To insure a deal

The Americans, who have the power to make or break a deal to liberalise international financial services are not saying anything today. “All one can say is everybody is working very hard and nothing will be clear till tomorrow,” a US official said. Another trade diplomat added, “if you were in Washington today, you would understand the full implications of the problem with Malaysia — in the world of free trade, you just don’t go backwards as Malaysia can do under what it has proposed.”

With less than 24 hours to go for 70 countries to finalise a financial services liberalisation package, all eyes are peeled on Malaysia which is going head-to-head with the US over the question of ownership of insurance firms. Under the proposed WTO pact, signatory countries will commit themselves to open their markets for banking, insurance and securities dealings to foreign competition.

The Malaysians, reflecting state policy have offered 51 per cent ownership in insurance companies operating in their country and have refused to guarantee that firms with larger stakes will not have to disinvest.

“Basically, it is now all down to a question of how that issue with Malaysia plays out,” one senior Western negotiator said. The 47 reworked offers on the table, many of them the result of systematic arm-twisting by the US and EU in capitals around the world is no longer enough. Neither is the widespread support for the deal from which the US walked away saying its market openings were not matched by those of others, especially Asian and Latin American countries. Listening to trade negotiators and lobbyists, it is difficult not to conclude that the fate of the deal in a sector which the WTO says generates $1.2 trillion a day in foreign exchange deals depends on who — Malaysia or the US — blinks first.

There’s more to it than originally met the eye. Beyond the WTO talks is domestic US politics and pressure groups. The Malaysian position places in the eye of the storm a US insurance conglomerate the American International Group (AIG) which holds 100 per cent of a Malaysian subsidiary and under current laws would have to go below 50 per cent by the middle of 1998.

The US giant has strong political influence in Washington and contributes to both the Democratic and Republican parties. American officials in what appears to be an attempt to make a virtue out of necessity by saying question is one of principle and if they let Malaysia off, what will happen when China and Russia, both waiting in the wings to get in, enter the trading system. They say both Indonesia, whose population is ten times that of Malaysia, as well as Thailand, the Philippines and Singapore have agreed to “grandfather” current foreign ownership levels in insurance which requires no firm to disinvest. The Malaysians say their original contract with AIG includes a disinvestment clause by 1998. The Americans say Malaysia is using that as an excuse by seeking to lodge that in the WTO. American insurance companies and financial services industry lobbies have set up entire secretariats in Geneva hotels to monitor the situation.

The Wall Street Journal add other reports in the US media have identified the AIG as one that forced the US Government away from the deal in 1995. Citing the Washington-based Centre for Responsive Studies, a group that tracks campaign funding, the report says AIG and its political action groups are said to have given $485,440 to Republican candidates and $442,990 to Democratic candidates. Diplomats say its Congressional supporters — Republican Senator Alfonso D’Amato and Democrat Senator Paul Sarbanes — have been pressing the administration not to agree to a deal that does not satisfy the AIG.

“The Malaysians have done what they can. Considering that Malaysian or Asian financial companies are not exactly waiting to raid US markets, what more can Malaysia do,” one developing country negotiator said. The West says that view is shortsighted. They say countries like India, Malaysia, Indonesia, as well as large economies in Latin America, have vast needs for capital to fund infrastructure, education, healthcare and everything else that goes into modern economies. For this, a sophisticated financial industry offering access to global capital is a pre-requisite.

Meanwhile, the verdict is not yet out on a re-worked Indian offer tabled on Wednesday. Trade sources say in the banking sector New Delhi has dropped certain MFN (the most-favoured nation rule, which is the mother of all WTO rules that prevents discrimination between countries) exceptions that were built into its 1995 offer. The US, for example had MFN exemptions in 1995 and was unwilling to grant to Indonesia concessions to gave the EU.

Diplomats say more than 90 per cent of the offers on the table have dropped MFN exemptions.

In the insurance sector, where Parliament threw out plans to open this sector to competition, New Delhi’s offer simply opens up additional possibilities for domestic insurance companies to insure themselves and their risks globally. “Basically, it’s several layers of risk-spreading,” one trade specialist said. He added that it was already current in India’s state-owned insurance sector where companies were doing this between themselves and also globally and that this had now been given a a WTO profile. As a case in point he pointed to a recent case of the failed Indian satellite that was handsomely compensated by international insurers. Certain statutory requirements (10 per cent), however, have been maintained.

With a day left for the talks to end, negotiators say neither Sir Leon Brittan’s optimism nor widespread support for a deal, nor the new offers on the table will make the difference in Washington whose every word is eagerly awaited and dissected in Geneva. Its happened once, in the telecommunications negotiations where when negotiators and journalists waited in Geneva, a deal was announced in Washington. That was good news. This time around no one is betting.