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Economists Issue Statement on
Capital Controls and the Trans-Pacific Partnership Agreement


Full Statement | Press Coverage

Initiated by the Global Development and Environment Institute, Tufts University (GDAE) and the Washington, DC-based Institute for Policy Studies (IPS), this economist statement calls for negotiators of the Trans-Pacific Partnership Agreement to recognize that capital controls are legitimate prudential financial regulations that should not be subject to investor claims under trade and investment treaties.

Following a number of official and academic findings that show capital controls are legitimate tools to prevent and mitigate financial crises, an increasing number of governments around the world are using capital controls and other macro-prudential measures in responsible ways to deal with heightened international financial instability. 

Meanwhile, the Obama administration is negotiating the “Trans-Pacific Partnership Agreement” with the nations of Australia, Brunei, Chile, Malaysia, Peru, Singapore, New Zealand, and Vietnam. The treaty has been hailed by the Obama administration as one that will right past wrongs and be a trade agreement “for the 21st century.” It is imperative that 21st century trade agreements leave all nations with the tools to prevent and mitigate financial crises.

Download the Letter in PDF Format

Read more on GDAE's work on Capital Controls and Trade Treaties
Learn more about IPS's work on Capital Controls

Full Statement

Hon. Craig Emerson, Trade Minister                                                    February 28, 2012
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.[1] 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.[2]

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.”[3]  Indeed, other TPP countries typically allow more flexibility in their trade and investment treaties.[4]

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.”[5]

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:

Sarah Anderson, Institute for Policy Studies, sarah@ips-dc.org
Kevin P. Gallagher, Boston University, kpg@bu.edu

Sincerely,

  1. Frank Ackerman, Senior Economist, Climate Economics Group, Stockholm Environment Institute, USA
  2. Alice Amsden, Professor of Development Economics, MIT, USA
  3. Sarah Anderson, Global Economy Project Director, Institute for Policy Studies, USA
  4. Dean Baker, Co-Director, Center for Economic and Policy Research, USA
  5. Nesecan Balkan, Professor, Department of Economics, Hamilton College, USA
  6. Lourdes Benería, Professor Emerita, Dept. of City and Regional Planning, Cornell University, USA
  7. Jagdish Bhagwati, Professor of Economics, Columbia University, USA
  8. Robert Blecker, Department Chair, Economics, American University, USA
  9. Howard Botwinick, Associate Professor of Economics, SUNY Cortland, USA
  10. John Cavanagh, Director, Institute for Policy Studies, USA
  11. Kimberly Christensen, Professor of Economics, Sarah Lawrence College, USA
  12. Jane D'Arista, Research Associate, Political Economy Research Institute, USA
  13. Paul Davidson, Editor, Journal of Post Keynesian Economics, USA
  14. Gerald Epstein, Professor of Economics, University of Massachusetts, Amherst, USA
  15. Thomas Ferguson, Senior Fellow, Roosevelt Institute, USA
  16. Kirsten Ford, PhD Candidate, University of Utah, USA
  17. Kevin Gallagher, Associate Professor, Boston University and Senior Researcher, Global Development and Environment Institute, Tufts University, USA
  18. Neva Goodwin, Co-Director, Global Development and Environment Institute at Tufts University, USA
  19. Ilene Grabel, Professor and Co-Director, MA in Global Finance, Trade and Economic Integration, University of Denver, USA
  20. Stephany Griffith-Jones, Financial Markets Director, Initiative for Policy Dialogue at Columbia University, USA
  21. Jonathan Harris, Director, Theory and Education Program and Senior Research Associate, Global Development and Environment Institute at Tufts University, USA
  22. Martin Hart-Landsberg, Professor of Economics, Clark University, USA
  23. Ann Helwege, Professor of International Relations, Boston University, USA
  24. Adam S. Hersh, Economist, Center for American Progress, USA
  25. P. Sai-wing Ho, Associate Professor, University of Denver, USA
  26. Olivier Jeanne, Professor of Economics, Senior Fellow, Johns Hopkins University, Peterson Institute for International Economics, USA
  27. Ethan Kaplan, Assistant Professor of Economics, University of Maryland at College Park, USA
  28. Emily Kawano, Executive Director, Center for Popular Economics, USA
  29. Jan Kregel, Levy Economics Institute, Bard College, USA
  30. Haider A. Khan, Professor of Economics, University of Denver, USA
  31. Timothy Koechlin, Director of International Studies Program, Vassar College, USA
  32. Anton Korinek, Professor of Economics, University of Maryland, USA
  33. Arthur MacEwan, Professor of Economics Emeritus, University of Massachusetts, Boston, USA
  34. Elaine McCrate, Associate Professor of Economics and Women's Studies, University of Vermont, USA
  35. John A. Miller, Professor of Economics, Wheaton College, USA
  36. Tracy Mott, Associate Professor and Department Chair, Dept. of Economics, University of Denver, USA
  37. Julie A. Nelson, Professor of Economics, University of Massachusetts Boston, USA
  38. José Antonio Ocampo, Professor of Economics, Columbia University, USA
  39. Thomas Palley, Associate, Economic Growth Program, New America Foundation, USA
  40. Eva Paus, Professor, Department of Economics, Mt. Holyoke College, USA
  41. Kenneth A. Reinert, Professor of Public Policy, School of Public Policy, George Mason University, USA
  42. Dani Rodrik, Professor of Economics, Harvard University, USA
  43. Jaime Ros, Professor of Economics, University of Notre Dame, USA
  44. Héctor Sáez, Analyst, Environment and Economy, USA
  45. John Schmitt, Senior Economist, Center for Economic and Policy Research, USA
  46. Stephanie Seguino, Professor of Economics, University of Vermont, USA
  47. Heidi Shierholz, Economist, Economic Policy Institute, USA
  48. Arvind Subramanian, Senior Fellow, Peterson Institute for International Economics (PIIE) and Center for Global Development (CGD), USA
  49. Matías Vernengo, Associate Professor of Economics, University of Utah, USA
  50. Tam Vu, Associate Professor and Chair, Department of Economics, USA
  51. Thomas Weisskopf, Professor Emeritus of Economics, University of Michigan, USA
  52. Timothy Wise, Director of Research and Policy Program, Global Development and Environment Institute, Tufts University, USA
  53. Mark Weisbrot, Co-Director, Center for Economic and Policy Research, USA
  54. Martin H. Wolfson, Associate Professor of Economics, University of Notre Dame, USA
  55. L. Randall Wray, Professor of Economics, University of Missouri, Kansas City, USA
  1. George Argyrous, Senior Lecturer, University of New South Wales, Australia
  2. Grant Belchamber, Economist, Australian Council of Trade Unions, Australia
  3. Ross Buckley, Professor of International Finance Law, University of New South Wales, Australia
  4. Robert Dixon, Professor, University of Melbourne, Australia
  5. Susan Engel, Professor of History & Politics, University of Wollongong, Australia
  6. G. C. Harcourt, Professor Emeritus, University of New South Wales, Australia
  7. Gillian Hewitson, Professor, Dept. of Political Economy, University of Sydney, Australia
  8. Evan Jones, Professor, Department of Political Economy, University of Sydney, Australia
  9. P.N. (Raja) Junankar, Professorial Visiting Fellow, School of Economics, University of New South Wales, Australia
  10. Steve Keen, Professor of Economics and Finance, University of Western Sydney, Australia
  11. John King, Professor of Economics, School of Economics and Finance, Latrobe University, Australia
  12. John Langmore, Professor, School of Social and Political Sciences, University of Melbourne, Australia
  13. Bruce Littleboy, Professor, School of Economics, University of Queensland, Australia
  14. Bill Lucarelli, Senior Lecturer, Economics and Finance, University of Western Sydney, Australia
  15. Robert E. Marks, Emeritus Professor, School of Economics, University of New South Wales, Australia
  16. Margaret McKenzie, Lecturer in Economics, School of Accounting Economics and Finance, Deakin University, Australia
  17. Rod O'Donnell, Professor of Economics, University of Technology Sydney, Australia
  18. Colin Richardson, Adjunct Professor of Economics, Centre for International Security Studies, University of Sydney, Australia
  19. Ben Spies-Butcher, Senior Lecturer, Macquarie University, Australia
  20. Kannan Srinivasan, Adjunct Research Fellow, School of Political and Social Inquiry, Monash University, Australia
  21. Frank Stilwell, Professor of Political Economy, University of Sydney, Australia
  1. Manuel Agosin, Faculty of Economics, University of Chile, Chile
  2. Alvaro Díaz, former Under Secretary of the Economy and Ambassador to Brazil, Chile
  3. Luis Eduardo Escobar, Economist, Private Consultant, Chile
  4. Ricardo Ffrench-Davis, Professor of Economics, National Prize Social Sciences and Economics, University of Chile, Chile
  5. Guillermo Le Fort Varela, Former Executive Director to IMF, Chile
  6. Patricio Leiva, Director, Latin America Institute of International Relations, Universidad Miguel de Cervantes, Chile
  1. Kee-Cheok Cheong, Senior Research Fellow, Faculty of Economics and Administration, University of Malaysia, Malaysia
  2. K.F. Chin, Lecturer, National University of Malaysia, Malaysia
  3. Martin Khor, Executive Director, South Centre, Malaysia
  4. Hwok-Aun Lee, Senior Lecturer, Faculty of Economics and Administration, University of Malaysia, Malaysia
  5. Michael Mah-Hui Lim, Senior Visiting Fellow, Penang Institute, Malaysia
  6. Satthiyan Nehru, Economist, Universiti Kebangsaan, Malaysia
  7. Charles Santiago, Member of Parliament, Parliament of Malaysia, Malaysia
  1. Peter Conway, Secretary, New Zealand Council of Trade Unions, New Zealand
  2. Paul Dalziel, Professor of Economics, Lincoln University, New Zealand
  3. Tim Hazledine, Professor of Economics, University of Auckland, New Zealand
  4. Prue Hyman, Associate Professor of Economics and Gender/Women's Studies, Victoria University of Wellington, New Zealand
  5. Keith Rankin, Lecturer, Department of Accounting and Finance, Unitec Institute of Technology, New Zealand
  6. Bill Rosenberg, Policy Director and Economist, New Zealand Council of Trade Unions, New Zealand
  7. Petrus Simons, Economic Consultant, New Zealand
  8. Robert H. Wade, Professor, Department of International Development, London School of Economics, New Zealand
  1. Humberto Campodonico, Economist, CEO, PETROPERU, Peru
  2. Oscar Dancourt, Professor of Economics, Catholic University of Peru, Peru
  3. Adolfo Figueroa, Emeritus Professor, Catholic University of Peru, Peru
  4.  Leonith Hinojosa, Professor, Open University, Peru
  5. Jürgen Schuldt Lange, Professor of Economics, Universidad del Pacífico, Peru
  6. Oscar Ugarteche, Investigador titular B, Instituto de Investigaciones Económicas, Universidad Nacional Autonoma de Mexico, Peru

Organizations listed for identification purposes only.


1. See, for example, Annex 10-E of the U.S.-Peru FTA and Annex 10-C of the U.S.-Chile FTA.

2. For some of the most important recent studies see:  Ostry JD, Ghosh AR, Habermeier K, Chamon M, Qureshi MS and Reinhardt DBS (2010). Capital Inflows. The Role of Controls. IMF Staff Position Note, SPN/10/04. Washington, DC, International Monetary Fund. Magud N, Reinhart CM (2011). Capital Controls: Myth and Reality - A Portfolio Balance Approach. Cambridge, MA, National Bureau of Economic Research.  Korinek, Anton (2011), The New Economics of Prudential Capital Controls: A Research Agenda, IMF Economic Review, 59: 523-561.  Further studies are available upon request.

3. Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne, “Managing Capital Inflows: What Tools to Use?” IMF Staff Discussion Note SDN/11/06, April 5, 2011. http://www.imf.org/external/pubs/ft/sdn/2011/sdn1106.pdf

4. Sarah Anderson, “Capital Controls and the Trans-Pacific Partnership,” Institute for Policy Studies, Sept. 10, 2011. http://www.ips-dc.org/reports/capital_controls_and_the_trans-pacific_partnership

5. G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences, as endorsed by G20 Heads of State and Government, November 3-4, 2011. http://www.g20-g8.com/g8-g20/root/bank_objects/0000005999-Coherent_Conclusions_on_CFMs_postCannes.pdf

 

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