Canada-Japan Financial Services – Executive Summary
This paper provides an overview of the financial services section in a prospective Canada-Japan FTA/EPA. After outlining the scope of financial services under discussion, Japan and Canada’s respective financial services environments are presented, as well as their FTA/EPA objectives, negotiating positions, and key reference agreements. (Please refer to a second paper – E-Commerce – for a discussion of linkages to human rights).
The definition and scope of financial services used for a prospective FTA/EPA follows that under GATS and is relatively consistent across disparate trade agreements. For both Japan and Canada, financial services include the banking, insurance, and securities sectors. Both countries detail limited exceptions to the scope, with Canada specifying explicit exclusion for social security services. Japan extends the definition of financial services explicitly to the processing and transfer of financial information. This extension recognizes the crucial role that information infrastructure in genera, and e-commerce in particular, play in the buttressing of financial services sector operations. Financial services for both countries primarily inhabit modes 1 and 3, cross border and commercial presence, respectively.
Both the Canadian and Japanese financial service sectors are liberalized in comparison to the majority of WTO-member states, and feature numerous foreign financial service firms in their respective domestic markets. The Japanese financial services sector, however, enjoys a considerably higher liberalization level than that of the Canadian sector, specifically in areas of company ownership and board of directors membership restrictions on nationality. These restrictions in the Canadian context serve to limit the involvement of foreign nationals in ownership of Canadian financial services firms. These limitations date from the signing of NAFTA, and restriction ceilings have been subsequently raised.
Nevertheless, this disparity in liberalization standards positions Japan as primarily offensive to Canada’s primarily defensive stance in a financial services FTA/EPA negotiation. Japan would thus seek harmonization of financial services ownership and senior management regulations, while Canada may be limited in its ability to accede to even-higher restriction ceilings. Japan’s main negotiation thrust may well focus on market access, while Canada would seek increased transparency and greater cooperation around bilateral banking standards. In addition to formalizing bilateral cooperation, areas of common interest between Canada and Japan in financial services may include non-discrimination provisions, as well as flexibility around new financial services. Common interests notwithstanding, achieving Japan’s objective of greater market access would necessitate considerable political capital and will on behalf of the Canadian federal government, especially given corresponding MFN commitments. Agreement for greater market access would thus entail a linkage to a trade sector where Canada takes a strong offensive position as a quid pro quo, long duration for harmonization of regulations in the schedule of commitments, or both.
Canada and Japan’s financial services positions and flexibility are defined, in part, by past agreements. For Japan, these include the Japan-Switzerland EPA and the Japan-Singapore EPA, both of relevance not only since the parties involved mirror Canada’s OECD membership status, but also due to the comparable maturity of their financial sectors. For Canada, NAFTA and the Canada-Peru FTA provide frameworks for financial services possibilities and limitations in a prospective FTA/EPA. Both Canada and Japan’s positions are, of course, supersets of their respective WTO GATS schedule of commitments for financial services. A financial services section would play a prominent role in a prospective Canada-Japan EPA/FTA due to the maturity and importance this sector plays in both parties’ economies and trade, as well as the substantial room for growth for financial service export between the two countries.