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A few well-written words can convey a wealth of information, particularly when there is no lag time between when they are written and when they are read. The IPS blog gives you an opportunity to hear directly from IPS scholars and staff on ideas large and small and for us to hear back from you.

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Entries since March 2012

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Getting Around Geithner

March 4, 2012 ·

I've been trying to get the Obama administration to come out of the Dark Ages on the subject of capital controls for three years. The light, however, seems to be shining only outside Washington.

I know capital controls aren't exactly issue No. 1 on Americans' minds. But these tools for managing volatile hot money flows have saved countless families around the world from economic disaster. And while they're most frequently used in developing countries, promoting financial stability anywhere is in the interest of all of us.

Tim Geithner is stuck in the Dark Ages. Photo by U.S. embassy in New Delhi.So in the wake of the worst financial crisis in 80 years, I thought it would be a no-brainer for the U.S. government to give up its longstanding policy of banning capital controls through trade agreements. The North American Free Trade Agreement and dozens of other U.S. treaties severely restrict our trade partners' ability to use capital controls. If governments break the rules, foreign investors can sue their pants off in international tribunals.

In 2009, I was appointed to an official advisory committee to the Obama administration on investment policy, where I talked myself blue in the face about the need for a rethink on capital controls. To pump up the volume, I partnered with Professor Kevin Gallagher of Boston University to organize more than 250 economists to sign a letter to the administration, urging trade reforms to allow capital controls.

Many fancy economists were eager to sign -- a Nobel Prize winner, a former finance minister and Central Banker, a Harvard department head, etc... We got coverage in the New York Times and Wall Street Journal, as well as the opportunity to present the letter to Treasury officials and trade negotiators.

Finally, we received a reply from Treasury Secretary Timothy Geithner. The administration would "seek to preserve" current policy, he said, since, in his view, governments have sufficient alternatives to capital controls to deal with volatility.

Ouch. Geithner made the International Monetary Fund look like a relative beacon of progressive enlightenment. After decades of blanket opposition, the IMF now endorses capital controls on inflows of speculative capital under certain circumstances. They have recommended outflows controls in a number of countries facing capital flight, such as Iceland, and are supporting inflows controls to prevent speculative bubbles in emerging market countries.

What about Geithner's argument that there are plenty of other policy tools to deal with financial volatility? An IMF paper from 2010 went through the alternatives and concluded that in certain circumstances capital controls are still needed.

Fortunately, there are ways to get around Geithner. The greatest hope lies in other countries that may put up a fight over this issue. The Obama administration is negotiating a Trans-Pacific trade agreement with eight other governments: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, and Vietnam. Several of these have used capital controls effectively in the past.

For example, throughout most of the 1990s, Chile required a percentage of all foreign investments to be deposited in the central bank for a year, helping to prevent rapid capital flight. Malaysia imposed controls on capital outflows at the height of the Asian financial crisis in 1998. Nobel economist Joseph Stiglitz has written that this allowed Malaysia to "recover more quickly with a shallower downturn and with a far smaller legacy of national debt."

More than 100 economists from countries in the Trans-Pacific trade talks have signed a new letter urging more flexibility on capital controls. This time, signatories include prominent scholars from six of the nine participating governments, including well-known free trade supporter Professor Jagdish Bhagwati of Columbia University and former IMF officials Olivier Jeanne of Johns Hopkins University and Arvind Subramanian of the Peterson Institute for International Economics. The letter will be delivered to each of the nine governments on the eve of a big March 1-9 negotiating round in Melbourne, Australia.

This isn't the only fix needed in our trade agreements. But if we can't move beyond the Dark Ages belief in the wonders of unfettered financial flows, it's hard to imagine winning much else in the way of enlightened trade reforms.

Crikey! Australia Shocks Corporate America on Trade

March 2, 2012 ·

The Australian government doesn’t like it when global tobacco giants can sue them over public health laws. Corporate America finds this utterly unreasonable.

President Barack Obama and Australian Prime Minister Julia Gillard.Thirty-one U.S. corporate lobby groups, from the Business Roundtable to the National Potato Council, sent a letter to President Obama this week, urging him to give Australia a good smackdown.

The Aussies’ offense? They have refused to accept trade rules that allow foreign investors to sue governments in international tribunals. Known as “investor-state” dispute settlement, these rules are in every U.S. trade agreement negotiated in the past 20 years – except the 2005 U.S.-Australia pact.

The Land Down Under stood up to U.S. corporate goliaths and their representatives in the U.S. Trade Representative’s office that time around. But the issue has come up all over again because the two countries are negotiating a new trade pact with seven others, called the Trans-Pacific Partnership. Australia has reiterated its opposition to these so-called “investor rights” in this broader trade deal.

If anything, the government’s opposition has hardened since its last go-round with U.S. trade negotiators. That’s because Australia is now the target of a high-profile investor-state case. Philip Morris, of the Marlboro empire, filed a suit against Australia last year, demanding compensation for that country’s plain packaging laws for cigarettes. Oops – while Australia had kept investor-state out of the U.S.-Australia trade deal, it allowed it in some other treaties. Philip Morris simply used a subsidiary in Hong Kong to file the claim under a bilateral treaty between that nation and Australia.

In a statement surprisingly lacking in the usual bureaucratic mumbo jumbo, the Australians made clear they weren’t about to expand their vulnerability to such lawsuits by accepting investor-state in the Trans-Pacific Partnership.

Corporate America’s hair has been on fire ever since. In the lobby group’s letter to Obama, they warn ominously that “Australia’s rejection of investor-state dispute settlement is not only thwarting the ability of the TPP negotiations to produce strong enforcement outcomes, it is also having a corrosive effect on the level of ambition and other key aspects of the TPP negotiations. If Australia were able to extract such a major exemption, other countries would press forward to seek their own major exemptions from core commitments.” 

Translation:  they fear if the United States goes all soft on the Australians on investor-state, the other countries will smell blood and demand similar rules that are pro-public interest, but corporate-unfriendly. Several of the other governments are already attempting to stand up to U.S. pharmaceutical company proposals that would reduce access to affordable medicines.

Another hot-button issue is capital controls, which include various measures designed to manage the flow of volatile “hot money” across borders. More than 100 economists from TPP countries signed a statement this week urging negotiators to allow governments to use this proven tool for preventing and mitigating financial crisis. Seventeen corporate lobby groups have argued in another letter that permitting U.S. trade partners to support financial stability through the use of capital controls would undermine everything from U.S. jobs to national security. Despite growing consensus among economists that such controls are legitimate policy tools, it is standard U.S. trade policy to prohibit their use and allow investor-state claims against governments that violate these restrictions.

Besides the United States and Australia, others involved in the Trans-Pacific talks are:  Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, and Vietnam. Their 11th round of negotiations is taking place in Melbourne, Australia from March 1 to 9. Let’s hope the Australian team that is taking on Corporate America can make the most of their home turf advantage.

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