Written evidence submitted by TheCityUK (MUO0018)

TheCityUK is the industry-led body representing UK-based financial and related . In the UK, across Europe and globally, we promote policies that drive competitiveness, support job creation and ensure long-term economic growth. The industry contributes over 10% of the UK’s total economic output and employs over 2.3 million people, with two-thirds of these jobs outside . It is the largest taxpayer, the biggest exporting industry and generates a trade surplus greater than all other net exporting industries combined.

As part of that work, TheCityUK’s Liberalisation of Trade in Services (LOTIS) Committee exists to consider trade and investment liberalisation questions affecting UK financial and related professional services. The Committee brings together individual businesses and representative bodies in the field of financial and related professional services, together with other voices such as the Corporation. The Committee has considered the issues raised by the Committee’s Inquiry, with particular reference to the World Trade Organisation (WTO).

TheCityUK’s evidence is confined to the WTO, as an institution of key importance to our members in underpinning the global rules-based system for trade. Before the WTO’s establishment, the UK body that has since become TheCityUK’s LOTIS Committee strongly advocated broadening the rules-based system to cover trade in services and to develop stronger dispute settlement systems. Both these changes came about when the Uruguay Round resulted in the formation of the WTO in 1995. Since then, TheCityUK has worked with the UK government and international business partners to advance services liberalisation. There have been some successes. But the WTO has come under increasing scrutiny. This year, the debate over this appointment of a new WTO director General will reflect wider concerns over the WTO’s future. The Committee’s inquiry is therefore timely.

Our Evidence also reflects points made in TheCityUK’s publication ‘Future UK Trade & Investment Policy: TheCityUK Submission’, which was issued at the start of 2017.

Summary

1. This submission draws on recent developments at the WTO. It explores some of the WTO’s recent difficulties and how the UK can work within the WTO to revive efforts to liberalise trade in services. It examines the case for innovative plurilateral approaches, particularly in relation to data and digital trade. It suggests some substantive goals for the UK in these areas and notes the significance of current steps to recruit a new WTO Director-General.

What are the vulnerabilities within the governance and procedures of the WTO and what practical steps are required to overcome them?

2. Now 25 years old, the WTO is the custodian of the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS) and associated agreements. Following the WTO’s establishment in 1995 under the Marrakesh Agreement (1994), Members progressed its “built-in agenda” with further agreements including the Protocol on , the Basic Telecommunications Reference Paper and the Moratorium preventing customs duties on electronic transmissions (the E-Commerce Moratorium). All these steps have provided a new level of security and stability for trade and a framework for further liberalisation. The WTO also offers a binding dispute settlement system and provides Members with a means of monitoring and reviewing each other’s trade policies at technical committees in Geneva.

3. In the early 2000s, many Members (including the UK, then represented by the EU) sought to build on the WTO’s successes and further liberalise trade in goods, agri-goods and services through the Doha Development Agenda (DDA). However, the DDA negotiations ran into difficulties of both process and substance, falling into abeyance after 2008. Since then, some DDA components have been agreed, notably the WTO Trade Facilitation Agreement (TFA) 2013, which expedited the cross-border movement of goods through more effective port procedures and customs co-operation. But such successes have been rare.

4. Lack of progress at the WTO has frustrated many Members. Some, including the US and EU, have resorted to seeking liberalisation through their own bilateral and regional Preferential Trade Agreements (PTAs) instead. These PTAs have brought improvements in trade liberalisation. But, as the US Trade Representative Robert Lighthizer has contended, their proliferation may have undermined the multilateral approach.1 There is an economic choice between PTAs (narrow and deep) and multilateral agreements (broader but often shallower). But the availability of the PTA route means that those Members that wholeheartedly favoured multilateralism in the 1990s can now resort to an alternative path for achieving liberalisation gains.

5. These trends have raised existential issues for the WTO:

1 See Ambassador Lighthizer’s remarks at Chatham House on 9 July 2020, https://uk.reuters.com/article/us-usa- trade-lighthizer/world-needs-either-multilateral-trading-system-or-bilateral-pacts-ustr-idUKKBN24A2VG a. The multilateral trade liberalisation agenda has stalled: The global economy has shifted towards services: value-added services as a percentage of global GDP rose from 54% in 1995 to as high as 65% in the period up to 2016-17, according to World data. Digital technologies permit more cross-border services trade than was possible before. But the WTO has struggled to advance negotiated liberalisation beyond what was agreed in the 1990s. There are many reasons, including the politicisation of trade issues and the emergence of public discontent of the kind seen at the WTO’s Seattle Ministerial Conference (MC3) in 1999. Services negotiations have been particularly affected: while the TFA (the WTO’s biggest achievement in the last decade) eased trade in goods, negotiations on trade in services, investment facilitation and e-commerce have proved harder to get started.2

b. WTO rules struggle with emerging trade challenges: Some new trade issues have emerged or intensified since 1995 which were not satisfactorily covered in the WTO Agreements. Negotiations for the Agreements dated back to the Cold War, when there was a clearer division between market and command economies (most of the latter not being GATT members). Since then, there has been a rise in “state capitalism” among Members (notably China). Some governments have developed profit-seeking state owned enterprises (SOEs) to strengthen their country’s global market share in strategic industries. The SOE business model raises level playing field concerns, especially if governments intervene in their markets to favour selected SOEs. Some Members are concerned that there is no comprehensive framework for dealing with such trade-distorting measures within the WTO, which lacks clear means for imposing the relevant disciplines on countries engaging in such behaviour. The WTO rules may serve to restrain Members from trade wars, but they cannot ultimately prevent them. US objections to China’s non-transparent SOE regime have been a key driver of the US-China confrontation, and the US’s unilateral approach in part reflected frustrations with the recourses available to it under the WTO Agreements.

c. WTO procedures can add to the difficulties of reaching agreement: the WTO’s operations are heavily dependent on its Members. The WTO Secretariat, while expert in its coverage, does not have the same powers as, say, the European Commission within the EU. WTO decision-making requires every Member (or at least a critical mass of Members, depending on the issue) to support progress. Agreement can therefore be difficult. Some Members have turned to negotiations outside the WTO framework, as in the Trade in Services Agreement (TiSA) negotiations (in abeyance since 2016). Many have resorted to the WTO’s dispute

2 TheCityUK is focussed mostly on services issues, but it has been difficult to advance free trade in other areas too including fishing subsidies. resolution function, which enforces WTO Agreements and interprets Members’ treaty obligations. But some Members, notably the US, feel that the WTO Appellate Body overstepped its mandate to apply the WTO Agreements, instead creating new trade law and sometimes rewarding litigants with uncovenanted advantages that they had unsuccessfully sought in negotiations. The US recently refused to agree new appointments to the Appellate Body, which since December 2019 has been non-quorate and unable to function. It is not yet clear how this deadlock will be resolved, although the EU-led initiative for a “Multi-Party Interim Appeal Arrangement” (MPIA), which aims to provide a temporary alternative to the Appellate Body for those Members who wish to take part, and which became operational on 3 August 20203, may offer one route ahead.

d. The balance among Members has changed: There are far more Members now than in the 1990s and shifts in the global economy have changed the economic balance among them. In 1995, the US, EU and Japan accounted for some 70% of global GDP. By 2018, the equivalent figure was approximately 50%.4 Developed countries are now less able to set the WTO agenda (as the Canada/EU/Japan/US “Quad” did formerly). However, the rules established in 1995, when they were stronger, still stand. In 1995, when developed countries occupied such a large share of global GDP, they agreed that developing countries should benefit from certain exemptions. Now, however, countries like the US question why Members like China should still claim “developing” status. Similar issues arise over the unevenness of Members’ trade liberalisation commitments. Members (including developing and emerging market Members) acceding after 1995 were required to make accession commitments to liberalisation that often exceeded those of existing Members. In some cases (e.g. China, which acceded in 2001) even these commitments no longer reflect a Member’s subsequent economic advance. Such Members have often been reluctant to liberalise further until longer-standing Members have matched their commitments, making a fresh WTO negotiating round more difficult.

6. These problem areas have recently intensified, with potentially widespread future effects, including on the UK’s financial and related professional services industry. Whereas previously the industry was mainly concerned that services liberalisation had stalled, there are now fears it might go into reverse. For instance, the E-Commerce Moratorium, which prevents customs duties being imposed on electronic transmissions, is under threat. The Moratorium helped facilitate the growth of internet technologies, but in March 2020 some Members proposed reviewing it as outdated and potentially limiting the tax-base for government revenues. Any imposition of taxes on data moving

3 Following notification on 31 July 2020 (https://trade.ec.europa.eu/doclib/docs/2020/august/tradoc_158911.12- Suppl.5%20(002).pdf) of membership of its pool of ten standing arbitrators 4 TheCityUK calculations based on IMF data across borders could prevent the free flow of data to certain countries, limit information exchange across borders and frustrate innovation. TheCityUK, with allies in the Global Services Coalition (GSC), has urged Members to maintain the Moratorium.

7. Covid-19 has led to further strains. As the virus spread, many governments imposed protectionist measures such as export controls to safeguard domestic medical supplies. The WTO is the natural forum through which governments favouring open trade, such as the UK, can work to overcome such trade barriers, and the WTO’s information-sharing function was important in ensuring a degree of transparency over their extent. But, as the pandemic has spread, the organisation has struggled to drive discussions between Members on removing them and implementing WTO rules on export restrictions and industrial subsidies in a co-ordinated way5. Indeed, there have been difficulties in engaging all Members in WTO proceedings since Covid-19 hit; some have been reluctant to use digital platforms for WTO discussions.

8. Discussions on tackling problem areas often start with proposals on procedural reform. But procedural change is only useful if it facilitates substantive progress backed by political will. Without that prospect, procedural wrangles can become fruitless. The UK’s priority should be to focus on the right blend of substantive and procedural questions, and especially to strengthen efforts to revive services liberalisation. The procedural challenges will not go away: policymakers will need to be creative in deploying and adapting WTO procedures to advance proposals that appeal in policy terms to as many Members as possible. If proposals cannot be identified that are attractive to all, efforts should be made to find “coalitions of the willing” ready to take up new challenges.

9. The UK may therefore need to take a plurilateral approach, falling short of full multilateralism but attracting Members seeking progress in a particular sector. There are different kinds of plurilateral agreements, with a broad distinction between agreements among those Members that choose to enter into commitments in a specific area, on the one hand, and ‘critical mass’ agreements which are between a subset of Members, but from which all members benefit on a Most Favoured Nation (MFN) basis, on the other. As noted above, Members have also tried to negotiate plurilateral agreements outside the WTO framework, the TiSA negotiations being an example. During and after the last WTO Ministerial Conference (MC11, Buenos Aires, December 2017), a number of “critical mass” style plurilateral agreements have begun to be developed via “Joint Statement Initiatives” (JSIs) which in some cases have involved significant proportions of the WTO membership in seeking to make progress on a non-multilateral footing.

5 As noted by Bernard Hoekman, Matteo Fiorini and Aydin Yildirim in Export Restrictions: A Negative-Sum Policy Response to the COVID-19 crisis, which can be accessed at: https://cadmus.eui.eu/bitstream/handle/1814/66828/RSCAS_2020_23.pdf?sequence=1&isAllowed=y 10. Plurilateralism could therefore be the WTO’s way ahead, particularly for services. Since 1995, the only substantial WTO breakthroughs on services (such as those on telecommunications and financial services) began by being plurilateral, but were made open to all WTO Members, whether negotiating parties or not. Initiatives during and after MC11 have tended in the same direction, in such fields as:

 E-Commerce: this JSI covers measures to combat moves to restrict digital trade and data-movement. Its importance for services lies in its potential to oppose data localisation measures which weaken businesses' cybersecurity efforts, undermine their ability to comply with key regulatory requirements for financial risk management, and make them more vulnerable to environmental risks by limiting their ability to manage their geographical exposure.  Investment facilitation: 70 members (accounting for 73 per cent of global trade) are now pursuing discussions towards developing a multilateral framework on investment facilitation (which could have significant implications for services, given the frequent need for services providers to establish a commercial presence in a market).  Domestic regulation: This JSI, signed by 59 Members, builds on the work of the WTO Working Party on Domestic Regulation (WPDR), aiming at rules to streamline and render more transparent the authorisation procedures for services suppliers worldwide.

There are other initiatives, which are important in themselves and for the future inclusiveness of the WTO’s work, even if less directly related to services. These include the Buenos Aires Declaration on Trade and Women’s Economic Empowerment6 (supported at MC11 by 121 WTO members and observers), as well as sustainable development and protection and preservation of the environment as fundamental goals of the WTO enshrined in the Marrakesh Agreement. The UK was represented by the EU at the start of all such initiatives but can now engage with them as a WTO Member in its own right.

In what context is the FCO engaging with the WTO? And how should the FCO engage with the WTO?

11. The FCO engages with the WTO most directly through the UK Mission in Geneva. Here, the current UK Permanent Representative to the WTO has risen to the challenge of expanding his diplomatic role, and that of his staff, from being one of 28 EU member- missions in Geneva, acting within the EU Common Commercial Policy framework, to representing the UK as an independent WTO Member. But the FCO has long been only one among many departments making an input into the UK stance in Geneva, and the

6 https://www.wto.org/english/thewto_e/minist_e/mc11_e/genderdeclarationmc11_e.pdf UK’s changed status within the WTO will only serve to accentuate this. Trade policy issues have implications for several areas of government and a joined-up government approach to policymaking will remain essential. The Department for International Trade (DIT) takes the overall lead on preparing the UK’s trade policy positions, for example, but many other departments provide input on issues as diverse as agriculture, technology, financial services, and the professions.

12. A cross-departmental approach is essential because it is increasingly difficult to separate trade concerns from other policy areas: several key global policy priorities cut across trade and other areas (i.e. “trade and” issues) and cannot be progressed without engagement from several parts of government simultaneously. For example, WTO rules permit Members to pursue trade related measures to protect the environment but subject to conditions aimed at preventing green policies being implemented for protectionist purposes. Discussions on how trade and environmental issues can best be managed are ongoing in Geneva. Trade and gender also calls for wide-ranging engagement.

13. UK policy on multilateral trade issues should not always be targeted directly or only towards the WTO or its Members in Geneva: policy coherence can only be maintained, and worthwhile alliances formed, by making the UK’s policy case to like-minded policymakers in other capitals, via the UK’s diplomatic network of Embassies and High Commissions. The UK will only be able to deploy coalitions at the WTO if it has laid the foundations through a network of strong relationships. This process needs to call on the efforts of all relevant government departments in London, working together. Departments such as the Treasury, the Department for Business, Energy, Innovation and Skills, the Ministry of Justice and the Home Office all have an important role in cooperating to frame and achieve coordinated objectives. The demanding nature of negotiations to liberalise services trade particularly underlines the need for efficient coordination at home and diplomatic alliance-building abroad:

 Negotiations concern “behind-the-border” barriers (usually regulatory) that relate to core aspects of a country’s domestic legislation and “right to regulate”, with potentially strong domestic sensitivities  Unlike in tariff negotiations, there is no mathematical calculus that exists to quantify gains (and parity of gains), placing a premium on persuading trade partners of the benefits  Many governments lack detailed information on services trade and are reluctant to make liberalisation decisions without adequate data, placing a premium on persuasion  The request-offer process governing trade negotiations gives talks a mercantilist edge that can be unhelpful and needs to be mitigated by a focus on mutual benefits  The terminology of services liberalising provided by the GATS framework is obscure to non-experts, not always self-evidently linked to the normal language of business priorities, and so requires special effort in coordination among departments and with business.

14. All these are reasons why it proved difficult to make progress multilaterally on services liberalisation in the WTO framework. They also underline why the UK government, in framing its new trade and investment policy for services, needs to adopt a dual approach, both harnessing all the departmental resources in different parts of government to ensure that policy objectives are fully shared at home, and adopting a coherent negotiating stance so that the arguments for these objectives are efficiently deployed with trade partners. Such a dual approach reflects the core need to both strengthen procedural safeguards for services suppliers (i.e. their rights to “due process” in any market in which they operate) and to ensure that all WTO Members follow good regulatory practices in their home markets.

15. The business community can help build international coalitions that support trade liberalisation at the WTO. The government has developed new links with business in support of the UK’s current trade and investment policy. These are under review7; and it is hoped that future government-industry consultation structures will include means of taking account of industry views on the future role of the WTO and other international economic organisations.

16. International business alliances already work together to press the case for services liberalisation in Geneva and in WTO Member capitals. As a member of the Global Services Coalition (GSC), TheCityUK works with other GSC members in Asia, the European Union, North America and the Pacific Rim to push for services liberalisation. TheCityUK and its members have also developed strong links to the financial and related professional services industries of UK trading partners and can draw on these to build new trading coalitions. However, while business can help shape private sector coalitions pressing for substantive policy change in Geneva, only governments have standing in WTO negotiations. These relative roles need to be clearly understood if government and industry are to optimise their joint effects.

17. Building coalitions and reaching agreement takes time at an international body with 164 Members. The GATT Uruguay Round negotiations leading to the formation of the WTO required more than a decade of formal and informal talks before reaching a successful conclusion. Today, it is important that the expectations of UK government and businesses for progress in Geneva are realistic. And it is important that all recognise that

7 See the reference to this on page 3 of The House of Lords European Union Committee – International Agreements Sub-Committee’s letter of 31 July 2020 to the Secretary of State for International Trade (https://committees.parliament.uk/publications/2234/documents/20486/default/) a WTO functioning imperfectly is far preferable to no WTO at all. For these reasons, the UK government should see engaging with the WTO as a long game, requiring considerable effort, initiative and perseverance. History shows that diplomatic efforts to build coalitions in support of freer trade, whether in Geneva or in national capitals, will not be wasted. Progress made in one setting can be built on in another, and coalitions assembled for one purpose can be deployed in other contexts. The Uruguay Round helped drive momentum for a range of valuable Free Trade Agreements, for which the WTO Agreements provided a coherent conceptual framework covering both goods and services. Today’s WTO discussions on e-commerce, services liberalisation and investment protections could equally become part of a strong set of future regional or plurilateral agreements that provide more jobs and growth, even if they do not ultimately result in a multilateral agreement.

18. An added current context for UK policy towards the WTO is the need to select a new Director-General (DG). This falls at a critical time for the WTO. No DG can tackle the WTO's challenges single-handedly. There have been many different leadership styles at the WTO. Peter Sutherland, the body's founding DG, used his high-profile international reputation and extensive network of government and business contacts to resolve differences between Members, bring the Uruguay Round negotiations to a close, and unambiguously champion trade liberalisation. Some subsequent DGs have taken a more technocratic approach and focussed on institution building. All such approaches have their value. But when the WTO is facing challenges from so many quarters, it will be necessary for Members to take special care to select a DG with the right combination of abilities to rally the membership, articulate the benefits of open trade, and deploy coalition-building skills.

19. Finally, as the government works with businesses to help overcome some of the challenges at the WTO, the considerable benefits that the UK has gained from WTO membership need to be remembered and publicised. The WTO has provided a framework of trade rules that have given UK consumers lower prices and more choice. UK businesses have secured new opportunities to expand and develop partnerships overseas. At a time of rising global challenges, the WTO, whatever its current circumstances, stands as a bulwark against protectionism. The UK government is right to continue to support it.

August 2020