House Dems: Financial safeguards needed in trade deal

Four House Democrats on Monday urged the Obama administration to ensure that a pending Asia-Pacific trade deal includes strong capital controls that would help minimize the damaging effects of financial crises.

The lawmakers want the Trans-Pacific Partnership (TPP) to give governments more flexibility to protect the stability of their financial systems by stemming the flow of speculative capital.

{mosads}”Policies promoting full and free movement of capital — without any controls on, for instance, volatile short-term speculative capital — have contributed to a series of financial crises within countries, with devastating economic and human costs, and major disruptions in the international financial system over the past quarter century,” the lawmakers wrote in a letter sent to U.S. Trade Representative (USTR) Michael Froman.

The lawmakers — Reps. Sander Levin (Mich.), Maxine Waters (Calif.), Gwen Moore (Wis.) and Charles Rangel (N.Y.) — pointed to the East Asian financial crisis in the late 1990s as an example of what can happen when short-term foreign capital surges into economies and is then abruptly pulled out.

The lawmakers expressed concern that the White House is maintaining a stance that the risks of volatile capital flows “are best managed through a mix of fiscal and monetary policy measures, exchange rate adjustment, accumulation of reserves and non-discriminatory prudential measures, such as bank reserves and capital requirements.”

Tighter capital controls are typically found in developing economies that lack sufficient reserves, unlike the financial framework in larger countries.

But the lawmakers argued that in 2010 the International Monetary Fund (IMF) detailed shortcomings of the White House’s stance and noted that some capital controls may still be necessary in some cases.

The IMF determined that countries using temporary capital controls in the run up to the 2008 financial crisis avoided some of the worst outcomes, they wrote.

But the lawmakers also acknowledged that the IMF has said that those additional measures “could put a country in conflict with its international obligations under free trade agreements, many of which prohibit their use.”

All four of the lawmakers on the letter voted against fast-track law that will streamline passage of the TPP deal when it reaches Capitol Hill.

But Levin, ranking member on the Ways and Means Committee, has repeatedly said he wants to vote for the TPP but wants significant changes to get his vote.