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FTAs have become a major conduit for developing and organising a legal framework for capital movements across borders. While FTAs contemplate the liberalisation of signatories’ capital account and the facilitation of payments and transfers as a means to foster trade in goods and trade in financial services between countries, the agreements do more than simply require the free flow of capital. Indeed, FTAs also provide a variety of exceptions and carve-outs aimed at providing regulatory policy space. The amount and degree of policy space differs between and among agreements, but the trend is for treaties to include more and stronger protections. This chapter analyses typical provisions relating to financial services found in FTAs before turning to common FTA exclusions and exceptions. In so doing, four modern agreements are extensively referred to as examples – CPTPP, USMCA, RCEP and CETA. While many obligations and exceptions are based on and resemble the GATS, the provisions contained in FTAs can be deeper and more comprehensive than those of the multilateral trading system. Properly drafted, such FTAs should provide comfort to governments seeking to make use of targeted CFMs that they will be able to do so without violating their bilateral and regional trade agreements.
The framework for the legal regulation of cross-border capital flows is critically important yet remains vastly unexplored and undeveloped. The preface introduces the background on the issue and explains how the book aims to fill the void and contribute detailed legal analysis to the ongoing discussion and debate. In contrast with existing literature, this book does not focus on the utility of capital flow management measures (CFMs) but on legal issues of fragmentation and associated problems. Much of the existing literature starts with the premise that members should have an absolute right to maintain CFMs – as a result, over-reading and misinterpreting of provisions is rife. This book has no pre-conceived ideological viewpoint but instead seeks to provide solid analysis on the consistency of CFMs with the trade and investment regimes and to develop a framework to manage and avoid regime conflict in existing and future treaties.
In the absence of an international framework applicable to cross-border capital flows, there is little doubt that the Fund had to assert its authority over capital movements. Without the Fund, a legal lacuna would exist and financial movements would go largely unregulated. Yet, it is less certain whether the Fund ever had the formal legal authority to empower itself to act as a de facto financial authority. A strict reading of the Articles of Agreement suggests that the Fund historically had no mandate over capital movements. Yet, several decades ago the Fund began slowly but steadily appropriating and assuming authority over capital movements. This chapter explores the legal instruments used by the Fund to organise the shift and expansion of its mandate. The chapter makes two major points. First, while the Fund grounded its mandate expansion on the text and wording of the Articles of Agreement, it relied on an Article IV byroad to interpret its constitutive instrument to escape the historical distinction between capital movements and current international transactions. Second, the Fund’s Institutional View of 2012 was not a radical break from tradition but merely a formalization and crystallisation of the ideas and direction it has pursued since 2008.
This chapter explores the legality of the IMF’s shift in mandate, and considers the overarching question of whether the institution was legally entitled to expand its mandate over time through de facto legal doctrines rather than express or implied consent of the members. The analysis begins with a consideration of the legal basis of the Fund’s initiative by examining the international legal theory on the legal personality of international organisations. That is, whether the mandate of an international organization is strictly dependant on the wording of its constitutive instrument(s), or whether the mandate can evolve so as to accommodate new de facto attributions and competences. The Fund’s mandate shift is then tested by taking into account the power of soft law. A key aspect in the legal literature is whether the constituent doctrine of ‘separate will’ or ‘volonté distincte’, which allows an organisation to act independently – that is without the express or implied consent of members – would apply to the mandate expansion as the move ensured the Fund maintained relevancy in an ever-changing world. Finally, the chapter concludes that the Fund’s mandate expansion was in line with the standards of international law applicable to international organisations.
This chapter assesses the compatibility of capital controls and other CFMs with the multilateral trade framework; that is, the WTO’s GATS. The GATS contains several provisions that relate to controls and restrictions on services in general, and to financial services in particular. This chapter begins by setting out the framework for obligations in the GATS relevant to cross-border capital movements before explaining and evaluating the relevant exceptions. While the exceptions should in theory allow capital controls to be put in place in a manner that is consistent with the GATS, each of the exceptions contain uncertainties which, depending on how they are interpreted, could mean capital controls would fall outside the scope of the exceptions. Recent jurisprudence, however, should provide some comfort to governments seeking to make use of exceptions in the financial services sector, namely the so-called prudential exception. In this regard, the GATS should not be viewed as a major impediment to the implementation of CFMs implemented in good faith and for prudential reasons.
Having clarified how capital movements are regulated at the multilateral level and explained how the multilateral framework translates to the bilateral or regional levels through FTAs, we now turn to the third level of regulation made available in an international law context – international investment agreements (IIAs). IIAs are critical to capital movements and capital flows in that they create a specific legal framework with substantive provisions aimed at protecting and promoting cross-border investors and investment. Like the previous chapter, this chapter refers extensively to the four representative comprehensive treaties – CPTPP, USMCA, RCEP and CETA. Where applicable, reference is made to other agreements, and in particular agreements negotiated by developing countries. The main conclusion of the chapter is that modern IIAs contain a wide range of safeguards and limitations which effectively allow host governments to put CFMs into place in circumstances of financial instability and financial duress. Moreover, the chapter also details how arbitral tribunals have narrowly interpreted state obligations and given substantial deference to host states when applying exceptions. That being said, treaties are drafted differently and the language, terms and choices made in drafting a treaty can significantly affect obligations and outcomes.
The analysis in the substantive chapters of the book have led to the following six observations and concluding remarks: (1) the IMF has regulatory authority over capital controls; (2) The WTO is not an impediment to the implementation of CFMs; (3) modern FTAs and IIAs are not an impediment to the implementation of CFMs; (4) Investment Tribunals and WTO Dispute Settlement Panels have interpreted the prudential exception broadly, fairly and reasonably; (5) a CFM taken in accordance with IMF recommendations or guidance is unlikely to conflict with modern trade and investment agreements; and (6) there is a potential convergence between WTO and international investment law. A recurring theme is that the risk of IEL instruments constraining governments has been overstated. The main risk lies not so much in IEL agreements per se but in those agreements that do not incorporate modern drafting techniques which limit or condition State obligations or provide for a wide range of safeguards to ensure that legitimate CFMs do not run afoul of treaty obligations.
With cracks in the liberalisation approach to capital flows appearing during the Asian Financial Crisis and subsequent crises in the early 2000s, policymakers and commentators began to understand that unregulated finance and cross-border flows could generate extreme financial instability. Capital controls have become widespread. For some, the controls are limited in nature and duration, but for others the controls are widespread and remain in place for an extended period. This shift has occurred at the same time the IMF has been more accepting of CFMs and in particular shifted its position on the extent to which they can be a source of instability in emerging markets. This chapter focuses on the role and legitimacy of CFMs. The chapter first provides a definition of CFMs and explains their role and impact in terms of capital flow management. Next, the chapter explains why CFMs are so controversial and elaborates on their operational aspects and overall desirability. The chapter concludes with a discussion on why CFMs remain difficult to manage from a macro level in the absence of a global regulatory framework.
Cross-border capital flows have long played an important role in the world economy. Yet foreign capital brings both benefits and risks to host countries. On the one hand, the expansion of global trade and the related increase in financial transactions have permitted market expansions and created wealth in both industrialized and emerging economies. On the other hand, cross-border capital flows can worsen economic conditions and deepen monetary instability. As a result, while capital account liberalisation and the free flow of capital were once almost universally praised as the solution to foster global economic growth, they have now come under serious scrutiny. In effect, there is an emerging consensus that a more careful and balanced approach to the management of cross-border capital flows is warranted. Before exploring these restraints and the legal and policy framework in which they have evolved, it is necessary to first provide a general overview of the current global financial landscape. This chapter does so by introducing the key pillars of the system – capital flows, the IMF and financial liberalisation – before elaborating on why this traditional approach to free capital flows has slowly but consistently shifted over time.
Focusing on capital controls, this study provides rigorous legal analysis to establish whether the mandate of the International Monetary Fund (IMF) extends to the capital account; that is, whether the IMF has the authority to control and/or regulate the use of capital controls by its member states. The book then analyses whether a country's use of capital controls is consistent with the obligations and commitments undertaken in various multilateral and bilateral trade and investment agreements. Finally, it analyses the tension within international economic law, as the IMF now encourages the use of capital controls under certain circumstances, while most trade/investment agreements prohibit or limit their use. Proposing a way forward to alleviate the tension and construct a more harmonious relationship between the norms and standards of finance, trade and investment, this study will be essential reading for policymakers.