Article 9.6bis: Treatment in Case of Armed Conflict or Civil Strife
1. Notwithstanding Article 9.11.6(b) (Non-Conforming Measures), each Party shall accord to investors of another Party and to covered investments non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

I was a bit surprised to find this one.  Presumably this refers to cases where the state is not bound to provide compensation, but does so discretionarily?  Why would countries sign up to a policy in which they have to treat the losses of citizens/residents the same as the losses of foreigners?  And why only for cases of “armed conflict or civil strife” –  but not, say, earthquakes, bank failures, or other vicissitudes of life?    London was badly bombed in the blitz in 1940.  Is this seriously suggesting that the British government, if it offered any compensation to any of the victims, had to treat, say, the owners of Swiss banks or factories the same as the owners of British banks or factories.  Why would they want to pre-commit to that, in respect of ex gratia measures?

There might be plenty of occasions when a country might want to treat these two groups of people equally, but why should it sign up to committing in advance to such equality of treatment?

Public policy should be made primarily in the interests of the citizens (and perhaps residents) of the country concerned.  In all manner of areas, we treat residents different from non-residents (eg access to public schools and the public health system, let alone voting).  In some cases, we even treat citizens differently from non-citizens: both might go prison for a crime, but the non-citizen can be deported too.  It isn’t always obvious where the lines should be drawn, but draw them we do.  And sometimes we revise them in light of specific circumstances.  But why pre-commit to treat any compensation for this particular class of losses equally between New Zealanders and others?

PS.  On the off chance that “non-discriminatory treatment” only refers to how different countries’ overseas investors are treated, it still seems an odd and inappropriate thing to pre-commit too.  In any “armed conflict”, some other countries will have been allies, other perhaps very friendly, and others neutral or perhaps mildly hostile.  Why would we pre-commit to treating investors from each of those countries equally, in offering discretionary compensation for any losses resulting from armed conflict (or civil strife)?

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.

I’m a bit puzzled about the new Joint Declaration of the Macroeconomic Policy Authorities of the Trans-Pacific Partnership Countries, that dropped into my inbox just after midday, courtesy of the RBNZ and the RBA.  This was, apparently  (and according to the RBNZ/Treasury press release)

“one of a number of issues that the US Congress has required the US Executive to demonstrate progress on, before it will consider passing the legislation necessary to implement TPP”.

The Declaration itself does not state who these “macroeconomic policy authorities” actually are, but I presume that the Reserve Bank of New Zealand and the Reserve Bank of Australia are directly parties to the declaration, even though both have operational independence in respect of monetary policy.  In the New Zealand case, the Minister of Finance has extensive powers to direct exchange rate policy, implemented by the Reserve Bank, but I’m not aware that there are comparable provisions in the RBA Act.

I’m partly curious about who is party to this declaration because I went to the Federal Reserve website, and found no press release or mention of the declaration (while the US Treasury Secretary –  a politician – has put out a release).

The joint Wheeler/Makhlouf statement is an odd affair.  The RBA’s statement is terse, and really just provides a link to the Declaration text.  But the New Zealand statement is substantial (longer than an OCR announcement release) and rather defensive –  perhaps reflecting an awareness of the public unease around TPP itself.  They are at pains to point out that it is all non-binding.  But non-binding statements can still come back to create difficulties in future.

From the Declaration itself, I was struck by the opening sentence:

We, the macroeconomic policy authorities for countries that are party to the Trans-Pacific Partnership…welcome the ambitious, comprehensive, and high-standard agreement reached by our respective governments in Atlanta.

Is that really the sort of political puffery that the Governor of an independent central bank should be signing up to about highly-contentious policies?  One might even ask whether the non-political head of the New Zealand Treasury should be making such statements, rather than (perhaps) leaving them to the Minister –  who could, quite reasonably, congratulate his colleagues.    I was curious what analysis either agency had undertaken to enable them to conclude that the 6000 page agreement was “comprehensive and high-standard”, and have lodged an OIA request with both agencies.

I also noticed the observation that “we further recognize that excessive volatility in capital flows can create policy challenges that may require a policy response”.    But perhaps there are enough qualifiers in that statement to render it meaningless (“excessive” volatility is like “unnecessary” variability –  different in the eye of each beholder).

The heart of the statement is a paragraph on exchange rate policies.

Each Authority confirms that its country is bound under the Articles of Agreement of the International Monetary Fund (IMF) to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. Each Authority is to take policy actions to foster an exchange rate system that reflects underlying economic fundamentals, and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.

Authorities commit to “not target its country’s exchange rate for competitive purposes”.  Perhaps this thought might discourage Graeme Wheeler from quite so many references to overvalued exchange rates in his monetary policy pronouncements.    But perhaps more importantly, transforming New Zealand’s economic prospects probably does require a strategy that focuses on a sustained lowering of the real exchange rate, to put New Zealand’s competitive position on a much stronger and more sustainable footing.  Sure, that doesn’t involve using monetary or fiscal policy directly to bring it about, but it really needs to be a key focus of economic policy taken together.  This declaration risks de-emphasising the real exchange rate as an adjustment mechanism.  As for “competitive devaluation”, it is worth remembering that the countries that devalued first came out of the Great Depression fastest –  oftten described as the “beggar thy neighbour” period.  “Competitive devaluation” is mostly an empty phrase in substance, but that won’t stop it being used – cited –  by critics (in the US Congress or other places) if some large TPP country or other (think Japan) actively seeks to depreciate its real exchange rate in ways that might help the country concerned and the wider world economy.

The Declaration also sets some provisions for (at least) annual Macroeconomic Policy Consultations, which will involve yet more travel for some unlucky Deputy Secretary/Deputy Governors.  I was amused at the line that “The Group is to conduct its meetings in a mutually respectful manner” –  the presence of which phrasing probably tells us a lot about the enthusiasm of some authorities to be part of this process.

The sort of talk that will take place at these meetings is surely largely harmless, but not necessarily cheap.  At its annual meetings this Group is to consider the macro and exchange rate policies of each TPP country, including “the policy responses which address imbalances”.  Perhaps we will finally get the long looked-for answers to New Zealand’s persistent macroeconomic imbalances?  Even if the meeting is, say, tacked on in or around the IMF Annual or Spring Meetings, how much time is going to go into preparing background papers, reviewing them, as well the travel etc.  How much does the Reserve Bank of New Zealand really want to know (or do we want to spend on it knowing) about macro policy and imbalances in Vietnam, Brunei or Peru?    At the time of the Funding Agreement earlier in the year the Reserve Bank was keen to stress its austerity, and I had understood that the Treasury was also under funding pressure.  What will be sacrificed so that yet another pointless international meeting can become a regular part of the international schedule?

And what of the defensive RB/Treasury statement?

A few lines caught my eye.

More broadly these commitments could help support stronger trade between TPP countries and seek to avoid practices that are harmful to economic growth and financial stability.

I’m not sure how.  As the agencies keep noting, it is all non-binding, and if (as in the NZ case) it is the Treasury and the Reserve Bank who are the parties, they don’t even the power to commit governments as to how they will use, eg foreign exchange intervention powers.    But this really comes down to the point above: “competitive devaluation” is a meaningless phrase, but the ability to depreciate one’s currency, perhaps sharply, in the event of significant economic weakness is not a power that should be lightly traduced.  What behaviours do Gabs and Graeme have in mind, undertaken by the TPP member countries, that have previously been “harmful to economic growth and financial stability”?  This, after all, is their own commentary, not some international lowest-common-denominator text.

Would the Reserve Bank’s policy on currency intervention breach the Declaration?

 

No. The framework does not restrict the ability of the RBNZ to intervene.

The framework setting out the operating of currency intervention policy under Section 16 of the Reserve Bank of New Zealand Act provides for interventions when the exchange rate is exceptionally high or low and clearly unjustified by economic fundamentals.  This is consistent with the text of the Declaration.  

 

Will this restrict New Zealand’s ability to change its exchange rate regime or approach to monetary policy?

 

No. The text on exchange rates largely echoes New Zealand existing commitments under Article IV of the IM Articles of Agreement. 

The exchange rate elements of the Declaration – for example the avoidance of exchange rate manipulation – are helpful in supporting stronger trade. 

It would be helpful to hear how the Reserve Bank and Treasury regard this document as it affects not just the section 16 activities of the Reserve Bank, but those that could be initiated, at any time, by a Minister of Finance under sections 17 and 18.  Those clauses are much more far-reaching.  I presume this press release was very carefully drafted, and carefully avoided reference to those powers.  Personally, I hope those powers are never used, but they are the powers that would allow for much tighter management of the exchange rate should some future government choose to.  Would such a government be advised by the Reserve Bank and Treasury that such a choice was inconsistent with this declaration?  I hope not.

I also noted that “largely” in the response to the final question.  It would be helpful to have spelt out where this (non-binding) agreement goes beyond the IMF Articles.

And, to repeat the point, the final sentence involves a pretty strong assertion, that there are gains in the form of larger international trade, to be had from non-binding declarations to discourage behaviours that the signatories have not pointed to examples of.  If TPP countries have not been doing this stuff, pledging (in a non-binding way) to go on not doing so can offer no trade gains. If they have been doing this bad stuff, we should be made aware of the examples that the Governor and Secretary have in mind.    Which exchange rate management practices of TPP countries in the last 20 years raise concerns for the Governor and the Secretary?

One does wonder how much this Declaration is aimed at the US Congress (no doubt to a fairly large extent) and how much it is aimed as a pre-emptive shot at China?  Would the parties, for example, consider that a Chinese choice to devalue the yuan in the current environment would breach the provisions of this agreement if China were a party to it.  And would the words strengthen the hands of mercantilist critics, even if the high-minded macroeconomists were unbothered by such choices.?

In the end declarations of this sort are about politics, including the price of getting TPP across the line (if it manages to).  If the agreement really is (quite) good as our government claims   –  or as gung-ho as the US Trade Representative would have one believe, extending more regulation further across the world –   then perhaps it is worthwhile.  Of course, without a proper independent assessement –  eg by the Productivity Commission –  it will be hard to know.     But if it is mainly about politics, it would be been much preferable for gushy statements and commitments (non-binding) to have come from Ministers of Finance –  the true “macroeconomic authority” at least in New Zealand –  and not from non-political and/or independent officials like the Secretary and the Governor.