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Monday, March 29, 2010

Financial Market Supervision: European Perspectives

James K. Jackson
Specialist in International Trade and Finance


The global financial crisis has sparked a debate over the cause and impact of the crisis. Academics and policymakers are searching for changes in the financial system that can correct any perceived weaknesses in the structure of regulation, the content of regulations, and the coverage of financial instruments and activities. Since the onset of the crisis, numerous proposals have been advanced to reform or amend the current financial system to help restore economic growth. In the United States, the Obama Administration has proposed a plan to overhaul supervision of the U.S. financial services sector. Senator Collins introduced S. 664, the Financial System Stabilization and Reform Act of 2009, with a companion measure, H.R. 1754, that was introduced by Representative Castle in the House of Representatives. The measures would create a Financial Stability Council and grant the Federal Reserve the authority to examine the soundness and safety of the financial system posed by bank holding companies. On March 16, 2010, Senator Dodd unveiled a proposal to reform financial markets that would include a Consumer Financial Protection Bureau within the Federal Reserve; a Financial Stability Oversight Council; new authority to liquidate banks; new regulations for credit rating agencies; new limits on banks' trading activities; and renovation of some federal banking legislation. Other measures include: S. 1682 (Senator Cantwell), the Derivatives Market Manipulation Prevention Act of 2009; S. 1803 (Senator Merkley), the Federal Reserve Accountability Act of 2009; S. 2756 (Senator Warner) the Financial Services Systemic Risk Oversight Council Act of 2009; H.R. 3795 (Representative Frank), the Over-the-Counter Derivatives Markets Acts of 2009; H.R. 3968 (Representative Ellison), to amend the Bank Holding Company Act; and H.R. 3996 (Frank), to improve financial stability. The crisis has underscored the fact that national and international financial markets have become highly integrated, and problems in one market can trigger contagion that can spread both among countries and into economic sectors to affect businesses, employment, and household well being. Increasingly, however, coordination among European capitals and between Europe and the United States has proven to be elusive. 

Similarly, governments in Europe are considering what, if any, changes they should make to their national financial systems. Along with the United States and other countries, European countries also are considering changes to the international systems of financial supervision and regulation in order to ensure prosperity through the smooth operation of domestic and international financial systems. This process may include reconsidering the roles and responsibility of the central banks in the post-financial crisis era. Various organizations and groups are advancing a large number of recommendations and prescriptions. Some goals for any such adjustments may include providing an institutional structure for oversight and regulation that is robust, comprehensive, flexible, and politically feasible while providing appropriate incentive structures to preclude excessive risk taking. Of course, there are no guarantees that amending the current system or employing a different regulatory and supervisory structure will preclude a repeat of the most recent financial crisis given that financial markets and institutions are continually growing, innovating, and responding to government- and market-imposed constraints. 

This report addresses the European perspectives on a number of proposals that are being advanced for financial oversight and regulation in Europe. The European experience may be instructive because financial markets in Europe are well developed, European firms often are competitors of U.S. firms, and European governments have faced severe problems of integration and consistency across the various financial structures that exist in Europe.



Date of Report: March 17, 2010
Number of Pages: 29
Order Number: R40788
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail congress@pennyhill.com or call us at 301-253-0881.

Europe’s Preferential Trade Agreements: Status, Content, and Implications

Raymond J. Ahearn
Specialist in International Trade and Finance

Preferential trade agreements (PTAs) comprise a variety of arrangements that favor member parties over non-members by extending tariff and other non-tariff preferences. PTAs, particularly free trade agreements (FTAs), have proliferated in recent years. In the post-war period, the European Union (EU), which is a PTA itself, has developed the largest network of PTAs in the world. The main findings of this report are as follows: 

• Historically, Europe's PTAs have differed among its partners in terms of provisions and commitments and they have been characterized by relatively modest ambition in terms of market-opening. In comparison, the U.S. approach has been more standardized in terms of its provisions and more focused on achieving reciprocal market access. These differences in approaches, however, have significantly narrowed since the EU adopted its more commercially oriented Global Europe strategy in 2006. 

• EU PTAs cover nearly twice as much trade (exports) in percentage terms (70% versus 40%) and seven times as much in value terms ($3.4 trillion versus $0.52 trillion) than U.S. PTAs. These numbers can be used to support the argument that U.S. firms may face more discrimination and possibly reduced sales than EU firms. At the same time, the data may overstate the degree of discrimination because the amount of trade covered by PTAs is not the same as the amount of trade conducted on a preferential (duty-free) basis. 

• Concerns about trade discrimination have been a factor in U.S. and EU efforts to negotiate and implement separate but similar PTAs with five trading partners (Israel, Mexico, Morocco, Chile, and Jordan). Based on market share data analyzed, neither side appears to have gained a competitive advantage from having negotiated a PTA. This, however, does not mean that individual firms and workers have not benefitted or that exports have not risen at faster rates after the PTA became effective. 

• In the past, Europe's PTA program has not been a major factor affecting U.S. FTA policy, which currently is in flux. However, Europe's recently negotiated FTA with South Korea raises the concern that U.S. exports will be disadvantaged due to the duty-free price advantage European-based producers will gain in the Korean market. The United States has also negotiated an FTA with Korea, but congressional approval currently is uncertain. 

• Ongoing negotiations between the EU and Canada over an ambitious and comprehensive FTA could also affect the U.S. FTA debate. If a robust agreement is reached, the EU and the United States would then both have FTAs with Canada and Mexico, making the absence of a FTA between the United States and EU all the more glaring after years of discussion. 

• It is not clear where Europe's PTA policy is headed. There are only a few remaining major developed countries that fall outside the EU's network of PTAs, including the United States, China, Japan, and Australia. While PTA negotiations with these countries could yield large economic benefits and provide a big impact (for good or ill) on the world trading system, some of these countries would likely demand liberalization of European agriculture and services, areas where there is widespread opposition in Europe.


Date of Report: March 22, 2010
Number of Pages: 42
Order Number: R41143
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail congress@pennyhill.com or call us at 301-253-0881.

Thursday, March 25, 2010

The Haitian Economy and the HOPE Act

J. F. Hornbeck
Specialist in International Trade and Finance


In December 2006, the 109th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I), which included special trade rules that give preferential access to U.S. imports of Haitian apparel. These rules were intended to promote investment in the apparel industry as one element of a broader economic growth and development plan. HOPE I allowed for the duty-free treatment of select apparel imports from Haiti made from less expensive third-country inputs (e.g., non-regional yarns, fabrics, and components), provided Haiti met rules of origin and eligibility criteria that required making progress on worker rights, poverty reduction, and anti-corruption measures. Early assessments of the effectiveness of HOPE I, however, were disappointing. The 110th Congress responded by amending HOPE I in the Hemispheric Opportunity through Partnership Encouragement Act of 2008 (HOPE II). HOPE II extends the preferences for 10 years, expands coverage of duty-free treatment to more apparel products, particularly knit articles, and simplifies the rules, making them easier to use. Early evidence suggests that apparel production and exports are responding to these changes. 

HOPE II also amended the eligibility requirements by requiring Haiti to create a new independent Labor Ombudsman's Office and establish the Technical Assistance Improvement and Compliance Needs Assessment and Remediation (TAICNAR) Program. The TAICNAR program provides for the United Nations International Labor Organization (ILO) to operate a firm-level inspection and monitoring program to help Haitian apparel factories comply with meeting core labor standards, Haitian labor laws, and occupational health and safety rules. It would apply to those firms that agree to register for the program as a prerequisite for utilizing the tariff preferences. The TAICNAR program is also designed to help Haiti develop its own capacity to monitor compliance of apparel producers in meeting core labor standards. 

The earthquake that rocked Haiti on January 12, 2010, caused considerable damage to the apparel sector, although much has been done to get capacity back to at least 80% of pre-earthquake levels. Early estimates of rebuilding costs for the industry begin at $25 million to refurbish damaged buildings, replace machinery, and train new employees. The apparel world moves quickly, and the greatest fear is that U.S. buyers will abandon Haiti for other production sites just as the apparel industry was making strides in redevelopment. Although buyers are reportedly willing to stay with Haiti factories, the sentiment could shift quickly if production is unable to return to levels adequate to meet orders. The U.S. Congress could respond by amending the tariff preferences and rules of origin in HOPE II to provide additional incentives for investors to operate in Haiti. First, the 55% value-added rule could be lowered, presumably allowing more firms to take advantage of the preference. Second, there is a capped (70 million square meter equivalents—SMEs) provision for both knit and woven articles that allows duty-free treatment for apparel made from third-country inputs with no value-added requirement. The rule is attractive for many apparel producers of varying size and capabilities in Haiti and the caps could be increased, exclusions reduced, or either eliminated. Third, Congress could reduce the 3-for-1 earned import allowance rule to a 2-for-1 or 1-for-1 rule. Other options might include a more comprehensive extension of tariff preferences to other manufactured goods or a broader elimination of tariffs across the board. The tradeoff would be the possible reduction in the use of U.S.-made yarns and fabrics in Haiti apparel production. Although Haiti is not a large producer by worldwide standards, U.S. firms may wish to minimize any possible negative effects on their industry.



Date of Report: March 16, 2010
Number of Pages: 28
Order Number: RL34687
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail congress@pennyhill.com or call us at 301-253-0881.

The Financial Crisis: Impact on and Response by The European Union

James K. Jackson
Specialist in International Trade and Finance

The European Union (EU) and the United States have taken unusual and extraordinary steps to resolve the financial crisis while stimulating domestic demand to stem the economic downturn. These efforts appear to have been successful, although the economic recovery remains tepid. The economic recession and the financial crisis became reinforcing events, causing EU governments to forge policy responses to both crises. In addition, both the United States and the EU have confronted the prospect of growing economic and political instability in Eastern Europe, Greece, and elsewhere over the impact of the economic recession on restive populations. In the long run, the United States and the EU likely will search for a financial regulatory scheme that provides for greater stability while not inadvertently offering advantages to any one country or group. Throughout the crisis, the European Central Bank and other central banks assumed a critical role as the primary institutions with the necessary political and economic clout to respond effectively. Within Europe, national governments, private firms, and international organizations varied their responses to the financial crisis, reflecting differing views over the proper policy course to pursue and the unequal effects of the financial crisis and the economic downturn. Initially, some EU members preferred to address the crisis on a case-by-case basis. As the crisis has ebbed, coordination among European capitals and between Europe and the United States has become more elusive and growing differences threaten the adoption of a coordinated long-term solution to regulatory reform and coordination of financial policies. 

Within the United States, Congress appropriated funds to help recapitalize financial institutions, and adopted several economic stimulus measures. In addition, Congress has been involved in efforts to reshape institutions and frameworks for international cooperation and coordination in financial markets. European governments also adopted fiscal measures to stimulate their economies and wrestled with failing banks. The financial crisis has demonstrated that financial markets are highly interdependent and that extensive networks link financial markets across national borders, which has pressed EU governments to work together to find a mutually reinforcing solution. Unlike the United States, however, where the federal government can legislate policies that are consistent across all 50 states, the EU process gives each EU member a great deal of discretion to decide how they will regulate and supervise financial markets within their borders. The limits of this system have been tested as the EU and others have searched for a regulatory framework that spans a broad number of national markets. Governments that have expended considerable resources utilizing fiscal and monetary policy tools to stabilize the financial system and to provided a boost to their economies may be required to be increasingly more inventive in providing yet more stimulus to their economies and face political unrest in domestic populations. Attention likely will also focus on those governments that are viewed as not expending economic resources commensurate with the size of their economies to stimulate economic growth.


Date of Report: March 17, 2010
Number of Pages: 38
Order Number: R40415
Price: $29.95

Document available electronically as a pdf file or in paper form.
To order, e-mail congress@pennyhill.com or call us at 301-253-0881.