Trade in Services and Emergence of a TNC Coalition

Until the policy debate during the 1970s, tradability of services was considered an oxymoron, while international exchange of services was taken as an “accounting” fact registered in the balance of payments sheets as “invisible transactions” (Drake and Nicolaidis 1992: 44; Feketekuty 1998: 81). The term “trade in services” first time appeared in the Report by the High Level Group on Trade and Related Problems drafted in 1973 by a group of eminent individuals chaired by Jean Rey, former President of the European Commission, to assess the systemic problems in the world

trading system in the run up to the Tokyo Round (OECD 1973; Feketekuty 1987: 298).

The framing of services in the trade context, as outlined in the Rey group report, was a radically new perspective promoted in academia by few economists such as Hugh Corbet of the Trade Policy Research Centre (TPRC) in London (Feketekuty 1987:

296).⁴⁶ In fact, these early works were produced mainly by some Anglo-American economists who constituted the intellectual basis for a growing epistemic community that helped shape the policy debate in the United States during the 1970s and 1980s (Drake and Nicolaidis 1992). In this context, trade concepts and principles were for the first time systematically applied to services by Brian Griffiths of LSE in a cornerstone book entitled “Invisible Barriers to Invisible Trade,” published in 1975. Nevertheless, aside from this early academic debate, international cooperation in services was restricted to sectoral agreements regulating intergovernmental technical cooperation in areas such as civil aviation, telecommunications and maritime.⁴⁷ Although the Treaty of Rome envisaged free movement of services as well as goods within the European Community, specific rules on trade in services were not elaborated until the launch of the Single European Act, which would pave the way for the Maastricht

46 Hugh Corbet was an influential figure in the trade policy debate in Europe during the 1970s.

Corbet was a consultant to International Chamber of Commerce in Paris and special advisor to the conservative opposition in Britain until 1979. TPRC established in 1968 would become the most significant non-U.S. body influential in the services policy debate from the mid-1970s on (Kelsey 2008: 79).

47 The International Telecommunications Union, International Civil Aviation Organization and International Maritime Organization were the bodies where governments cooperated to set mutual standards in these sectors (Brock 1982: 236).

Treaty of 1992 (Drake and Nicolaidis 1992: 44-5). The idea of the tradability of services through applying trade norms and principles within the context of trade negotiations was taken from the academic context to the policy debate by a number of U.S. based TNCs facing significant regulatory barriers in their operations in foreign markets.

Global economic transformations from the late 1960s brought about a competitive environment for U.S. based TNCs that eventually led to the consideration to utilize trade policy instruments to dismantle barriers. American TNCs operating internationally in different service sectors faced two particular sets of challenges especially in areas where European and Japanese firms built up productive capacities (Aggarwal 1992). The first set of challenges included market access difficulties, both for their cross-border sales abroad and their investments, especially in the Japanese and NIC markets. The second challenge was in the U.S. market as these companies faced an uneven and disadvantageous business environment compared to their foreign competitors because of the relative economic openness of the U.S. market.

Thus, a coalition of interests emerged among U.S. service industries in the early 1970s to handle both sets of challenges by activating U.S. trade policy tools. The leading social forces that reframed different sets of corporate interests in the context of trade policy were the U.S. TNCs operating in the financial sector, especially in insurance and banking.

American TNCs in financial services were internationally competitive because of the large scale of their financial markets and the deregulation trend initiated in the early 1970s. According to Susan Strange, domestic deregulations for financial operators and money markets in the 1970s and the scale of these markets and operators created a comparative advantage for U.S. based financial giants that were able to take relatively higher risks for profits (Strange 1988: 108, 131). The competitiveness of U.S. operators such as American Express would continue into the 1980s. According to Harry Freeman of American Express, the company became a world-scale financial leader with $16 billion of market capitalisation in the mid-1980s, followed by American International Group (AIG) ($10 billion), and Citicorp (around $6 to 7 billion) (Freeman 1987: 138). However, ongoing protectionism in financial markets was an important factor increasing costs of international business for banks and insurance companies (Bhagwati 1987: 211). In the early 1980s, markets were still highly regulated even in the OECD region. In most of the advanced economies, markets were closed to the entry of foreign insurance firms (Kennedy 1992: 2). In Europe, since the inception of the EC, this sector had undergone regional liberalization for investments while the market was still closed to cross-border trade (Shelp 1981: 137-142; 171). The EC deregulation in banking had yet to start to liberalize investments while trade opening was also in a planning stage in the early 1980s (Shelp 1981: 207). A comprehensive

regional deregulation agenda in Europe would be set off with the initiation of the single market program in the second half of the 1980s. The insurance market in Japan was also protected up until the 1980s while the market was dominated by domestic companies in the mid-1980s (the share of foreigners in domestic market was only 1 percent) (Feketekuty 1988: 142; Shelp 1981: 157).

On the other hand, financial deregulations in the U.S. had created pressures and incentives to build up international competitiveness in Europe and other advanced economies that led to the liberalisation of internal markets (Strange 1988: 131). Thus a deregulatory trend in finance was put in motion in the UK, Canada and other countries in the 1970s and 1980s, which ultimately pushed banks, insurance and securities firms to operate in a more competitive environment. This trend also generated counter pressure on the American financial sector for further elimination of domestic regulations on business operations (Freeman 1987: 140). The Japanese banking and securities firms, as well as French, German, British and Canadian companies, became more competitive with growing market share and annual earnings (Freeman 1987: 138).⁴⁸ Similarly, large European insurance firms became a cause of concern as they enjoyed the ease of access to the U.S. market (Aggarwal 1992:

48 Harry Freeman notes that top four Japanese securities firms earned almost $3 billion in 1986, which was equal to the earnings of twenty-five to thirty top U.S. firms in securities (Freeman 1987: 138).

40). While the maintenance of market shares domestically and internationally was crucial for U.S. TNCs, an equally important goal became to enter the lucrative but heavily regulated markets of NICs (Beder 2006: 127; Freeman 2000: 456).

Similar concerns were shared by other American service suppliers in shipping, aviation, construction, and engineering. While U.S. trade policy had legal and political leverage to open markets to sectors operating in manufacturing, service industries lacked governmental assistance. Pan American Airways became the first U.S.

company to concoct the idea of extending the purview of U.S. trade policies to the service industries during the policy debate around the forthcoming Trade Act of 1974.

The company was excluded from international mail delivery services in some countries because of internal discriminatory regulations excluding foreign companies from operating in similar conditions with national firms (Feketekuty 1988: 299-300/2010, interview). In its campaign to insert provisions for service suppliers Pan American Airways was joined by other corporations seeking the creation of policy instruments by the government to tackle regulatory barriers abroad. The campaign was orchestrated by AIG, a U.S. insurance giant. AIG was in difficulty to enter lucrative Asian markets and was concerned about the lack of sufficient policy tools to protect its investments in Third World markets (Freeman 2001: 184; Shelp with Ehrbar 2006: 127). The leading figure who organized this intensive lobbying activity was

Ronald K. Shelp, who had been recently appointed to the position of vice presidency responsible for international relations of AIG (Feketekuty 1988: 300). Shelp’s conversations with U.S. government officials illustrated that insurance was not seen as an exportable value benefiting U.S. economy as were goods in engineering, construction and manufacturing industries (Shelp with Ehrbar 2006: 126-127). Shelp puts forward that

Other companies had a prima facie case to begin with. AIG had to make a case.

So AIG had to push doubly hard to persuade its own government that its overseas operations had any value (Shelp with Ehrbar 2006: 127).

Shelp was familiar with the trade policy instruments and terminology owing to his previous career with the International Department of the U.S. Chamber of Commerce (Feketekuty 1988: 300; Shelp 2010, interview). He found out that the tradability of insurance was a “totally alien concept” for government officials, and together with other TNCs they argued that insurance, banking and credit card transactions and transportation constituted the same sectoral category of “services” which were tradable like commodities (Shelp with Ehrbar 2006: 127). The campaign that was orchestrated by AIG before the legislation of the Trade Act of 1974 was, thus, joined by business executives with transportation, construction and other industries. These individuals gave testimonies about their problems in external operations during the hearings of the Senate Finance Committee and eventually secured a role in the

crafting of significant provisions for services in the 1974 bill (Shelp 1981: 153;

Feketekuty 1988: 300; Kelsey 2008: 77). This early coalition of corporate interests later became the nucleus of a broader agenda-setting campaign to bring services under the purview of the GATT as of the late 1970s. Before turning to this wider scale political campaign it would be illuminating to explore the constitutional amendments in U.S.

trade law from 1974 on that paved the way for TNCs in service industries to influence the trade agenda and policy-making.