Desperate to clinch a new global trade deal, World Trade Organization chief Pascal Lamy is planning to convene a “mini-ministerial” meeting in the third week of July. The aim of the meeting is to come up with agreements on trade in agriculture, industry, and services which have been the focus of the so-called Doha Round of WTO negotiations that have dragged on since 2001.

Developing country governments have been rightly concerned about agreeing to texts which promise illusory reductions in agricultural subsidies in the European Union and United States and require them to cut their industrial tariffs proportionally more than the developed countries. They should also not allow themselves to be snookered into a bad agreement on services.

While global attention has focused on the talks on agricultural subsidies and industrial tariffs, the US and EU have made it clear that they will not settle for a trade package that does not include services. As US Trade Representative Susan Schwab bluntly stated in a recent opinion piece, Washington “will not support a Doha package unless it includes an ambitious outcome on services that delivers commercially meaningful results.” While Schwab portrays the services talks as the poor cousin of the agriculture and industry negotiations, an equally possible outcome is a services agreement unaccompanied by deals in industrial tariffs and agriculture. With the North-South polarization in agriculture and industry, salvaging Doha with a deal in services, which are said to account for 50-60 per cent of economic activity in most developing countries, might become an increasingly attractive option to the EU and US.

Much media coverage of developing country concerns in services has centered on the so-called Mode 4 of the General Agreement on Trade in Services (GATS), which addresses the movement of “natural persons.” Much resentment has been expressed with a multilateral system that facilitates the movement of capital and goods into developing country markets but severely limits the entry into developed country markets of labor from the developed countries. But an equal, if not greater, concern of the developing countries is their current lack of capacity to regulate transnational service providers. Their fears have been fanned by the current troubles of the global financial system, which are traceable to the virtual absence of global regulation of developed country financial operators. While financial services are just one of many services covered by GATS, the US and EU have made a liberalized financial sector their main demand on developing countries. It has been revealed, for instance, that the EU has demanded that some developing countries eliminate regulations that cover the activities of hedge funds. The EU has also demanded that Mexico open up its market to trade in derivatives, the slippery financial instruments that have played such as key role in the current financial chaos.

Most developing countries welcome foreign capital, but they have learned the hard way that a strong foreign financial presence demands a strong regulatory regime tailored to a particular country’s needs and capacities. It was the indiscriminate elimination of capital controls across the region at the behest of the International Monetary Fund and the US Treasury Department that brought on the devastating Asian financial crisis. With practically all capital controls lifted and investment rules liberalized, some $100 billion flowed into the key Asian economies between 1993 and 1997, with the money gravitating toward areas of high and quick return, like the stock market and real estate.

With few controls on where the funds went, overinvestment soon swamped the the stock and housing markets, causing prices to collapse and triggering follow-on dislocations in the exchange rate, the balance of payments, and the balance of trade. Gripped by panic, speculators scampered toward the exit. With both entry and exit rules liberalized, there was no way for governments — except for Malaysia, which defied the IMF and imposed capital controls — to stop the stampede, and the $100 billion that fled the region in a few short weeks in the summer of 1997 brought economic growth to a screeching halt from Korea all the way down to Indonesia.

Capital account and financial liberalization was also a key demand pushed on Argentina in the 1990’s by developed country authorities. Buenos Aires complied, prompting Larry Summers, then US Secretary of the Treasury, to claim that the end result of foreign interests controlling 50 per cent of the banking sector and 70 percent of private banks was a “deeper, more efficient market and external investors with a greater stake in staying put.” Summers was dead wrong. Foreign control aggravated the financial crisis into which Argentina was plunged in 2002, with the foreign-controlled banks ceasing to lend to local governments and businesses and sending capital out of the country instead. With no credit, small and medium enterprises, and not a few big ones, closed down, throwing thousands out of work as the country spiraled into depression.

After the Asian financial crisis, the Argentine financial collapse, and the dot.com crash of 2000-2002, which was also caused by a speculative bubble promoted by lack of financial regulation, one would have thought that developed country authorities would put the emphasis on seriously regulating the activities of global financial actors.

Global finance, however, resisted any move toward effective regulation.. While there were calls for controls on proliferating financial instruments such as derivatives, these got nowhere. Assessment and regulation of derivatives were to be left to market players who had access to sophisticated quantitative “risk assessment” models that were being developed.

Moreover, despite the fact that it was developed country-based financial institutions like hedge funds that triggered the Asian crisis, the so-called Basel II process focused not on disciplining these actors but on standardizing developing country financial institutions and processes along the weakly regulated “Anglo-American” financial model that had already been implicated in scores of crises since the 1980’s. Having been burned by the consequences of financial deregulation, many developing country governments were not surprised when “self regulation” led to the massive housing bubble whose bursting has brought the global financial system to the edge of collapse.

One of the stock scenarios of the old western movies was that of a train picking up speed towards a collision with another train as the lifeless hand of the engineer, already shot dead by outlaws, remained pressed on the accelerator. Current developments in global finance are reminiscent of this scene. A global consensus is forming around strongly reregulating the financial sector. But in disregard of this emerging consensus and the financial chaos around them, developed country negotiators at the WTO, much like the dead hand of the engineer, continue to press developing countries for a services agreement that would drastically liberalize their financial sectors!

The developing country governments should steer clear of the train wreck that will certainly ensue from the US and EU’s determination to pursue global financial liberalization at any cost. They must not agree to a services deal that would compromise their ability to effectively regulate financial and other services. Just as they must say no to agricultural and industrial tariff agreements loaded down with inequitable conditions, they must also not be party to a services agreement that would have no other effect but to continually drag them into the terrifying maelstroms of unregulated global finance.