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<p class="MsoNormal"><big><i style="mso-bidi-font-style:normal"><span
style="font-size:12.0pt;line-height:115%;font-family:"Times
New Roman","serif"">Kevin P. Gallagher
published the following op-ed in the </span></i><span
style="font-size:12.0pt;line-height:115%;font-family:"Times
New Roman","serif"">Financial Times<i
style="mso-bidi-font-style:normal"> today based on the <a
href="http://www.ase.tufts.edu/gdae/policy_research/CapAcctReg.html">recent
Pardee
Center report</a> from the <em>Task Force on Regulating
Global Capital Flows for Long-Run Development, which he
co-chairs.</em></i></span></big></p>
<p class="MsoNormal" style="text-align:center" align="center"><b
style="mso-bidi-font-weight: normal"><span
style="font-size:14.0pt;line-height:115%;font-family:"Times
New Roman","serif"">Don’t trade away financial
stability in Trans-Pacific Partnership</span></b></p>
<p style="text-align:center" align="center"><em><span
style="font-style:normal; mso-bidi-font-style:italic">By Kevin
P. Gallagher</span><br>
Financial Times, </em><em><span
style="font-style:normal;mso-bidi-font-style: italic">March 6,
2013</span></em></p>
<p>Negotiators will meet in Singapore this week for yet another
round of talks on a Trans-Pacific Partnership – it is the 16th
time in just a few years. A TPP would bring together key
Pacific-rim countries into a trading bloc that the US hopes would
counter China’s growing influence in the region.</p>
<p>Among other sticking points, talks remain stalled because the US
insists that its TPP trading partners dismantle regulations for
cross-border finance. Many TPP nations will have nothing of it,
and for good reason. The US stance stands on the wrong side of
country experience, economic theory and guidelines issued by the
International Monetary Fund. </p>
<p>TPP nations such as Chile and Malaysia successfully regulated
cross-border finance to prevent and mitigate severe financial
crises in those countries in the 1990s. In the wake of 2008, there
has been a global rethink regarding the extent to which
cross-border financial flows should be regulated. Many nations
such as Brazil and South Korea have built on the example of Chile
and Malaysia and reregulated cross border finance through taxes on
short-term debt and foreign exchange derivative regulations. After
2008, emerging markets and developing nations want as many tools
as possible to prevent and mitigate crises.</p>
<p>New research in economic theory justifies this. <a
href="http://blogs.ft.com/economistsforum/2012/01/capital-controls-are-not-beggar-thy-neighbour/"
title="Capital controls are not beggar thy neighbour - FT.com">Anton
Korinek and Olivier Jeanne</a> have demonstrated how
externalities are generated by cross border financial flows
because investors and borrowers do not know (or ignore) what the
effects of their financial decisions will be in terms of financial
stability in a particular nation. Foreign investors may well tip a
nation into financial difficulties, and even a crisis.</p>
<p>The authors argue that regulating cross border finance will
correct for the market failure and make markets work more
efficiently.</p>
<p>Such thinking has in part triggered an about face at the IMF on
capital flows. Last December, the IMF endorsed an “<a
href="http://www.imf.org/external/pp/longres.aspx?id=4720"
title="The Liberalization and Management of Capital Flows -
IMF.org">institutional view”</a> on capital account
liberalization and the management of capital flows. The IMF now
recognises that capital flows bring risk, particularly in the form
of capital inflow surges and sudden stops, which can cause a great
deal of financial instability. Under such conditions, the IMF will
now recommend the use of cross-border financial regulations to
avoid such instability.</p>
<p>I led a <a
href="http://www.bu.edu/pardee/2012/03/02/task-force-on-regulating-global-capital-flows/"
title="Task Force On Regulating Global Capital Flows - BU.edu">task
force</a> that held a compatibility review examining the extent
to which the regulation of cross-border finance was compatible
with many of the trade and investment treaties across the globe.
It consisted of former and current Central Bank officials, IMF and
WTO staff, members of the Chinese Academy of Social Sciences, as
well as scholars and members of civil society. In a <a
href="http://www.bu.edu/pardee/car-task-force/" title="Pardee
Center Task Force Report, March 2013 - BU.edu">report</a>
published this week, we find that US trade and investment treaties
were the most incompatible with new thinking and policy on
regulating global finance.</p>
<p>Not only do US treaties mandate that all forms of finance move
across borders freely and without delay, but deals such as the TPP
would allow private investors to directly file claims against
governments that regulate them, as opposed to a WTO-like system
where nation states (ie the regulators) decide whether claims are
brought. Therefore, under investor-state dispute settlement a few
financial firms would have the power to externalise the costs of
financial instability to the broader public, while profiting from
awards in private tribunals.</p>
<p>Such provisions fly in the face of recommendations on investment
from a group of more than <a
href="http://www.ase.tufts.edu/gdae/policy_research/CapCtrlsLetter.html"
title="Economists Issue Statement on Capital Controls and Trade
Treaties - ase.tufts.edu/gdae/">250 US and globally renowned
economists</a>. The 2012 <a
href="http://www.iisd.org/itn/2013/01/14/the-imfs-new-transfers-policy-and-the-trading-system/"
title="The IMF’s New Transfers Policy and the Trading System -
iisd.org">IMF decision</a> echoes these sentiments when it says
“these agreements in many cases do not provide appropriate
safeguards or proper sequencing of liberalization, and could thus
benefit from reform to include these protections”.</p>
<p>Members of our task force recommend that emerging market and
developing countries refrain from taking on new trade and
investment commitments unless they properly safeguard for the use
of cross-border financial regulations. <a
href="http://www.huffingtonpost.com/2012/06/13/obama-trade-document-leak_n_1592593.html"
title="Obama Trade Document Leaked, Revealing New Corporate
Powers And Broken Campaign Promises - Huffingtonpost.com">Leaked
text</a> of the TPP reveals that Chile and other nations have
proposed language that could provide such safeguards. The US
should work with those nations to devise an approach that gives
all nations the tools they need to prevent and mitigate financial
crises.</p>
<p>Copyright <i style="mso-bidi-font-style:normal"><a
href="http://blogs.ft.com/economistsforum/2013/03/dont-trade-away-financial-stability-in-trans-pacific-partnership/?">Financial
Times</a></i> 2013 (first time visitors to the FT page will
have to sign in but opinion articles at the FT are free)</p>
<p><em>Kevin P. Gallagher is researcher at the Global Development
and Environment Institute (GDAE) at Tufts University and a
professor of International Relations at Boston University. He is
co-chair of the Task Force on Regulating Global Capital Flows
for Long-Run Development and co-editor of the task force’s
latest report, <a
href="http://www.ase.tufts.edu/gdae/policy_research/CapAcctReg.html"><span
style="font-style:normal">“Capital Account Regulations and
the Trading System: A Compatibility Review”</span></a>.</em></p>
<p class="MsoNormal"><span style="font-family:"Times New
Roman","serif"">Read more on GDAE’s work on <a
href="http://www.ase.tufts.edu/gdae/policy_research/CapitalControls.html">Capital
Flows,
Trade and Investment Treaties, and Development</a><br>
Read more on GDAE’s <a
href="http://www.ase.tufts.edu/gdae/policy_research/globalization.html">Globalization
and
Sustainable Development Program</a></span></p>
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