January 5, 2016

Would a MAC be Consistent with TPP Provisions Regarding Capital Flow Management?

To its everlasting credit, Public Citizen issued a note in 2014 entitled Alone and Confused: U.S. Trade Officials Defy Post-Crisis Consensus Backing Capital Controls.  It aptly remarked that, "Clinging to a pre-crisis position endorsed by Wall Street, the Office of the U.S. Trade Representative (USTR) continues to push binding “trade” deals that ban the use of capital controls." 
 The same paper notes that, "Congressional leaders, prominent economists and the International Monetary Fund (IMF) all agree: capital controls – regulations to stem destabilizing flows of speculative “hot money” into or out of a country – are legitimate, common-sense policy tools for preventing or mitigating financial crises." For example, the IMF, long a leading advocate of free cross-border capital flows, has concluded that, under certain conditions, capital flow management policies are a fully legitimate part of the macro-economic policy toolbox.  
"Alone and Confused" also provides a very useful checklist that makes it easier to understand why preserving the right to use capital flow management tools is so important and should not be abridged by the TPP. According to the checklist, the main reasons that governments use capital controls are:
  • To ensure economic stability in the face of balance-of-payment crises,
  • To prevent asset bubbles,
  • To avoid rapid currency appreciation or depreciation,
  • To effectively use monetary policy to create jobs and stem inflation, and
  • To eliminate rent-seeking activities.
  • To ensure a stable climate for long-term domestic investment
Perhaps the biggest contribution the Public Citizen note made was to raise a big red flag warning that the TPP Agreement should be modified significantly to support capital flow management policies.
Given the secrecy that surrounded the earlier drafts of the TPP, it is difficult to track relevant changes over time, but this blog post examines evidence indicating that, if earlier leaked copies of the text were representative, important and very welcome changes have indeed been made.
More specifically, this post examines Article 29.3: Temporary Safeguard Measures. This key part of the TPP agreement moderates some of the more doctrinaire statements of principle in earlier chapters. This is the section indicating the real scope for policy design options that are available to countries such as the United States that need to take steps to solve severe internal and external imbalances without running afoul of TPP commitments.
The following analysis of Article 29.3 indicates that the Market Access Charge (MAC) that is the focus of this blog site would be fully consistent with and allowed by the TPP language. In other words, if implemented in its present form, the United States could implement a MAC through separate legislation without fear of violating TPP provisions. 
This is an extremely important conclusion. As indicated in my blog post entitled TPP: As Strong as its Missing Link – Fair Currency Values (October 14, 2015), perhaps the most worrisome aspect of the TPP as negotiated is that, without a mechanism to establish a fair, trade-balancing exchange rate for the US dollar, America's trade deficits are likely to increase -- even though exports will expand within a 12-nation pan-Pacific trade agreement, imports are likely to expand even faster, and on a net basis, this will kill rather than increase jobs.

Americans know -- and fear -- this problem. Consequently, a serious risk exists that, without parallel legislation along the lines of the proposed MAC to assure that the dollar moves to and remains at a trade-balancing exchange rate, the public will put so much pressure on Congress that the TPP will be rejected -- along with the potential benefits of trade expansion, specialization, and rules that reduce barriers to US products in foreign markets.

Given what is at stake, it is important to examine the Safeguards section carefully and move quickly to take advantage of the flexibility that the safeguard language provides by implementing a Market Access Charge that will make the US dollar, US manufacturing, and US workers once again fully competitive with foreign producers, both here in America and in export markets abroad.

So, without further ado, let's look at the relevant TPP text.

Article 29.3: Temporary Safeguard Measures /c

1.      Current Account Transactions: Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers for current account transactions in the event of serious balance of payments and external financial difficulties or threats thereof.
This language protects the MAC from any accusations that it obstructs current account transactions. However, it may be necessary and/or desirable to implement an A/B Bank Account system./a

2.     Capital Account Transactions: Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers relating to the movements of capital:
(a) in the event of serious balance of payments and external financial difficulties or threats thereof; or
(b) if, in exceptional circumstances, payments or transfers relating to capital movements cause or            threaten to cause serious difficulties for macroeconomic management.
The MAC would only come into effect when conditions (a), (b), or both are present.

3.   Regarding any measure adopted or maintained under paragraph 1 or 2:
(a) National and/or Most-Favored Nation Treatment: Measure shall not be inconsistent with the TPP articles calling for National and/or Most-Favored Nation Treatment (Articles 9.4, 9.5, 10.3, 10.4, 11.3, 11.4)
The MAC is designed to be non-discriminatory in terms of National and/or Most-Favored Nation Treatment

(b) IMF: Measure shall be consistent with the Articles of Agreement of the International Monetary Fund;
The MAC is fully consistent with IMF Articles of Agreement – and with the IMF Institutional View on capital flow management tools.

(c) Unnecessary Damage: Measure shall be consistent avoid unnecessary damage to the commercial, economic and financial interests of any other Party;
The MAC is designed to be highly market friendly. It is price-based, non-discriminatory, and focuses on the core problem, not on symptoms.

(d) Necessity: Measure shall not exceed those necessary to deal with the circumstances described in paragraph 1 or 2;
The MAC charge is designed to be automatically and dynamically scaled to provide just the degree of adjustment required.
(e) Temporary and Phased Out Progressively:  Measure shall be temporary and be phased out progressively as the situations specified in paragraph 1 or 2 improve, and shall not exceed 18 months in duration; however, in exceptional circumstances, a Party may extend such measure for additional periods of one year /b, by notifying the other Parties in writing within 30 days of the extension, unless after consultations more than one half of the Parties advise, in writing, within 30 days of receiving the notification that they do not agree that the extended measure is designed and applied to satisfy subparagraphs (c), (d) and (h), in which case the Party imposing the measure shall remove the measure, or otherwise modify the measure to bring it into conformity with subparagraphs (c), (d) and (h), taking into account the views of the other Parties, within 90 days of receiving notification that more than one half of the Parties do not agree;
Although the MAC system would be in place on a permanent basis to provide clear signals and a stable economic environment, the MAC charge would be temporary because it would move to a non-zero rate only when needed. If the current account deficit at any time reached one percent of GDP on average over the previous 12 months, the MAC charge would move from zero to an initial rate of 25 basis points. Then, based on six-monthly reviews of the average current account balance over the previous twelve months, the MAC charge would increase in line with increases in the current account deficit as a share of GDP.

The MAC would phase out progressively as follows: Once the current account deficit began to shrink, the MAC charge would decline in like measure. Once the current account deficit dropped below one percent of GDP, the MAC charge would phase out entirely, returning to a zero rate.

 (f) Expropriation and Compensation: Measure shall not be inconsistent with Article 9.7 on Expropriation and Compensation;
      Not applicable – the MAC does not involve expropriation.

(g) Capital Outflows: In the case of restrictions on capital outflows, measure shall not interfere with investors’ ability to earn a market rate of return in the territory of the restricting Party on any restricted assets.
      Not applicable – the MAC only applies to inflows.

(h) Measure shall not be used to avoid necessary macroeconomic adjustment.
Far from making it possible to avoid necessary macroeconomic adjustment, a MAC is urgently needed to accomplish the macroeconomic adjustments that the United States requires.

The U.S. suffers serious internal and external imbalances today because, in the highly financialized global economy of the 21st century, the dollar is persistently overvalued. This has happened because exchange rates are now determined largely by the demand for U.S. capital assets, not by the demand and supply of exports and imports as was true in earlier centuries.

A MAC is the best way to re-establish a link between exchange rates and balanced trade – a precondition for meaningful, sustainable growth in America that will benefit all Americans – and through spillover effects, the entire world -- during the 21st century

                                   America Needs a Competitive Dollar - Now!

a/ See post of Jan 4, 2016 on the Americans Backing a Competitive Dollar – Now! blog (www.AbcdNow.blogspot.com, or http://abcdnow.blogspot.com/2016/01/incoming-payments-for-us-exports-will.html#more)

b/ This provision, which allows extending the time that temporary measures can be in place, is vital to the operation of the MAC. Short term results can be attained with import quotas and prohibitive tariffs such as those used during the Great Depression. However, as we know from such experience, a focus on fixing the short-term symptoms rather than on fixing the underlying problem can be devastating. In contrast, the MAC will bring the dollar’s exchange rate to its trade-balancing equilibrium rate by moderating the demand for U.S. capital assets. This approach will be slower but far safer and more effective in the long run than measures used during the Great Depression. In effect, the MAC shrinks the cancer of trade deficits and currency overvaluation over time with carefully calibrated doses of moderation rather than by trying to chop the cancer out with a single meat-ax blow.

c/ The original language of Article 29.3 has been modified slightly to facilitate inserting comments between each sub-article. The substance is unchanged.

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