U.S. Trade in Financial Services: An Overview

Financial services -- banking, securities, and insurance -- are a key element of the U.S. economy. With international trade in services generally rising, financial services have become a critical element of new and proposed multilateral, regional, and bilateral trade agreements, as well as a source of some disputes with major trading partners. Congress not only oversees this critical industry, but it also has very substantial responsibilities with regard to U.S. trade, trade policy, and trade agreements, of which financial services are today an important part. U.S. policy has been to extend national treatment to foreign financial firms operating within the United States and to seek national treatment for U.S. firms operating abroad. In addition, the United States has sought to improve market access by seeking the reduction of various barriers, including, for example, limits on types of products that may be sold, ceilings on the level of activity, or limitations on the right to establish a commercial presence within a country. The World Trade Organization (WTO) provides the first multilateral framework for trade in financial services -- the Financial Services Agreement (FSA) of the General Agreement on Trade in Services (GATS). The FSA went into effect on March 1, 1999, after difficult and drawn out negotiations. It's impact has largely been to bind current practices, but it is a work-in-progress. Under Article XIX of the GATS, a new set of negotiations on services, including financial services, commenced in February 2000. Financial services will also likely be part of a new round of WTO negotiations that might be launched. Although the completed, but still pending, agreements with Vietnam and Jordan do not open up financial markets of any significant size, they may provide opportunities for some U.S. firms. The United States is negotiating free trade agreements with Chile and Singapore. The financial sectors of these two countries are largely open, but financial services issues, nevertheless, are important aspects of these negotiations. The United States is also in the midst of negotiating the proposed Free Trade Area of the Americas (FTAA) with the 34 countries of the Western Hemisphere (excluding Cuba), an area with which the United States already enjoys a healthy surplus in financial services. The FTAA is to be implemented by December 2005. Financial services trade remains an important element of established U.S. regional and bilateral trade arrangements and relationships. The North American Free Trade Agreement (NAFTA), historically the first trade agreement to address financial services trade issues, fully opened the financial markets of our two NAFTA partners, Canada and Mexico, resulting in a financial services trade surplus for the United States. The European Union (EU) is fully open without a bilateral accord. Financial services trade with Japan is modest. It has not grown appreciably in recent years, and the United States has been pressing Japan to open up its financial services market to more trade. WTO access for China is likely to open a few opportunities for U.S. financial firms in the short-term, with opportunities likely increasing as the Chinese economy develops. This report will be updated as events warrant.