GATS NEGOTIATIONS TODAY—DARKNESS FOLLOWED BY THE DAWN OR JUST MORE DARKNESS?

By 
David F. Snyder
American Insurance Association

London 
May 22, 2006

There is a saying that “it is always darkest before the dawn.” One thing is certain about the current state of the GATS negotiations at the WTO: if lack of progress can be likened to darkness, it is very dark right now.  Whether more darkness or the dawning of significant progress follows, remains unknown.  

The Doha Round has been a serious failure for the insurance sector, despite strong efforts by many parties.  Instead of increasing the consensus for free trade, the Round has served to divide the developed countries, especially the US and EU, even as it has failed to open insurance markets in developing countries.  Deadlines have come and gone and successive strategies have been unsuccessfully employed to get the negotiations going. Most importantly, the packages that have been tabled to date are disappointing and wholly inadequate both as to quantity and quality.    

Companies that were once invested heavily in the WTO process have now pulled back, believing that the WTO is increasingly irrelevant.  This erosion of support among the critical business constituency should be alarming for those who are involved in the Geneva system or who believe it is beneficial.  

The sense of weakness and lack of commitment will also embolden the adversaries, making progress even that much more difficult to obtain. For example, we have seen state legislation proposed in the US that goes so far as to declare that the state “declines to participate” in free trade accords negotiated and agreed to by the national government.  Working with the rest of the business community we identified and helped to defeat that legislation, because there is still enough commitment left in the business community to exert its influence to support the trade negotiations.  If that commitment wanes, such legislative struggles may turn out quite differently.    

The Linkage With Agriculture And Manufacturing Has Crippled The Whole Process.

Services constitute the lion’s share of the global economy yet progress on global services negotiations has been relegated to a position for all practical purposes behind agriculture and manufacturing.  And, as those sectors continue to generate controversy and realize no break-throughs, they slow down services negotiations, as well. 

To some extent, the emotional connection with agriculture and manufacturing is understandable because most nations have not traditionally been comfortable with becoming totally dependent on others for food and basic manufactured goods.  It is also understandable that there is the desire not to re-establish a mercantile system.  But the significant damage resulting from a lack of progress on services, and particularly insurance, is shared by both developed and developing countries.   

The Effect of This Linkage Has Been To Divide The US And EU And Cause Commercial Harm.

It is painfully obvious that the failure to move on agriculture and manufacturing, and the increasingly strident demands in these areas, along with Mode 4 demands on the US, have worked to the advantage of protectionist forces and to the disadvantage of the people of both the world's developed and developing economies.  This is manifested most obviously in the inability of the developed countries to obtain anything meaningful in terms of market opening from the less developed countries.  So the commercial harm is significant to companies and the economies of the developed world.  

This climate of dispute that has been created among the developed countries over agriculture has emboldened the protectionist forces opposing service liberalization in the closed markets.  They are able to achieve their objectives, disguised in negotiating positions such as unreasonable demands for Mode 4 access or reductions in agricultural subsidies.  So long as the EU and the US can be encouraged to exhaust negotiating resources in blaming each other, closed markets remain closed and a few beneficiaries in them prosper while their countries are deprived of key services and related benefits and the developed countries are deprived of new business revenue.  

The Impasse Has Also Caused Social And Economic Harm To The Welfare And Development Of Less Developed Countries.

The social and economic harm caused by stunting the growth of insurance is particularly acute for the less developed countries.  Among its other social values, insurance compensates for loss that would otherwise be borne by government, thereby freeing public resources for other uses.  It provides compensation and thereby supports the security of individuals and businesses.  Pending payment of claims, insurance premiums are invested in the economy, largely for infrastructure development, including roads, airports, hospitals and schools that support over-all development.  Finally, insurers as risk managers and mitigation advocates can assist in reduction of loss of life, injuries and productivity losses due to preventable occurrences, such as industrial accidents and motor vehicle crashes. 

Any Real Progress In The Past Three Years Has Been Achieved In Bilateral And Regional Negotiations, Not In The Doha Round.

Recognizing the complexity, and more recently the futility of the WTO system, the US has increasingly turned to bilateral and regional free trade agreement negotiations to obtain commercially meaningful commitments.  These efforts have succeeded, as indicated by, among others, the Chile, Singapore, Morocco, Bahrain and the Central America Free Trade Agreements and the prospect of benefits from the on-going Korea and Malaysia Free Trade Agreement negotiations.

The only real commercial value of the WTO system at this point in time appears to be in the accession negotiations.  We believe that the just concluded accession agreement with Viet Nam is a good case in point.  There we obtained national treatment, the lifting of foreign direct investment controls and full access with all modes of establishment in the near future. We are also deeply engaged in the Russia accession talks.    

The Current Path At Geneva—Light At The End Of The Tunnel Or Just More Tunnel?   

Despite the current stagnation, hope springs eternal.  Based on the schedule set forth last December, a good plurilateral proposal, the Financial Services Collective Request, was agreed to by a reasonably strong set of demandeurs including the EU and the US with a target group including China, India, Brazil Indonesia and more than a dozen other countries.  The collective request contains provisions on Modes 1, 2, and 3 applicable to insurance and transparency in regulation.  While general, it certainly is a decent conceptual foundation with all of the core components at least mentioned.  

Now, we are at a critical period determining whether this procedure will be any more successful than its failed Doha predecessors. To achieve progress on services, including insurance, the “cluster” meetings in late June must produce the beginning of intensive negotiations with bilateral discussion resulting in improved offers by the end of July.  This summer, revised offers must be negotiated, with final offers made by this fall and WTO accord by the end of this year.  Meeting this schedule will be critical for ultimate success.  This is because Trade Promotion Authority in the US is expiring in July 2007 and a key senator said on May 15th that the special trade negotiating authority is unlikely to be renewed.  

Certain Insurance Issues Are Recurring And Would Best Be Dealt With Through Multilateral Negotiation.  
   
As a frequent industry advisor to the US Government on bi-lateral and multilateral negotiations, I have seen some consistent issues regarding insurance put on the table.  Our goals are always the same—commitments consistent with the Insurance Model Schedule and Best Practices of the Financial Leaders Working Group and a negative checklist where possible.  But many obstacles are presented. The obvious ones are foreign equity caps (e.g. India and Malaysia), the refusal to permit freedom of establishment including branching (e.g. the Russian accession position) and non-transparent regulatory systems (e.g. China).  

More specific issues include reservations for certain lines of insurance ,such as “compulsory lines” (e.g. Russian accession position) which in actuality make up a large portion of any non-life insurance market and uncompetitive reinsurance rules such as forced investment in state-run monopolies (e.g. Brazil) or local companies (e.g. China). On the other hand, we are often able to achieve cross-border marine, aviation and transport insurance.  National treatment issues occur but not with great frequency, although an example of this would be China’s inconsistent regulatory approvals for branches that are advantageous and concurrent for Chinese companies but consecutive and drawn-out for foreign companies. 

Because of the heavy regulation of insurance, even excellent commitments at the negotiating table can be denied through day-to-day regulation.  That is why we try to include as many sound regulatory principles as possible into the trade agreements.  That is also why a transparent regulatory process, including publication in draft form, opportunity to submit comments and have them considered, a final publication with adequate compliance time and the ability to appeal to a neutral court, are all fundamental to trade in insurance.  

Beyond the procedural aspects of insurance regulation is the substance of insurance regulation, especially with regard to solvency and market conduct.  The International Association of Insurance Supervisors (IAIS) is gradually building up a system of international standards and guidelines with an accreditation process.  While having independent and competent regulation is important for the health of any insurance market, the lack of deference to other regulators, or mutual recognition, will loom as a larger issue for insurers as the regulatory apparatus in the underdeveloped countries grows, albeit consistent with more universal principles under the IAIS. 

Conclusion

The Doha Round has been a failure for insurance as it has been for so many other sectors.  Fortunately, other negotiations have achieved some limited success and US free trade agreements with Korea and Malaysia would present some very significant and meaningful commercial prospects for insurers.  

We continue to desire a better outcome in Geneva and are working toward that end.  But the time is running out and so is the willingness of our companies to support and participate in that system. Whether the current chain of failure will continue or be broken remains to be seen.  Is this the darkness before the dawn or just more darkness?  Time and our efforts will answer that question.  

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David F. Snyder is Vice President and Assistant General Counsel for the American Insurance Association that represents more than 400 insurers, many with global interests.  Mr. Snyder has actively participated in trade and international regulatory deliberations in Amman, Beijing, Geneva, London, Washington and elsewhere.