Economists Issue Statement on Capital Controls and Trade Treaties

Since the onset of the global financial crisis, Triple Crisis bloggers have been commenting on the need for policy space for capital controls in developing countries and the need to reform US trade agreements, which generally prohibit their use.  To further that end, Triple Crisis co-chair Kevin Gallagher and Sarah Anderson of the Washington-based Institute for Policy Studies initiated an economist sign-on letter, which has more than 250 signatures including many Triple Crisis bloggers. It was released today and presented to Congress and the Obama Administration. The press release, with links to the letter and further information, follows.

More than 250 Economists Call for Trade Reforms to Allow Capital Controls

In a letter delivered January 31, more than 250 economists urged the Obama administration to reform U.S. trade rules that restrict the use of capital controls.

The statement reflects growing consensus among economists that capital controls, while no panacea, are legitimate policy tools for preventing and mitigating financial crises.

Signatories include several economists who have been generally supportive of free trade but are critical of the capital control restrictions (e.g., Arvind Subramanian, Senior Fellow of the Peterson Institute for International Economics and Nancy Birdsall, President of the Center for Global Development), as well as former IMF officials (e.g., Olivier Jeanne of Johns Hopkins University) and a Nobel laureate (Joseph Stiglitz).

The United States has trade or investment agreements with 52 countries that restrict the use of capital controls and allow private foreign investors the right to sue governments that violate these restrictions.  Several additional deals are in the works, including:

• U.S.-South Korea free trade agreement. Status: pending congressional approval.
• Trans-Pacific Partnership. Status:  Trade negotiators from the United States and eight other countries will meet for a 5th round of talks in Chile on Feb. 15.
• Investment treaty with China. Status: The U.S. government is expected to soon complete a review of its model Bilateral Investment Treaty (BIT), which will accelerate negotiations with China, India, and several other countries.  Presidents Obama and Hu “reaffirmed their commitment” to these ongoing negotiations in a Jan. 19 joint statement.

Kevin Gallagher, Boston University professor and research associate at the Global Development and Environment Institute at Tufts University (GDAE), and Sarah Anderson, director of the Institute for Policy Studies Global Economy Project, initiated the statement. In 2009, Gallagher and Anderson examined this issue as members of the Investment Subcommittee of the State Department’s Advisory Committee on International Economy Policy.

“It’s in the U.S. interest to allow other governments the authority to apply sensible capital controls,” says Anderson. “In a globalized world, expanding the policy options to combat financial crisis makes sense for U.S. businesses, workers, and the environment.”

“U.S. trade treaties are inconsistent with the emerging consensus in the economics profession and among the international financial institutions that capital controls are a legitimate part of the toolkit,” says Gallagher. “The U.S. and its trading partners should have all the possible tools available to prevent and mitigate future financial crises.”

Read more commentary on capital controls from Triple Crisis bloggers Kevin Gallagher, Stephany Griffith-Jones, and Ilene Grabel.