# **III. Including Financial Services in PTAs – Key Considerations**

**The liberalization of trade in financial services is helpful to, but is not a panacea for, domestic financial system modernization** . Liberalization is desirable in order to serve the development needs of the domestic financial system by improving efficiency and the allocation of resources via healthy competition with foreign providers. There already exists a substantial body of literature on the positive relationship between finance and growth<sup>15</sup> and on the spillover effects of foreign (particularly bank) entry<sup>16</sup> , although there are also important sequencing/speed considerations and other preconditions to the process of financial liberalization<sup>17</sup> . More specifically, the size of benefits from trade liberalization in financial services depends critically on the market’s attractiveness that will determine the extent to which foreign providers will take advantage of the opportunity (the so-called ‘if you build it, will they come’ argument), as well as on complementary regulatory reforms. The latter include the adoption of international prudential standards, the elimination of financial repression measures, and the strengthening of the enabling ‘financial infrastructure’ environment (i.e. rule of law, credit bureaus, collateral registries, accounting and auditing standards, payment systems etc.). It is important to note that such reforms go well beyond trade policy and cannot therefore be tackled solely in the context of a trade agreement _per se_ .

## **_Approaches to liberalizing trade in financial services_**

**Countries have achieved the liberalization of trade in financial services in three main ways** : (i) unilaterally, by opening their financial systems to international competition in the context of domestic reform efforts; (ii) at the multilateral level under the auspices of the WTO’s _General Agreement on Trade in Services_ (GATS); and (iii) on a reciprocal or preferential basis by concluding bilateral or plurilateral PTAs, of which free trade agreements (FTAs) are the most common type. Depending on the country context and circumstances, one or more of these approaches has been used to liberalize specific sub-sectors and/or modes of financial services provision<sup>18</sup> .

**Autonomous market opening has been the most common form of liberalizing trade in financial services** . Most developed countries have adopted such a strategy, progressively liberalizing their financial markets over a relatively long period of time. Many developing countries followed (or are following) the same path, although in some cases – such as Mexico – the advent of a crisis led to or even accelerated the market opening process. When the time came to negotiate the GATS, these countries typically bound at (or below) the regulatory _status quo_ in their schedules, consolidating the actual degree of openness prevailing at the time of the agreement’s entry into force. China and some recent WTO accession countries (e.g. Vietnam), are the clearest examples of

> 15 See Demirguc-Kunt and Levine (January 2008) for a recent overview of the evidence.

> 16 See Clarke et al. (Spring 2003) for a review of the literature.

> 17 See, for example, International Monetary Fund (June 2007).

> 18 See Saez (December 2006), Arbeláez, Flórez and Salazar (August 2006), and Echandi (September 2006) for the cases of Chile, Colombia and Costa Rica respectively _._

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