This guide addresses the incongruence in the need for capital flow measures (“CFMs”) as perceived by the IMF and their permissibility under international investment agreements (“IIAs”) and the WTO regime. CFMs would be essential to contain the effects of volatile capital flows – episodes of which may well be imminent as countries retract unconventional monetary policies and withdraw excess capital, making such analysis relevant.
In analysing the degree the permissibility of CFMs, this study focusses on the provisions of the US Model BIT, 2012 and the WTO GATS Agreement. With regard to the latter, this study finds that the GATS Agreement (pertaining to the capital account in exclusion to the GATT) allows for significant flexibilities with mandatory reference to the statistical analysis of the IMF. Separate from such flexibilities, the GATS also permits prudential measures with respect to financial services. However, the width of such ‘prudential carve-out’ and the degree to which it would draw from/be influenced by IMF prescriptions remains unclear.
With respect to the US Model BIT, 2012 (“2012 BIT”) this study finds that although a specific reference to the IMF remain lacking, there exist flexibilities permitting CFMs in limited circumstances. Specifically with respect to financial services, the 2012 BIT allows for a ‘prudential carve-out’, matching the GATS provision verbatim, and also a modified dispute resolution procedure as an additional safeguard.
In addition, the 2012 BIT specifically curtails the guarantee of free transfers by giving precedence to host state laws relating to, inter alia, securities, futures, options and derivatives. Separately, the 2012 BIT also contains a ‘self-judging’ essential security exception which would permit a broad range of CFMs if invoked in an economic crisis.
However, the above flexibilities under the 2012 BIT may not operate ideally owing to interpretive knots in currently prevailing jurisprudence further compounded by the conspicuous lack of precision on the need and timing for CFMs in a given economy.
Even so, the 2012 BIT is not as restrictive qua CFMs as certain other IIAs. Indeed, the only evident restriction on CFMs under the 2012 BIT is with respect to prudential/preventive CFMs impacting sectors other than financial services (which restriction is arguably similar in scope to that under the WTO regime).