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The TPP and International Capital Management

by Bill Rosenberg, Campaign Against Foreign Control of Aotearoa (CAFCA)

A number of factors have underlined the need for regulation of financial markets, and in particular management of international capital flows, in recent months. There is broad agreement that the current global financial crisis amply demonstrates the need for more regulation of financial markets; whether that will move beyond rhetoric to effective action and what form it might take is as yet far from clear, but the Stiglitz Commission of the UN General Assembly[1] has put a broader range of regulatory measures on the table, bringing opposition from the US and other advanced economies. New Zealand politicians, officials and commentators have as a result of the global crisis and statements of Standard and Poor’s in considering New Zealand’s sovereign credit rating[2] become much more aware of the effects of the chronic and large current account deficit, which is overwhelmingly due to the deficit on income from overseas investment, a large part of which is extensive overseas borrowing by the four Australian banks which dominate New Zealand’s financial system. Finally it is becoming increasingly clear that with open capital markets, New Zealand’s monetary authorities have severely weakened influence on New Zealand’s monetary settings. The Reserve Bank has repeatedly expressed concern that the Australian owned banks in particular are not reducing their interest rates in line with the Official Cash Rate[3].



In a recent article I brought these issues together, providing a theoretical and empirical analysis and outlining a range of tools that were advisable for managing the movements of capital between New Zealand and international markets[4]. The tools included:


International capital management policies which allow the government to control

  • Minimum stay periods for capital movements into New Zealand;
  • Capital movements out of the country, particularly at times of crisis;
  • A small financial transactions tax (“Tobin tax”) to discourage speculative financial market transactions;
  • End-use of overseas borrowing such as to limit or give preference to trade and foreign currency-earning investment;
  • Volume limits on both foreign currency and New Zealand dollar denominated overseas borrowing;
  • Minimum maturities (terms) of overseas borrowing, and matching of maturities between borrowing and lending.
  • Foreign direct investment where it is largely a financial transaction as distinct from investment which includes substantial introduction or creation of physical assets or know-how.


Financial sector: in addition to the above capital management policies,

  • Government representation on boards and/or stronger supervision of banks and other financial institutions which accept government guarantees, are “too big to fail”, or are capable of significantly impacting economic (including monetary) policies, to ensure they do not undermine these policies;
  • Take the next opportunity to nationalise the New Zealand operation of at least one of the large Australian-owned banks and create a governance structure that ensures it operates consistently with New Zealand’s public interest in order to enlarge the part of the financial system that acts consistently in the public interest;
  • Control overseas ownership of the New Zealand financial sector firstly to reduce the proportion of the sector which is overseas owned and secondly to diversify the home countries of overseas ownership;
  • Legislate to ensure the separation of traditional commercial banking (deposit taking and lending) and investment banking;
  • Require regulatory approval for financial services which are of high risk (whether sourced from New Zealand or abroad);
  • Regulate firms which are “too big to fail”. One method may be to extend commercial law to prevent the creation of such entities, even if they are consistent with competition law.[5]


However many of these policies are made difficult or entirely banned by international agreements New Zealand has signed (on top of political constraints imposed by the high debt levels themselves). There is a risk that the position will be made even worse by the current Doha Round of negotiations in the WTO (as it relates to the General Agreement on Trade in Services, GATS, and particularly the Financial Services agreement under GATS) and the anticipated TPP negotiations which will include negotiations on Financial Services and Investment, both of which could add further barriers to this path to stability. There are already similar provisions to the GATS in the bilateral free trade agreements with China and Singapore, and investment provisions in those agreements and one with Thailand which contain further constraints.


All capital controls are potentially affected by the GATS. There is a wide-ranging provision (in a footnote to the agreement!) which requires that foreign financial service providers present in New Zealand must be allowed to transfer capital into New Zealand without restriction[6]. However since GATS does not have a companion requirement giving foreign providers the right to transfer capital out of the country, it may be that management of outward movements could be used to impose conditions on inward movements. The GATS does guarantee unrestricted “current” payments and transfers (such as company profits)[7], which could be used as a cover for significant movements of funds, and the investment provisions of bilateral agreements such as with China guarantee free capital transfers in either direction. Similarly, Footnote 8 goes further for remote provision of services. For services provided from other countries to consumers in New Zealand (such as through the internet), New Zealand may restrict neither outward nor inward capital transfers. Though New Zealand has not made any commitments in this mode for financial services (though it has for many other services), this is likely to be an area where the US will put pressure on for further commitments in the TPP negotiations, and in the WTO.


Under the Financial Services provisions[8] of the GATS, New Zealand has committed to put no restrictions on New Zealanders accessing financial services provided in another WTO member. Typically that arises when New Zealanders travel to another country, but the internet has blurred the distinction between this and the previous “mode of supply”. What it does mean at the least is that the New Zealand government cannot control the activities of wealthy individual New Zealanders setting up bank accounts and borrowing money overseas, although we may be able to prevent them transferring it to New Zealand. This may well cause problems for any capital and currency regulations.


The Financial Services provisions also require New Zealand to allow any overseas owned financial service provider to offer any “new financial service”. This prevents New Zealand from refusing permission for high risk financial instruments, some of which have led to the current financial crisis in the US. Other GATS provisions, and similar rules in bilateral and regional agreements prevent us giving more favourable treatment to New Zealand owned institutions such as Kiwibank (“National Treatment”), and require us to give service providers from other WTO members equally favourable treatment regardless of which country they are based in (“Most Favoured Nation”). These will make it difficult for us to diversify the ownership of the major banks, to give special treatment to government-owned banks which undertake to operate consistently with New Zealand’s public interest, and to increase our regulation of foreign direct investment as proposed. Market Access provisions of the agreement may also prevent us limiting the volume and value of particular types of lending; it may even prevent us taking action over the “Too Big to Fail” problem by limiting the size of any bank as one expert in the area has suggested[9].


There are two significant exceptions provided in the GATS and in New Zealand’s bilateral agreements: in case of balance of payments difficulties, and for prudential reasons. The balance of payments provision however is aimed at short term measures taken specifically at the time of external financial difficulties, can be challenged as exceeding what is “necessary” (always a contentious matter of political judgement), and can be reviewed by a WTO disputes panel. It is not designed to allow preventative measures as are intended here. Further, the US has refused to accept this exception in its bilateral trade agreements with Singapore and Chile[10] and is likely to do the same in the TPP negotiations.


The prudential exception (typically “including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system”) is a contested one. There is not clear international agreement on what is a prudential measure and what is not. What is now regarded as prudential as a result of the financial crash, may not have been several years ago, indicating that what is considered prudential is heavily context-specific, often involving complex political considerations. It is unlikely that some measures would be challenged in the current circumstances because the major powers are using them themselves; in other circumstances they would challenge such actions to enable market entry for their financial corporations and products. For example, Ellen Gould and Patricia Arnold, who have analysed the GATS in the light of the financial crisis, point out that the Glass-Steagall Act in the US was repealed in 1999 after becoming “a target of EU trade negotiators who defined it as a barrier to European countries” (there was also intensive lobbying from parts of the US financial sector which hoped to benefit from the repeal). The Act “separated commercial banking (deposit taking and lending) from investment banking to ensure that depositors’ savings were not put at risk in speculative investments and to avoid conflicts of interest”. If the Act was still in place, the US financial crisis may well have been quarantined to investment banking and had a far less pervasive effect on the stability of the financial system. Yet it was apparently not protected under the prudential provisions, and certainly that protection was open to challenge[11].


[1] Recommendations by the Commission of Experts of the President of the General Assembly on reforms of the international monetary and financial system, Chaired by Joseph Stiglitz, 19 March 2009, available at http://www.un.org/ga/president/63/letters/recommendationExperts200309.pdf. It notes (paragraph 37) that “Many bilateral and multilateral trade agreements contain commitments that circumscribe the ability of countries to respond to the current crisis with appropriate regulatory, structural, and macro-economic reforms and rescue packages…” [sic].

[2] For example “S&P warning hits dollar”, 13 January 2009, http://www.stuff.co.nz/archived-stuff-sections/archived-business-sections/business/market-meltdown/793433, accessed 21 June 2009.

[3] For example, “Downturn may be nearing end, but recovery not assured”, Reserve Bank of New Zealand, 17 June 2009, http://www.rbnz.govt.nz/news/2009/3664523.html, accessed 21 June 2009.

[4] “Financial crises, trilemmas, and a time to rethink”, by Bill Rosenberg, Foreign Control Watchdog, number  120, May 2009, p. 5-22, also available at http://www.converge.org.nz/watchdog/20/02.htm.

[5] For example, Shyam Sunder, J. L. Frank Professor of Accounting, Economics and Finance at Yale School of Management, has made proposals to regulate “too big to fail” financial institutions in the US: “Dealing with Too-Big-to-Fail”, unpublished Yale working paper, September 2008.

[6] Footnote 8 to Article XVI. Note that this applies to all foreign service providers present in New Zealand in sectors under which New Zealand has made commitments, not only in financial services. So for example, since New Zealand in 1994 made commitments under Real Estate, an overseas owned Real Estate company has the right to make “related” transfers of capital into New Zealand without restriction. Not all WTO members have made commitments under Financial Services, which is a highly controversial area for obvious reasons.

[7] GATS Article XI.

[8] These consist of two main supplements to the GATS agreement itself: the Understanding On Commitments In Financial Services, and the Annex On Financial Services. New Zealand has made commitments to these with few significant reservations.

[9] “Dealing with Too-Big-to-Fail”, by Shyam Sunder, unpublished Yale working paper, September 2008.

[10] “Using free trade agreements to control capital account restrictions: summary of remarks on the relationship to the mandate of the IMF”, by Deborah E. Siegel, Senior Counsel, Legal Department International Monetary Fund, ILSA Journal of International and Comparative Law, Vol 10, 2004, p. 297-304.

[11] “Financial Instability and the GATS Negotiations” by Ellen Gould, Canadian Centre for Policy Alternatives, Briefing Paper, Trade and Investment Series, Vol. 9, No.4, July 2008, http://www.policyalternatives.ca/reports/2008/07/reportsstudies1930/?pa=A2286B2A.; and The General Agreement on Trade in Services (GATS): Implications for regulation of financial services in the United States”, by Patricia Arnold, Associate Professor, School of Business Administration, University of Wisconsin-Milwaukee ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ), September 2002, for presentation to the Transatlantic Consumer Dialogue, 5th Annual Meeting, Washington, D.C., 28-30 October 2002, www.tacd.org/events/meeting5/P_Arnold.doc.

Last Updated on Tuesday, 16 March 2010 02:05

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