DISCUSSION

Utilising the interpretative principle of ejusdem generis, we can delineate the types of policies captured by the first sentence. The various dictionary definitions of “prudent” congeal around the notion of individual agents’ risk aversion, caution, circumspection and judiciousness. The context provided by the illustrative examples of prudential motivations in the PMD include: “for the protection of investors, depositors, policyholders or persons to whom a fiduciary duty is owed by a financial service supplier…” These illustrative examples seem geared towards the so-called “principal-agent problem”, i e, rules that discourage management (agents) of an enterprise from acting against the interests of the other stakeholders (prin cipal). Thus, it is unsurprising that one of the most commonly cited “prudential measures” is minimum capital or reserve requirements that keep financial managers from making decisions to become more indebted or have more loans outstanding than would be wise to keep the enterprise intact as an ongoing concern.

The final illustrative example provided in the PMD’s first sentence is something of an outlier, referring to the “financial system” as a whole. This example could be seen as widening the scope of the PMD considerably, so it is worth dissecting the phraseology in some detail. The Oxford English Dictionary (OED) defines “integrity” as “the condition of having no part or element taken away or wanting”, while “stability” is “immunity from destruction or essential change”. “Ensure” is defined as “to make certain the occurrence or arrival of (an event), or the attainment of (a result)...” Taken together, this illustrative example should be read as “to make certain that the financial system does not lose any part or element and is immune from destruction or essential change”. The GATS negotiators could have used a weaker formulation, such as “contribute to protecting the financial system”. Instead, the use of the word “ensure” suggests an outcomeoriented test: that the measure not merely be motivated by prudential concerns, but that total stability and integrity actually be achieved as a result of the measure.

In sum, four out of five of the PMD’s illustrative measures relate to rules that contribute to the minimisation of harm brought by agents on principals, which

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would seem to indicate the “centre of gravity” of the definition of “prudential” under the PMD. Only one of the five illustrative examples goes beyond this to examine rules that relate to systemic risks. Policies taken for the more traditional “prudential” reasons examined by the first four examples would likely have an easier time falling under the scope of the PMD, while the fifth type of policy would be subject to greater scrutiny.

Even if a measure comes within the scope of the PMD’s first sentence (no easy task), it must also be within the scope of the second sentence, which imposes limitations on the ability to invoke it as a defence: “Where such measures [i e, those ‘taken for prudential reasons’] do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.” Much of the existing academic literature on the PMD interprets the second sentence as socalled “anti-abuse language”, and Zutshi echoes this sentiment repeatedly and in especially unrestrained terms. But there are several reasons to doubt the soundness of this interpretation.

First, this interpretation goes against the “ordinary meaning” of the verbs “to use” and “to avoid”, in violation of Article 31 of the Vienna Convention on the Law of Treaties (VCLT). Advocates of the anti-abuse interpretation seem to be reading the PMD as saying “used with the intent to avoid” rather than the formulation actually utilised: “used as a means of avoiding”. The verbs “to use” and “to avoid” do not require a demonstration of intent on the part of the subject.18 For this reason, legal invocations of the verb “to use” are often modified to “used with intent” when actions resulting from unique motivations are meant to be differentiated from generally prevailing customs.19 Whether a WTO member “uses a measure to avoid” its GATS obligations is determined by the fact of the GATS obligations not being fulfilled, not because the WTO member was motivated by the intent to avoid its GATS commitments.

Second, Zutshi’s interpretation goes against the principle of effective treaty interpretation, which requires that two treaty obligations described using different words be given different meanings. Treaty

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negotiators and interpreters are familiar with the standard anti-abuse language of the so-called chapeau of GATT Article XX.20 They chose not to utilise that language, and instead create sui generis language of the PMD. Interpreters would have to accordingly apply a different legal standard.

Appli cation of Chapeau

The chapeau comes into play when a panel has sided with a complainant that a respondent country has violated their WTO obligations, but has sided with the respondent that the policy nonetheless is taken for some permissible objective (such as protection of human life) and that the policy is (for instance) “necessary” to achieve the objective. The chapeau represents a “final cross-check”, to show that the permissible violation of a WTO obligation is not taken for protectionist reasons or in an arbitrary manner not expressly prohibited by the violated obligation itself. In contrast, the “final cross-check” PMD is simply a return to the initial test, of whether a violation of an obligation or commitment occurred. Only one respondent has survived the chapeau test in the history of the WTO,21 and it is hard to see how a respondent could ever survive the PMD test.

This raises the question of whether the PMD as a whole can be left with any legal effect.22 Zutshi rightly identifies this interpretive quandary, and notes that interpreters should ensure that “no text or expression is rendered inutile”. While he worries that we would leave the PMD inutile, his interpretation would lead Article XVI (or any other claimed violated provision) effectively inutile. He writes (without interpretive support) that the PMD allows regulatory interventions that “result in violation of a specific commitment”. And: “As to the application of the caveat in practical terms, the facts and circumstances of individual cases under dispute will show whether or not a challenged measure was for prudential reasons or taken with the intent of avoiding a commitment.”

Aside from such interpretation going against the ordinary meaning of the English text of the GATS, there is the issue of whether any policy (be it related to trade in goods, services, investment or intellectual property) could ever be said to be taken “with the intent of avoiding a

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DISCUSSION

commitment”. There is little WTO jurisprudence that delves deeply into how “intention” is ascertained for the purpose of trade law, but recent panels have examined the architecture, design, structure and characteristics of legislation. In practice, this has meant that they examine the preambles and legislative history of the challenged measure.23

By Zutshi’s evidentiary standard, if a country claims a measure is prudential, this defence could only be invalidated if a parliament was so guileless as to include a provision in the preamble of legislation along the lines of, “While we are claiming this financial reform is for prudential reasons, the real reason is because we seek to violate the GATS commitments”. We know of no instance in the history of the WTO where a legislature has taken action so capricious that it stated the motivation as violating WTO commitments. Rather, a nation takes action that is intended towards some other goal (protection of jobs, consumers or environment), and is unaware of or unconcerned about violating its WTO commitments. By Zutshi’s reading, the PMD would render other GATS provisions inutile, which would be even more unacceptable for an agreement that has as its stated objective “the reduction or elimination” of barriers to services trade.24

PMD and Capital Controls?

All of the foregoing could be moot in the instance of CMTs. The lex specialis interpretive principle suggests that Article XII (which establishes certain limited permissible deviations from Article XI) is rather the governing exception for CMTs. This was the conclusion of two University of Zurich scholars whose writings tend towards supportive of the current WTO regime. In their study of the provisions, Rolf Weber (a WTO panelist) and Christine Kaufmann wrote:

The right of a member to issue or maintain such prudential regulation seems to find its limits in Article XI GATS. Indeed, paragraph 2 of the Annex on Financial Services underlines that the prudential carve-out should not be used to avoid commitments or obligations under the GATS Agreement. This sheds uncertainty on the relationship between the Annex on Financial Services and the GATS, in particular Article XI GATS. The issue is well illustrated by the current request from the EC to Chile to lift its requirement that a prior authorisation by the Central Bank is necessary before profit repatriation to be allowed. Such restrictions are indeed considered by the EC to be in breach of Article XI... If this provision is interpreted as prevailing over the prudential carve-out, it seems to prevent countries from taking prudential measures with respect to payment in transfers, in fact measures, which could be ‘nevertheless very effective for dealing with

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financial stability’.

The Planck commentaries provide support for this conclusion, stating that members may not use prudential measures to “actually avoid any obligations under the GATS (including the obligation to libera lise international transfers and payments relating to services for which specific commitments have been made)”.26 Also, arbitrator Mark Kantor has a similar interpretation of the non-applicability to capital and current restrictions of a nearly identical PMD clause in bilateral US trade and investment agreements.27

GATS: A Special Problem

Zutshi sets up a straw man when he concludes that “Specific commitments of members in the financial service sector were in no way responsible for the crisis”, since no one has argued this in the first place. Rather, the apprehension is that commitments under GATS may prevent both developed and developing countries from putting in place financial sector policies that are seen to be in society’s interests. Some of the issues with respect to CMTs and banking requirements have already been highlighted. There are further areas of concern for developing countries, most strongly with respect to development banking and directed credit. The requirement of national treatment may affect countries seeking to develop their own domestic financial sector in particular ways, especially to generate greater financial inclusion. The importance of public sector banks in maintaining stability and furthering an economic growth strategy has become evident in the light of the role played by successful development banks such as BNDES in Brazil. Such options may be constrained in some countries depending upon the exact nature of their Article XVI commitments. Similar concerns apply to the possibility of directing credit to certain sectors for developmental or societal purposes. Since no country has developed without some recourse to directed credit, this is a serious limitation.

Two underlying axioms imbue Zutshi’s analysis. The first is that GATS generally provides a framework for trade liberalisation that is generally favourable to developing countries and that therefore it is in their interests to promote and further strengthen the agreement. This issue is not so clear cut, and Zutshi’s own discussion of the costbenefit equation suggests that subjective perceptions play an important part in such a judgment. The second is an excessive faith in the ability of the IMF to serve as the objective arbiter in case of disputes with respect to restrictions imposed by a member in case of balance of payments difficulties. He notes approvingly that the “IMF has a decisive say in the assessing the balanceof-payment and the external financial situation of a consulting member under Article XII”. But in fact this power has been asymmetrically applied by the IMF, often to the detriment of developing countries, as has even been recognised by the Inde

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pendent Evaluation Office of the IMF.

We have raised several areas where GATS disciplines are at best ambiguous, and at worst, could pose barriers to financial services reform. There are still other areas we have not explored, such as the worrying implications of the proposed disciplines on the accountancy sector, or even the overly expansive interpretation of non-discrimination rules. This discussion should underline that developing countries’ efforts to further discuss these intersections should be encouraged, not discouraged. Indeed, if there had been more honest engagement on these issues the first time around, proponents of GATS would not currently confronting difficult questions for which they have no good answers.29

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Notes dozen procedural and substantive hurdles, such (“General Exceptions”) has virtually identical

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