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TWN Info Service on Finance and Development (Feb09/06)
25 February 2009
Third World Network

US Trade Policies Limit Countries’ Use of Capital Control

As the global economy descends further into crisis, a new report finds that US trade and investment agreements with 52 countries have removed one tool that has proved effective in past crises: capital controls.

The Institute of Policy Studies (IPS), in its report “Policy Handcuffs in the Financial Crisis” said that at a time when many economists including those in the IMF have recognized the importance of capital controls in the management of financial crises, the US has pushed ahead with attempts to restrict their use.

This worrying development is likely to be reflected as well in current and future trade agreements being negotiated by the European Union (EU) with 123 developing countries. Financial liberalization is a key element in EU trade agreements. As in the case of the EU-Caribbean Forum (CARIFORUM) Economic Partnership Agreement (EPA), the EU is pushing for liberalization of major financial services including the free movements of capital and current payments. An analysis by TWN (http://www.ftamalaysia.org/article.php?aid=214) shows that although the CARIFORUM-EU EPA does contain some financial liberalisation safeguards, they are inadequate. This is because they are too narrow (for example, they cannot be used to limit the movement of current payments, or can only be used if there is also a balance of payments crisis), and comes with other restrictions.

If this is any indication, both the EU and US FTAs will see limits being imposed on countries’ ability to regulate their financial sector at a time when government regulation and control have never been more critical to stem the current and growing global financial and economic crisis.   

 The IPS report can be found at: http://www.ips-dc.org/reports/#1056

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US trade policies limit 52 governments’ use of capital controls to fight financial crisis

Policy holdover conflicts with growing consensus among economists

Institute for Policy Studies

As the global economy descends further into crisis, governments are searching their toolboxes for instruments to protect their people from financial volatility. A new report finds that U.S. trade and investment agreements with 52 countries have removed one tool that has proved effective in past crises: capital controls.

“The Obama administration has a tremendous opportunity to wipe away the relics of a failed policy agenda that turned our global economy into a financial casino,” says report author Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies. “Eliminating obsolete restrictions on capital controls is one important step.”

The report includes quotes in support of capital controls from numerous noted economists, including former IMF chief economist Kenneth Rogoff, who recently wrote that countries with stringent capital controls are less likely to suffer from the current financial crisis than those completely open to international capital markets.

KEY REPORT FINDINGS:

U.S. Web of Capital Control Limits: Although many countries have used capital controls effectively to address financial market volatility, 52 national governments lack the power to control money flows across their borders as the result of U.S. trade pacts or bilateral investment treaties.

IMF Learned from Asian Crisis, U.S. Didn’t: The International Monetary Fund abandoned its blanket opposition to capital controls after some countries used this tool to avoid the worst effects of the Asian financial crisis that erupted in 1997. The U.S. government forged ahead, initiating agreements restricting capital controls with 22 more countries. Such restrictions are also in the pending U.S.-Colombia Free Trade Agreement.

Investors Can Sue for Compensation: Countries that violate these restrictions face potentially expensive lawsuits by foreign investors. In the supra-national arbitration tribunals that handle such cases, there’s no public accountability, no standard judicial ethics rules, and no appeals process.

Policy Handcuffs are Inherited: Of the 52 leaders who are now bound to such agreements, only 13 were in office at the time their country’s agreement was signed. In Bolivia , Ecuador , and several other countries, government leaders are working to develop alternative models for governing international investment and finance.

Opportunities under new U.S. Administration: President Barack Obama has committed to revising the investment rules in U.S. free trade agreements, along with other proposed trade policy reforms. The IPS report lays out five key opportunities for change, including renegotiating trade agreements and bilateral investment treaties, rolling back World Trade Organization commitments on financial deregulation, and reforming World Bank and IMF policies.

According to report author Anderson, “It’s critical that policymakers not only eliminate capital control restrictions, but also commit to building a new global framework that allows governments to play responsible roles in ensuring that foreign investment and finance support social goals.”

source: IPS

 


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