond its WTO obligations, permitting market access across virtually all service sectors."

In its controversial 13th chapter, the U.S-Korea agreement lists a number of limits that governments are not allowed to place on financial institutions, including the number of such institutions, the value of their assets and number of employees. Todd Tucker, research director of Public Citizen's Global Trade Watch, claims that, if U.S. regulators or Congress were to decide to limit the size of a bank's assets or market share in order to avoid situations where banks become too big to fail, the Korean government or individual Korean corporations could challenge that law under the FTA. Tucker also claims that the agreement would prohibit any regulatory bans, such as on credit default swaps or flash trading.

In his article on the website Remapping Debate, Mike Alberti writes that if the agreement is signed, "[the] U.S. would not be able to enforce such limitations on Korean companies, and visa versa. But, as a practical matter, the provisions would also effectively discourage the impositions of such limitations on domestic institutions operating in each country as well, since neither country would want to put its own companies at a disadvantage relative to the other country's financial institutions."

It is not only the new U.S.-Korea FTA that has the potential to interfere with necessary financial reforms. The GATS can result in challenges to laws designed to reduce excessive speculation in commodity markets. As the food and energy bubbles of 2008 showed, deregulation of these markets resulted in a massive increase in financial speculation to the point that investors dominated, rather than assisted, legitimate business users of commodity markets.

According to the Netherlands-based Centre for Research on Multinational Corporations, "If the EU were to introduce limits on speculative trading in food commodity derivative markets through quantitative limits or even bans on speculators and speculative commodity products, this would not be considered to be prudential as defined in the GATS Annex … because such measures to stabilise food prices are not meant to prevent the instability of the financial system, because trading in food commodity derivatives is relatively small, but rather to avoid food prices from becoming too high or volatile (which resulted in more hunger for the poor as in 2008)." Essentially, any governmental initiatives to rein in excessive speculation would be open to challenge from any WTO member country.

A host of new laws being considered by many countries post-financial crisis, from bans on naked short selling (speculating with other people's money) to new requirements for credit rating agencies and increased capital controls, are all susceptible to challenges through trade agreements based on a logic of market fundamentalism.

Aldo Caliari, director of the Rethinking Bretton Woods Project at the Center of Concern, a faith-based organization advocating for economic justice, says the U.S.-Korea FTA reflects "a model that was developed before the financial crisis" that "assumes that deregulation is going to lead to benign results." He writes, "It does not really take on board what we are learning right now about the problems embedded in that model, [the assumption] that financial actors are going to self-regulate and that they will do it in the best interests of society."

Clearly, we have learned much from the recent financial crisis, but global trade agreements have not adapted to this new reality and continue to tie governments to failed policies. The U.S.-Korea FTA makes a bad situation even worse by giving even more rights to the financial institutions that caused the disaster and limiting governments' ability to rein in their power. Without fixing these major failings, no new trade agreement should be signed into law.

Faith in action:

Call your senators and tell them to vote against the U.S.-Korea trade agreement and the agreements with Colombia and Panama which Congress is expected to consider soon. Explain that these agreements will undermine the good work that Congress did in passing strong financial reforms last year.

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