Copyright 2001 FDCHeMedia, Inc. All Rights Reserved. Federal Document Clearing House Congressional
Testimony
June 26, 2001, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2355 words
COMMITTEE:HOUSE FINANCIAL SERVICES
SUBCOMMITTEE:
INTERNATIONAL MONETARY POLICY AND TRADE
HEADLINE: FINANCIAL SERVICES TRADE
TESTIMONY-BY: MARK WEISBROT, CO-DIRECTOR OF THE
AFFILIATION: CENTER FOR ECONOMIC AND POLICY RESEARCH
BODY: June 26, 2001
Testimony of
Mark Weisbrot Co-Director, Center
for Economic and Policy Research
I would like to thank
Chairman Bereuter and the Committee for this opportunity to testify today on the
subject of expanding our trade in financial services. The Center for Economic
and Policy Research is a non-profit, non-partisan policy institute that seeks to
expand public debate on issues -- mostly economic issues -- that are too often
seen as the province of experts, from which the majority of people are therefore
excluded. I will focus my remarks on the public interest in the agreements by
which the liberalization of trade in financial services is being pursued: the
Free Trade Agreement of the Americas, the General Agreement on Trade in Services
(GATS), NAFTA -- and legislation, such as Trade Promotion Authority.
While it is clear that there are some gains to be made by
US financial firms and banks from the liberalization of trade in financial
services, we must weigh these gains against the costs of entering into and
expanding the international agreements by which such liberalization is achieved.
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 in the 1980s. When these costs and risks are
weighed against the potential benefits of liberalizing trade in financial
services, it seems that the best course of action would be to avoid further
expansion until our foreign commercial policy is fundamentally transformed.
On the benefit side, it is argued that the expansion of
trade in financial services can help to reduce our trade deficit. This is
certainly a worthy goal. The United States is presently running a current
account deficit of $450 billion annually, or approximately 4.5 percent of GDP.
From an economic standpoint, this is at least as serious a problem as running a
Federal budget deficit of the same magnitude -- probably worse, since the debt
accumulated as a result of these current account deficits is owed to people and
institutions outside the country. This foreign debt, near the highest in the
industrialized world at almost 20 percent of GDP, is a burden on future
generations of Americans. It is growing at a rate that is clearly unsustainable
by any economic measure. At current growth rates, our foreign debt will reach 50
percent of GDP in less than seven years.
Nonetheless,
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.
The proponents of NAFTA, including a number of reputable economists, made
this argument back in 1993, promising that a continued expansion of our trade
would create a net gain of hundreds of thousands of jobs here. In fact the
opposite happened -- our trade deficit with the NAFTA countries went
$16.6 billion in 1993, to $62.8 billion in 2000 (in constant 1992 dollars), and
our overall current account deficit has ballooned to its present record of $450
billion.
The expansion of trade in financial services
should therefore not be considered outside of the agreements in which it is
embedded. But even if we were to consider financial services in isolation, the
potential benefits are limited. The argument for expansion is based on the fact
that the United States is running a trade surplus in this area, and -- in
contrast to most other areas of trade -- exports have expanded more rapidly than
imports, as trade in financial services has grown. While this is true, our net
exports of financial services currently total about $8.8 billion.
Even if this were to double in the next few years, the
increase would only reduce our current account deficit by about 2 percent.
The Committee has 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 US markets. It
would seem that we currently have considerable problems regulating our own
securities markets as they now stand, in the wake of the recent collapse in
technology stocks. Companies used a variety of accounting tricks to inflate
their revenues at the peak of the bubble. According to Fortune magazine, for
example, Priceline.com would report as revenue the full value of airplane
tickets and hotel rooms it had booked, although travel agencies do not normally
do this, since they keep only a small fraction of these funds.1 Priceline is now
trading at 18 percent of its peak value, and the collapse of tech stocks since
March 2000 has forced millions of Americans to change or postpone their
retirement plans. In many cases the large financial firms encouraged small
investors to put their retirement savings in stocks, telling them (wrongly) that
they could not lose if they were holding stocks "for the long haul." Before we
further open our securities markets to foreign firms, we might want to get our
own house in better order, so that we can have the proper regulation to protect
the millions of small investors who have placed much of their retirement savings
in the stock market.
The de-regulation of financial
services entails other risks, as we saw just a few years ago in the Asian
financial crisis. As a number of prominent economists have argued -- including
such high profile advocates of expanding trade as Jeffrey Sachs 2 of Harvard,
Columbia University's Jagdish Bhagwati,3 and also former World Bank Chief
Economist Joseph Stiglitz -- this crisis was largely brought on by the opening
up of financial markets of countries such as South Korea and Indonesia. This
resulted in a huge influx of short-term foreign lending, which subsequently
rushed out even faster-- a reversal of capital flows within a year of about 11
percent of the GDP of South Korea, Indonesia, Thailand, the Philippines, and
Malaysia. The result was a collapse of currencies, credit, and ultimately the
economies of the region. This also had a "blowback" effect on our own economy,
as thousands of steel workers lost their jobs, and agricultural producers in the
United States were also hard hit by Asian crisis.
The
agreements for international deregulation of financial services, such as the
General Agreement on Trade in Services, cover a broad range of services, and
could seriously erode the ability of governments to regulate much of commerce in
the public interest. For example, Article VI:4 of the GATS "calls for the
development of any "necessary disciplines" to ensure that 'measures relating to
qualification requirements and procedures, technical standards and licensing
requirements do not constitute unnecessary barriers to trade.' 4 This is a
general problem with all of these agreements: the attempt to subordinate the
larger national and public interest to commercial interests, and to the
interests of particular corporations.
For these reasons
it is especially important that the Committee consider the expansion of trade in
financial services in conjunction with the larger agreements -- NAFTA,
the proposed FTAA and the WTO -- of which this expansion is a part. When one
looks carefully at the impact of these agreements, it is clear that they are
misnamed: their most important impacts have little to do with trade. One of the
most damaging parts of NAFTA was its creation of the "investor-to-state
dispute resolution" mechanism, whereby foreign investors were given the right to
sue governments for regulatory actions that infringe upon their ability to make
a profit. This has turned out to be an enormous threat to environmental
regulation, and one that could never have passed Congress if it were known to
the public.
Consider the complaint brought under NAFTA's Chapter 11 by the Ethyl corporation. In 1997, the
Canadian government banned the import of MMT, a gasoline additive made from
manganese that is not used in the United States. There is no doubt that this
action was taken for the purpose of environmental health and safety, mainly from
fears of MMT as a potential neurotoxin, especially for children.
Under the threat of losing a $250 million lawsuit, the Canadian
government repealed the legislation banning MMT and paid the corporation $13
million in damages. There are a now a number of similar cases pending, including
a $970 million claim by Canada's Methanex corporation against the state of
California over another banned gasoline additive, Methyl Tertiary-Butyl Ether
(MTBE). Because it is highly water soluble, a known animal carcinogen and
possible human carcinogen, and very costly and difficult to clean up, it is seen
as a major threat to groundwater. In California, more than 10,000 groundwater
sites have already been contaminated by MTBE.
Our
government now wants to extend this power to foreign investors from 33 countries
in the Free Trade Area of the Americas. As is usual with these agreements, they
are negotiated in secret: although a committee made up primarily of corporate
CEO's and other business people with particular interests in the agreement is
allowed to see the drafts, they are not available to the press or to the
public.
The authority of Congress to approve these
agreements has also been usurped by the "fast-track" procedure, now renamed as
"Trade Promotion Authority." It is often argued that the United States cannot
negotiate these agreements without granting this authority to the executive
branch, but this does not appear to be true. From 1994-97 the US negotiated a
wide-sweeping agreement within the 29-nation OECD called the Multilateral
Agreement on Investment (MAI).
The agreement ultimately
collapsed in the face of a campaign against it by over 600 NGOs, for many of the
reasons discussed here. But there was no evidence that the United States
negotiators ran into any trouble for their lack of "fast-track" authority.
It is for good reason that the US Constitution confers
upon the legislative branch the authority "to regulate Commerce with foreign
nations."5 It is only in the last couple of decades that this power has been
transferred to the executive, and during this time the scope of our
international agreements has also expanded exponentially to subordinate the
environment, public health, and a host of other regulatory issues to the
expansion of trade. The loss to the public has been great.
Last but not least, it is worth briefly looking at what the expansion
of commerce, through agreements and arrangements that do not take into account
the public interest, has brought to the average citizen both at home and abroad.
In the United States, the median real wage today is currently the same, in terms
of its purchasing power, as it was 27 years ago. This one statistic tells a very
big story. Median: that means the 50 th percentile, i.e., half of the entire
labor force is at or below that wage. This includes office workers, supervisors,
everyone working for a wage or salary - not just textile workers or people in
industries that are hard hit by import competition or runaway shops. Real: that
means adjusted for inflation, and quality changes. It is not acceptable to
argue, as is often done, that the typical household now has a microwave and a
VCR. That has already been taken into account in calculating the real wage.
This means that over the last 27 years, the typical wage
or salary earner has not shared in the gains from economic growth. Now compare
this result to the previous 27 years (1946-1973), in which foreign trade and
investment formed a much smaller part of the US economy, and was more
restricted. During this time, the typical wage increased by about 80 percent.
It must be emphasized that these statistics are not in
dispute among economists. Their validity is also verified by the experience of
most people who are old enough to have lived through the first half of the
post-World-War II era. In the sixties and seventies, it was not uncommon for an
average wage earner to buy a home and support a family with one income, and even
put their children through college. This is no longer true.
There are differences among economists as to how much of the typical
employee's misfortune has been due to globalization. But few would deny that it
is a significant factor.
William Cline, a staunchly
pro-globalization expert in this area, has estimated that 39 percent of the
increase in wage inequality from 1973-93 has resulted from increased trade.6
(This does not include the effect of increasing international investment, which
has also put downward pressure on wages.) Other estimates have been smaller, but
they still are enormous when we compare them, for example, to the measured gains
from increasing trade.
Increased opening to
international trade and capital flows, in the manner that has been pursued over
the last two decades, has not seemed to help most people in the poorer countries
of the world. During the last 20 years, the economies of Latin America have
grown by only percent per person, for the whole period (1980- 2000). By
contrast, in the previous 20 years (1960-1980), per capita growth was 75
percent.7 There has been a slowdown in growth during the era globalization
throughout most of the low to middle income countries of the world, with the
poorest nations suffering the worst declines. In addition, and partly as a
result of this growth slowdown, there has also been reduced progress in life
expectancy, infant and child mortality, education, and other social indicators
over the last two decades.8
For all of these reasons,
until we can ensure that the majority of people can share in the benefits from
increasing international trade and commerce, and ensure that we do not
compromise the ability of our governments to regulate these activities, as well
as their ability to protect the environment and public health, we should not
seek to expand these agreements through the proposed FTAA, Trade Promotion
Authority, or continued negotiations to expand the General Agreement on Trade in
Services (GATS).