Quantifying the policy space for regulating capital flows in trade and investment treaties

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The Intergovernmental Group of Twenty-Four | April 2019

Quantifying the policy space for regulating capital flows in trade and investment treaties

by Kevin P. Gallagher, Sarah Sklar, Rachel Thrasher


The International Monetary Fund as well as many in the academic community have
identified that some trade and investment treaties restrict the ability of nation states to regulate volatile capital flows in order to prevent and mitigate financial instability. This paper summarizes that literature and then quantifies the variation across over 200 trade and investment treaties with respect to their level of policy space for capital flow management measures (CFMs). With these data we measure the level of stringency of a particular treaty by creating a composite score and then examine the collective level of policy space across the global treaty system. Our findings are as follows:

• In terms of the total number of treaties, we find that the majority of trade and investment
treaties leave significant policy space for regulating cross border finance in the world
economy. South-South treaties tend to have the most policy space, whereas North-South
and North-North treaties have less.

• When weighted by the level of trade and foreign investment however, we find that those
treaties with the least amount of policy space for CFMs represent 68 percent of world
GDP and 76 percent of global capital flows. What is more, it appears that the global trend
is toward treaties without the policy space for appropriate regulation.

• Our findings may be underestimates given the consistent practice of international
tribunals allowing more stringent treaty terms to be imported into more flexible treaties
through ‘most-favored-nation’ clauses.

From a policy perspective we have identified a major inconsistency across the global
economic governance system. Whereas the IMF board, the G20, and the Bank of International Settlements have all reiterated the need for policy space to regulate capital flows within the space provided under the IMF Articles of Agreement, the international trade and investment system is increasingly taking away that policy space (IMF, 2012b; G20 2011; BIS, 2009). The world economy lacks a global body to address inconsistencies across global treaty regimes. Whereas the IMF has recommended that new treaties have the proper policy space, even if such a recommendation was carried out, the world economy would still have hundreds of treaties (not including thousands of bilateral investment treaties) that do not permit trade and investment treaties. These inconsistencies should be addressed at the IMF, G20, in the United Nations
system, and in the trade and investment regime itself.

Read the study (pdf)