Haste Makes Waste : WTO, Pilot Free Trade Zones and Financial Experiments

While trade liberalization is the major objective that the world trade regime pursues in the long-run, the desirable pace and mode of liberalization for each economy may vary. This is particularly the case for financial liberalization, which involves plenty of prudential concerns such as control and management of systemic financial risks. In recent years, East Asia has seen a growing use of the “one-country-two-zone” approach (“OCTZ Approach”) for experimenting with trade liberalization in a progressive manner. Notable instances include the Pilot Free Trade Zones in China (including Shanghai, Tianjin, Guangdong and Fujian), the National Strategic Special Zones in Japan, and the proposed Free Economic Pilot Zones in Taiwan. Such progressive liberalization, coupled with regulatory experiments, may be a more balanced and steady way to pursue financial liberalization while simultaneously satisfying regulatory needs. The legal implications of the OCTZ Approach vis-a-vis the current WTO laws, however, remain understudied. In this paper, I focus on the WTO laws related to financial sectors and analyze the potential legal issues of the financial experiments in these zones. I argue that the principal legal risk lies in the anti-avoidance provision of the prudential exception contained in the Financial Annex. In particular, the interpretation of this provision is likely to refer to the principle of consistency as established by the current case law of Article XX chapeau of GATT 1994. If so, whenever a WTO Member adopts the OCTZ Approach, it might compromise the protection originally offered by the prudential exception to, and accordingly affect the WTO-consistency of, their already existing out-zone financial regulations. I argue that this is not a desirable result and propose both the interpretative approaches and rule-making approaches for addressing these legal concerns. This paper also offers an opportunity to rethink the principle of consistency and its expansive use under the current WTO case law