WORLD TRADE
ORGANIZATIONS/CSS/W/86
11 May 2001
(01-2434)
Council for Trade in Services
Special SessionOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
Negotiating Proposal for Financial Services
The following communication has been received from the delegation of the Republic of
Korea with the request that it be circulated to the Members of the Council for Trade in Services.
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I. BACKGROUND: PERSPECTIVE ON FINANCIAL SERVICES LIBERALIZATION
1. Financial services are one of the most important infra-services and liberalization of trade in
financial services has considerable impact on an economy as a whole.  A well-functioning financial
system provides an important vehicle for efficient allocation of financial assets and promotion ofeconomic competitiveness.
2. Liberalization of trade in financial services has many positive aspects, including (i) increased
economic growth through the introduction of foreign capital, (ii) adoption of advanced financial
practices and know-how, and (iii) greater financial market efficiency through increased competition.
3. However, in the current international financ ial environment characterized by rapid and
massive movement of private capital, an imprudent financial services liberalization could have
negative effects on the development of financial systems as well as on the stability of emergingmarket economies.  The 1997 Asian financial crisis is a case in point. Ill-prepared liberalization of
financial services lacking sound financial infrastructure and strong supervisory system actually
weakened financial system and eventually resulted in financial crises.
4. Following the Asian financial crisis, the international community discussed on the
strengthening the financial systems of emerging market economies as a part of reforming theinternational financial architecture.  The discussions were deemed to contribute to widespread
adoption of international standards on financial supervision. Nevertheless, financial systems of
emerging market economies are still fragile.
5. Therefore, Korea believes that international community should encourage developing
countries to take more efforts to strengthen their financial systems in preparation for the furtherliberalization of their financial markets.  In this respect, negotiations on financial services should aim
at achieving more orderly and sequenced liberalization in accordance with the levels of developments
of financial market and supervisory system of member countries.S/CSS/W/86
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II. SCOPE AND MODALITY OF THE NEGOTIATIONS
A. HORIZONTAL COMMITMENTS
6. While the main method of negotiation shall be Request and Offer approach, Korea recognizes
that a formula approach aiming at undertaking horizontal commitments may enhance the level of
liberalization of financial services.  However, it  would be desirable that horizontal commitments
should be applied in such a way as to guarantee stability of trade in financial services, taking into
account the financial circumstances of member countries.
7. In the same vein, the adoption of an “Understanding of Commitments on Financial Services”
by all Members as a part of their specific commitments of the financial services may force some
Members to adopt financial liberalization beyond what their financial circumstances allow for.  The
level of horizontal commitments, therefore, should be established through thorough discussion among
member countries.
B. CREDITS FOR AUTONOMOUS LIBERALIZATION
8. Autonomous liberalization of financial services is a valuable voluntary contribution to
expanding trade in financial services.  Providing credits for such autonomous liberalization is an
effective tool for encouraging member countries to take self-generating financial liberalization
measures.  Consequently, credit must be given to autonomous liberalization measures in the financial
services negotiations in accordance with the criteria to be developed at the Council for Trade in
Services Special Session.
III. EXPECTATIONS FROM THE NEGOTIATIONS
9. Korea believes that financial services negotiations should aim at gradual removal of various
obstacles and barriers that distort the flows of financial services. Korea is of the view that theinitiatives of advanced countries in this respect are particularly important.
A. C
ONSTRAINTS ON COMMERCIAL PRESENCE
10. Trade barriers that constrain commercial presence, including limitations on equities sharing,
types of operation, number of operations and nati onality of management or employees, need to be
gradually abolished by all member countries.
B. MFN EXEMPTIONS
11. MFN exemptions are of the most fundamental pr inciples of the multilateral trade system, and
thus should be eliminated except for those which can be justified for historical or geographical
reasons.  In particular, the reciprocity test applied by certain countries to protect and assist the
expansion of foreign operation of their financial institutions should be abolished without exception.
C. DIFFERENT LIMITATIONS APPLIED BY SUB -CENTRAL GOVERNMENTS
12. Different regulations applied by sub-central and local governments on types of operation,
ceiling on equities sharing, or other limitations on trade in financial services act as critical barriers to
establishing or expanding operations of services suppliers. Therefore, the financial services
negotiations should aim at harmonizing different regulations maintained by sub-central and local
governments.S/CSS/W/86
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D. LIBERALIZATION OF CROSS -BORDER TRADE IN FINANCIAL SERVICES
13. Cross-border financial transactions, especially those related to capital transactions, could
increase volatility of financial systems.  The recent development in e-finance based on the expansion
of internet transactions has created a new international financial environment with greater possibility
for large-scale and rapid cross-border capital movements.  In addition, financial transactions withoutcommercial presence tend to increase the possibility of capital reversal which can cause financial
crisis through contagion effect and self-fulfilling behaviours. In-depth discussion, on the framework
of prudential regulations on cross-border trade in financial services, are required in the financial
services negotiations.
14. Korea is of the view that liberalization of cross-border transactions should be limited to those
which (i) assist other economic activities and (ii) are not related to large-scale capital movement, such
as financial consulting services and credit rating business.
E. T
RANSPARENCY OF PRUDENTIAL REGULATIONS
15. Prudential regulations and measures are essential to ensuring the stability of financial
markets. The financial services negotiations should  not erode the principles that protect the right of
financial authorities to implement prudential regulations as described in paragraph 2(a) of Annex on
Financial Services.
16. However, prudential regulations should not be abused to restrain market access of foreign
suppliers.  They should not aim at reducing the range of operation of foreign financial services
suppliers or imposing excessive burdens on them. Korea looks forward to discussion on how to
develop more transparent and objective prudential regulations in the future negotiations.
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