Accelerating Two Way Trade and

Investment Flows in Services

James Bond

President Australian Services Roundtable

Chief Economist

Financial Services Council

Understanding services is the first step

“ . . .to animate and extend the cultivation of the

land, whose produce is the most real and certain

wealth of a state . . .” Francios Quesnay (18th

century)

“I don’t want to be Prime Minister of a country that

doesn’t make things”.

Former Australian Prime Minister Kevin Rudd (2006)

Australians believe that the mining sector accounts

for 35 per cent of GDP, when it actually accounts for

just 9.2 per cent of GDP. (Australia Institute, 2011)

Growth in services as a proportion of the Australian economy

Malaysia About 60%

Financial Services: Largest Sector of the Australian Economy Industry Contribution to GDP Gross Value added (June 2011)

0

5

10

15

Finance &insurance

Manufacturing Mining construction Agriculture

1990 2011

per cent

Defining Services Trade I

Mode 1: Cross Border Supply

Services supplied from one country to another. For example, where an

Australian fund manager earns fees managing the funds of individuals from

another country from within Australia.

Mode 2 Consumption Abroad

Where consumers or companies make use of a service in another country.

For example tourism.

Defining Services Trade II

Mode 3: Commercial Presence

A foreign company sets up a subsidiary or branches in another country, for

example foreign banks opening branches in another country.

Mode 4: Movement of natural persons

Individuals travelling from their own country to provide services, for example

a lawyer travelling to another country to provide legal advice

Accelerating bilateral services trade:

Free Trade Drives Growth

Multilateral – through World Trade Organisation

Regional Free Trade – ASEAN, Trans Pacific Partnership

Bilateral Free Trade – Malaysia, Australia Free Trade Agreement

Regional Co-operation – APEC, Asia Region Funds Passport

Multilateral – through World Trade Organisation

A Services Plurilateral

The best services offers would reduce protection by just 13 per

cent.

Countries would sign up to commitment which is 99 per cent more

restrictive than current practice.

Updated government procurement agreement would add $100

billion to world trade.

Two of most protected sectors excluded: professional services and

air traffic.

Multilateral – through World Trade Organisation

A Services Plurilateral

Goowitz and Mattoo, World Bank

“The bottomline: At this stage, Doha promises somewhat greater

security of access to services markets but not one iota of

liberalization.” (Gootiiz & Mattoo, 2009, p. 2)

Multilateral – through World Trade Organisation

A Services Plurilateral

Services account for 68 per cent of global GDP.

Agriculture less than 10 per cent.

Developed countries meeting to discuss a separate services

only agreement.

India, Brazil, South Africa and China are opposed

Benefits for countries like Malaysia – growth will come through

services liberalisation in the 21st century just as it came

through goods liberalisation in the 20th.

Accelerating Investment

“Economic theory dictates that when domestic distortions

and externalities from FDI are both absent, the optimal FDI

policy ought to be no policy at all – ie. Governments should

allow unfettered market transactions.” (Hoekman and

Saggi, 1999, p. 4)

Multilateral Framework for Foreign Direct Investment?

Strong economic case for FDI agreement under WTO.

Concluding trade and investment deals together doubles the

benefit.

Deal with “beggar-thy-neighbour” policies. (eg Australia’s

subsidies for multinational car manufacturers).

Bilateral Investment Treaties (BITs) have drawbacks:

Investment diversion;

Do not lead to significantly greater investment (United Nations

Committee for trade and development)

However, cost to Doha Round agreement probably too high.

Free Trade in Services and FDI are linked: Solve services

trade liberalisation and you solve large part of investment

liberalisation

80 to 85 per cent of restrictions on international investment are in

services.

FDI in agriculture and manufacturing already relatively open.

Services industries considered sensitive by governments and

restricting investment is method of protection:

telecommunications, broadcasting, energy, financial services, civil

aviation and maritime transport.

Trans Pacific Partnership (TPP) and Investment

“. . . substantive legal protections for investors and investments of

each TPP country in the other TPP countries, including ongoing

negotiations on provisions to ensure non-discrimination, a minimum

standard of treatment, rules on expropriation, and prohibitions on

specified performance requirements that distort trade and

investment.” (Australian Department of Foreign Affairs and Trade,

2011)

Malaysia-Australia Free Trade Agreement (MAFTA)

education services – 70 per cent ownership in higher education

services, increasing to 100 per cent in 2015; 70 per cent ownership in a

range of other education services;

financial services – 70 per cent ownership in investment banking and

direct insurance services;

telecommunications – at least 70 per cent ownership in all

telecommunications services; and

professional services – 100 per cent ownership in accounting,

auditing and bookkeeping services; 100 per cent ownership in

management consultant services (excluding financial management

consulting); 51 per cent ownership in taxation services.

Australia’s problem with FDI

Significant political concern with FDI in Australia – particularly in

agriculture and food production.

Australian Treasurer must still sign off on FDI in Australian businesses

valued at over $50million. (Foreign Acquisitions and Takeovers Act

1975)

In some “sensitive industries” Parliament provides an additional layer of

approval.

eg Corporations Act for Australian Stock Exchange

Merger of Australian Stock Exchange and Singapore Stock Exchange

blocked by the Australian Government in 2011.

Asian Regional Funds Passport – A practical example of

regional integration

The European UCITs system allows financial products developed in one country to be sold in all other European countries.

There is no equivalent UCITS regime in Asia.

Limited, inconsistent and inefficient regulatory regimes for recognition of foreign funds.

Despite this, a high proportion of funds offered in Asia are domiciled outside the region:

Hong Kong 91%

Singapore 79%

Taiwan 59%

Over the past three years approximately 40% of all new sales into UCITS funds have been sourced from Asia.

Patchwork of Mutual Recognition Agreements.

Asian Regional Funds Passport Low mutual fund penetration: USD2.757 trillion, 13% of global FUM

GDP growth/share: USD16,652 billion today, USD24,591 billion by 2015

Low pension system coverage (less than 10%)

Asian Regional Funds Passport

The common set of passport regulations would need cover a wide range of issues,

including:

- Eligible investment asset classes;

- Custody arrangements;

- Offer document conditions;

- Fund registration arrangements;

- Licensing arrangements for the provider;

- Any limits on leverage;

- Any liquidity requirements; and

- Investor protection and dispute resolution procedures.

Asian Regional Funds Passport

Lower the barriers to entry for Asian based fund managers wanting to offer funds

in the region.

Grow the regional managed funds market – size, capability, employment, etc.

Drive innovation and productivity in financial services in all countries

participating.

Improve the level of choice and competition for all consumers in the region.

Reduce operating costs for fund managers in the region and hence prices for

consumers of financial services.

Lower the cost of capital within the region.

Next Steps: APEC “We also recognized the role of ABAC and the private sector in supporting finance

officials’ exploration of the concept of an Asia Region Funds Passport (ARFP) in

order to develop the sound funds industry and better integrate financial markets with

due regard for investor protection. We expect further development of this work, in

consideration of economies’ level of market development, which could help explore

the establishment of a pilot ARFP.” (APEC Finance Ministers’ Communique 2011)

“We note the technical work that is underway to gradually progress the development

of an Asia Region Funds Passport (ARFP). Taking into account this progress and

the different regulatory, economic and market conditions of economies in the region,

as well as efforts by ASEAN to better integrate capital markets, we look forward to

further development of the proposed model, governing arrangements and policies

for a pilot ARFP.” (APEC Finance Ministers’ Communique 2012)

International symposium on integrating financial services in the Asia region –

Sydney 2013.

Conclusions: Accelerating services trade and investment

between Australia and Malaysia

1. Advocate for services, reform 20th century institutions and fight the physiocrats;

2. Multilateral agreements under the WTO the best way to accelerate services

trade and investment;

3. In the circumstances, a services only agreement is the second best option for

accelerating services trade AND investment;

4. Malaysia should consider joining the group of countries discussing a services

only agreement under the WTO;

5. Australia and Malaysia should be more open – Malaysia remove domestic

investor requirements – Australia remove sensitive sector related legislation;

6. Asia is the centre of growth in this century and should break away from

European institutions – regional cooperation and integration can drive growth –

Asia Region Funds Passport is an example.

jbond@fsc.org.au

02 8235 2511