Congressman Barney Frank, Ranking Member of the House Committee on Financial Services, and Congressman Sander Levin, Ranking Member of the House Committee on Ways and Means, today released a letter to Treasury Secretary Timothy Geithner, expressing concern over future U.S. free trade agreements if the very important subject of capital controls is not addressed. Levin and Frank are leaders in the U.S. House on trade and international economic issues.
In their letter to the Administration, Frank and Levin ask Secretary Geithner to affirm that specific provisions in U.S. trade and investment treaties would allow governments to use controls to protect and strengthen the stability of their financial systems, or if that is not the case, to work to change them.
Frank and Levin have long been concerned that the language in U.S. trade and investment treaties was too restrictive and did not leave adequate flexibility for governments to use controls to stem the massive flows of speculative capital that can exacerbate economic crises, especially in developing economies. In response, the Administration has claimed that its interpretation of the language in U.S. trade treaties already allows partner governments the flexibility they need to use controls to deal with rapid flows of money.
"Given the importance of this issue," the letter states "and the widespread view that the language is excessively restrictive, we request an official written statement of U.S. policy on the Administration's interpretation that the scope and coverage of the "prudential exception" in U.S. free trade agreements and bilateral investment treaties grants parties the ability to deploy capital controls on the inflow or outflow of capital without being challenged by private investors."
In the wake of the recent financial crisis, there is a growing consensus among economists and at institutions such as the International Monetary Fund, the United Nations and the Asian Development Bank that uncontrolled capital flows -- massive flows of speculative capital coming in and out of countries -- can have a destabilizing effect on the global financial system and that capital controls can serve as important macro-prudential measures that nations should have in their toolkit to prevent and mitigate financial crisis.
"All of the lessons of the past decade strongly support the use of appropriate capital controls and our trade agreements should reflect that," said Frank. "We believe it is important before the Trans-Pacific Partnership agreement moves forward that the Administration make clear exactly how our trade agreements support the use of capital controls."
"Absent these interpretative clarifications," the letter concludes, "we believe there will be continued doubt about the ability of our trading partners to use capital controls, and we would not support that."