I was happy to see Acting Deputy Secretary Justin Brown elaborate on the Department of Foreign Affairs and Trade's thinking in regard to the Trans-Pacific Partnership (TPP) last week on The Interpreter.

To recap, back in February I discussed one of my TPP misgivings: I think the TPP does not sufficiently protect Australia's ability to use capital controls. Capital controls, at a basic level, prevent money from crossing international borders. They were once taboo in polite company, but many have had a change of heart, including the IMF. There is now recognition that capital controls can form part of the policy response to a crisis.

Justin Brown suggests that protections under Article 11.11 of the TPP (and others) provide 'ample' scope for a country to impose capital controls. In particular, he highlights the fact that Article 11.11 allows parties to impose controls for 'prudential' reasons.

In my original post, I mentioned the case of Iceland. Iceland's capital controls, I would argue, are not motivated by 'prudential' considerations. Rather, a key consideration was the Icelandic Government's fiscal position. You see, if residents in Iceland could have had their way, they probably would have transferred a lot of money out of the country during the crisis. However, by forcing residents to keep their money in Iceland, the government had a pot to borrow from, to fund their appropriately counter-cyclical fiscal deficit. The IMF mentioned this a number of times in its reports on Iceland. For example: 'This (analysis) points to a need to carefully coordinate the fiscal adjustment path with the capital control liberalization path.' In other words, counter-cyclical fiscal policy would have run into problems without capital controls.

As far as I can tell, there is nothing in Article 11.11 to allow for capital controls for this reason. And so I worry that we will not have the flexibility to deal with a crisis. If the Global Financial Crisis showed us anything, it was that the unthinkable can happen. Our policy framework should respect that fact.

My perspective on the TPP continues to be influenced by the downside risks. That's because the upside is small, so we have to consider the costs very carefully. And I don't think we have done that.