[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
TRADE IN FINANCIAL SERVICES:
CURRENT ISSUES AND FUTURE DEVELOPMENTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTERNATIONAL MONETARY POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 26, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-30
U.S. GOVERNMENT PRINTING OFFICE
73-597 WASHINGTON : 2001
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on International Monetary Policy and Trade
DOUG BEREUTER, Nebraska, Chairman
DOUG OSE, California, Vice Chairman BERNARD SANDERS, Vermont
MARGE ROUKEMA, New Jersey MAXINE WATERS, California
RICHARD H. BAKER, Louisiana BARNEY FRANK, Massachusetts
MICHAEL N. CASTLE, Delaware MELVIN L. WATT, North Carolina
JIM RYUN, Kansas JULIA CARSON, Indiana
DONALD A. MANZULLO, Illinois BARBARA LEE, California
JUDY BIGGERT, Illinois PAUL E. KANJORSKI, Pennsylvania
MARK GREEN, Wisconsin BRAD SHERMAN, California
PATRICK J. TOOMEY, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
CHRISTOPHER SHAYS, Connecticut CAROLYN B. MALONEY, New York
GARY G. MILLER, California LUIS V. GUTIERREZ, Illinois
SHELLEY MOORE CAPITO, West Virginia KEN BENTSEN, Texas
MIKE FERGUSON, New Jersey
C O N T E N T S
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Page
Hearing held on:
June 26, 2001................................................ 1
Appendix
June 26, 2001................................................ 29
WITNESSES
Tuesday, June 26, 2001
Farmer, Thomas L., General Counsel, Bankers' Association for
Finance and Trade.............................................. 10
Judge, Steve, Senior Vice President, Government Affairs,
Securities Industry Association................................ 11
O'Connor, Peter, Executive Vice President, ACE INA, on behalf of
the
American Insurance Association................................. 8
Weisbrot, Mark, Co-Director, Center for Economic and Policy
Research....................................................... 14
APPENDIX
Prepared statements:
Bereuter, Hon. Doug.......................................... 30
Oxley, Hon. Michael G........................................ 63
Sanders, Hon. Bernard........................................ 65
Waters, Hon. Maxine.......................................... 70
Farmer, Thomas L............................................. 79
Judge, Steve................................................. 84
O'Connor, Peter.............................................. 72
Weisbrot, Mark............................................... 94
Additional Material Provided for the Record
Bereuter, Hon. Doug:
Foreign Trade in Financial Services: Background Information,
CRS memo, March 26, 2001................................... 33
Foreign Trade in Financial Services: Bilateral and Regional
Agreements and Relations: CRS memo, April 27, 2001......... 40
TRADE IN FINANCIAL SERVICES:
CURRENT ISSUES AND FUTURE DEVELOPMENTS
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TUESDAY, JUNE 26, 2001
U.S. House of Representatives,
Subcommittee on International Monetary
Policy and Trade,
Committee on Financial Services,
Washington, DC
The subcommittee met, pursuant to call, at 2:35 p.m., in
room 2128, Rayburn House Office Building, Hon. Doug Bereuter,
[chairman of the subcommittee], presiding.
Present: Chairman Bereuter; Representatives Roukema,
Castle, Manzullo, Biggert, Capito, Sanders, Waters, Carson, and
Sherman.
Chairman Bereuter. The hearing will come to order. I regret
we are getting such a late start. But the good news is that we
expect--no assurances, but we expect that we'll be
uninterrupted now for 2 hours. The Subcommittee on
International Monetary Policy and Trade meets in open session
today to examine financial services trade. The subcommittee
will hear from private sector witnesses who will testify about
financial services trade as it pertains to insurance banking
and securities.
This hearing will be the beginning of this subcommittee's
and the full committee's examination of this important subject.
The word ``trade'' was actually added to this subcommittee's
title. It had not been a part of the title before. And I am
convinced that financial services exports have a substantial
benefit for the American people and for American firms. And if
this subcommittee and committee doesn't pursue it, then we are
neglecting our responsibilities.
In fact, on July 11th, U.S. trade representative, Robert
Zoellick, will brief the Members of the Financial Services
Committee at the full committee level on pending issues and
financial services trade, and he addressed some of those issues
in a meeting this morning here on Capitol Hill. The Financial
Services Committee has jurisdiction over trade as it pertains
to financial services. This is quite important as U.S. cross-
border trade and financial services have recently grown quite
significantly.
U.S. cross-border transactions, of course, are between
resident U.S. companies and foreign consumers. In the year
2000, U.S. cross-border exports of financial services equaled
$20.5 billion, which is an increase of 26\1/2\ percent relative
to 1999. Moreover, unlike the current overall U.S. trade
deficit, U.S. financial services trade had a positive balance
of $8.8 billion in the year 2000. It is important, I think, to
note that these statistics do not even include the activities
of the affiliates of U.S. companies, which are physically
located in a different country.
I want to call my colleagues' attention to two memoranda
addressed to this Member from the Congressional Research
Service, at my request, and I think they provide good
background for us as we prepare to explore this subject. And I
want to particularly commend Patricia Workman and William H.
Cooper for the work they have done on these memoranda and for
their offer of further assistance.
[The information referred to can be found on page 33 in the
appendix.]
Before introducing our distinguished panel of witnesses, I
would like to briefly stress the following three issues that
are quite important in today's hearings. First, U.S. policy
toward foreign financial institutions, barriers to financial
services trade and current efforts to open financial service
markets. I am interested in the thoughts of our witness panel
on these three particular subjects, as well, of course, as on
other relevant subjects and issues. First, the U.S. uses a
policy of national treatment for foreign financial institutions
that have a presence in the U.S.
National treatment allows foreign-owned financial
institutions and U.S. domestically owned financial institutions
to be treated the same. In fact, under the Financial Reports
Act of 1988, the Secretary of the Treasury must provide to
Congress a quadrennial study of changes and laws that affect
national treatment of foreign banks and security firms in the
United States.
Second, U.S. financial service firms do confront many types
of trade barriers. For example, Japan, until recently,
restricted sales of foreign insurance companies of life and
non-life insurance. Another example, the Brazilian government
denies foreign marine cargo insurers the ability to compete for
that business. I am interested in other specific examples which
restrict foreign markets' access to U.S. financial
institutions. But I think you could just give us an unlimited
amount of such examples.
Third, even with these trade barriers, there are current
efforts to open up financial service markets, which my
colleagues are all aware of. Financial service trade is part of
the larger framework of the World Trade Organization (WTO)
negotiations on trade and services. The General Agreement on
Trade in Services (GATT) within the WTO was concluded in 1997.
As a result of a financial services agreement, it included
member commitments to provide national treatment and market
access to foreign providers of financial services.
Moreover, in the year 2000, a new round of service
negotiations of course began in the World Trade Organization
(WTO). Furthermore, the Free Trade Areas of the Americas,
(FTAA), is another example of an effort to open up the
financial services market. In June of 1998, nine negotiating
committees, including one for financial services, were
established under the 34 nations in the Western Hemisphere. Due
to the prospective emerging markets, the U.S. financial
services sector could benefit greatly from the FTAA.
Lastly, this Member believes that giving the President
Trade Promotion Authority, (TPA), would provide new
opportunities for financial services trade. While the U.S.
continues to be the global leader in financial services, this
position could be threatened by the lack of a TPA. Currently,
the European union has free trade agreements with 27 countries,
while the U.S. has only two such free trade agreements which
are signed into law. The TPA would greatly enhance the
credibility, I think, of the U.S. negotiating position in both
the WTO and the FTAA.
On May 10th, President Bush provided Congress an outline of
his 2001 legislative agenda, including the TPA. In addition, I,
of course, would note, Representative Phil Crane introduced the
TPA bill, HR 2149 which currently has 89 co-sponsors.
To assist the subcommittee examining these issues I am
pleased we will have the opportunity to hear from our
distinguished panel of private witnesses.
First Mr. Peter O'Connor, the Executive Vice President of
Global Government Affairs and New Markets for ACE INA, will
testify on behalf of the American Insurance Association (AIA).
ACE INA, which has offices in 50 countries, is one of the
world's largest providers of property and casualty insurance.
Mr. O'Connor has 30 years of international management
experience.
Second, the subcommittee will hear from Thomas L. Farmer,
the General Counsel of the Banker's Association for Finance and
Trade, (BAFT). This association, which represents
internationally active financial institutions and companies,
promotes the expansion of financial service markets worldwide.
Mr. Farmer has had a distinguished career, which includes being
a founding member of the Overseas Development Council and the
former General Counsel of the Agency for International
Development.
Third Mr. Steve Judge will testify on behalf of the
Securities Industry Association, SIA. The SIA represents nearly
700 security firms, including investment bankers, broker
dealers and mutual fund companies. SIA member firms are active
in both U.S. and foreign markets. Mr. Judge has been the head
of the Securities Industry Association since 1993. Prior to
joining SIA, he was a congressional staff member for more than
13 years.
In addition, Dr. Mark Weisbrot, the Co-Director of the
Center for Economic and Policy Research in Washington, DC will
testify. Dr. Weisbrot has written different publications on
trade and globalization. In addition, he is the author of a
weekly column on economic and policy issues that is distributed
to newspapers by the Knight Ridder Tribune media services.
We welcome the distinguished panel to our hearings, and
without objection, your written statements will be included in
their entirety in the record. But first, I turn to the
distinguished Ranking Member of the International Monetary
Policy and Trade Subcommittee, Representative Bernie Sanders
from Vermont for any comments that he might have.
Mr. Sanders.
[The prepared statement of Hon. Doug Bereuter can be found
on page 30 in the appendix.]
Mr. Sanders. Thank you very much, Mr. Chairman, and welcome
to our guests. And I thank you for holding this important
hearing. I think the first point that I would make is that
while it is very important to be talking about financial
services and trade, we should understand, as Mr. Weisbrot will
tell us, I suspect in a few moments, that our net exports of
financial services currently total about $8.8 billion. Now that
sounds like a lot of money. But even if this were to double in
the next few years, the increase would only reduce our current
account deficit by about two percent. So I think it is
important to look at the issue of financial services within the
context of our entire trade policy.
I happen to be one of the Members in the Congress who
believes that our current trade policy overall is a disaster.
And it is worthy of a lot more discussion than we presently
hear. It is quite incomprehensible to me that in a time when we
have this year, a trade deficit of over $400 billion, a record-
breaking trade deficit, that we hear very, very little about
that issue.
We have, as many of you know, presidents in recent years,
whether it is currently President Bush or President Clinton or
President Bush's father, the former President, they were all
very strong free trade advocates. And what very often President
Clinton and the others would tell us is that for every $1
billion in U.S. exports, we gain about 14,000 jobs. And that is
true.
But unfortunately, they didn't do the other side of the
equation. What happens when you have a $400 billion trade
deficit? How many jobs do you lose? And the answer is
obviously, that we lose many, many jobs. And, in fact, using
the same accounting principles that President Clinton and
others have used, we have lost over 1.4 million good-paying,
manufacturing jobs since last year alone, and 6.3 million
manufacturing jobs overall due to our failed trade policies.
So while today we will hear, in fact, that trade regarding
financial services has been a positive for the United States,
we cannot not put that in the overall context of our trade
policies in general, which, to my mind, are a disaster. In
terms of the North American Free Trade Agreement, (NAFTA), in
terms of China, as all of you know, we have an $8.38 billion
trade deficit with China. Let us talk about that as we discuss
renewing most-favored-nation status for China, which I suspect
will be coming before Congress in July.
In terms of NAFTA, we have now a $24.2 billion trade
deficit with Mexico. Before NAFTA, as a matter of fact, that
used to be a surplus. We have a $50 billion trade deficit with
Canada, which has more than doubled since NAFTA. So I am not
quite clear how people keep telling us that NAFTA, or most-
favored-nation status and free trade with China has been this
great success. And that is only in terms of job loss. But there
are other aspects to the economy when you are looking at huge
trade deficits, and that is the pressure on wages.
There was a recent poll, a study that came out, which
indicated, lo and behold, guess what, the middle class has not
been doing particularly well, despite the great economic boom.
In fact, the average American today is working longer hours for
lower wages than was the case 25 years ago before the great
economic boom. And if you are looking at people who do not have
college degrees, young entry-level workers without a college
education saw their average real wage plummet by 28 percent
between 1979 and 1997, because many of the jobs that
traditionally had gone to high school graduates are now being
done in China and in Mexico.
So Mr. Chairman, I will be brief. And with your permission,
would like to enter my full comments into the record. But the
bottom line is, we cannot just look at financial services and
say ``Hey, free trade is great.'' Now I understand that we
don't have jurisdiction for these other issues within this
subcommittee.
But my own view is we have got to be honest. Our current
trade agreements are not working for the average American
worker, for the vast majority of our people. Yes, they are
working for multi-national corporations who love the idea of
being able to gain access to China and Mexico and every other
country on earth where they can hire labor at very, very low
wages, take American jobs, bring them abroad. But, I think, Mr.
Chairman, I applaud you for holding this hearing, and I
understand the limitations of our jurisdiction. But I am one
who believes that our current trade policy has been a disaster
for American workers. We need to rethink it. And with your
permission, Mr. Chairman, I would submit my remarks for the
record.
Chairman Bereuter. Thank you, Mr. Sanders. Without
objection, the gentleman's entire statement and other Members'
opening statements which they may have will be a part of the
record. Hearing no objection, that will be the order. Are there
Members that wish to be heard in opening statement?
[The prepared statement of Hon. Bernard Sanders can be
found on page 65 in the appendix.]
Mr. Sherman. Yes, Mr. Chairman.
Chairman Bereuter. I see Mr. Sherman. Under the rule, Ms.
Waters and Mr. Sherman are entitled to 3 minutes each.
Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman. I appreciate
this hearing and I appreciate the fact that you organized this
hearing on Trade and Financial Services and your willingness to
allow the Members of the subcommittee to express our concerns
regarding the direction of our Nation's trade policies.
President Bush has placed the passage of Trade Promotion
Authority, also known as Fast Track Authority, at the top of
his legislative agenda on international trade. Fast Track
Authority may be used for a new round of World Trade
Organization negotiations, as well as negotiations for a Free
Trade Area of the Americas and other regional and bilateral
trade agreements. These trade negotiations could have far-
reaching implications for people in the United States and
around the world.
I am particularly concerned about the impact that trade
agreements have on labor, the environment and public health.
International trade cannot be expanded at any cost. We must
insure that working people and their families actually benefit
from international trade. This will not happen unless
individual countries have laws and policies to improve wages,
working conditions, protect the environment and address the
needs of their people. Only then will increased trade result in
rising incomes and the improvement of living standards in the
United States and the countries in which we trade.
Let me begin by pointing out that I am not one to demand
that all countries have the same minimum wage or that
developing countries be forced to accept the same labor and
environmental laws as the United States. However, labor unions,
consumer advocates and environmental organizations must be at
the table when the United States negotiates trade agreements
and their legitimate concerns must be addressed. This will
require the participation of people who represent labor unions
and civil society organizations, and in the developing
countries well as the United States.
I am especially concerned about the impact of WTO
intellectual property rules on public health in developing
countries. The Trade Related Aspects of Intellectual Property
Rights, the TRIPs Agreement, is one of the international
agreements enforced by the WTO. The TRIPs agreement allows
pharmaceutical companies, for example, to demand monopoly
prices for medicines for which they have patents, including
medicines for the treatment of HIV and AIDS.
As a result of the TRIPs agreement and pressure from
pharmaceutical companies, millions of people in developing
countries have been denied life-saving medicines, because they
cannot afford to pay the prices the pharmaceutical companies
demand. A few countries have begun to respond to the HIV/AIDS
pandemic by enacting laws to allow the distribution of generic
HIV/AIDS medicines to their populations. Pharmaceutical
companies have responded by using the WTO and TRIPs Agreement
to challenge their laws.
I am not going to continue this statement. I will ask that
it be submitted for the record. But let me just close by saying
I am concerned about what is happening also in the Caribbean,
our neighbors. And, because I have spent some time there, I
have witnessed the way that we have treated them in terms of
their banking laws. I think there is a lot of room for
improvement.
We have a lot of American firms, for example, that are
going down to the Bahamas, but they cannot get the tax credits
for holding their conventions there. The conventions that they
hold there are important trade for the Bahamas, for example,
because their economy is built on tourism. And if, in fact, our
companies are going there, the economy is built on tourism,
they are our friends and our neighbors. When we talk about
financial services, why don't we correct some of the problems
that we have created before we even start to talk about some
new ones?
Also, I want to just say this: If we are interested in
``know your customer'' rules and laws, we have got to practice
what we preach. Let us not go someplace else demanding what we
don't do here in the United States. With that, I will yield
back the balance of my time.
[The prepared statement of Hon. Maxine Waters can be found
on page 70 in the appendix.]
Chairman Bereuter. Thank you, ma'am.
The gentleman and lady's entire statement under previous
unanimous consent requests are included.
The gentleman from California, Mr. Sherman.
Mr. Sherman. I commend the Chairman for holding these
hearings and commend the gentleman from Vermont, especially,
for his focus on the most enormous trade deficit in the history
of mammalian life and the effect that financial services can
have on that. You don't have to be a member of the Progressive
Caucus to see the importance of our trade deficit. At that
table 2 years running, Chairman Greenspan has sat there and in
response to my questions, has been amazed, as I am, that this
trade deficit has gone on so long without exploding. And
predicting that some day, some date that neither one of us
would predict, that it has to come to an end, perhaps a
crashing end.
The financial services area is one area where we have some
competitive advantages and might be able to get some of that
trade deficit reversed. But financial services are perhaps
unique among the products in the world. If you have a
competitive advantage in widgets, you export widgets and it
helps your trade deficit.
In contrast, financial services, while it can produce tens
of thousands of jobs here in the United States, could also be
the vehicle for exporting hundreds of billions of dollars in
capital. And I think it is important that we look at what we
can do to keep capital in the United States. We had a $1.3
trillion tax cut in this country, adopted in large part to
increase the amount of capital available for the expansion of
American business, not to simply lead to the export of capital
from the United States to other countries.
In addition, you have the enormous effect our financial
services industry can have on some of the most horrific human
rights problems around the world. Slavery, obviously, had an
enormous impact on our economy. That was a century-and-a-half
ago. Today, slavery is being practiced in Sudan and this House
had the fortitude to close off Sudan and those companies that
do business with Sudan from the U.S. capital markets,
particularly the New York Stock Exchange.
And I think that this subcommittee ought to look for other
opportunities where it does have an impact on our business, but
is there anybody in this room that would want to gain an
economic advantage by supporting or participating in slavery in
Sudan? I don't think so.
So I commend the Chairman for holding these hearings and
think that as we go through the process, we need to ask is our
involvement in international financial markets going to help us
with the trade deficit and is it going to reflect American
values, particularly in dealing with some of most extreme human
rights violations? I think, though, that I join with the
gentleman from Vermont in saying we need a more comprehensive--
outside the jurisdiction of this subcommittee--review of how a
country that once ran the world's greatest trade surplus is now
running the world's greatest trade deficit. I yield back.
Chairman Bereuter. I thank the gentleman. And without any
further ado, we will proceed with the witnesses. Because I
think some of the major benefits will come from the questioning
to the witnesses. I am going to ask the witnesses to summarize,
in effect, to meet a 5-minute limitation. I regret doing that,
but I think it is probably essential for the benefit of our
deliberations.
First we would like to hear from Mr. Peter O'Connor,
Executive Vice President of ACE INA testifying on behalf of the
American Insurance Association.
Mr. O'Connor.
STATEMENT OF PETER O'CONNOR, EXECUTIVE VICE PRESIDENT, GLOBAL
GOVERNMENT AFFAIRS AND NEW MARKETS FOR ACE INA, ON BEHALF OF
THE AMERICAN INSURANCE ASSOCIATION
Mr. O'Connor. Thank you, Mr. Chairman, and other
distinguished Members of the International Monetary and Policy
and Trade Subcommittee for holding this important hearing
today. I am providing testimony today on behalf of the American
Insurance Association, which represents 370 major U.S. property
casualty insurers. Trade in financial services has grown
rapidly over the last decade and is now a major component of
the U.S. trade policy. And insurance has been a strong member
of that increasingly robust trade sector. In fact, U.S.
financial services exports last year stood at $17 billion, a 30
percent increase from 1999. Subsidiaries of U.S. insurers sold
over $46 billion of products overseas in 1998.
Liberalization of trade and insurance, combined with the
development of open and transparent regulatory regimes, is
critical to the growth of U.S. insurers and to the health of
the U.S. insurance industry overall. But more importantly, it
is critical to the ability of emerging and transitional
economies to grow and develop their economies and provide
social safety net protections to their citizens. Insurance is
important to any economy for a number of reasons, but I will
cite only two. First, insurance is an essential and vital
component of a country's financial infrastructure. Insurance
companies can be major sources of national income. In
collecting relatively small premiums from their many thousands
of insureds, insurance companies are able to invest large sums
locally.
This, in turn, deepens and broadens the domestic financial
services marketplace, which generates higher savings rates and
therefore greater economic development. Insurers are also the
largest purchaser of Government bonds, which are used to
finance infrastructure projects such as schools, hospitals,
roads, and power plants.
Second, insurance supports beneficial increases in overall
trade and investment and creates jobs, both in the U.S. and in
the emerging market. American companies, including small- and
medium-size enterprises, are more likely to export to and enter
foreign markets if they have access to specialized products and
services that they require and U.S. insurers provide. Increased
sale of U.S. products overseas translates to more jobs being
created back home to supply the overseas demand. Countries
around the world, both developed and developing, are
recognizing the important role of a healthy and competitive
insurance marketplace in their economy.
As a result, U.S. insurance company investment and sales
outside our country have increased substantially over the last
decade. The insurance industry has been increasingly active in
a number of public policy areas to promote expanded
international trade. U.S. insurers strongly support the efforts
of U.S. trade officials and many Members of Congress to expand
trade in both the multilateral and bilateral arenas. But our
focus in both realms is clear: greater market access for our
business and greater regulatory transparency for our products.
On the multilateral front, the U.S. insurance industry
strongly supports the Bush Administration's efforts to initiate
a broad trade round within the World Trade Organization,
beginning at its ministerial in Doha, Qatar in November. While
the 1997 commitments are valuable, U.S. insurers are ready to
build on those commitments and work with U.S. negotiators to
gain further access to those markets and improve regulatory
conditions.
Specifically, the U.S. insurance industry has rallied
behind a proposed model schedule that urges countries to make
improvements to their 1997 market access commitments, but also
to address domestic regulatory issues that effectively act as
barriers for U.S. insurers. On the bilateral front, the U.S.
insurance industry has been strongly supportive of U.S. trade
agreements to expand trade in all areas, including insurance
with countries that welcome foreign investments and trade. We
are particularly supportive of the U.S. bilateral trade
agreement with Vietnam and have lobbied for its passage in
Congress. The insurance industry supports ongoing trade
negotiations with other countries, both developed and
undeveloped, including the European Union, Japan and India.
Our recent focus has been on emerging markets that have
long maintained less developed insurance systems, but now
appear committed to creating modern and competitive insurance
sectors, including China, India and Vietnam.
Based on the market opening commitments China made in its
1999 accession agreement with the U.S. and reaffirmed earlier
this month, the industry was strongly supportive of permanent
normal trade relations for China last year. We remain committed
to normal trade relations for China this year, when Congress
votes on that measure to maintain its current trade status
until China becomes a full WTO member.
Finally, AIA and its member companies, as well as others in
the insurance industry, strongly support the enactment of the
Trade Promotion Authorities, known as TPA. We believe the
stronger the mandate the President has to enter into trade
agreements, the more likely it is the U.S. will be able to
negotiate agreements that provide greater benefits to the U.S.
economy and consumers.
All of these separate ongoing trade issues involving many
countries around the world ultimately address different market
barriers and economic circumstances that are unique in each
country. But our goal with each issue is the same, to further
open each market so that U.S. investors can fairly compete
there.
In conclusion, Mr. Chairman, a healthy and productive
global insurance infrastructure is vital to a prosperous,
innovative and growing global economy. AIA, ACE INA and others
in the insurance industry have been proud to play a role in
expanding insurance sales abroad and in the process benefiting
consumers, economies, and global living standards.
We look forward to working with you and all Members of the
subcommittee on the major policy and trade challenges of this
year. We appreciate having the opportunity to testify before
you today and would be happy to answer any of your questions
that you may have.
[The prepared statement of Peter O'Connor can be found on
page 72 in the appendix.]
Chairman Bereuter. Thank you Mr. O'Connor.
We will now hear from Mr. Thomas Farmer, General Counsel,
Bankers' Association for Finance and Trade. Mr. Farmer, you may
proceed.
STATEMENT OF THOMAS L. FARMER, GENERAL COUNSEL, BANKERS'
ASSOCIATION FOR FINANCE AND TRADE
Mr. Farmer. Thank you, Mr. Chairman. You have our written
statement. It is brief, and I am sure you have a chance to read
it now or later, and I won't go into that statement in any
detail. I will try to respond more directly to some of the
issues that you and your colleagues have raised. Let me make
one diversion here in anticipation of my colleague from the
SIA.
Chairman Bereuter. Bring the mike a little bit closer.
Mr. Farmer. Let me just say that I have just read his
statement, and I wish to associate our association with what he
has said. We have worked together on a lot of these issues, and
we are quite close to them. Let me make a special reference to
two issues that are in his statement that are not even alluded
to in ours, which concern unilateral sanctions, and again, I
think that is something that is worth discussing later. And
then the brief reference to the adequacy finding by the
European Union, (EU), on privacy issues. Again, that is an
important issue and he has presented it very well.
Let me also say that we are very pleased that a number of
Members of your subcommittee and the full committee have
already expressed their views on that issue. And we hope to be
able to work with you on resolving that before very long. Let
me go ahead and address one of the issues that I have alluded
to that the Chairman brought up, which is national treatment,
which is an important principle and the Bankers' Association
for Finance and Trade, (BAFT), has supported that for many
years.
I have had the privilege of working on that very issue for
at least 20 years. And I have to tell you, it is a very blunt
instrument, because it is really not in the interest of the
U.S. to close its markets to foreign institutions for the
reasons that I have mentioned in our statement. The depth and
liquidity of the U.S. financial markets is very much supported
and strengthened by the ability of foreign banks to get full
national treatment in this country.
And this subcommittee, over the years, has passed
legislation which has consistently, and we are very pleased
about that, treated foreign institutions on the same basis as
American institutions, and that is one of the reasons why our
markets, the U.S. financial markets, are as deep and as liquid
and as well-functioning. And one of the contentions we have
made is that to a large extent, the vitality of the U.S.
economy results from the lower cost of capital, the breadth of
instruments that are available, and the access of foreign
investors and lenders to the U.S. capital markets.
Almost consistently, the U.S. has benefited from the
ability of foreign capital to operate in this country, whether
it comes here through our institutions through their foreign
head offices or from foreign-owned institutions through their
local offices. This has been very successful, and we have made
a lot of progress, and the U.S. Treasury has played a key role
in persuading other countries, including Japan, to which you
made references, and Canada, to which I made reference, to open
up their markets to American financial institutions. The
persuasive element in those negotiations, and I have seen them
up close, has not been so much the threat that we will exclude
them from our markets, but the fact that our markets are
working better than their markets, and that it is in their
interest to permit foreign-owned institutions into their
markets.
Canada is maybe one of the prime examples of that. The U.S.
Government has had this debate with the Canadians for a long
time. Even in NAFTA, the Canadians did not want cross-border
branching, and therefore it isn't part of NAFTA. But then in
1995, the Canadian government began to worry about the
shrinkage of the Canadian capital market, the impact on the
Canadian economy and their conclusion was, to a large extent,
this was due to the fact that the Canadian government had made
Canadian markets unattractive to foreign banks and so they
reversed course.
And in 1997, in the General Agreement on Trade in Services,
(GATS), they made a commitment to open up their markets to
cross-border branching and then they did that. In this example,
the function of the U.S. market has worked in a number of
cases. I think Mr. Judge will agree with me also on the
Japanese bilateral negotiations. Again the Japanese concluded
that really it was in their interest to open up their markets.
And I think that is the way to proceed in those negotiations,
to have the principle of national treatment, but to realize its
limitations, and importantly, to keep the openness of our
markets as a glowing example of what really helps the economy,
and the economy of the U.S.
So I would emphasize that I am not qualified--I am not an
economist--to discuss trade imbalances generally, and certainly
my charter doesn't run to that. But I would like to suggest
that the attractiveness of U.S. markets, U.S. financial
markets, has resulted in, partly through the structure of these
markets, has resulted in a large inflow of foreign capital over
the years.
I don't have any figures that compare the outflow or the
inflow, but my guess is that on balance, there is more of an
inflow. In any case, I think it has helped us deal with what is
admittedly a very difficult situation, which is the trade
imbalance. So I'd like to address those points.
[The prepared statement of Thomas L. Farmer can be found on
page 79 in the appendix.]
Chairman Bereuter. Thank you, Mr. Farmer.
We'd like now to hear from Mr. Steve Judge, Senior Vice
President for Government Affairs, Securities Industry
Association.
STATEMENT OF STEVE JUDGE, SENIOR VICE PRESIDENT, GOVERNMENT
AFFAIRS, SECURITIES INDUSTRY ASSOCIATION
Mr. Judge. Chairman Bereuter, Mr. Sanders, Members of the
subcommittee, thank you for the opportunity to present the
securities industry's views on trade issues that affect the
financial services industry. The U.S. capital markets are the
deepest, most transparent and most innovative in the world. The
securities industry's unique function, matching those who have
capital with those who will use it productively and advising
clients and investors on how to manage their investments, are
vital to world's economic growth.
The U.S. financial services sector's continued strength
depends upon access to foreign markets. It is critical that we
continue to pursue access to all markets worldwide. Increased
competition improves efficiency and provides consumers with the
broadest range of products and services at the lowest cost.
Countries that erect barriers to entry, not only harm our
ability to provide the products and services our customers
demand, but also inhibit growth and innovation in their own
economy.
The products and services that U.S. financial services
firms offer are eagerly sought by foreign individuals,
institutions and governments. In fact, financial services
exports topped $20.5 billion with a record trade surplus of
$8.8 billion. Over the last decade, the U.S. capital markets
have seen their share of the global pie shrink. Approximately
80 percent of the world's Gross Domestic Product, (GDP) and
half of the world's equity and debt markets are located outside
the U.S.
So obviously, many of the best future growth opportunities
lie in non-U.S. markets. It is a long-established U.S. policy
to promote economic growth through open markets. The Securities
Industry Association, (SIA), supports efforts to eliminate the
protectionist barriers through WTO financial services
negotiations and through bilateral and regional pacts.
SIA strongly believes that substantial liberalization of
financial services markets can only be realized if countries
improve regulatory transparency. Lack of transparency and
implementation and application of regulations frustrates
markets' access in the same way as does tariffs.
Over the last 2 years, SIA has undertaken a major effort to
increase regulatory transparency. We published a paper
identifying the principles on which transparent regulatory
systems are built. This effort has received the support of U.S.
financial services regulators and we have worked with APEC, the
OECD, IMF, WTO regulators in North America, Europe, Asia and
Latin America. Indeed, just earlier today, SIA spoke to members
of the International Organization of Securities Commissions on
the importance of transparent regulation. And we will give a
major presentation of this paper to their annual meeting on
Friday in Copenhagen.
We are urging our trade negotiators to incorporate these
transparency principles in future agreements. These principles
would 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 on a non-discriminatory basis.
SIA strongly supports the inclusion of financial services
in the year 2000 round. We believe this is a tremendous
opportunity to build upon the 1997 WTO accord. Though that
agreement did not achieve the elimination of all the barriers
that the securities industry sought, it did create a strong
basis for further liberalization. SIA's objectives for the
upcoming round are to expand on the 1997 commitments, transform
voluntary liberalizations undertaken since 1997 into binding
commitments, and to reject offers that do not fully grandfather
existing investments and operations.
We are extremely supportive of the Administration's efforts
to forge trade accords with Chile and Singapore, and the free
trade area of the Americas. These targeted negotiations provide
an opportunity for groundbreaking financial service agreements,
and they must set a high standard against which future
agreements will be measured.
SIA supports Trade Promotion Authority for the President as
an essential tool in negotiating favorable trade agreements. We
have been actively seeking a declaration from the European
Union, (EU), that Title V of Gramm/Leach/Bliley, in combination
with the Fair Credit Reporting Act and other U.S. laws and
rules, constitutes adequate protection for personal data
handled by the U.S. finance services sector for purposes of the
EU data protection directive. Such a determination is critical
for the U.S. financial services sector by guaranteeing that the
uninterrupted flow of data will insure continued investor and
market confidence.
The privacy debate in the United States will continue to
evolve. A U.S./EU agreement on adequacy does not preclude
further developments and privacy law in either the U.S. or in
Europe. An EU adequacy determination would, however, allow U.S.
financial services firms to comply with the extensive legal
regimes already in place on both sides of the Atlantic without
the threat of costly and disruptive data stoppages.
SIA is increasingly concerned about proposals to seek to
use the U.S. capital markets to achieve foreign policy goals.
U.S. capital markets attract investors and companies from all
over the world, and regularly serve as a safe haven in times of
crisis. Denying access to U.S. capital markets is not an
effective tool for addressing complex foreign policy issues.
Doing so could seriously disrupt investor confidence, both
domestic and foreign in U.S. markets and jeopardize our
continued vibrancy. If issuers are denied access to our markets
through unilaterally imposed sanctions they may simply find
capital in other markets where U.S. firms are less likely to be
competitive.
As the world leader in providing innovative services and
products, U.S. financial service firms are essential to job
creation and economic growth in the United States and
worldwide. Access to foreign markets is more necessary than
ever to help firms meet their customer's demands. Your
leadership will be a critical factor in deciding the framework
for ongoing negotiations within the WTO and other upcoming
market-opening trade accords.
Once again, I thank you for your efforts in the past and
for the opportunity to testify today. SIA stands ready to work
with you as an active participant in these important
discussions.
[The prepared statement of Steve Judge can be found on page
84 in the appendix.]
Chairman Bereuter.Thank you very much, Mr. Judge.
Now we will hear from Dr. Mark Weisbrot, the Co-Director of
the Center for Economic and Policy Research. Mr. Weisbrot, you
may proceed as you wish.
STATEMENT OF MARK WEISBROT, CO-DIRECTOR, CENTER FOR ECONOMIC
AND POLICY RESEARCH
Mr. Weisbrot. Thank you. I would like to thank Chairman
Bereuter and the subcommittee for this opportunity to testify
on this issue. The Center for Economic and Policy Research is a
non-profit, non-partisan policy institute and we seek to expand
public debate on issues such as this. I will focus my remarks
on the public interest in these agreements, such as the Free
Trade Agreement of the Americas, (FTAA), the General Agreement
on Trade in Services, and NAFTA, and also such legislation as
Trade Promotion Authority.
While it is clear there are some gains to be made by U.S.
financial firms and banks by the liberalization of trade in
financial services, we must weigh these gains against the cost
of entering into and expanding the international agreements by
which such liberalization is achieved. You cannot liberalize
trade in financial services without accepting the rest of the
agreements, such as the FTAA. We must also consider the costs
and risks associated with liberalization and deregulation, some
of which only become apparent after the fact, as in our own
savings and loan deregulation experience in the 1980s.
On the benefit side, it is argued that the expansion of
trade in financial services can help reduce our trade deficit.
As Congressman Sanders already pointed out, there is not going
to make very much difference even if we were to double the $9
billion surplus that we currently have. It is about 2 percent
of our current account deficit, which is now running at 4.5
percent of GDP, $450 billion a year. And as Congressman Sherman
pointed out, this is a very serious problem and I am always
amazed as an economist by how little attention it gets in the
press. It will have to get some attention soon, because we
cannot go on doing this indefinitely. Our foreign debt is now
nearly 20 percent of the Gross Domestic Product. If we keep
going at the rate we are going now, it will reach 50 percent in
less than 7 years, which is a level that no industrialized
country has ever had. And again, from an economic point of
view, this is at least as serious a problem as a budget deficit
of the same order. In fact, it is more serious, because the
money is owed to people and institutions outside the country.
And yet, Congress does take very seriously, and the press does
take very seriously, the possibility of a Federal budget
deficit 10 and 20 years into the future, while at the same time
this much more important trade and current account deficit is
basically ignored.
However, we should be wary of promises that expanding our
trade through agreements such as NAFTA, the proposed FTAA or
the WTO, will reduce our trade deficit, as the proponents of
NAFTA promised back in 1993. Of course prominent economists
argued that it was going to expand our trade, which it did, and
expand our trade surplus and create a net gain of hundreds of
thousands of jobs here, and instead--and I am using figures,
they are only slightly different, because they are in constant
1992 dollars, from what Congressman Sanders said--but you can
see our NAFTA deficit went from $16.6 billion in 1993,
quadrupling to almost $62.8 billion in 2000, and of course our
overall current account deficit has ballooned.
The subcommittee asked whether it would be advisable as
part of the process of expanding trade in financial services to
ease the restrictions on foreign companies that wish to sell
securities in U.S. markets. I just want to mention that we have
enough problems here policing our own securities markets, as
was shown in the recent collapse of the bubble in tech stocks,
and you have any number of examples.
One I gave here is Priceline, for example, which is now
trading at 18 percent of its peak value. Well, they measured
their revenue in terms of their ticket sales, airline ticket
sales and hotel room sales, the total amount of them. This is
one of the many accounting manipulations that was not stopped
by the Securities and Exchange Commission, and partly as result
of that, we had a huge bubble and it burst and millions of
Americans are already having to change or postpone their
retirement plans. So I would suggest that we need to get our
own house in better order before we expand our own markets to
more difficult-to-police foreign securities.
Finally, a couple more points if I can. The deregulation of
financial services has other risks. We saw this in the Asian
financial crisis, which most economists now agree was brought
on by an opening up of capital markets in the region, which led
to a sudden influx of hot money that flowed right out within
the following year in 1997-1998. And you had a reversal of
capital flows, about 11 percent of GDP for South Korea,
Indonesia, Philippines, Malaysia and Thailand. This is what
really brought on the crisis and the collapse of the currencies
and the economic collapse in the region, which did have an
effect also in the United States, particularly on certain
industries. Steel workers, farmers were particularly hard hit.
So we have to be careful with international deregulation of
financial services even on its own terms and apart from the
other conditions that are included in these agreements.
I guess I am out of time, but if we do have time I would
like to come back to some of the other conditions that are in
these agreements that we should be particularly wary of.
[The prepared statement of Mark Weisbrot can be found on
page 94 in the appendix.]
Chairman Bereuter. Thank you very much. Gentlemen, thank
you very much for your testimony. We very much appreciate it.
We will now move to the 5-minute question rule, and I will
begin the questioning by a question that I want to address to
all of you. I will give you a minute or two to think about it
and I would like to then have brief answers from each of you. I
will move to a second question in the meantime. These are the
two related questions.
What type of barriers do you believe are the most damaging
to international trade in financial services? And then, second,
I want to ask you which countries are the most restrictive,
have the most restrictive rules for gaining market access? You
can give me one, two or three nominees.
And in the meantime, Mr. Judge, I would like to go to a
comment you had at page 6 related to what you describe as a
NAFTA model for transitions; that is, transition periods, for
entry into developing country markets. And the points that you
are making that NAFTA could be in, that it is sector specific.
Is that the primary reason you cite this or is it something
about the transition period model itself?
Mr. Judge. No, it was the transition model itself. In some
negotiations it makes sense to have a transition period to get
to a goal of total market access and that cannot be
accomplished immediately.
Chairman Bereuter. How do you think, for example, the China
WTO access treated your country on transition periods and other
elements that limit or begin to open up your access to
securities, exports, sales?
Mr. Judge. Our support for the China agreement was based on
the general benefit to the economy. The securities industry
itself did not receive as favorable a treatment under that as
other industries did.
Chairman Bereuter. It was one of their disappointments in
short, wasn't it?
Mr. Judge. Yes, we were very disappointed in the agreement
reached on securities with China.
Chairman Bereuter. Now if I could come back and ask each of
you, just doing down the line, Mr. O'Connor, do you want to
give me what are the most damaging barriers to international
trade in financial services?
Mr. O'Connor. Well, based on my experience, I think some of
the barriers that are significant are ownership. In some
countries there is a limitation on ownership for foreign
companies. India has a limitation of 26 percent, which is very
bothersome. Another one is the product approval process. That
has been very problematic in Japan where foreign companies,
until recently anyway, have been subject to another approval
process for their products that was different than it was for
Japanese companies. And then another example, I think certain
countries, China comes to mind here, they have closed out
certain sectors, certain product sectors for foreign companies.
Automobile insurance is a closed sector. There were other
sectors, but automobile is one.
Chairman Bereuter. Let's deal with the barriers first. Mr.
Farmer, which are your nominees?
Mr. Farmer. Well, we will talk about the barriers first.
Chairman Bereuter. Yes.
Mr. Farmer. The commercial banking industry I don't think
feels it has significant barriers to entry in any market that
is of real interest to the industry in terms of an economy
which would be worth trying to operate in.
Chairman Bereuter. Is that because of national treatment
giving us more leverage?
Mr. Farmer. That is basically due to the fact that the 1997
GATS agreement made a great deal of progress, and always I
mention Canada and Japan being prime examples there. There are
barriers in the sense of hurdles to operating successfully in
some of these markets I have mentioned in my statement, where
the regulatory structure is such that the risks for operating
in those markets make them unattractive. Lack of transparency
in the regulatory system, actually the SIA statement on that is
quite comprehensive. Lack of ability to have input on
regulatory structures, and the other thing I would say is
weakness of the local banking sector. It really isn't possible
to operate successfully in a country if the local banking
sector, as it is, for example, in Russia, simply doesn't
operate properly.
Chairman Bereuter. That is interesting. We will have to
come back to that one. I want the other barriers nominated by
Mr. Judge if I may. Excuse me, Mr. Farmer. Mr. Judge.
Mr. Judge. Where they exist, ownership and market
establishment barriers are still very important, but we found
that, as Tom said, Mr. Farmer said, the 1997 WTO accords
removed many of those. But more important are the lack of
transparent regulatory systems in these countries. That is
something that is really a country-by-country, barrier-by-
barrier, regulation-by-regulation fight that we have to make.
Chairman Bereuter. Thank you very much. I am out of time,
but I want to go to Dr. Weisbrot to see if he wants to suggest
the most egregious or difficult barriers.
Mr. Weisbrot. I can't speak for the industry, obviously--I
think this is one of the problems with the way this is looked
at--some of the things that are barriers to entry to financial
services markets are actually regulatory measures that are
necessary to maintain stability in local capital markets. And
the example I gave in my testimony, for example, as to what
brought on the Asian financial crisis was a removal of
restrictions on foreign borrowing that allowed banks and
corporations there to borrow almost unlimited amounts from
abroad of short-term capital. Of course, this is what created
the instability that led to the currency crashes that brought
with it the whole collapse of the economies in the region,
because you had this enormous influx of short-term capital,
which was pushed very strongly by the U.S. Treasury Department.
Prior to this deregulation it would not have been possible.
Chairman Bereuter. Thank you very much. That subject about
what caused the financial crisis in Asia is the subject of
another discussion, but my judgment is that is only one of the
reasons. The other was crony capitalism and mishandling of it
by the IMF in its initial stages, but that is for another day.
Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman. I understand we have
representatives from the insurance banking and securities
industry here and you are testifying about financial services,
and that is fair enough. That is your interest. But I would
like you to do me a favor and put another hat on as well. Just
pretend that you are not representing a financial services
industry, but you are a Member of the United States Congress
that has to look at financial services and a dozen other
things. And if a constituent came up to you and said, sir, we
now know that financial services are running a surplus, Mr.
Congressman, but we have an $83 billion trade deficit with
China--I know some of you have mentioned NAFTA. We have now a
$24 billion trade deficit with Mexico, whereas before NAFTA, we
had a surplus. We have a $50 billion trade deficit with Canada,
which has more than doubled since NAFTA.
So now you are a United States Congressman and not just a
representative of a financial service industry. Tell me what
you would tell a constituent when a constituent said, hey,
these are not working for me, because I lost my job or my wages
are going down or my wife lost her job. So how do you feel
about the China agreement, the NAFTA agreement overall?
Overall, not just from your financial services. Give us some
advice as to how we should vote on these issues.
Mr. O'Connor, if you could briefly respond, Mr. Farmer, Mr.
Judge, Mr. Weisbrot.
Mr. O'Connor. Congressman, the insurance industry is a
particular industry. It is not a manufacturing industry, it is
a service industry. So I don't think anybody has lost their job
in the insurance industry, because of opening of new markets. I
would use the specific example of China. Right now, the Chinese
can sell their goods in the United States. Basically they have
a pretty good free access to the U.S. marketplace where U.S.
companies don't have access to selling goods to the same extent
in China. I would say the WTO accession and implementation of a
bilateral trade agreement would reduce the trade deficit with a
significant trading partner of the United States where we have
a deficit, and that is China.
Mr. Sanders. I appreciate that and, as you know, we don't
pick and choose in general. When we are dealing with NAFTA, you
are not just dealing with insurance, you are dealing with
automobiles and steel and everything else.
So you did not quite answer my question. I am appreciative
of the fact that the financial services industry is running a
surplus, but we can't pick--well, we can pick and choose, but
the approach we have taken is broad trade policy.
Mr. Farmer, how would you answer that question?
Mr. Farmer. Let me say I am neither a Member of Congress or
an economist.
Mr. Sanders. For a few minutes you will be a Member of
Congress.
Mr. Farmer. I am way over my head. I think a lot depends on
who your constituents are. I would think Mr. Bereuter's
constituents, to the extent they are farmers, are quite happy
with NAFTA and some of the other agreements. In other words, I
think there are balances. Certainly I think if I were an
economist, and I am not, I think you need to look at trade
balances on a worldwide basis, not on a bilateral basis. I know
we are running a worldwide deficit at this point also, but we
are running also a capital account and this is one area where
the financial services industry comes in well. A lot of this is
balanced off by the need for, and the willingness of, our
creditors to keep holding onto those little green pieces of
paper that we give them, the dollar bills. That is partly due
to the fact that they can invest these papers extremely well in
the United States, thereby helping our capital markets,
lowering our capital costs, and the part of the economy that is
driven by them doing well.
Mr. Sanders. I have to interrupt you, because we don't have
much time and I want others to comment. I would say when we
talk about trade or economic policy in general sometimes we
miss the bottom line, and what the bottom line is to me, to be
frank, is how the average citizen is doing. Does this trade
policy benefit the average person? You are right, in some cases
a farmer in Mr. Bereuter's district or my district benefits,
but on average when you are running up a $400 billion plus
trade deficit I think the evidence is overwhelming that the
average American is not benefiting.
Mr. Judge, your view?
Mr. Judge. First of all, I might tell other industries to
follow the example of the financial services industry. The
financial services industry seems to have a pretty good example
of how this can be done. I encourage other industries to follow
the notion of expanding markets overseas. I would want to make
sure there is a cause and effect relationship between the
enactment of the trade agreement and the trade deficit that you
point out. I am not sure in the absence of these trade
agreements that the trade deficit would be all that much
better. In fact, it could be worse. I would make sure I
understood there is a cause and effect relationship there, and
I am not sure there is one there yet.
Mr. Sanders. Subject for another discussion.
Mr. Weisbrot.
Mr. Weisbrot. I don't think actually any economist would
dispute the relationship between the trade agreements and the
deficit. They might dispute the actual effect of that trade
deficit on things like wages for employment over the long run.
But I think what you would have to say is, first of all, the
agreements--NAFTA and the FTAA, they are deliberately designed
to make it easier for U.S. corporations to move their
investments elsewhere, direct foreign investment elsewhere. So
there is no doubt that they have that effect. The other effect
they have is to push wages down. Here, if you look at them, is
the one probably most important statistic that you can look at
concerning the U.S. economy from the point of view of the
people, and that is the median wage. That is, the real median
wage adjusted for inflation is today the same as it was 27
years ago. Now this is unprecedented in American economic
history. This means that the majority of the labor force in the
United States has literally not shared in the gains from
economic growth over the last 27 years. If you compare that to
the previous 27 years, the typical wage increased by 80
percent. The difference between 80 percent and zero is huge,
and a good part of that again, economists would argue how much,
but a sizable part of that is due to our international
commercial agreements and exchanges.
Mr. Sanders. Thank you all.
Chairman Bereuter. The time of the gentleman has expired.
There were three Members here at the beginning of session. Mrs.
Roukema was here at the beginning of the first session. First,
we will hear from Mrs. Roukema, Mr. Castle, Mrs. Biggert, and
then order of appearance under the committee rules.
Mrs. Roukema.
Mrs. Roukema. I don't quite know where to begin here, but I
have listened very carefully to what you have to say. And
coincidentally I might tell you that I and Mr. Bereuter were at
a policy hearing this morning where Trade Ambassador, I'm
sorry, Bob Zoellick, our Trade Negotiator for the Bush
Administration, was speaking, and we had noted the Trade
Promotion Authority which a couple of you referenced. That has
been evidently pointed out as something that Congress has to
do. I don't know how high a priority you rank that. But I would
like to know if you want to comment on the Trade Promotion
Authority. I would be happy to hear that, but I would like to
know what do you think our Trade Rep, Mr. Zoellick, should be
doing now for your industry, and I heard you say you need more
transparency country to country. And you did talk about some of
the damaging barriers to financial services. What should the
Trade Rep be doing with the Administration and through the
Administration with your industry?
Mr. O'Connor. I think the Trade Representative should be
addressing these barriers that we mentioned earlier.
Mrs. Roukema. I'm sorry? Should be?
Mr. O'Connor. Addressing.
Mrs. Roukema. Has there been any movement in that direction
in the correspondence? There has been correspondence and
dialogue.
Mr. O'Connor. Yes. There is an open communication link
between our industry anyway and the U.S. Trade Representative,
and we constantly advise. This is a moving target. As we go
forward, we constantly advise what are the remaining barriers
and what the problems are. Transparency continues to be a
problem and we make our proposals to USTR and have frequent
meetings with them, and they are very serious about us helping
the financial services industry, particularly insurance,
address these issues with the offending countries.
Mrs. Roukema. Either you or anyone else, please amplify on
that, but at the same time tell me, has there been any action
taken besides communication and discussions?
Mr. Farmer. Could I? Let me say the way the U.S. Government
is structured in financial services outside of insurance, the
principal responsibility, negotiating responsibility is not
with Mr. Zoellick, but with the Secretary of the Treasury. We
have worked very closely with the Treasury over the years
through various administrations and they have been very
actively negotiating on these very issues with foreign
governments.
My reference to Canada and Japan reflect mostly the efforts
of the U.S. Treasury to get the regulatory structures improved
in these countries, and that has continued to go on. And I
would say the Treasury also is working with the IMF, which is
beginning to give technical assistance to countries that don't
understand regulation. And so through the Treasury/IMF channel
there has been a lot going on.
As you know, the current Treasury is just getting into
place for various reasons, and we are looking forward to even
more activity by them when they get their top people in place.
Mrs. Roukema. Thank you.
Yes, Mr. Judge.
Mr. Judge. First of all, we strongly support TPA, and we
think it should be a high priority. Second, I think the U.S.
Government should be encouraging that the WTO Financial
Services Round to remove further barriers. I think Mr. Farmer
pointed out the good relationship between USTR and the
Treasury, and Treasury's responsibility for banking and
securities and USTR's responsibility for insurance and other
financial services.
The last Administration, and the previous Administration,
have done a very good job working with the industry in trying
to identify our major concerns and addressing them. I think so
far the rhetoric out of the Administration has been very
positive on these issues, and so we look forward to working
with them in the next year or two and developing those
negotiating positions.
Mrs. Roukema. Excuse me. You said the rhetoric has been
good, but has there been action as well?
Mr. Judge. I don't mean that pejoratively. The public
statements have been very positive is a better way of saying
that. My rhetoric was flawed there.
Mr. Farmer. The senior political officials of the Treasury
are not yet in place and it is not fair to judge the Treasury
performance on the last few months.
Mrs. Roukema. Mr. Weisbrot.
Mr. Weisbrot. We are against the Trade Promotion Authority,
and we think, first of all, the Constitution confers upon the
legislative branch the authority to regulate commerce with
foreign nations. It is a relatively recent development that it
has been shifted more and more to the executive branch, and I
think one of the problems of it is you have these commercial
agreements that are negotiated that do neglect the public
interest, as Congresswoman Waters was pointing out, in terms of
environmental health, public health and of course the effect on
workers.
Mrs. Roukema. Excuse me, I wasn't quite sure. What did you
say about Trade Promotion Authority? Whose responsibility did
you say it is?
Mr. Weisbrot. Congress should have the responsibility, the
main responsibility, for trade and commercial agreements.
Mrs. Roukema. You are saying we should be pushing that
immediately?
Mr. Weisbrot. No, I think what Trade Promotion Authority
does is it shifts that authority to the executive branch by
allowing Congress to have only an up or down vote on that. So
it really takes most of the power away from Congress on that.
Mrs. Roukema. But you are the minority on that?
Mr. Weisbrot. I don't know if I am the minority in the
country.
Mrs. Roukema. I mean on the panel.
Thank you very much.
Chairman Bereuter. The gentlelady from Illinois, Mrs.
Biggert, is recognized.
Mrs. Biggert. Thank you very much, Mr. Chairman. I have a
question. What areas do you want to see addressed in the next
round of negotiations? I will start with Mr. O'Connor.
Mr. O'Connor. I will pick up on that and also respond to
Congresswoman Roukema's question further. AIA, the industry
association that I represent, has identified 150 barriers,
trade barriers, entry barriers, market barriers, and that list
is being prepared and it will be transmitted to USTR. And that
will be also on the agenda for the Doha Ministerial, which will
take place this fall.
Mrs. Biggert. Are you optimistic that there will be
progress made on these fronts?
Mr. O'Connor. In some areas. That is a long list. But there
are some priority areas. I think I mentioned a couple of them
earlier, and we are hopeful that there will be progress.
Mrs. Biggert. OK. About 10 years ago, the U.S. financial
services industry was quite concerned with the development of
the EU and how that would affect the ability of U.S. firms to
compete. So what has been the experience of the financial
sector with the EU?
Mr. Farmer. Let me say on banking it has been excellent.
There have been lengthy negotiations with the EU, again very
strongly assisted by the U.S. Treasury, and the end result has
been that U.S. financial institutions are treated the same way
as European institutions just as we treat them over here. I
would say on the whole within the G-7 countries now there is a
reciprocity of the national treatment and equal access to each
others' institutions that is exemplary.
The EU privacy directive is another matter. It is a
misunderstanding we think on the part of the Europeans as to
what our privacy regime consists of, and that is
understandable. It is very new. It is very complex, and I think
we are just beginning to understand ourselves how it is working
and how effective it is.
Mrs. Biggert. Then just another general question is what
are the benefits to the U.S. financial services firms when new
markets are opened to their services and how does this help our
economy?
Mr. Judge. How does it help our economy? It helps in
several ways. First, when new markets are opened up, U.S. firms
are able to provide services to that economy that they were
unable to provide before. That provides revenue for U.S. firms.
Second, it means the economies in those countries are more
competitive, they are more advanced. It provides us the ability
to export other goods into that country that they may not have
been able to purchase before. They may not have had the income
or they may not have had the need for those goods and services
produced by United States manufacturers.
Third, we provide export financing for those exports into
that country. There are several ways in which greater access by
U.S. firms to those countries increase U.S. economic interests.
Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
Chairman Bereuter. Thank you very much, Mrs. Biggert.
The gentleman from Illinois, Mr. Manzullo, is recognized.
Mr. Manzullo. Thank you very much. Unfortunately, the
people that were criticizing you for only having an $8 billion
trade surplus do not realize that the trade surplus for all
services is $80 billion. And that is engineering,
architectural, legal, I think about 17 different areas that all
become part of what we know as trades and services. For years I
have belonged to a group called the Transatlantic Business
Dialogue that entered into a memorandum of understanding on
policy standards which would open up the way in EU, for more
American service sectors. I wonder if you could comment? There
are continued negotiations for transparency in each of those 17
areas.
Mr. Farmer, you already stated that things couldn't be any
better in banking in Europe. But is there any improvement in
our relations in the EU for banking? And then Mr. Judge for
securities and Mr. O'Connor on insurance.
Mr. Farmer. Well, I would just say that basically leaving
aside our current debate on the privacy issue, the important
thing is not to disrupt the good relationship that is now
working. And these are capital markets which we think are doing
well, and the Europeans are beginning to get to a Europe-wide
financial market, which doesn't yet exist, and when it does, I
think it is going to be very beneficial for our firms as well.
I don't think we have any real disputes or differences of views
between ourselves.
Mr. Manzullo. We will leave that alone, then. Good.
Steve.
Mr. Judge. Well, I think Tom is right that this is an
evolving relationship between the United States and Europe. As
they have greater common markets, there are fewer country-by-
country differences, and so that is an advantage. We do have
different regulatory systems, and we have to learn how each of
the different systems work. They need to learn about ours and
we need to learn about theirs.
On balance, I think the relationship between the United
States and the EU is as good as any relationship in the world,
but clearly there are areas we can work on, and we are working
on them. They have begun efforts in several areas, privacy,
capital adequacies. We have an ongoing dialogue with the EU at
present on some of their new initiatives and that we expect to
continue. So those are areas we have to work on. On balance, it
is a pretty good relationship. We have some issues at present.
Mr. O'Connor. The U.S. insurance industry and the trade
associations, working together with the Europeans, have come up
with a model schedule which deals with an ideal form of
regulation, transparent regulation, that we would like to have
adopted as much as possible around the world, so that we have
to start to have a global scale, a global model of regulation
that we can all follow. A lot of progress has been made on that
and we have good support from the Europeans as well.
Mr. Manzullo. Would that apply to China also?
Mr. O'Connor. Yes.
Mr. Manzullo. I know we have Met Life in our district and
they have been trying to get into China for a considerable
period of time.
The other question I have is more of a comment. Bob
Vastine, who is with the Coalition of Service Industries--I
think you are all part of that--wrote an article in the Keough
Journal several months ago where he states that when we pierce
markets initially with the service industry that the
merchandise sector will follow behind that. And I would like
your comments on that.
Mr. Judge. I think that is a very good point, that it is
many times the easiest way in which to enter a market, the
first entrant being the financial services industry. But doing
so, you bring in the tools with which other parts of the
economy and other parts of the U.S. economy can export into
that country. You have the financing for the export, you have
the financial infrastructure in place to make those exports
possible. So I think in many ways we in the financial services
sector are the door opener for many trade relationships.
Mr. Manzullo. Could Ex-Im Bank have any role in providing
more financial services for exports?
Mr. Farmer. I would not say that, but I think obviously to
the extent that our customers, our exporters are able to export
better with Ex-Im financing, thereby the economy benefits. I
don't think that it directly benefits the financial services
sector other than its ability to effectively serve and provide
export financing, especially for small business, which is more
dependent because of its risk profile for Ex-Im support than
maybe some of the others.
Mr. O'Connor. On the insurance side, certainly the
availability of insurance products from foreign insurance
companies in a new opening market helps ease the entry for
manufacturing companies who are entering into a market and want
to have insurance coverage that provides the similar type
coverage that they will be getting in the U.S. So that does
help encourage investment overseas.
Mr. Manzullo. Thank you very much.
Chairman Bereuter. I thank you.
I do have a couple more questions, and we will take
questions from other Members if they wish. First of all, you
all have excellent testimony.
Mr. O'Connor, I particularly was struck by the five reasons
you cite why insurance is important to any economy. I think
that is very succinct and it seems to me out of enlightened
self-interest insurance sectors ought to either be developed in
those countries or they should permit American and other
developed country insurance companies to come there if they
want their economy to thrive. I think that is a very
interesting citation of five simple reasons why it is important
that insurance must exist for an economy to thrive.
I am struck, as I listen to you--particularly the three
representatives of the financial services sector, how Mr.
Farmer has fewer concerns and complaints. It seems to me it
must relate to the fact that there is a banking system in every
country, crude or as inadequate as it may be; whereas insurance
is not really available in any substantial area of some
developing countries, or it does not cover the areas of
insurance that we would cover in this country. The same is true
with securities. And so we can make national treatment work as
leverage to assure that American banks doing business abroad in
a different country, or within the EU market areas, are treated
equally; national treatment in turn if we give them national
treatment in this country.
So we lack that leverage. I don't know if you, Mr. Judge,
or you, Mr. O'Connor, have anything to suggest to us as to how
we can have more leverage for insurance and securities. If you
do, I would like to hear it now or later. What can we do to
better arm the USTR to make sure we get a good deal for your
sectors?
Mr. Judge. One of the key things that we have found in
discussing trade opportunities with other countries is that it
is important that they understand that it is in their own best
interest to allow freer access by U.S. financial services
firms, banking, insurance and securities into their markets,
that that increases their economic efficiencies, that that
increases the opportunities for growth. One thing I think that
is important is their own self-interest, and we have to educate
them about that.
In terms of leverage, we have a very open market and we do
not support negotiations of restricting our market in order to
provide leverage over other countries and financial services.
We think that probably has some short-term and long-term
problems in it. But what is important is that banking tends to
be the first industry that is out there. And in order to have a
good securities market you have to have an accumulation of
assets to have an efficient securities market. I think the same
is probably true for insurance. You need to have a basis first
of a good commercial banking market.
Mr. O'Connor. I think the greatest leverage that we have in
our industry is the fact that we generate--let me put it
another way. We mobilize savings within a country so we can
generate a tremendous pool of funds that haven't been generated
before that would be invested in state bonds, government bonds,
which I said earlier in my testimony would then be invested in
infrastructure projects such as schools, hospitals, highways,
railways, airports. I think that is significant leverage. And
as countries see that the U.S. has had a lot of experience in
mobilizing capital and putting that capital to work to build
infrastructure, when the new markets see that message and
understand that message, I think that is terrific leverage,
because they are all very concerned about building a modern
infrastructure as quickly as possible.
Chairman Bereuter. Japan has historically been one of the
most difficult countries for the insurance sector, for foreign
insurance companies to leap to clear. Do you think that has
contributed in any fashion to their financial problems? For
example, the Japanese people right now are putting their money
into the post offices there as their major savings outlet. And
as you know, the interest rates that are paid there are
basically just storing their money. Do you have any suggestions
as to whether or not this is a major impediment or cause of
their financial problems? Or would that be an exaggeration?
I am searching for a good rationale why we can convince the
Japanese they have to bring their barriers down.
Mr. O'Connor. The reason for the problems in the Japanese
economy, particularly in the insurance sector, which is really
troubled, there is a flight to quality to the State postal
savings system. I think the significant part of that problem
was created by a lack of transparency in regulation, and I
would say that regulation is a problem there.
Chairman Bereuter. Am I imagining things or have you in
your sector made a breakthrough in Korea lately? Did I read you
finally had success for opening up markets in South Korea, in
the Republic of Korea?
Mr. O'Connor. It is not on our priority list. At least in
our industry, on the P and C side, we have been active for many
years. It is a difficult market to do business in, but we don't
see a significant barrier at this time.
Chairman Bereuter. I would like to supply all four of you
with copies of two memoranda that are prepared for the Members
here by the Congressional Research Service, particularly the
last one dated April 27, which looks at the potential impact on
the financial services sector of agreements in Jordan and
Singapore and Vietnam, and I know one of you specifically
mentioned your interest in Vietnam. Is that you, Mr. Judge?
Mr. Judge. I mentioned Singapore.
Chairman Bereuter. Singapore, and they also look at Chile.
Dr. Weisbrot, I can't help engaging you a little bit here
in light of what you said with respect to your lack of support
for Trade Promotional Authority, and I think it is beyond my
capacity to turn you around on that today, but I would make
this comment and invite you to respond to it if you wish.
The reason we granted President Ford Fast Track Authority,
which is now named Trade Promotional Authority, as you probably
know, was related to the fact that you are absolutely right
that under the Constitution Congress has the authority to
regulate foreign commerce, but the problem we ran into is that
countries or groups of countries were unwilling to proceed with
trade negotiations, because they realized they could sit there
all day, and finally after months, perhaps work out agreements
with the United States Trade Representative and then Congress
could come along and second-guess them. So that was not the end
of the line when they finally shook hands across the table as
to what the agreement could be. And so we delegated to the
President, every President until the President's party failed
him in the House, to give President Clinton Trade Promotion
Authority for then-called Fast Track Authority. We always gave
the President that ability. And the assurance we gave to the
countries across the table from us in those trade negotiations
is that Congress couldn't change it. They could vote up or
down, but they couldn't amend it and it would be handled
expeditiously in 90 days. So we reached Fast Track Authority
only because we reached an impasse with trade negotiations.
They were unwilling to let that negotiation be second-guessed
by Congress when it finally came to us, since both Houses have
to approve that kind of agreement, that kind of a treaty.
So what alternative do we really have, given the
unwillingness of other countries to engage us in trade
negotiations under the old arrangement?
Mr. Weisbrot. Well, I have two or three answers to that.
Chairman Bereuter. OK.
Mr. Weisbrot. First of all, I do hear the story a lot, but
I do also see examples of a story when the U.S. negotiators are
taken seriously without the Fast Track Authority. You did see
the Multilateral Agreement on Investment was negotiated from
1994 to 1997, and it was about 90 percent complete, according
to people who were involved in the negotiations, and it did
eventually collapse, but it had nothing to do with the United
States not being taken seriously, and I don't remember any
country or anybody in any other country in negotiations raising
the issue that the United States did not have Fast Track
Authority to negotiate with the 28 other members of the
Organization for Economic Cooperation and Development in which
the treaty was being negotiated. And that was a major treaty.
That was every bit as powerful as NAFTA or the proposed FTAA in
terms of things that were being negotiated.
So I think it clearly is possible to negotiate without the
Fast Track Authority.
Chairman Bereuter. You can negotiate, but you can't
conclude.
Mr. Weisbrot. Like I said, it was never an issue, and they
could have concluded. If it was not for the opposition from
over 600 non-governmental organizations all around the world
who mounted an enormous campaign against that agreement, I
think it would have been concluded. I don't think it would have
fallen apart as a result of the authority of the United States
not being respected there to negotiate that agreement.
The other thing is if you look at the agreements you are
talking about where back in the seventies you are talking about
the GATT, for example, General Agreement on Tariffs and Trade,
where the issue being negotiated was really just tariffs and
some non-tariff barriers to trade, mainly just tariffs. And now
these trade agreements are enormously much more powerful. That
is why I don't call them trade agreements. I always call them
commercial agreements, because it is a misnomer to call NAFTA
or the FTAA a trade agreement, because the provisions of those
agreements that have the most impact on society and the economy
of the member countries are, in fact, the non-trade parts of
those agreements.
So the agreement, for example, that Congresswoman Waters
mentioned on intellectual property rights, which is included in
NAFTA and the WTO and will be included in the FTAA, and of
course the investor-to-State dispute resolution mechanism of
NAFTA, which gives corporations for the first time ever the
right to directly sue governments for regulations,
environmental or any other kind of regulations that infringe on
their profits, that is an enormous change that affects every
aspect of our regulation. There has already been environmental
regulation, both in Canada and it is now threatening
environmental regulation in California of the gasoline additive
MTBE, which California tried to ban and it is now being
challenged by a Canadian company. There are a number of
examples of these cases, and of course there are all the cases
in front of the WTO. Basically these agreements have reached
into a broad area that affects public health and safety
enormously, much more than the General Agreement on Tariffs and
Trade did, and to tell Congress they have only an up or down
vote on these issues to me is just a terrible abdication of
responsibility.
Chairman Bereuter. Well, if I had an alternative that was
workable, and you haven't given us one.
Mr. Weisbrot. I think Congress----
Chairman Bereuter. And it is not just agreements. I admit
to you, in fact, that recent agreements like NAFTA are very
broad in their implications. They are trade related, they are
commerce related. They are international commerce related. But
they are broad, I will give you that. They have an effect on
our society as well as the other partners of society. But it is
not just the trade agreements of the seventies. We didn't have
to go. We weren't forced by our negotiating partners to go to
some new arrangement until 1974. And then from 1974, from 1994
to 1996, I think it was 1994, we had all these Presidents
successively given this grant of power by Congress, saying you
do your best to conclude the deal and you can be assured that
your trade partner knows that proposed agreement that we
finally have inked is not going to be changed. It may go down
entirely, but it is not going to be changed. It is not that
they do not respect us. They know that the man who is sitting
at the table does not have the final authority. We uniquely
have given our parliamentary body, in this case the Congress,
the final say because of our Constitution. So tell me an
alternative.
Mr. Weisbrot. Can I suggest one? One would be for Congress
to set the guidelines, to set out a series of goals and say
this is what we want the executive to negotiate in these
agreements.
Chairman Bereuter. Yes, that can certainly be done.
Mr. Weisbrot. And then they know beforehand this is what
they are supposed to negotiate, and then they resolve the
problem you are referring to, where other countries might worry
that the Congress is not going to approve that agreement. Then
you will have a real congressional input from a body that is
much more accountable to the public than the USTR.
Chairman Bereuter. That is certainly a reasonable
suggestion on your part. Just how far do you take it? Do you
take it to the point of micromanagement, where in effect it is
impossible for negotiation to proceed? But it doesn't have to
be taken to that point. So I accept your suggestion that we can
be more detailed in the guidelines that we give to our trade
negotiators and you can even differentiate between what they
will do on bilateral versus multilateral.
Mrs. Capito, you have the last word if you would like.
Mrs. Capito. No, I don't have any questions.
Chairman Bereuter. I would like to thank you very much.
I believe we have just barely scratched the surface. I am
very interested in this subject. I believe we can make progress
and we can assist you and therefore reduce the trade deficit
that we have by enhancing the level of services, especially the
financial services, that we are able to export abroad. And I
know Chairman Oxley is particularly interested that the
subcommittee and committee make progress in this area.
So for the first time in anybody's memory this House of
Representatives is going to focus on trying to make sure that
financial service exports are more successful. Thank you,
gentlemen, for your testimony.
[Whereupon, at 4:09 p.m., the hearing was adjourned.]
A P P E N D I X
June 26, 2001
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