Real Clear Markets

Financial Services in the New Trade Negotiations with Europe

The U.S. and the European Union (EU) will soon begin formal negotiations for a new treaty to further open up trade and investment across the Atlantic. Officials are attempting now to agree on the overall framework for the Transatlantic Trade and Investment Pact (TTIP), which will then guide the laborious and politically sensitive negotiations. An important question is whether and to what extent financial services will be included in the treaty. Ideally, an ambitious effort will be undertaken in this area to put transatlantic coordination of key financial reforms back on track.

It is likely that financial services will be formally included in the negotiations, primarily because there is a laudable desire to make the scope of a potential treaty as wide as possible. Political sensitivities may force some exclusions; for example, there is strong pressure from the French to exclude areas of trade that might endanger the preservation of their subsidies and rules to protect the French movie and other cultural industries. There does not appear to be nearly that level of sensitivity about financial services, at least if the treaty goals in this area are narrowly defined.

The real question, therefore, is likely to be what aspects of trade and investment in financial services will be included. Virtually everyone can agree that tariffs, and equivalents, and “market opening” measures are appropriate to consider. However, there are few or no tariffs in financial services across the Atlantic and relatively few areas of disagreement on market access. (There remain some issues about access by U.S. funds managers and rating agencies to EU markets, for instance, but these are minor by comparison with other transatlantic trade issues.)

The central point is whether to use the treaty negotiations as an opportunity to better coordinate financial regulation as the two sides of the Atlantic proceed forward on major revamps of regulation that reflect the lessons of the financial crisis. Finance is a highly regulated industry and the nature of regulation has a strong impact on the relative competitiveness of different financial institutions. Therefore, a level playing field for firms on the two sides of the ocean can only be achieved with appropriately coordinated regulation.

There is an understandable reluctance among many, including the U.S. Treasury Department, to mix trade negotiations with important and complex financial regulations, especially given the critical importance of financial stability. However, finance is a global business that is dominated by North America and Europe and the TTIP negotiations may give us a chance to better coordinate the regulation of it.

Almost three years ago, one of us (Doug Elliott) was the “rapporteur” (essentially, coordinator/report writer) for a task force of American and European experts of all stripes who examined the state of transatlantic cooperation on financial reform. The report was pretty optimistic, while still pointing out dangers of divergence. (See ). The U.S. and Europe had a clear common commitment to financial reform and quite similar views about how to accomplish it, views that were publicly committed to by the leaders of the G-20 governments, including ours. There also appeared to be a real recognition that coordinated actions must be taken, given the intertwined nature of our national financial systems, which was underlined by the global financial crisis that first appeared in the U.S., triggered for the most part by U.S. problems.

Sadly, cooperation has visibly deteriorated in the last 12-18 months, despite the continued existence of the need for common action and a consensus on the broad outlines of the answers. Parochial interests and differing national inclinations about key implementation issues have been steadily chipping away at the bedrock of our common viewpoints and interests. Perhaps some of this was inevitable as the urgency of the crisis faded and as we moved from principles to actual decisions, especially given our differing legal and economic systems. The truth is that we have plenty of parochial infighting and differing views just within the U.S. regulatory system, much less across borders.

But, we must not give in to defeatism or complacency about transatlantic coordination. It is critical and it can be accomplished considerably more effectively than it has been recently. That is why it is worth trying to use the TTIP to remedy as many of these problems as possible. We need to elevate the perceived importance of transatlantic financial cooperation in order to overcome bureaucratic and political resistance to sensible coordination. Framing the problem as one of international cooperation to ensure higher economic growth and greater stability for all sides will help to counter the parochial pressures.

What does this mean practically? Financial regulation is too complex, and judgments about it too subjective, for the treaty to contain explicit rules that can be arbitrated by a body equivalent to the World Trade Organization. What can be done is to achieve a re-commitment at the highest levels to the previous G-20 principles on financial regulation, the subsequent Basel III accord on bank capital and liquidity, and to as much more as can be agreed in the TTIP negotiations. There should then be a periodic reporting mechanism to the U.S. President, and his or her counterparts, about the state of progress in transatlantic cooperation on those aspects of financial reform that affect us all. Further, there ought to be a mechanism for either side to appeal for mediation to an organization established by the treaty to help iron out differences. Note that this is mediation, not arbitration. If the two sides remain in disagreement, then nothing would be forced on them.

Government officials and regulators do not like to be put into the position of having to defend themselves to national leaders. Just as occurs in advance of summits, a number of differences may miraculously be resolved in time for the formal report to be delivered to the leaders. It would be useful to have this kind of pressure for cooperation to offset all the day-to-day pressures for parochial choices.

We do need to ensure that any mechanism included in TTIP is consistent with the broader global efforts to coordinate financial regulation. The Financial Stability Board, the Basel Committee on Bank Supervision, the International Organization of Securities Commissions, and other international bodies, serve as important forums to coordinate policy. For this reason, the G-20 leaders have mandated that these groups play an important global role. Luckily, there is no need for a conflict between transatlantic commitments and broader international cooperation, as long as the importance of the global discussions is borne in mind as the two major blocs negotiate.

One concern that is expressed about including financial services in this way is a fear that the Europeans will push to water down rigorous U.S. regulatory proposals. This fear should not prevent us from using the approach described above. First, we do in fact agree with the Europeans on the core of what we are trying to do and, while they are taking longer to formulate specific regulations, this is not a stalling device; it reflects the problems of multi-country decision-making. In some areas, the Europeans are proposing stricter and perhaps better rules than our own. They are generally proceeding forward as solidly as we are, just on a somewhat different time frame. Third, the non-binding approach advocated here would allow us to hold firm on anything we feel is critical while giving us a forum that should be at least as effective in pushing Europe as it would be in allowing them to push us.

Cynicism and pessimism are reasonable viewpoints when dealing with trade issues and with financial regulation, but if we allow them to stop us from trying to move forward, then they do real harm. There are strong common interests and common viewpoints on the two sides of the Atlantic on these issues. Designing a mechanism within TTIP to encourage agreement and to push back against parochial interests is a reasonable goal and one that could pay real dividends.