How Obama is to the Right of Reagan on Trade

Sarah Anderson, guest blogger

I hate to break it to the Tea Partiers, but their presidential idol was less of a free-market hardliner in trade negotiations than Barack Obama.

While doing some archaeological digging into old treaties, I discovered that the Reagan revolutionaries were relative softies on at least one issue — government meddling in capital markets.

The vast majority of the 52 existing U.S. trade agreements and bilateral investment treaties forbid governments from putting controls on capital flows. But buried in the annexes to four Reagan-era treaties, I found exemptions allowing trade partners to apply such controls during financial crises. Capital controls are various measures including (gasp!) taxes designed to prevent speculative bubbles or rapid capital flight.

Tea Partiers should give Obama credit for adhering more strictly to free market orthodoxy on this issue. His officials have made clear they are pushing for a ban on these crisis prevention tools in the Trans-Pacific Partnership (TPP), the first trade deal to be negotiated under Obama’s watch. The eighth round of these nine-party talks is set for September 6-15 in Chicago.

Earlier this year, more than 250 economists sent a letter to the administration urging a re-think. “Given the severity of the global financial crisis and its aftermath, nations will need all the possible tools at their disposal to prevent and mitigate financial crises,” they wrote. Treasury Secretary Timothy Geithner responded by arguing that this was unnecessary because governments could find other ways to deal with volatility. USTR spokeswoman Carol Guthrie confirmed in a Bloomberg interview that U.S. negotiators expect to push for open capital-transfer rules in the Trans-Pacific Partnership negotiations.

That rigid position places the Obama administration to the right not only of Reagan, but also both Bush presidencies and the International Monetary Fund.

After decades of blanket opposition, the IMF now endorses capital controls on inflows of speculative capital under certain circumstances. They have recommended outflows controls in a number of countries facing capital flight, such as Iceland and Ukraine. And they have been even more broadly supportive of emerging market countries that are using controls on inflows to prevent speculative bubbles.

In Brazil, for example, where hot money has driven up the value of the real, the government has imposed a one percent tax on currency derivatives and a six percent tax on foreigners’ purchases of bonds. On August 3, the IMF executive board described the country’s use of capital controls as an “appropriate” tool to manage foreign investment inflows.

A recent IMF report on one of the countries that received a Reagan exception — Bangladesh — credits capital controls with preventing the “global flight to safety” that left so many poor economies in shambles after the crisis erupted in 2008. Bangladesh instead doubled its central bank reserves during that period.

Reagan also allowed crisis-time exceptions in investment treaties with Turkey and Egypt, while a 1985 trade agreement with Israel has no restrictions whatsoever. All three have used these policies in the face of financial volatility.

President George H.W. Bush was no fan of capital controls, but he did allow limited exceptions in the North American Free Trade Agreement and bilateral investment treaties with Sri Lanka and Tunisia. His son’s administration beat back attempts by Singapore and Chile to obtain similar waivers, but softened its stance with South Korea, a country scarred by uncontrolled capital flight in the late-1990s crisis.

Aside from the handful of exceptions, 44 U.S. agreements prohibit capital controls even during a financial collapse. According to the IMF, these deals are outliers. The global norm is to “provide temporary safeguards on capital inflows and outflows to prevent or mitigate financial crises, or defer that matter to the host country’s legislation.” Indeed, as I’ve detailed in this new study, other TPP countries’ existing agreements include broad safeguards.

What can happen without such safeguards? Global corporations and financiers have the power to sue governments that resort to capital controls and demand compensation, even as a nation is reeling from severe economic catastrophe. That’s something Federal Reserve Board member Daniel Tarullo has described as not only “bad financial policy and bad trade policy,” but also “bad foreign policy.”

And yet the Business Roundtable, U.S. Chamber of Commerce, Financial Services Roundtable, and 14 other business groups have called on the administration to reject proposals to permit capital controls under trade agreements.

Thus, while Obama might seem lonely standing so far out on the anti-regulation end of the spectrum on this issue, if he sticks to his guns, he’ll have lots of admirers on Wall Street and in the executive suites.

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and served on the Investment Subcommittee of the U.S. State Department’s Advisory Committee on International Economic Policy in 2009.

4 Responses to “How Obama is to the Right of Reagan on Trade”

  1. Hi Sarah, I admire your capacity for doing this type of research and liked your very useful entry. Actually, NAFTA is not so open to capital controls beyond what IMF Articles of Agreement already say and I think it imposes new restrictions. On the other hand, Article 2104:5.d of NAFTA prohibits the normal emergency measures in case of balance of payments difficulties (tariff surcharges, quotas, licenses, etc.). So, from this standpoint, the Chapter on Exceptions in the case of Balance of Payments emergencies should read “There are No exceptions”. In this sense, NAFTA goes against the principles recognized in the Understanding on Balance of Payments Provisions of the WTO. Some years ago I published a detailed analysis on this (“Balance of Payments provisions in the GATT and NAFTA”, Journal of World Trade, Vol. 30, no. 4). I hope we can exchange views on these points.

  2. Kevin P. Gallagher says:

    It is true that NAFTA’s balance of payments exception is rather limited, as Sarah says. The “Fireman’s Fund vs. Mexico” case shows that tribunals have even narrowed those limited measures (see:

    Sarah is right to point out however that NAFTA is the last significant US trade or investment treaty to even have a Balance of Payments exception at all. And, the US Treasury Secretary wrote to 250 economists from around the world to say they have no intention to change that policy (see:

    So Sarah is right, Obama is to the right of Reagan and Bush (I) on trade. Very concerning given that neither of those Presidents had a financial crisis like that showed how important leaving policy space to prevent and mitigate financial crises really is.

  3. Alejandro – I’d love to get a copy of that journal article. The NAFTA safeguard is definitely very limited — the exceptions and conditions go on for several pages! But it’s at least a slight departure from the standard US “free transfers” approach — and one that we can hopefully pry open further in this new context.

    best regards, Sarah

  4. Sarah, I agree with you on that point, as well as others that you make in the entry. The evolution that you trace in trade agreements and their relation to these macroeconomic issues is a very important contribution, especially in the context of today’s crisis. Thanks again. I’ll be sending a scanned copy of that paper soon and I’ll be looking forward to your comments and critique.