I still have no idea whether the TPP agreement our government has reached is, on balance, a net benefit to New Zealanders.  Without a proper independent assessment and analysis, undertaken by an agency that is both competent and independent (in the New Zealand case, think of the Productivity Commission), it is going to be difficult to know.   Imposing more regulation, across a range of quite diverse countries, doesn’t have the same presumption of economic benefit that lower tariffs do.  And the addition of yet more international meetings of officials and politicians seems like pure loss.

I’ve printed off, but not yet read, the modelling exercise done for MFAT –  the government’s negotiators –  that suggests annual benefits of as much as 1 per cent of GDP, at least for the subset of provisions they looked at.  And on Saturday, a form email from Tim Groser dropped into my inbox, urging me to sign a National Party petition to show my support for New Zealand’s exporters back TPP as “vital” to our economic future.  Frankly, it seems a little desperate when the Minister of Trade is having to generate his own petitions.

Some of the things I’m most uneasy about are matters of principle.  I think it is simply wrong that foreign investors should have access to different courts than New Zealand firms and individuals do in respect of issues relating to their activities in New Zealand.  Equal and common access to justice should be a foundational principle of our longstanding democracy –  no doubt things might be different in the brutal and corrupt communist regime that is our new treaty partner Vietnam .  This isn’t an argument about how many claims there will ever be against New Zealand (probably few),  but simply about differential access to justice. Our Courts should be open to all who seek justice in New Zealand (and open more generally), and there should be no special jurisdictions for favoured parties.   And New Zealand law should be made by the New Zealand Parliament, with any interested parties (domestic or foreign) free to make their cases in the public debate here.

Out of interest, I have dipped into a few of the chapters of the TPP is the days since the text was released.  I wanted to focus this morning on bits of Chapter 29, Exceptions and General Provisions, and especially Article 29.3 Temporary Safeguard Measures.  I had some peripheral involvement in New Zealand’s stance on these provisions, but here I just wanted to comment on what has finally been agreed.

The Article is only a couple of pages long, and the key points are here:

1. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers for current account transactions in the event of serious balance of payments and external financial difficulties or threats thereof.
2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining restrictive measures with regard to payments or transfers relating to the movements of capital:

(a) in the event of serious balance of payments and external financial difficulties or threats thereof; or

(b) if, in exceptional circumstances, payments or transfers relating to capital movements cause or threaten to cause serious difficulties for macroeconomic management.

Since 1982 New Zealand has not had current account restrictions in place, and since the end of 1984 we have not had capital controls in place.  I hope we never adopt such controls again.  But it is the sort of decision that an elected government should be free to take.

New Zealand, for example, adopted current account convertibility controls briefly during the Great Depression, and then had both capital and current account controls in place from the foreign exchange crisis of 1938 until the early 1980s.  There were legal limits in place on what you could import, how much you spend on an overseas holiday, and official permission was required for, for example, overseas magazine subscriptions.  And that was before starting on the capital restrictions, on New Zealanders having money abroad, and on foreigners have money here.  It isn’t a world I ever want to go back to.

But capital and current account controls have not gone from the face of the earth.  In recent years, one OECD country (Iceland) and one EU country (Cyprus) have put new controls in place, and in the previous 15 years Malaysia and Argentina had also deployed such controls.

It is probably inconceivable to the US –  a very large country, and home of a “reserve currency” –  that such restrictions could ever be warranted outside wartime (unlike, no doubt, numerous other direct controls like FATCA or AML/CFT ones), but for small and highly-indebted countries it is another matter.  If New Zealand were to face a severe outbreak of foot and mouth disease, at a time when financial stresses were heightened anyway, controls might be an option a New Zealand government would want to consider.   Same might go for a severe flu pandemic, of the sort that so much planning was done for last decade, which closed down for a time world financial markets.  There would be costs and benefits to adopting controls, but it should be a choice for New Zealand governments to make.  It is about keeping a full arsenal of risk management options.

So I’m pleased to see that both 1 and 2 made it into the final agreement.  After all, any controls need to be consistent with the Articles of the International Monetary Fund –  which we’ve belonged to since 1961.  The IMF articles don’t put any particular restrictions on capital controls, but require approval from the Fund for any current account restrictions.  That approval is supposed to be provided in advance, but Iceland secured approval retrospectively in 2008, so these aren’t just abstract issues.

But the TPP articles goes further, and in some respects where they go are quite concerning.

Here are the main conditions controls have to meet

(c) avoid unnecessary damage to the commercial, economic and financial interests of any other Party;

(d) not exceed those necessary to deal with the circumstances described in paragraph 1 or 2;

(e) be temporary and be phased out progressively as the situations specified in paragraph 1 or 2 improve, and shall not exceed 18 months in duration; however, in exceptional circumstances, a Party may extend such measure for additional periods of one year, by notifying the other Parties in writing within 30 days of the extension, unless after consultations more than one half of the Parties advise, in writing, within 30 days of receiving the notification that they do not agree that the extended measure is designed and applied to satisfy subparagraphs (c), (d) and (h), in which case the Party imposing the measure shall remove the measure, or otherwise modify the measure to bring it into conformity with subparagraphs (c), (d) and (h), taking into account the views of the other Parties, within 90 days of receiving notification that more than one half of the Parties do not agree;

(f) not be inconsistent with Article 9.7 (Expropriation and Compensation);

(g) in the case of restrictions on capital outflows, not interfere with investors’ ability to earn a market rate of return in the territory of the restricting Party on any restricted assets; and

(h) not be used to avoid necessary macroeconomic adjustment.

4. Measures referred to in paragraphs 1 and 2 shall not apply to payments or transfers relating to foreign direct investment.

5.  A Party shall endeavour to provide that any measures adopted or maintained under paragraph 1 or 2 be price-based, and if such measures are not price-based, the Party shall explain the rationale for using quantitative restrictions when it notifies the other Parties of the measure.

In principle, (c) looks fine –  “unnecessary” damage should be avoided in the same way our Reserve Bank should avoid “unnecessary” exchange rate variability.  But what is unnecessary and who defines it?   And (d) too –  responses should be proportional to the seriousness of the situation, rather than using a minor crises as a pretext of abandoning openness.  I never really looked into (f) when I was involved in official discussions and I’m not starting now.

But here is where I start getting more uneasy.  On my reading of (e), under no circumstances can capital or current account controls be in place for more than 2.5 years.  New Zealand previously had them in place for 45 years, but more relevantly Iceland only this year announced plans to remove controls put in place, in response to a severe crisis, in 2008.    This provision goes well beyond anything in, for example, the multilateral framework of the IMF Articles of Agreement, and even provides a veto power to (a majority of) the other countries on even having controls in place beyond 18 months.

It might seem unlikely that the veto would ever be exercised (such is international politics that rather than upset a partner one could just let the last 12 months of controls run out)…..but, unlike the IMF, disputes under this Agreement can (presumably)  be dealt with through the ISDS process.  So rather than mere political lobbying about whether extending controls is a good idea, interested private foreign parties could seek remedial action.  Could they, for example, take a claim against another foreign government for failing to be stringent enough in evaluating whether any extension of New Zealand’s controls was really warranted within the terms of the agreement?

Which brings us to (h) above  Not avoiding “necessary” macroeconomic adjustment might sound uncontroversial, but…..any such controls substitute, almost by construction, for other forms of macroeconomic adjustment.  One could always let the exchange rate go lower (shifting more resources into exporting), or default (reducing the amount of resources that need to be shifted into exporting).  Is it really appropriate to have such judgements –  about the best mix of policy tools in a crisis – reviewed by courts –  let alone private foreign tribunals?

(g) has long puzzled me, (even though it sounds reasonable) because it has never been entirely clear what it means.

And if 5 has ended up in a reasonable place, it still seems to have a stronger preference for price-based measures (fees and taxes) rather than quantitative restrictions than may really be warranted.  I’m all in favour of price-based measures as a general principle, and think that many of the quantitative restrictions countries put in place are quite costly (think quotas rather than tariffs).  But the track record is that many of the authorities with a strong rhetorical commitment to price-based interventions actually themselves use quantitative restrictions  when under pressure.  I’ve frequently pointed out to people that during the 2008 crisis, short-sales prohibitions were common interventions in many countries (including the US).  Personally I thought they were wrongheaded, but smart people –  and, more germanely, people with a political mandate, disagreed.  I’m not sure I noticed price-based measures in FATCA, for example.   “Temporary safeguard measures” shouldn’t be used very often at all, but if they are used only in extremis it is quite likely that quantitative restrictions will be the most effective, and perhaps even efficient, remedy at times.  As a simple example, when the exchange rate is collapsing, or expected to collapse, almost no credible fee or tax will discourage someone who just wants his or her money out.

But my biggest single concern around the temporary safeguards provisions relates to 4.  This clause prohibits any current or capital account restrictions applying “to payments or transfers relating to foreign direct investment”.    I think that is a bad policy to pre-commit to for several reasons:

•  There is no good reason to preference foreign direct investment over other flows, capital or current
• The agreement contains no definition of foreign direct investment
• This exception opens potentially large enforcement problems.

If anything, one could probably mount an argument for putting the restriction in the reverse.  After all, as the footnote to this article points out “FDI”, as envisaged here, tends to be undertaken to establish a “lasting relationship” –  unlike (say) as foreign investor buying a 90 day bank bill –  and this agreement allows controls for only 30 months at maximum.  If you establish a lasting relationship, isn’t it reasonable to share the opportunities and restrictions of the residents of the country?  In bank crisis resolution for example (eg the OBR), the focus is on quickly re-establishing the liquidity of transactions balance accounts, with much less immediate interest in the liquidity of longer-term claims.  Why reverse things here?   And why are countries agreeing to preference flows that relate to a foreigner’s investment in New Zealand over those of an identical asset (say, another sawmill) held by a New Zealander.  And note that the prohibition here is not just on the capital proceeds of the sale of an FDI asset, but on the earnings of that asset.  Under TPP, it appears that a country could put in place restrictions on a foreign owner remitting interest receipts (from, say, a government bond) abroad, but not on a foreign owner (of, say, a factory or a bank) remitting interest on a related party loan, or on remitting a dividend.  What is the ground for such a differential treatment?  I can’t see it.

The clause has a footnote

For the purposes of this Article, “foreign direct investment” means a type of investment by an investor of a Party in the territory of another Party, through which the investor exercises ownership or control over, or a significant degree of influence on the management of, an enterprise or other direct investment, and tends to be undertaken in order to establish a lasting relationship.  For example, ownership of at least 10 per cent of the voting power of an enterprise over a period of at least 12 months generally would be considered foreign direct investment.

But what, if any, legal force does that have? It is descriptive rather than prescriptive.  That might be fine for statistical classification purposes, at a time when there are no controls.  But it looks to provide no effective buffer against the numerous attempts that will come, if controls are ever put in place, against attempts to get round the law.  If, for example, a foreigner’s government bond matures and they invest the proceeds as 100% of the shares of “XYZ Asset Management Company”, the only asset of which is the proceeds of the bond, is that foreign direct investment (for the purposes of this agreement)?  If it is held in that form for at least 12 months?     People more skilled in financial engineering than I am could surely quite easily invent countless more clever ways of bringing their funds within this ill-defined ambit of “foreign direct investment”.

And all these matters appear to be resolved, when disputes are taken, not openly by domestic courts under domestic law,  or even through state to state dispute resolution mechanisms such as those under the WTO, but by offshore administrative tribunals litigated by individual aggrieved private companies.

For some people on the libertarian side of things, all these objections will be moot.  Who cares, they might argue.  Controls such as these are always and everywhere a bad idea, and anything that makes them harder to enforce is a good thing.  If we must have such provisions in international agreements to fend off the antediluvians, this is the second-best way of rendering them meaningless.

And I can see the logic of their argument. But it doesn’t appeal.  Strong and successful countries make their own laws, and set their own constraints.  Democracy and national sovereignty are probably never absolute principles, but I think New Zealand governments should have the option of imposing these sorts of controls, and trying to make them work, especially in crisis circumstances –  which one could readily envisage lasting longer than 30 months.  The longstanding multilateral framework, reflected in  the IMF Articles, agrees.  If New Zealanders really want to rule out the crisis controls options, that’s fine too.  But write and debate a constitution and establish these economic freedoms in such a national, domestically justiciable, document.

As it is, even our own Treasury and Reserve Bank signed up to a non-binding international declaration the other day which said that “we further recognize that excessive volatility in capital flows can create policy challenges that may require a policy response”.  Personally I’m sceptical, but they signed it.  Are they really saying that in no conceivable circumstances can those “serious difficulties for macroeconomic management” ever last for more than 30 months?  I’d be interested to see their analysis/evidence for that proposition.