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February 01, 2011

Economists to Obama: Save U.S. Export Markets; allow Capital Controls!

Our colleages at GDAE and IPS have recently released a sign-on letter from over 250 economists calling for trade agreements to permit countries to utilize capital controls. As the letter states:

many U.S. free trade agreements and bilateral investment treaties contain provisions that strictly limit the ability of our trading partners to deploy capital controls. The “capital transfers” provisions of such agreements require governments to permit all transfers relating to a covered investment to be made “freely and without delay into and out of its territory.”

Under these agreements, private foreign investors have the power to effectively sue governments in international tribunals over alleged violations of these provisions. 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 and require an extended “cooling off” period before investors may file their claims.iii However, these minor reforms do not go far enough to ensure that governments have the authority to use such legitimate policy tools. The trade and investment agreements of other major capital-exporting nations allow for more flexibility.

We recommend that future U.S. FTAs and BITs permit governments to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.

Among the signatories are Nobel Laureate Joe Stiglitz, Harvard professors Ricardo Hausmann and Dani Rodrik, and Peterson Institute economist Arvind Subramanian.

As Kevin Gallagher, an organizer of the letter, points out:

The United States has trade or investment agreements with 52 countries that restrict the use of capital controls and allow private foreign investors the right to sue governments that violate these restrictions.  Several additional deals are in the works, including:

  • U.S.-South Korea free trade agreement. Status: pending congressional approval.
  • Trans-Pacific Partnership. Status:  Trade negotiators from the United States and eight other countries will meet for a 5th round of talks in Chile on Feb. 15.
  • Investment treaty with China. Status: The U.S. government is expected to soon complete a review of its model Bilateral Investment Treaty (BIT), which will accelerate negotiations with China, India, and several other countries.  Presidents Obama and Hu “reaffirmed their commitment” to these ongoing negotiations in a Jan. 19 joint statement.

Hopefully this letter will help spark some of the needed reforms to NAFTA-style deals. After all, financial crises abroad can lead to the collapse of U.S. export markets - imperiling U.S. jobs. All options should be on the table without risking trade pact challenge - including capital controls.

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Comments

Don Juan of Austria

It's great that all those signatories recognize that capital controls are a great idea for developing countries.

Some of them (like Stiglitz) would be a little more valuable if they didn't also criticize trade controls to help the developed world's working class. It always bugs me to see people like him, probably pulling down well into six figures, and very concerned about the developing world (good), but not willing to take the obvious steps (trade controls) to help the developed world's working class.

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