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Expert knowledge Transitions and Trade in ‘Financial Services’

by Brett Christophers on July 4, 2016
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When the General Agreement on Tariffs and Trade (GATT) was negotiated in 1947, it would have been essentially inconceivable to all those involved that when it was replaced by the World Trade Organization (WTO) 48 years later, the multilateral trading system constituted by the latter organization would incorporate a treaty – the General Agreement on Trade in Services (GATS) – encompassing trade in (inter alia) financial services. That financial services belong among the myriad other goods and services covered by the WTO’s treaties is, today, taken-for-granted, at least among the individuals and institutions with the power to shape such treaties. But half-a-century ago it was not. In this post, drawing upon arguments developed at much greater length in my book, Banking across boundaries: Placing finance in capitalism, I explain how the unimaginable became the commonsensical, focusing on the role of various ‘experts’ in effecting this transition.

Christophers banking across boundariesAnyone trying to argue in 1947 for the inclusion of financial services alongside the tradeable goods – and it was only goods – covered by the GATT would have faced three main ideational obstacles: ideas, in other words, that would effectively have militated against such a possibility.

The first concerned ideas about trade, and especially about what was considered tradeable. Goods were obviously tradeable. But it was conventional wisdom among economists that services were not; they were deemed the proverbial ‘non-tradeable’. Why? For two reasons. One was that services do not cross borders physically in the manner of shipped goods – you cannot ‘see’ them being traded. The second was that services cannot be stored; and if they cannot be stored, how can they be shipped? One reason (though not the only one) why services in general were excluded from the GATT, therefore, was that trade was generally not thought to extend to the service economy.

Even if services had been included in the GATT, however, it is unlikely that financial services more specifically would have been on the table, and to understand why requires understanding the second ideational obstacle. Simply stated, the core, intermediation-based activity of the financial sector was not generally thought of as a ‘service’. Intermediation was more often thought of as a ‘position’ or role. Banks made money not so much through what they provided as by virtue of where, in a wider network of economic actors, they stood, intermediating between those with financial surpluses and those with deficits and generating revenue from an interest-rate spread rather than from a service fee – although of course fees were earned on some of what were then more marginal, non-interest-based, lines of business.

Alongside these two key ideational obstacles to financial services becoming a negotiable trade ‘issue’ – the fact that services were not deemed tradeable and finance was not considered a service – was a third. This also concerned finance, but it related less to what kind of activity or ‘thing’ finance is than to what kind of contribution it makes (or is believed to make) to an economy. According to the economic theory of comparative advantage that underwrites the ‘free trade’ agenda embedded in the GATT and WTO, trade in goods is mutually beneficial where the production of those goods is itself economically productive – where, that is to say, it adds value. Trade may not be so advisable where an activity either adds no value or where it swallows it. Think of it this way: encouraging an activity that sucks value from elsewhere in the economy is one thing where the value at least stays within the national economy; encouraging such an activity where, through trade, it transfers such value elsewhere is another thing altogether.

And here’s the thing: at the time of the birth of the GATT, finance was widely considered just such an unproductive or even ‘parasitic’ activity, and not only within the population at large (where, of course, such a perception continues commonly to prevail, especially after the traumas of the post-2007 global financial crisis). The most important and influential forum within which the productiveness or otherwise of an economic activity was – and still is – officially adjudicated was national income accounting, which is predicated upon the determination of which side of an all-important ‘production boundary’ different activities belong on: the unproductive (unpaid household labour being perhaps the classical example) or the productive. And in the 1940s, which was a formative period for national income accounting, the orthodoxy among statisticians of various high-profile countries, including some of those which took a lead in developing harmonized international accounting standards, was that finance was unproductive. The United Kingdom was one such country; France was another.

Thus, the prospects for financial services becoming part of a multilateral trade agreement based on free-trade principles, had anyone actually considered such prospects, would have looked far from positive at that time. Finance was widely deemed unproductive; it was generally not seen as a service; and services were not considered tradeable. All three ideas would clearly need to change in order for finance – in the guise of financial services – to accede to the WTO’s trade table.

And they did – at different times, at different rates, and courtesy of the ‘work’ of a range of different experts. Let’s take these three ideational transitions, which were connected to one another in various important ways, in reverse order.

In terms of national accounting and the powerful measures of gross domestic product and ‘value-added’ that it generates, when did finance ‘become’ productive in the sense that consensus was reached among national statistical agencies that the finance sector is productive? Not until the 1970s. Some agencies, including in the United States, had from the very start used accounting treatments that rendered financial activities productive, but others gravitated to this position over time. It was in the 1970s that arguably the two most important holdouts – France and the United Kingdom – came to the same conclusion and altered their treatments accordingly. They, and others, did so on the basis of a decades-long conversation among statisticians and economists, conducted at conferences, workshops and in the pages of journals like the Review of Income and Wealth, around the nature of finance and how it should be statistically represented.

The ‘servicization’ of finance – that is, the conceptual transition whereby it came to be widely viewed as a service, even to its intermediation-based core – occurred somewhat later. This may surprise some, especially younger, readers, for whom the category ‘financial services’ is a commonplace, part of the taken-for-granted categorical furniture of modern capitalism. But prior to the 1980s, it genuinely was not. It was seldom heard. ‘Finance,’ rather, needed to be actively, determinedly yoked to ‘services’ until the glue held firm and thus the category took root and became conventional econ-speak. This conceptual and terminological work was performed primarily in the late 1970s and the beginning of the 1980s, and by a very different type of ‘expert’ from the earlier work of making finance (conceptually) productive.

Before looking at this work, however, we need to consider the third ideational transition, whereby services in general came to be considered tradeable economic activities, endowing them with the properties necessary to become a credible object of international trade negotiations. This, too, occurred relatively late in the day. Services were not only excluded from the original GATT negotiations; they remained wholly absent from its next four rounds (in 1951, 1955-56, 1960-62, and 1962-67), too. And no wonder. The phrase ‘trade in services’ was not officially coined until 1972, specifically in a report into the long-term outlook for trade commissioned by the Organisation for Economic Co-operation and Development. Until that point, and indeed for several years thereafter, services – which, of course, still excluded finance – essentially belonged in a separate universe from trade.

All this changed between the mid-1970s and the mid-1980s. As research carried out by William Drake and Kalypso Nicolaïdis, among others, has shown, a broadly-constituted epistemic community of economists, consultants and other experts ultimately achieved the consensus that services were indeed tradeable, by writing documents and making speeches containing this message and by organizing industry, media and government events premised on this very conviction. In the 1980s, in particular, their arguments were popularized around the world by influential industry-based interest groups such as the Coalition of Service Industries and the Liberalization of Trade in Services Committee. Key national governments with power at the trade-negotiation table, such as the US government, rapidly converted to the new trade-theory orthodoxy; and so, ultimately, by 1995, did the GATS signatories, albeit with markedly varying degrees of enthusiasm.

With this knowledge in hand, we can now return to the abovementioned ideational work of turning ‘finance’ into ‘financial services’. In the mid-1970s, a number of large US financial institutions, including American Express, Citigroup and American International Group (AIG), were becoming increasingly frustrated by formidable barriers to entry to foreign markets. This frustration was only heightened by the fact that they saw their national peers in physical-goods sectors being supported by the US government in tackling their own market access problems. But in recognizing this support, the executives of those financial institutions also spied an opportunity. If the government helped other industries, might it not also help the US financial sector? Perhaps it would. But the support the government gave to other national ‘champions’ was specifically in the trade-negotiations context. So if finance was ever to receive the same benefaction, it, too, it appeared, needed to become part of the trade agenda. For this to happen, services needed to be considered tradeable and finance needed to warrant being treated as a service.

AIG wall streetThe implications were twofold. First, executives of the aforementioned US financial institutions became active members of and leading voices within the epistemic community advocating the generic ‘trade in services’ nostrum. When research was initiated or conferences were organized or Congress was lobbied to support the basic principle of trade in services and the need for negotiations on such trade, the key figures were frequently the same: Ronald Shelp and Hank Greenberg of AIG, and Harry Freeman and Joan Spero from American Express. In fact, WTO Director of the Services Division, David Hartridge, would later claim that there would have been no GATS without the ‘enormous pressure’ applied specifically by US financial institutions and their executives.

Second, and equally importantly, the same individuals and institutions simultaneously set about cementing the notion that finance was one such (tradeable) service; from a selfish perspective, there was of course no point in getting services to the trade-negotiating table if finance was not even part of the services package to be negotiated. Here, the work involved was anything but subtle. Apparently, American Express executives, from 1979, asked everybody in the company to begin using the term ‘financial services’ – particularly with the media – until it caught on. And within a matter of years, it was part of the everyday vernacular of US economic life.

In sum, a whole series of closely-connected economic ideas – about finance, about services, about trade, and about value – needed to be reconstituted in order for finance to become part of the retinue of products and services negotiated in influential trade organizations such as the WTO. And a wide array of expert actors of one sort or another was involved in the processes that effected this reconstitution. It may appear axiomatic today that ‘financial services’ belongs at the trade negotiating table. But that has not always been the case. Its ‘belonging’ is a relatively recent invention, and is the product of power and institutional leverage as much as of intellectual reformation.

This post originally appeared in Global Policy

Brett Christophers

Brett Christophers has degrees from the Universities of Oxford, British Columbia and Auckland and is Professor of Human Geography at Uppsala University in Sweden. The author of four books, Brett’s research ranges widely across the political and cultural economies of Western capitalism, in both historical and contemporary perspectives. Particular interests include money, finance and banking; housing and housing policy; urban political economy; markets and pricing; accounting, modelling and other calculative practices; competition and intellectual property law; and the cultural industries and discourses of ‘creativity’

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