GDAE and IPS circulated the following sign-on letter for economists demanding that the TransPacific Partnership Agreement (TPPA), now being negotiated, exclude current proposed restrictions on the use of capital account regulations to prevent and mitigate financial crises. They are seeking signatures from economists in the nine current TPPA countries: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, and Vietnam.
Economists from these countries who wish to sign on to this call for action please send your name, affiliation and country to: email@example.com.
The TPPA is what US President Barack Obama hails as a “21st Century Trade Agreement” that improves upon and rectifies past problems in US trade and investment treaties. Thus this is a particularly opportune time to weigh in, as a major TPPA negotiation round will begin in Melbourne, Australia on March 1, 2012.
Since the financial crisis began, the Asian Development Bank, the United Nations Economic and Social Commission for the Asia-Pacific, the International Monetary Fund and others have all agreed that capital account regulations are legitimate tools to buffer nations from volatile capital flows. However, the U.S. government has used trade agreements to severely restrict a nation’s ability to deploy such regulations.
In January 2011, we organized a similar letter to the Obama administration signed by more than 250 economists, urging a general reform of U.S. trade policies with regard to capital controls. Treasury Secretary Timothy Geithner responded by stating that the administration would “seek to preserve” current policy since in his view governments have sufficient alternatives to capital controls to deal with volatility.
This new economist letter is more specific to pending negotiations in a region that has been susceptible to volatile capital flows and that has proven that regulating such flows can contribute to stability and growth. In the wake of the crisis, let us urge policy-makers in all TPPA countries to ensure that nations have all the tools possible to prevent and mitigate future crises. Additional background is available here.
To be issued March 1, 2012
Hon. Craig Emerson, Trade Minister
Department of Foreign Affairs and Trade of Australia
H.R.H. Prince Mohamed Bolkiah, Minister
Ministry of Foreign Affairs and Trade of Brunei Darussalam
Hon. Alfredo Moreno Charme, Minister
Ministry of Foreign Affairs of Chile
Yb. Dato’ Sri Mustapa Bin Mohamed, Minister
Ministry of International Trade and Industry, Malaysia
Hon. Tim Groser, Trade Minister
Ministry of Foreign Affairs and Trade of New Zealand
Hon. Eduardo Ferreyros, Minister
Ministry of Foreign Trade and Tourism of Peru
Hon. Lim Hng Kiang, Minister
Ministry of Trade and Industry of Singapore
Amb. Ronald Kirk, Trade Representative
Office of the United States Trade Representative
Hon. Vu Huy Hoang, Minister
Ministry of Industry and Trade, Vietnam
Re: Promoting financial stability in the Trans-Pacific Partnership Agreement
Dear Trade Ministers,
We, the undersigned economists, write to you regarding the capital transfers provisions in the proposed Trans-Pacific Partnership Agreement (TPPA). We are concerned that if recent U.S. treaties are used as the model for the TPPA, the agreement will unduly limit the authority of participating parties to prevent and mitigate financial crises.
Nearly all U.S. free trade agreements (FTAs) and bilateral investment treaties (BITs) strictly limit the ability of trading partners to deploy capital controls – with no safeguards for times of crisis. A few recent U.S. trade agreements put some limits on the amount of damages foreign investors may receive as compensation for certain capital control measures. They also extend the “cooling off” period before investors may file claims in international tribunals. However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools.
Authoritative research published by the National Bureau of Economic Research, the International Monetary Fund, and other institutions has found that limits on short-term capital flows can stem the development of dangerous asset bubbles and currency appreciations, and grant nations more autonomy in monetary policy-making, and protect nations from the dangers of abrupt capital flight.
The U.S. government’s rigid opposition to capital controls does not reflect the global norm. According to an IMF report, “Most BITs and FTAs either provide temporary safeguards on capital inflows and outflows to prevent or mitigate financial crises, or defer that matter to the host country’s legislation. However, BITs and FTAs to which the United States is a party (with the exception of NAFTA) do not permit restrictions on either capital inflows or outflows.” Indeed, other TPP countries typically allow more flexibility in their trade and investment treaties.
While capital controls and other capital management techniques are no panacea for financial instability, there is an emerging consensus that they are an important part of the macro-economic toolkit. Indeed, all G-20 leaders endorsed the following statement at the 2011 Cannes Summit:
“Capital flow management measures may constitute part of a broader approach to protect economies from shocks. In circumstances of high and volatile capital flows, capital flow management measures can complement and be employed alongside, rather than substitute for, appropriate monetary, exchange rate, foreign reserve management and prudential policies.”
Increased financial stability is in the interest of businesses, working people, and consumers in all TPPA parties. When one country falls into crisis, its trading partners lose export markets. When one country cannot control financial bubbles that drive up currency values, consumers in trading partner countries may be hurt by rising prices on imported goods. When exchange rates are unstable, long-term investors and businesses engaged in exporting or importing face uncertainty.
Thus, we recommend that the TPPA permit governments to deploy capital controls without being subject to investor lawsuits, as part of a broader menu of policy options to prevent and mitigate financial crises.
We look forward to discussing these issues further. Please direct inquiries to: