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Published online by Cambridge University Press: 26 November 2020
Capital controls—measures taken to regulate the outflow or inflow of capital—are employed by governments to maintain financial stability and prevent or mitigate the effects of economic crises. For many decades capital controls were out of favour among economists and policymakers. Of late, however, they have become acceptable, if somewhat controversial, tools of financial policy, with the International Monetary Fund stating that ‘in certain circumstances, [capital controls] can be useful to support macroeconomic adjustment and safeguard financial stability’. Yet, little is known about the legality of capital controls under the various international treaties and rules of international organisations. This article introduces capital controls, traces their evolution over time, considers the success of short-term and long-term controls implemented in Chile, Malaysia, Iceland and China, and examines the consistency of selected controls with international rules and obligations. We suggest treaty language will be the critical factor in determining the legality of a particular capital control under a trade or investment agreement.
This research is supported by Hong Kong General Research Fund (GRF) Project No. 14613717, entitled, “When Regimes Clash on Capital Controls: Managing the Conflicting Norms and Standards of the IMF, WTO and International Investment Agreements”.
Thanks to KPMG Law and King & Wood Mallesons for their financial support of this research, and to Mia Trzecinski for invaluable research assistance. All responsibility is the authors.
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4 By some accounts, outflows from bond and equity funds in emerging markets in March 2020 exceeded four per cent of net asset value—a more substantial withdrawal of funds than the same stage of the 2008 GFC for capital flows to emerging markets. See D Lubin, ‘Does Coronavirus Herald Capital Controls?’ Financial Times (online, 30 March 2020).
5 A Tooze, ‘The Coronavirus Is the Biggest Emerging Markets Crisis Ever’ Foreign Policy (online, 28 March 2020).
6 R Hughes, ‘Safeguarding Governments’ Financial Health During Coronavirus: Learning from Past Viral Outbreaks’ (VoxEU, 29 March 2020).
7 Tooze (n 5).
8 UNCTAD ‘The Covid-19 Shock to Developing Countries’ (March 2020) UNCTAD/GDS/INF/2020/2.
9 A Ghosh and M Qureshi, ‘What's in a Name? That Which We Call Capital Controls’ (2016) International Monetary Fund (IMF) Working Paper WP/16/25.
10 ibid.
11 IMF, The Liberalization and Management of Capital Flows: An Institutional View (Policy Papers, 14 November 2012).
12 MA O'Grady, ‘What We Can Learn From Chile's Financial Crisis’ The Wall Street Journal (online, 29 September 2008).
13 H Tapia and R French-Davis, ‘The Chilean-Style of Capital Controls: An Empirical Assessment’ (Econometric Society Latin American Meeting, Santiago, July 2004).
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20 Eichengreen et al. (n 17) 49–52; Reinhart and Smith (n 15); Rajan (n 16); Magud, Reinhart and Rogoff (n 17) Table 6.
21 Reinhart and Smith (n 15) 8.
22 However, while in the short term the increase in unremunerated reserve requirements was effective, by 1996 over 40 per cent of Chile's debt to BIS reporting banks had an admittedly residual maturity of less than one year: Edwards (n 17) 25.
23 F Gallego, L Hernandez and K Schmindt-Hebbel, ‘Capital Controls in Chile: Effective? Efficient?’ (Latin American and Caribbean Economic Association Annual Meeting, Rio de Janiero, October 2000) 4.
24 Edwards (n 17); L Alfaro, ‘The Effect of Capital Controls’ (World Economic Forum, 22 January 2015).
25 The conclusion of Ariyoshi et al. (n 17) is that inflow controls were partly effective in reducing the level and increasing the maturity of inflows in Malaysia and Thailand, and in affecting the composition of the inflows in Colombia and possibly in Chile but were largely ineffective in Brazil.
26 P Bustelo, C Garcia and I Olivie, ‘Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)’ (1999) Instituto Complutense De Estudios Internacionales Working Paper No 16, 78. This was a recommendation of the Council on Foreign Relations in the US: see PG Peterson and CA Hill, ‘The Future of the International Financial Architecture; A Council on Foreign Relations Task Force’ Foreign Affairs (online, November/December 1999).
27 ‘The Perils of Global Capital’ The Economist (Washington DC, 22 August 1998) 52. And, of course, capital flows are not the only mechanism for the transmission of contagion. Even a completely closed capital account will not insulate an economy from trade-related contagion (‘Emerging-Market Measles’ The Economist (US, 20 August 1998) 52) as Taiwan experienced in the wake of the Asian crisis. See also Wade, R and Veneroso, F, ‘The Gathering World Slump and the Battle over Capital Controls’ (1998) 231 New Left Review 13, 40Google Scholar; L Alfaro, A Chari and F Kanczuk, ‘The Real Effects of Capital Controls: Financial Constraints, Exporters, and Firm Investment’ (2015) National Bureau of Economic Research Working Paper 20726, 4–5.
28 Ariyoshi et al. (n 17).
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31 S Mydans, ‘Malaysia is Ready to Inflict its Own Economic Medicine’ The New York Times (online, 16 December 1997).
32 ibid.
33 K Meesook et al., ‘Malaysia: From Crisis to Recovery’ (Occasional Paper No 207, IMF, 27 August 2001).
34 Athukorala (n 29).
35 Thailand, Indonesia and Korea turned to the IMF for financial assistance. The Philippines did not adopt an IMF program in response to the crisis, because it was not severely affected by it. See Balisacan, AM and Hill, H, The Philippine Economy: Development, Policies and Challenges (Oxford University Press 2003) 4–5CrossRefGoogle Scholar.
36 In 1994, the Malaysian government temporarily imposed restrictions in response to a surge of speculative inflows in the early 1990s. The controls included, among other things, a ceiling on non-trade and non-investment external liabilities of banks and a prohibition on sales of short-term bonds to non-residents and non-trade related swaps and forward transactions on the bid side with foreigners. These restrictions resulted in a sharp reduction in short-term liabilities. By the end of 1994, most of the controls were lifted. See Kaplan, E and Rodrik, D, ‘Did the Malaysian Capital Controls Work?’ in Edwards, S and Frankel, JA (eds), Preventing Currency Crises in Emerging Markets (University of Chicago Press 2002) 393Google Scholar.
37 M Zainal Abidin, Malaysia's Economy: Crisis and Recovery in M Zainal Abidin and Z Haji Ahmad (eds), The Financial Crisis in Malaysia: The Economic and Political Consequences (Institute of South East Asian Studies 2001) 74.
38 Meesook et al. (n 33).
39 ibid.
40 ibid.
41 ibid; Buckley, RP, ‘The Role of Capital Controls in International Financial Crises’ (1999) 11 Bond Law Review 231Google Scholar.
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43 ibid 54.
44 ibid.
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47 Zainal Abidin (n 37) 1; C Reinhart and H Edison, ‘Capital Controls during Financial Crises: The Case of Malaysia and Thailand’ (2001) University of Maryland, Department of Economics MPRA Paper No 13903.
48 Quoted in Viczany, M et al. , ‘Australia's Business Attitudes to Malaysia’ in Nyland, C et al. (eds), Malaysian Business in the New Era (Edward Elgar 2003) 29Google Scholar.
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63 Navaratnam, RV, Malaysia's Economic Sustainability: Confronting New Challenges Amidst Global Realities (Pelanduk 2002)Google Scholar. In the IMF's review of Malaysia's policies between 1997 and 2000 the changing public sentiment towards these policies is noted: ‘Market assessment turned more positive, however, as it became clear that Malaysia's macroeconomic policies were not out of line, that the undervalued pegged exchange rate was contributing to the rapid recovery of exports and output, and that financial sector reforms were being vigorously pursued.’ See Meesook et al. (n 33) 3.
64 Meesook et al. (n 33) 71.
65 Abdelal, R and Alfaro, L, ‘Capital and Control: Lessons from Malaysia’ (2003) 46(4) Challenge 36Google Scholar.
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67 NE Magud, CM Reinhart and KS Rogoff, ‘Capital Controls: Myth and Reality – a Portfolio Balance Approach’ (National Bureau of Economic Research 2011). Greece introduced capital controls in 2015, including: limiting withdrawals to €60 per day and businesses transactions to €5,000 per day; banning cashing of cheques; and severely limiting transfers abroad. These measures were abolished in 2019.
68 FM Baldursson, R Portes and EE Thorlaksson, ‘Iceland's Capital Controls and the Resolution of Its Problematic Bank Legacy’ (2017) SSRN.
69 ‘Iceland Request for Stand-By Arrangement’ (IMF 2008) IMF Country Report No 08/362.
70 Baldursson, Portes and Thorlaksson (n 68).
71 ‘Iceland Request for Stand-By Arrangement’ (n 69).
72 The programme includes an appropriately tight monetary policy and continued restrictions on capital flows in the near term. See ibid.
73 In 2011, the Iceland Parliament approved amendments to the Foreign Exchange Act, the Customs Act and the Central Bank of Iceland Act and extended the authority to maintain capital controls beyond 2011, when the enabling legislation was set to expire. Act No 127/2011 Amending the Foreign Exchange Act, the Customs Act and the Act on the Central Bank of Iceland.
74 Baldursson, FM, ‘Iceland's Capital Controls’ in Aliber, RZ and Zoega, G (eds), The 2008 Global Financial Crisis in Retrospect (Springer International Publishing 2019)Google Scholar.
75 Rules on Foreign Exchange Iceland, No 1082 (28 November 2008), Central Bank of Iceland, art 1.
76 ibid, art 3.
77 ibid, arts 6, 8, 9.
78 ibid, art 4.
79 ibid, art 5.
80 IMF, ‘IMF Executive Board Approves US$2.1 Billion Stand-By Arrangement for Iceland’ (19 November 2008) Press Release No. 08/296.
81 Baldursson, Portes and Thorlaksson (n 68).
82 For instance, Pálmi Sigmarsson v Seðlabanki Íslands (Central Bank of Iceland) (Case E-3/11) [2011] OJ C 208.
83 Judgment of the Court of 14 December 2011 in Case E-3/11 [2012] OJ C 291/15.
84 See Lupo-Pasini, F, ‘The Rise of Nationalism in International Finance: The Perennial Lure of Populism in International Financial Relations’ (2019) 30 Duke Journal of Comparative & International Law 93Google Scholar.
85 Kamin, SB, ‘The Current International Financial Crisis: How Much Is New?’ (1999) 18 Journal of International Money and Finance 201CrossRefGoogle Scholar.
86 Yu, Y, The Management of Cross-Border Capital Flows and Macroeconomic Stability in China (TWN Global Economy Series 2009)Google Scholar.
87 X Wu 吴晓求, Annual Research Report on China's Capital Market China's Capital Markets: Liberalization and Internationalisation 中国资本市场研究报告: 中国资本市场开放与国际化 (Renmin University Press 2015). L Yin 林森殷 and J Wu 君吴, Capital Account Liberalisation and Financial Innovation of Shanghai Pilot Free Trade Zone 资本账户开放与上海自贸试验区金融创新研究(China Financial and Economic Publishing House 2014).
88 The circulation, use and mortgage of foreign currency in China were prohibited. Unauthorised sales or purchases of, and unlawful possession of foreign exchange are prohibited. There were also strict penalties for violation of foreign exchange control. See Provisional Regulations for Exchange Control of the People's Republic of China (中华人民共和国外汇管理条例 (失效) [1980] China State Council; and The Detailed Rules for the Implementation of Penalties for Violation of Foreign Exchange Control (违反外汇管理处罚施行细则) (1985) SAFE.
89 Provisional Regulations for Exchange Control of the People's Republic of China [expired] (中华人民共和国外汇管理暂行条例) [1980] China State Council.
90 M Deng 邓敏, L Gu 顾磊 (ed) 主编, Introduction to China's Foreign Trade 中国对外贸易概论 (Southwestern University of Finance and Economics Press 2018).
91 For example, they can retain foreign exchange in cash and need not sell their foreign exchange earnings from exports and providing services to the government. Business expenditure, after-tax profit, and other lawful earnings can be drawn from their cash account and transferred abroad. They can borrow loans from abroad without approval if it was necessary for their business operation. See Rules for The Implementation of Foreign Exchange Control Regulations Relating to Enterprises with Overseas Chinese Capital, Foreign-Capital Enterprises and Chinese-Foreign Equity Joint Ventures [expired] (对侨资企业、外资企业、中外合资经营企业外汇管理施行细则), No 141 [1983], SAFE. See also E Prasad and S-J Wei, ‘The Chinese Approach to Capital Inflows: Patterns and Possible Explanations’ (2005) IMF Working Paper No 05/79.
92 Regulations on Borrowing Overseas Commercial Loans by Resident Institutions [expired] (境内机构借用国际商业贷款管理办法) [1991], SAFE.
93 IMF, ‘People's Republic of China Accepts Article VIII Obligations’ (Press Release No 96/58, 4 December 1996).
94 Exporters and importers were required to provide documentation to prove the amount of foreign exchange received/paid was consistent with the value of the export and import contracts. See Interim Provisions concerning the Administration on the Checking Off of Import Exchange Payment [expired] (进口付汇核销管理暂行办法), [1994], SAFE; Detailed Rule for Implementation of Regulation on Management over the Verification of Export Collection of Foreign Exchange [Expired] (出口收汇核销管理办法实施细则, No 12 [1998], SAFE.
95 Official statistics and academic research both show significant capital flight during this period. See Gunter, FR, ‘Capital Flight from China: 1984–2001’ (2004) 15(1) China Economic Review 63CrossRefGoogle Scholar; Lin, GJ and Schramm, RM, ‘China's Foreign Exchange Policies since 1979: A Review of Developments and an Assessment’ (2003) 14(3) China Economic Review 246CrossRefGoogle Scholar.
96 Wang, HY, ‘The Asian Financial Crisis and Financial Reforms in China’ (1999) 12(4) The Pacific Review 537CrossRefGoogle Scholar.
97 The Interim Measures on the Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors [expired] (合格境外机构投资者境内证券投资管理暂行办法), Decree of the China Securities Regulatory Commission and the People's Bank of China No 12 [2002], CSRC and PBOC Measures for the Administration of Securities Investment within the Borders of China by Qualified Foreign Institutional Investors (合格境外机构投资者境内证券投资管理办法), Order No 36 [2006], CSRC, PBOC, SAFE.
98 The Interim Administrative Measures for Commercial Banks to Provide Overseas Financial Management Services (商业银行开办代客境外理财业务管理暂行办法) Notice No 121 [2006], PBOC, CBRC, and SAFE; The Interim Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (合格境内机构投资者境外证券投资管理试行办法) Order No.46 [2007], CSRC.
99 See Zhu, S, ‘Implementing China's WTO Commitments in Chinese Financial Services Law’ (2006) 6(2) China Review 3Google Scholar.
100 Yu (n 86).
101 Decision of the Ministry of Commerce on the Provisions on the Merger or Acquisition of Domestic Enterprises by Foreign Investors (关于境外投资者并购境内企业的规定), Order No.10 [2006] Ministry of Commerce.
102 Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies (境内居民通过境外特殊目的公司融资及返程投资外汇管理操作规程), Notice No.75 [2005] SAFE.
103 It should be noted that these specific measures have been revised or abolished in the recent reforms.
104 Yu (n 86).
105 Zhang, M, ‘China's Capital Control: Stylized Facts and Referential Lessons’ in Gallagher, KP, Griffith-Jones, S and Ocampo, J Antonio (eds), Regulating Global Capital Flows for Long-Run Development (Boston University 2012) 85Google Scholar.
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107 This trend is manifested in the revised Regulation on the Management of Foreign Exchanges and its corresponding detailed rules. See Regulation of the People's Republic of China on the Management of Foreign Exchanges (中华人民共和国外汇管理条例), No 532 [2008], State Council.
108 Chan, S, ‘Assessing China's Recent Capital Outflows: Policy Challenges and Implications’ (2017) 5 China Finance and Economic Review 3CrossRefGoogle Scholar.
109 Specific measures include: limitations on residual's foreign exchange, quota limitations and administrative approvals for outflowing portfolio investment, enhanced supervision and verification of outward direct investment and outbound loans, quantitative restriction on overseas lending, and macro-prudential measures that affect capital flows such as unremunerated reserve requirements.
110 The extent of real estate purchases in certain foreign countries, such as Australia and Canada, by Chinese citizens shows the porosity of these measures. Q&A on Foreign Exchange of Insurance Business (外汇保险业务常见问题答疑) (1 July 2019) SAFE.
111 RQDII that allows qualified domestic investors to buy yuan-denominated assets in overseas capital markets was introduced in November 2014. It was suspended in late 2015 along with several other outbound schemes due to fears of capital flight and worries of rapid yuan depreciation. See Notice by the General Administration Department of the People's Bank of China of Further Clarifying Matters concerning the Administration of the Overseas Securities Investment by RMB Qualified Domestic Institutional Investor (中国人民银行办公厅关于进一步明确人民币合格境内机构投资者境外证券投资管理有关事项的通知) No 81 [2018], General Administration Department of the PBOC.
112 Notice by the People's Bank of China Concerning Further Clarification of Outbound Lending by Domestic Enterprises (中国人民银行关于进一步明确境内企业人民币境外放款业务有关事项的通知) No 306 [2016] PBOC.
113 The reserve requirement was initially imposed only on residents but was extended to non-residents in 2016. It was reduced to zero per cent in September 2017 and was raised to 20 per cent again in August 2018. See Notice of Adjustment of Foreign Exchange Risk Reserves Policy (关于调整外汇风险准备金政策的通知) No 190 [2018], PBOC.
114 This reserve requirement was reduced to zero per cent in 2014 and in 2016 a standard reserve requirement was imposed.
115 Notice on Further Promoting the Convenience of Cross-border Trade and Investment (国家外汇管理局关于进一步促进跨境贸易投资便利化的通知) No 28 [2019], SAFE.
116 SAFE, ‘Abolish Restrictions on the Investment Quota of Qualified Foreign Investors (QFII/ RQFII) and Further Expand the Opening up of Financial Markets Rules and Regulations Interpretation’ (Release, 10 September 2019).
117 Notice of the State Administration of Foreign Exchange on Issues concerning Strengthening the Administration of Foreign Exchange Capital Inflows (国家外汇管理局关于加强外汇资金流入管理有关问题的通知) No 20 [2013], SAFE.
118 Yu (n 86).
119 Prasad and Wei (n 91).
120 Ariyoshi et al. (n 17) 63.
121 Wu (n 87).
122 JD Ostry et al., ‘Capital Inflows: The Role of Controls’ (Staff Position Note SPN/10/04, IMF, 19 February 2010); JD Ostry et al., ‘Managing Capital Inflows; What Tools to Use?’ (Staff Discussion Note SDN/11/06, IMF, 5 April 2011); Ostry, JD et al. , ‘Tools for Managing Financial-Stability Risks from Capital Inflows’ (2012) 88(2) Journal of International Economics 407CrossRefGoogle Scholar. The IMF also stated its view on capital controls in its Communiqué that ‘when dealing with macroeconomic and financial stability risks arising from large and volatile capital flows, the necessary macroeconomic policy adjustment could be supported by prudential measures and, as appropriate, capital flow management measures’. See IMF, ‘Communiqué of the Thirtieth Meeting of the International Monetary and Financial Committee, Chaired by Mr. Tharman Shanmugaratnam, Deputy Prime Minister of Singapore and Minister for Finance’ (Press Release No 14/466, 2014).
123 KP Gallagher, S Anderson and A Viterbo, ‘Capital Flow Management and the Trans-Pacific Partnership Agreement’ (G-24 Policy Brief No 79, October 2013).
124 ‘The 2007 Decision on Bilateral Surveillance over Members’ Policies’ (IMF, 28 July 2017).
125 Articles of Agreement of the International Monetary Fund, 2 UNTS 40 (signed and entered into force 27 December 1945) (IMF Articles of Agreement) art VIII section 2(a).
126 IMF Articles of Agreement art VIX section 2. Some Chinese measures, such as the enhanced dual verification process for import payments were imposed with an aim to detect suspicious and disguised capital transactions under the current account, after China accepted the obligations of Article VIII. See SAFE (n 91). As many legitimate current transactions on cross-border goods and services have been adversely affected by this enhanced verification, these measures are perhaps not in line with China's commitment to the obligations of Article VIII. Wu (n 87).
127 ibid, art XXX(d).
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129 ibid, citing International Monetary Fund, The Fund's Role Regarding Cross-Border Capital Flows, Prepared by the Strategy, Policy, and Review Department and the Legal Department, in consultation with other Departments 25 (15 November 2010) 18.
130 ibid 216.
131 See Martin and Mercurio (n 128)
132 That being said, the IMF Balance of Payments Manual still distinguishes between current and capital transfers. See IMF, Balance of Payments Manual (IMF 2008).
133 Fund documents confirm the strategy and shift. See eg International Monetary Fund, Article IV of the Fund's Articles of Agreement: An Overview of the Legal Framework, Prepared by the Legal Department in consultation with the Policy Development and Review Department (28 June 2006). For detailed analysis, see Martin, AP and Mercurio, B, ‘The IMF Mandate on Capital Controls: Legal Analysis of the Article IV Byroad and the Institutional View of 2012’ (2017) 34 Arizona Journal of International and Comparative Law 529–56Google Scholar.
134 Siegel, D, ‘Capital Account Restrictions, Trade Agreements, and the IMF’ in Gallagher, KP (ed), Capital Account Regulations and the Trading System: A Compatibility Review (Report, Pardee Centre, March 2013) 67Google Scholar.
135 IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (Report, October 2012).
136 ‘The 2007 Decision on Bilateral Surveillance over Members’ Policies’ (n 124); IMF, ‘IMF Executive Board Adopts New Decision on Bilateral Surveillance Over Members’ Policies’ (Public Information Notice No 07/69, 21 June 2007).
137 IMF, ‘Modernizing the Legal Framework for Surveillance – An Integrated Surveillance Decision’ (Revised Proposed Decisions, 17 July 2012).
138 For extended commentary, see Martin and Mercurio (n 133); Martin and Mercurio (n 128).
139 IMF (n 11).
140 See Broos, M and Grund, S, ‘The IMF's Jurisdiction Over the Capital Account—Reviewing the Role of Surveillance in Managing Cross-Border Capital Flows’ (2018) 21 Journal of International Economic Law 489CrossRefGoogle Scholar.
141 Martin and Mercurio (n 128) 223–34.
142 ibid.
143 Tamirisa, NT, ‘Exchange and Capital Controls as Barriers to Trade’ (1999) 46(1) IMF Staff Papers 69Google Scholar.
144 Bonnitcha, J, Poulsen, LN Skovgaard and Waibel, M, The Political Economy of the Investment Treaty Regime (Oxford University Press 2017) 4Google Scholar.
145 Marrakesh Agreement Establishing the World Trade Organization (opened for signature 15 April 1994, entered into force 1 January 1995) 1867 UNTS 3 annex 1B (‘General Agreement on Trade in Services’) (‘GATS’) art XI.
146 Article XI:2 provides that ‘nothing in this Agreement shall affect the rights and obligations of the members of the IMF under the Articles of Agreement of the Fund, including the use of exchange actions which are conformity with the Articles of the Agreement’.
147 GATS fn 8.
148 Pasini, FL, ‘Movement of Capital and Trade in Services: Distinguishing Myth from Reality Regarding the GATS and the Liberalization of the Capital Account’ (2012) 15(2) Journal of International Economic Law 581, 594Google Scholar. It could be argued, however, that capital movement is not an essential part of the service since the bank could raise capital in the host country. See De Meester, Bert, ‘Liberalization of Financial Flows and Trade in Financial Services under the GATS’ (2012) 46(3) JWT 733, 774Google Scholar.
149 See sections IA and IB above.
150 Rajan (n 16). See section I above.
151 Chile's schedule of specific commitment (1994) GATS/SC/18.
152 See Pasini (n 148) 598–9.
153 ibid.
154 Gari, G, ‘GATS Disciplines on Capital Transfers and Short-Term Capital Inflows: Time for Change?’ (2014) 17 Journal of International Economic Law 399CrossRefGoogle Scholar.
155 GATS art XVII:1.
156 GATS art XI:2 provides that a Member shall not impose restrictions on any capital transactions inconsistent with its specific commitment … except … at the request of the Fund. Article VI:1 of the IMF Articles of Agreement authorises the Fund to request a Member to exercise controls on capital transfers to prevent the use of the Fund's general resources to meet large or sustained outflows of capital. The request from IMF shall prevail over the GATS obligations.
157 GATS art XII allows Members to impose restrictions on capital flows inconsistent with their specific commitments for balance of payments purposes.
158 GATS prudential carve-out under art 2(a) of the Annex on Financial Services (‘FSA’).
159 Gari (n 154).
160 WTO Appellate Body, Argentina–Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items (Report AB-1998-1, 27 March 1998) paras [69]–[74].
161 Viterbo, A, ‘How to Make the GATS a Code of Conduct for Capital Controls’ in Gallagher, KP (ed), Capital Account Regulations and the Trading System: A Compatibility Review (Report, Pardee Centre, March 2013) 13Google Scholar.
162 IMF's view on this was inconsistent over time. See WTO Secretariat, ‘Exceptions and Balance-of-Payments Safeguards’ (Working Note WT/WGTI/W/137, 26 August 2002).
163 GATS art XII:2.
164 For instance, the IMF has stated that measures should not discriminate between residents and non-residents, and the least discriminatory measure that is effective should be preferred. However, failure to discriminate between residents and non-residents would render the policy ineffective. See Meesook et al. (n 33).
165 Gallagher, Anderson and Viterbo (n 123).
166 Panel Report, Argentina–Measures Relating to Trade in Goods and Services, WT/DS453/R, 30 September 2015, Annex B-31 para. 2.
167 ibid paras 3.1–3.3.
168 ibid para 7.821.
169 See ibid paras 7.864–7.945.
170 ibid para 7.861. See also the Appellate Body Report, at paras 6.244–6.255, 6.272.
171 ibid. ‘[T]he exception makes it possible to exempt or exonerate any measure affecting the supply of financial services that has been taken “for prudential reasons”.’
172 ibid para 7.868. This position is at odds with that of investment tribunals. For discussion, see Martin, A and Mercurio, B, ‘Towards Convergence of Trade and Investment Law? A Right to Prudential Measures for the Preservation of Financial Stability’ (2018) 51(3) The International Lawyer 553, 570–9Google Scholar.
173 ibid para 7.869.
174 ibid para 7.848.
175 ibid 7.870 (citing United States–Gambling para 6.461; European Communities–Asbestos para 168; Korea–Frozen Beef para 176).
176 ibid para 7.871.
177 ibid para 7.871.
178 ibid para 7.890 (‘an “imminent” danger may give rise to long-lasting measures to avoid the recurrence of similar situations in the future’. . . ‘they may be urgent measures to confront an imminent risk, temporary or provisional measures, or even permanent (or long-lasting) measures, which might be taken even in the absence of an imminent risk that would prevent fulfilment of one of the motives or reasons mentioned in that paragraph’. It is therefore, ‘the nature of the situation that threatens a particular prudential objective that will dictate the nature of the measure’).
179 ibid.
180 See further, Martin and Mercurio (n 172) 570.
181 M-F Houde, A Kolse-Patil and S Miroudot, The Interaction Between Investment and Services Chapters in Selected Regional Trade Agreements (OECD Trade Policy Papers No 55, 19 June 2007).
182 Financial Support Guideline for Greater Bay Area (2020) PBOC, CBIR, CSRC and SAFE.
183 SAFE (n 107).
184 Free Trade Agreement Between the People's Republic of China and the Republic of Singapore, (signed 23 October 2008, entered into force 1 January 2009) annex 5 Part A (China's Schedule of Specific Commitments on Services) (‘China–Singapore FTA’); Free Trade Agreement Between the People's Republic of China and the Government of the Republic of South Korea, (signed 1 June 2015, entered into force 20 December 2015) annex 8-A-2 (China Schedule of Specific Commitments) (‘China–Korea FTA’).
185 Agreement on Trade in Services of the Framework Agreement on Comprehensive Economic Co-operation between the Association of Southeast Asian Nations and the People's Republic of China (signed and entered into force 14 January 2007).
186 Protocol to Implement the Second Package of Specific Commitments under the Agreement on Trade in Services of the Framework Agreement on Comprehensive Economic Co-operation Between the Association of Southeast Asian Nations and The People's Republic of China (signed and entered into force 16 November 2011) (‘ASEAN–China Agreement on Trade in Services’).
187 China–Korea FTA (n 184) annex 8-A-2.
188 China–Singapore FTA (n 184) annex 5A.
189 China–Korea FTA (n 184) annex 12 C: ‘Nothing in this Chapter, Chapter 8 (Trade in Service) or Chapter 9 (Financial Services) shall be construed to prevent a Party from adopting or maintaining temporary safeguard measures with regard to payments and capital movements
(a) In the event of serious balance of payments or external financial difficulties or threat thereof; or
(b) Where, in exceptional circumstances, payments and capital movements cause or threaten to cause serious difficulties for the operation of monetary policy or exchange rate policy in either party ….
Nothing in this Chapter, Chapter 8 or Chapter 9 shall be regarded to affect the rights enjoyed and obligations undertaken by a Party as a party to the Articles of the Agreement of the IMF.’
190 China–Korea FTA (n 184) art 9.5 Prudential Carve-out: Notwithstanding any provisions of this Chapter or Chapter 12 (Investment), a party shall not be prevented from adopting or maintaining measures for prudential reasons ….
191 China–Singapore FTA (n 184) art 72; ASEAN–China Agreement on Trade in Services (n 186) art 10.
192 China–Singapore FTA (n 184) art 72 contains restrictions to safeguard BOP and at the request of the IMF.
193 ASEAN–China Agreement on Trade in Services (n 186) art 10.2, 11 provide exceptions in serious balance of payments and external financial difficulties or at the request of the IMF.
194 UNCTAD, ‘International Investment Agreements Navigator’ (Investment Policy Hub 2020).
195 This is the language of the US Model BIT. Typical example of similar treaty language includes, for instance, The Agreement Between China and Korea on the Promotion and Protection of Investment, (signed 7 September 2007, entered into force 1 December 2007) art 6 provides that ‘each Contracting Party shall ensure that all payments relating to an investment in its territory of an investor of the other Contracting Party may be freely transferred into and out of its territory without delay …’.
196 Kolo, A, ‘Transfer of Funds: The Interaction Between the IMF Articles of Agreement and Modern Investment Treaties: A Comparative Perspective’ in Schill, SW (ed), International Investment Law and Comparative Public Law (Oxford University Press 2010)Google Scholar.
197 Juillard, P, ‘Freedom of Establishment, Freedom of Capital Movements, and Freedom of Investment’ (2000) 15(2) ICSID Review 322CrossRefGoogle Scholar.
198 Unpublished, on file with author. Monetary policy exceptions calculated as in line with IMF policy and financial distress exceptions including BOP, financial stability or prudential carve-outs.
199 The 1987 ASEAN Agreement for the Promotion and Protection of Investments (signed 15 December 1987, entered into force 2 August 1988) (‘the 1987 ASEAN Investment Agreement’).
200 ibid art VII (Repatriation of Capital and Earnings).
201 Similar free transfer clauses appeared in the BIT between the Belgo-Luxemburg Economic Union and Malaysia signed in 1979. Malaysia was sued by the Belgian investor for losses caused by control measures contrary to the commitment in the BIT. The case was dismissed on jurisdictional grounds, that the investment was not an approved investment and thus outside the scope of the BIT. Under art 1(3), a covered investment made in Malaysia had to be invested in a project classified as an ‘approved project’ by the appropriate ministry in Malaysia. See Philippe Gruslin v Malaysia ICSID (2000), Case No AB/99/3. The 1987 ASEAN Investment Agreement covers a broader scope of investment than the Belgo–Luxemburg and Malaysia BIT. It covers investment approved in writing and registered by the host country. Therefore, if investors had challenged Malaysia for breaching its obligation under the ASEAN Investment Agreement, they would likely have succeeded.
202 The Framework Agreement on the ASEAN Investment Area (signed 8 October 1998) art 2, annotation 1 (‘AIA Agreement’).
203 Viterbo, A, International Economic Law and Monetary Measures: Limitations to States’ Sovereignty and Dispute Settlement (Edward Elgar 2012) 243CrossRefGoogle Scholar.
204 S Ulvund Solstad, ‘Introduction to the ASEAN Comprehensive Investment Agreement’ (ASEAN Business News, 12 April 2013).
205 The ASEAN Comprehensive Investment Agreement (signed 26 February 2009, entered into force 24 February 2012) art 13.
206 ibid arts 13.4, 16.
207 EEA Agreement, art 43, para 2.
208 Request for an Advisory Opinion from the EFTA Court by Héraðsdómur Reykjavíkur received 14 February 2011 in the case of Pálmi Sigmarsson v Seðlabanki Íslands, E-3/11.
209 OECD, Definition of Investor and Investment in International Investment Agreements (OECD 2008) 7.
210 IMF, ‘Policy Tracker’ (Policy Responses to COVID-19, 17 April 2020).
