How will the TPP affect Australia’s ability to protect itself from another global financial crisis?
One of many causes for concern around the TPP is its potential effect on the stability of our financial system.
Australia’s vulnerability to global financial shocks
The Australian dollar is one of the world’s most traded currencies, mainly by currency speculators. Overseas investment makes up a significant part of our economy and the mainly foreign-owned banks operating in Australia have at times held massive levels of short-term foreign debt. This makes Australia extremely vulnerable to destabilising flows of capital in and out of the country. The proposed TPP will seriously fetter Australia’s ability to follow the lead of other countries and apply capital controls to protect our economy. What’s more, foreign banks, insurance companies, money traders, and overseas property dealers from the other 11 countries would gain special powers to challenge laws and policies designed to shift the focus of investment away from speculation and grow our productive economy.
The TPP would prevent Capital Controls
Australia has already willingly eliminated many of the legal mechanisms that limit the exposure of our economy to global financial shocks. The TPP would lock in our lax regulatory system and may even require us to weaken it further.
Under a leaked TPP negotiating text the governments would have to permit the free flow of capital related to investments from the other countries (including investments in our currency), government bonds and other ‘financial assets’. This effectively forbids the use of regulations to control or restrict the movement of capital, such as financial transaction taxes (a small tax on transactions that curbs volatility and discourages speculation) or minimum stay requirements that deter quick turnaround investments.
Changing Tide Accepts Capital Controls as Legitimate
Capital controls are especially important at times of financial crisis. In the 1997-98 Asian Financial Crisis rapidly growing Southeast Asian nations — who were funded by high levels of foreign debt — defaulted and foreign capital took flight. Countries like Thailand, Indonesia and the Philippines refused to impose capital controls and suffered heavy losses. Malaysia, however, chose to buck the ‘orthodoxy’ and insulate itself from attacks by currency speculators with emergency capital controls, successfully giving its economy the space to recover.
After the global financial crisis capital controls are increasingly seen as a legitimate way that countries can protect themselves against heavy losses in an era of globally-linked financial sectors which rapidly spread a financial crisis around the world. Even the traditionally conservative International Monetary Fund has endorsed their use in appropriate circumstances.
Capital controls are also useful for managing the level of the exchange rate.
Prominent economists oppose TPP provisions on capital controls
A series of letters to the Obama Administration from prominent economists (here and there) detail how existing US trade and investment treaties have been used to prevent their signatories from using capital controls and ask for these provisions to be excluded from the TPP. Top US Democrats Barney Frank (Chairman of the House Financial Services Committee) and Sander Levin (House Ways and Means Committee) have written an open letter in support of capital controls being allowed under US trade and investment agreements.
Investor-State Dispute Settlement
One of the major grounds for concern around the TPP is that foreign investors could sue the Australian government for compensation in secretive international tribunals over new laws or policies which they claim would significantly hurt their investments. This would mean that foreign banks, insurance companies and money traders from the other 11 countries — especially the US — could challenge new financial regulations introduced to defend the Australia economy from speculation.
No Effective Exceptions
The past experience of some TPP countries makes them very nervous about restrictions on capital controls and they have proposed limited exceptions and emergency powers allowing their use. The United States opposes these exceptions, even in a balance of payments emergency.
Despite deregulation, Australia still has some legal capacity to protect ourselves in a financial crisis, and we should not trade this away. Our government is elected by us to look after our interests, and it should not have to answer to transnational corporations for introducing measures designed to protect and grow our economy.
Does the TPP sound like something Australia should be a part of?
Tell the government what you think by sending them an open letter.
If interested you can view the Australian department for foreign affairs and trade’s position here (link)