July 2013

Trans-Pacific Partnership Agreement (TPPA) and Capital Flows 

Based on a presentation given at the Stakeholders Forum in the 18th Round of TPPA Negotiations in Kota Kinabalu, Malaysia, on July 20, 2013

The 18th round of negotiations for the Transpacific Partnership Agreement (TPPA) held in Kota Kinabalu, Malaysia from July 15 to 25, 2013 just ended. Twelve countries are participating in the TPPA negotiations – Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Chile, Peru, Mexico, Canada, and United States, with Japan joining in only in the 18th round. There are twenty nine chapters under negotiations with 14 chapters having been agreed upon. Negotiators hope to complete the process by October of 2013. The whole negotiation process has been carried out by government officials, usually from the ministry of trade and industry, is clouded in secrecy. This has generated much public concern and discontent in some of these countries. Law makers and the general public in Malaysia have demanded for more transparency and information that have not been forthcoming and also asking for ratification by the full Parliament before signing the Agreement. Several public peaceful demonstrations have been held to oppose Malaysia’s participation in the negotiations. The latest occurred in July 20th in front of the hotel in Kota Kinabalu where the negotiations were held. The police took high-handed action, detained 14 of the demonstrators and submitted them to drug testing.

The Investment Chapter of the TPPA that has been leaked specifically states “Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory”. In other words, countries participating in the TPP will not be allowed to exercise any form of controls over the inflow and outflow of capital. This is even more restrictive than the IMF conditions for regulating capital flows. The IMF, itself an advocate of free capital movements, has been critical of the provisions on capital mobility in agreements like the TPPA, stating in a 2012 report, “The limited flexibility afforded by some bilateral and regional agreements in respect to liberalization obligations may create challenges for the management of capital flows”.

It is understood that participants have agreed to this provision in the Investment Chapter. However, the final extent of any safeguards and exceptions is unclear. Questions were raised at the session that negotiators held with stakeholders over these concerns and the answer was it is still under negotiation.

In the leaked investment chapter, the safeguards refer specifically to the ability of a government to take temporary measures with regard to current account transactions if there is serious balance of payment or external financial difficulties; or with regard to payments or transfers relating to capital movement. The questions are: how long does “temporary” mean and who defines it? Does temporary mean a few months or a few years? In the case of Malaysia, it banned capital outflow for a year during the Asian Financial Crisis and then changed it to 10% levy on proceeds from sale of securities for another year or so. Would the TPPA allow for that? In all the bilateral agreements that have been signed, disputes over ambiguities are settled in international arbitration tribunals whose neutrality has been compromised by conflicts of interest, i.e., some of the judges who sit on the tribunals have also represented companies that brought suits against countries. Furthermore, would these tribunals be in a better position to judge what is best for the countries that imposed such capital controls? It would seem that the countries that are affected should judge for themselves when it is prudent to phase out or lift such controls.

Second, the leaked investment chapter specifies a number of very restrictive conditions under which the safeguard measures can be applied. These conditions include:

  • Application on a non-discriminatory basis among the parties
  • Be consistent with the Articles of Agreement of the IMF for parties that are parties to the said Articles
  • Avoid unnecessary damage to commercial, economic and financial interests of other parties
  • Do not exceed those necessary to deal with circumstances described above
  • Be temporary and be phased out progressively as the situation improves

Various legal opinions have pointed out that these restrictions serve only to cancel out the safeguards and exceptions provided for earlier and hence should be removed.

Another provision in the Investment Chapter refers to sovereign debt restructuring. It specifies that a claim cannot be brought against a country that has a negotiated debt restructuring in place except for a claim that the restructuring violates the national treatment (NT) and most favoured nation (MFN) articles. This provision is good as an investor should not claim against a party that already has a negotiated debt settlement in place. However, the provision is weakened by two conditions – the NT and MFN exceptions and the stipulation that the negotiated restructuring must be accepted by creditors who hold at least 75% of the aggregate principal amount of the outstanding debt. This threshold is too high. Even in negotiated debt restructuring in the private sector, a two thirds threshold is accepted as binding.

Countries negotiating to sign the TPPA must insist on deleting any provisions in the Investment Chapter that restricts their ability to regulate capital flows, or at the least have enough safeguards and exceptions that are water-tight enough to be able to regulate capital flows for both micro and macro prudential reasons as well as to maintain financial and economic stability. There is enough evidence that free capital flows, particularly those associated with speculative financial transactions, like carry trades, are highly volatile and create financial, foreign exchange and other macro economic instability to recipient countries. This happened during the Asian Financial Crisis and also this recent Global Financial Crisis. Countries need the policy space to regulate both the inflow and outflow of capital in order to prevent, manage and overcome financial and economic crisis. Malaysia, as noted earlier, used capital controls successfully to get out of the crisis in 1998 and 1999. When Malaysia used it at that time, it was regarded as heretical, and vehemently opposed by the IMF. Ten years later, the IMF admitted that capital controls helped Malaysia emerge faster from the crisis. Another country that used capital controls successfully, to its benefit but seldom publicised, is the United States. In 1963, to stem capital outflows and balance of payment problems, the U.S. introduced the Interest Equalization Tax (IET) to tax US dollar bonds raised by foreign corporations on Wall Street that yielded a lower interest rate. This tax effectively reduced the international US dollar bonds issued in the US as a percentage of all international US dollar bonds raised world wide from 72% in 1963 to 55% in 1964 and 28% in 1968.


To a lay person, TPPA, BITS and FTAs are dry and arcane abbreviations that do not interest us. Yet, they have a serious impact on our lives. So what are they and why should we bother about them?

Click here to read more of Dr. Lim Mah Hui’s article published in The Edge Malaysia on June 24, 2013.