Capital controls used to be taboo. The idea that a country would interfere with the free flow of capital across its borders was anathema to any right-thinking policy-maker.
That view has changed. Now there is a recognition that capital flows can be destabilising, as the rush to get money out of a country can exacerbate a crisis. Most famously, the IMF changed its tune, saying in 2012 that 'in certain circumstances, capital flow management measures can be useful.'
Trade negotiators, however, may have been slow to catch on – capital control measures may be inconsistent with various treaties. And if that’s the case, then any country imposing capital controls could be subject to action.
This action could be pursued through state-to-state channels, or even through Investor State Dispute Settlement (ISDS) channels, where private agents can take governments to tribunals to seek redress. Imagine if a large US bank were to seek damages from a small economy if that small economy was implementing measures to stave off a crisis. What a mess that would be.
Presumably in response to concerns about this possibility, the Trans-Pacific Partnership includes Article 29.3 . This sets out various conditions under which countries can impose capital controls.
But I reckon these conditions don’t go far enough.
For a start, there are time limits. The TPP allows for a country to impose these controls, but if they need to be implemented for longer than eighteen months (Iceland’s capital controls have been in place since 2008 and counting), the other parties to the agreement need to give their blessing.
That could be a problem. If Australia were to impose capital controls at some point, what guarantee is there that we will see eye-to-eye on their rationale with the other TPP signatories? We’ve disagreed with our friends before on appropriate crisis responses – the Asian Financial Crisis comes to mind. There’s no good reason why it won’t happen again.
If that happens, and a financial behemoth then takes Australia to an ISDS tribunal…well, that is going to be awkward.
There are other issues with the carve-out. For example, it does not apply to foreign direct investment, which could open up all sorts of enforcement problems. If you want details, Michael Reddell, a former New Zealand economic mandarin, discussed potential problems in November.
I hoped these issues would have been covered in Australia’s National Interest Analysis, released a couple of weeks ago.
But not a whisper. The Australian National Interest Analysis ran for only nineteen pages (the Kiwis managed nearly 300). Nineteen pages to assess 6000 plus pages in the agreement. Doesn’t seem adequate to me. And most of that was just a statement of what the TPP included. The issue of capital controls was not addressed.
So, we are all left wondering: do our top officials think this carve-out goes far enough? If so, why? And while we are on the topic, to what extent do our previous treaties limit our ability to impose capital controls?
There is a potentially gaping hole here. And I have not seen any assessment of the risks.
Photo courtesy of Flickr user runran