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Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Treaties

Kevin P. Gallagher
G-24 Discussion Paper, United Nations

Do nations have the policy space to deploy capital controls to prevent and mitigate financial crises? This report examines the extent to which measures to mitigate the global financial crisis and prevent future crises are permissible under a variety of bi-lateral, regional, and multi-lateral trade and investment agreements. It is found that the United States trade and investment agreements, and to a lesser extent the WTO, leave little room to maneuver when it comes to capital controls. This is the case despite the increasing economic evidence showing that capital controls can be useful in preventing or mitigating financial crises.  More specifically, this study demonstrates that:

  • Capital account liberalization is not associated with economic growth in developing countries;
  • Capital controls can help developing countries maintain financial stability.  Indeed, those nations that deployed capital controls in the run-up to the global financial crisis were less hard hit during the crisis.
  • The WTO allows for the use of capital controls for those nations that have not made market access commitments in cross-border trade in financial services or foreign investment in financial services.
  • WTO members that have made commitments in financial services are not permitted to use capital controls, however untested safeguard mechanisms may apply to prevent and mitigate crises.
  • US agreements do not permit restrictions on capital movements of any kind and have no apparent exceptions to this rule.  A handful of recent US agreements have a grace period however, which delays action on capital controls for a certain period of time.
  • US agreements stand in stark contrast with the agreements of other capital exporters such as EU nations, Canada, Japan, and even China.  These nations either fully permit the use of capital controls or at minimum have safeguard mechanisms for crises.

The report concludes by offering remedies at the WTO and within US trade and investment agreements to better ensure that developing nations can effectively deploy capital controls to prevent and mitigate financial crises.


Download the full report.

Download the accompanying policy brief.

Visit GDAE's web page on capital controls, trade treaties, and development .

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The Global Development and Environment Institute’s Globalization and Sustainable Development Program examines the economic, social and environmental impacts of economic integration in developing countries, with a particular emphasis on the WTO and NAFTA's lessons for trade and development policy. The goal of the program is to identify policies and international agreements that foster sustainable development.

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