Servicing Citi’s Interests GATS and the Bid to Remove Barriers to Financial Firm Globalization

by Antonia Juhasz

There may be no force greater in the drive to expand the reach and power of financial corporations world-wide than Citigroup. Born out of a merger between Citibank and Travelers Group that was only legalized after the fact by a rollback in the U.S. laws prohibiting combinations between banks and insurance companies, Citigroup is now prioritizing a deregulatory agenda for financial services on a worldwide scale

Citigroup –– which already maintains operations in more than 100 countries –– hopes to use the World Trade Organization’s General Agreements on Trade in Services (WTO’s GATS) to pry open new markets around the world while restricting the ability of governments to regulate their behavior. The result could be increased monopolization of global financial markets, decreased consumer and social protections, decreased access to financial services and increased global economic instability.

Citigroup is extremely well-connected politically. The company and its predecessors have never been shy about flexing their political muscle. Citigroup was born out of the 1998 merger of Citibank and Travelers Group in clear violation of U.S. laws designed to protect consumers and the economy. Citi and Travelers merged under a loophole that gave them a temporary exemption from the merger prohibition, launched an aggressive lobbying blitz, and eliminated the laws blocking their way.

Citi leveraged its influence to help create the service agreement at the WTO, and is using it today in its push to have the agreement expanded and strengthened.

“Without the enormous pressure generated by the American financial services sector, particularly companies like American Express and CitiCorp, there would have been no services agreement and therefore perhaps no Uruguay Round [the negotiations that led to the WTO's creation] and no WTO,” David Hartridge, then director of the services division of the WTO, said in 1997.

Citigroup is not alone in the push for liberalization of trade in services. But it is a key player in the corporate coalition driving this agenda.

Understanding GATS

The GATS was adopted in 1994 as part of the newly established WTO system, bringing services under the framework of the world’s largest and most powerful international trade body. Services — as opposed to goods — are described as anything you can not drop on your foot. They include education, health care, Social Security, water for drinking and sanitation purposes, prisons and telecommunications. Citigroup is most interested in financial services, including insurance, banking, securities, asset management and pension funds.

Services have historically been kept out of international trade agreements because they cover issues that are essential to human and societal well-being. Services also posed special difficulties; where a manufacturer can simply ship goods across borders, service providers must often set up shop in a foreign country if they are to deliver cross-border services. For these and other reasons, the existing GATS is relatively weak. Major corporations, with Citigroup among those at the head of the pack, are pushing for a strengthened and expanded GATS in ongoing negotiations at the WTO.

Citi’s Influence

Citigroup has several avenues of direct and indirect influence over U.S. government negotiating positions on The GATS.

• Citigroup is a leading member of the highly influential U.S. Coalition of Service Industries (CSI). Formed in 1982, CSI is the foremost industry lobbying group on services trade. According to CSI, it formed “to ensure that U.S. trade in services, once considered outside the scope of U.S. trade negotiations, would become a central goal of future trade liberalization initiatives. It played a major role in shaping the GATS.
  

• For the last six years, Citigroup has benefited from a seat at one of the most powerful tables in U.S. trade negotiations, the U.S. Department of Commerce Industry Sector Advisory Committee (ISAC). Citigroup has been represented, either directly or through its membership in the CSI on the Services ISAC (ISAC 13) every year since at least 1997 (the earliest date for which membership lists are publicly available).
  
  
• Representation on ISAC 13 provides Citigroup with a unique and direct influence on the development of U.S. government negotiating positions. According to the 2001 ISAC annual report, “The advice provided through the advisory committee constitutes a very unique and committed way for the entire industry to formulate a position for the sector. ... It has become an intrinsic part of developing U.S. positions for all negotiations.”
  
  
• Citigroup was a principal co-sponsor of the 1999 World Services Congress (WSC) –– a hallmark event for the advocates of services liberalization. Many of the recommendations found in the closing paper of the conference that included leading representatives from industry, the WTO and government, were mirrored, often verbatim, in U.S. negotiating positions that followed.
  
  
• In February 2002, Citigroup was a corporate co-sponsor of a Commerce Department-Coalition of Service Industries joint event, Services 2000, “a Business-Government dialogue on U.S. Trade Expansion Objectives.” According to the Department of Commerce, “the conference will give U.S. service industries the opportunity to help shape the U.S. negotiating agenda through industry-specific roundtables.” Lionel Johnson, VP International Government Relations of Citigroup, Inc. moderated the round table on Banking, Securities and Funds Management.

Citizen organizations have no comparable level of influence in U.S. government trade policy. Thanks to a successful 1999 legal suit against the Clinton Administration to open the ISACs to representation from nonindustry groups, there are now two public interest organizations on the 17 ISACs (each of which have one-to-two dozen members). One is on ISAC 3, dealing with chemicals and the other is on ISAC 12, dealing with forest products.

While “civil society and public interest organizations are consulted periodically, primarily during briefings that are intended mainly for the United States Trade Representative’s office to provide updates on the status of negotiations,” says David Waskow, trade policy coordinator for the Washington, D.C.-based Friends of the Earth-US, U.S. trade “negotiators have said explicitly at these briefings that their primary task is to represent U.S. industry.” No such deference is shown to citizen group positions, Waskow says.

What Citigroup Wants

Above all, corporations providing financial services want increased access to global markets with as little government control as possible. The first step to achieve this goal is a GATS requirement that governments remove restrictions on the level of foreign ownership in the financial services sector. In a November 1998 submission to the U.S. government, for example, CSI recommends that “foreign investors should have the right to establish through a wholly owned presence or other form of business ownership, and to operate competitively through established vehicles available to national companies.”

Similarly, in a July 13, 2001 submission to the WTO, the U.S. government requests that the GATS, “remove restrictions on suppliers ability to establish preferred form of commercial presence, whether as subsidiary, branch or joint-venture; and at the level of equity participation preferred by the service supplier.”

These proposals would enable financial service providers to enter another country’s market and, for example, buy existing banks without having to have a domestic partner. Inclusion of such a provision in the North American Free Trade Agreement (NAFTA), paved the way for Citigroup’s purchase of Mexico’s largest commercial bank, Banamex.

In a January 2002 report, “GATS: A Disservice to the Poor,” the World Development Movement (WDM) points to Aotearoa/New Zealand as a cautionary tale of the consequences of foreign control of finance. The full liberalization of financial banking services has left every one of Aotearoa’s/New Zealand’s banks, including the Bank of New Zealand, under foreign control. Affordable financial services and low-cost loans have dried up — so much so that the government has proposed setting up a new bank, the People’s Bank, to be owned and operated by the government itself.

Mandating local ownership requirements has a variety of potential benefits in addition to facilitating access to credit for all sectors of society. It can curtail profit repatriation — the drain of capital out of a country. It may deter disloyal behavior; foreign finance companies are much more likely to flee in times of crisis. And ensuring that a foreign company holds some domestic assets within the country in which it is operating can help ensure it can satisfy any legal liabilities it might incur.

Another example of domestic regulations that are threatened by GATS negotiations include laws requiring foreign businesses to hire a certain percentage of local workers. Local hiring requirements help increase employment and facilitate the transfer of knowledge from the foreign service provider to the local community.

However, industry statements and U.S. negotiating positions stress instead the need to encourage temporary entry of natural persons through the GATS so that they can use their own experts and managers rather than drawing on local expertise or training local people.

Strengthened GATS rules would prevent countries from favoring financial service providers with a record of sensitivity to racial and/or economic inequalities, environmental conditions or the rights of workers. They would block countries from giving preferences to community-based banks on the grounds that they are superior in providing services and credit to lower-income or geographically dispersed consumers.

Citi Supreme

A central concern cited by opponents of GATS-style deregulation and liberalization is that most countries in the world simply do not have adequate regulatory structures in place to handle the economic power and marketing prowess of global financial companies like Citigroup. For example, most developing countries do not have counterparts to U.S. laws such as the Community Reinvestment Act — obligating banks to make credit available in lower-income neighborhoods — and the Truth in Lending Act — requiring full disclosure to consumers of the cost of loans. Most do not have sophisticated regulatory authorities to comb through finance company books and ensure they comply with prudential standards. Laws that protect consumers from aggressive and socially irresponsible advertising and marketing practices are also missing in most countries — a major concern for many in developing countries who fear the impact of aggressive campaigns to use credit cards and the prospect of becoming U.S.-style “debtor societies.”

Countries seeking to implement these consumer and financial regulatory protections may find GATS blocking their way. But the larger problem is one of sequence: with the financial sector opened up, the lobby against adoption of such rules may be too strong to overcome. Even those countries with such laws in place could potentially see them “rolled back” by an expanded GATS.

The record of Citigroup above all financial firms in this area is clear: As its very birth attests, Citigroup has and will use its ever-expanding influence to eliminate laws that run counter to its aims. GATS could become the newest tool in an arsenal designed to create a world where Citi and other corporate interests reign supreme.

Antonia Juhasz is project director with the San Francisco-based International Forum on Globalization.