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Entries tagged "model bilateral investment treaty"
May 29, 2012 · By Sarah Anderson
At a point in the election season when politicians of the same party tend to sweep their differences under the rug, two senior Democrats have sent a strong letter to the Obama administration on a subject unknown to most American voters.
This is the issue of capital controls -- various measures governments use to control volatile flows of money across their borders. Iceland, for example, used them to prevent massive capital flight in the midst of their meltdown. Other countries have used them to prevent speculative bubbles. In fact, governments that used capital controls during the 2008 crisis were among the least hard-hit, according to International Monetary Fund research.
However, despite their proven effectiveness in many cases, these policy tools are prohibited by U.S. trade and investment policies. Particularly in the wake of the worst financial crisis in 80 years, it's an embarrassingly outmoded position that only serves the narrow short-term interests of global financiers and corporations.
Thankfully, two top Democrats are not willing to just overlook the problem. In a letter to Treasury Secretary Timothy Geithner, Representatives Barney Frank and Sander Levin stated they could not support U.S. trade agreements unless the administration produces a "binding interpretation" of U.S. policy clarifying that governments would not be subject to investor lawsuits if they use this policy tool to manage financial volatility.
Frank is the ranking Member of the Financial Services Committee, while Levin is the leading Democrat on trade policy as the ranking Member of the Ways and Means Committee. They are part of a growing chorus calling for trade reforms to allow greater flexibility on capital controls. In fact, in their letter to Geithner, they cited a statement signed by more than 250 economists calling for such changes in U.S. policy.
The Frank-Levin letter comes at a key moment. In April, the Obama administration released a new model U.S. bilateral investment treaty. Despite strong calls for reform from public interest representatives on an official advisory body, the new model maintains the old language prohibiting capital controls, with no exceptions for times of financial crisis. Governments that violate such rules face the prospect of being sued by foreign investors in international tribunals.
The administration intends to use this new model as the template for bilateral investment treaties with China, India, and several other countries. It's also a strong indication of what they're seeking in ongoing negotiations over a Trans-Pacific Partnership, a trade agreement involving at least eight other governments.
By stepping up pressure from Congress, Frank and Levin may help alter the outcome of these negotiations. By showing that the views of U.S. officials are not monolithic, they may embolden negotiators from other countries who are seeking a more reasonable approach. Two of the governments involved in the Trans-Pacific talks, Singapore and Chile, sought exemptions for the use of capital controls to prevent crises when they negotiated bilateral trade agreements with the United States about a decade ago. At that time, the Bush administration refused to concede, beyond putting some modest limits on how much investors could demand in compensation for certain types of controls.
Today, we have the opportunity to apply lessons from a financial crisis caused by poorly controlled financial activities. And it's never been clearer that financial stability at home and abroad is essential for U.S. economic health. When our trading partners fall into financial crisis, we lose export markets and jobs. When hot money makes it impossible to control currency values, it hurts long-term investors and exporters and importers from the United States.
It's in all of our interest to support a fresh, flexible approach to capital controls.
January 31, 2011 · By Sarah Anderson
Who says economic policy has to be polarizing? In a remarkable sign of consensus, more than 250 economists across the ideological spectrum have signed a letter to the Obama administration in support of capital controls.
Until quite recently, this would have been unthinkable. For decades, the International Monetary Fund and the U.S. government led a crusade to eliminate capital controls, which include taxes and other measures to manage cross-border "hot money" flows.
As part of a broader liberalization agenda, the IMF used loan conditions and the U.S. government used trade and investment agreements to try to end such policies. U.S. officials even insisted that trade rules allow foreign investors to sue governments in international tribunals over violations of their "rights" to free capital mobility.
Then, after several countries used capital controls effectively to insulate themselves from the ravages of the 1990s financial crises, the IMF's opposition began to soften. And since the 2008 financial meltdown, the IMF has actually recommended such controls in certain circumstances, such as to prevent massive capital flight in Iceland or to stem assest bubbles in emerging markets.
The U.S. government, meanwhile, has carried on the old crusade and now has trade or investment agreements with 52 nations that prohibit capital controls.
In the statement delivered to to the Obama administration, economists are urging the Obama administration to end these outmoded policies. Initiated by the Institute for Policy Studies and the Global Development and Environment Institute at Tufts University (GDAE), the letter carries endorsements from:
- Former IMF Economists: e.g., Arvind Subramanian, now a Senior Fellow at the Peterson Institute for International Economics, and Olivier Jeanne, a Professor at Johns Hopkins University.
- Free Trade Supporters: e.g., Center for Global Development President Nancy Birdsall and her colleague Kimberly Elliott, who, while critical of capital control restrictions, have been generally supportive of U.S. trade policies, from the Central America pact of 2005 to the pending U.S.-Korea deal.
- A Nobel Laureate: Joseph Stiglitz.
- Former High-ranking Government Officials: Harvard's Ricardo Hausmann, a former Inter-American Development Bank Chief Economist and Minister of Planning of Venezuela; Y. Venugopal Reddy, former Governor of the Reserve Bank of India; and José Antonio Ocampo, former Finance Minister of Colombia.
As the letter points out, this is a timely issue since "in recent months, a number of countries, from Thailand to Brazil, have responded to surging hot money flows by adopting various forms of capital regulations."
The Obama administration has ample opportunities to bring a fresh approach to ongoing negotiations in its:
- Efforts to conclude pending trade agreements with Colombia, Korea, and Panama.
- Review of the U.S. model bilateral investment treaty, which will be the basis for new deals with India, China, and several other countries.
- Talks over a "Trans-Pacific Partnership Agreement" with eight other nations.
Making sure these deals don't prevent governments from using sensible capital controls would be one important part of a pro-worker, pro-environment, pro-democracy trade reform agenda. If we've learned anything from the current crisis, it's that we're living in a globalized financial system, where chaos in one part of the world can be devastating for businesses and workers elsewhere.