The IMF’s New Transfers Policy and the Trading System

In late 2012, the International Monetary Fund (IMF) officially endorsed an “institutional view” on the management of capital flows. Though the IMF will continue to urge nations to eventually liberalize all capital transfers, henceforth the IMF will advise nations, under certain circumstances, to deploy capital controls on inflows and outflows of capital.  In its new view the IMF pointed out that such advice may conflict with obligations that nations have under trade and investment treaties, and offered to provide a forum for reconciliation.  This short note provides an overview of the new IMF view, pinpoints how it may conflict with country obligations under trade and investment treaties, and discusses remedies for reform.

What the IMF decided

On December 3, 2012 the IMF made public an Executive-Board approved “institutional view” on capital account liberalization and the management of capital flows. In a nutshell, the IMF’s new ‘institutional view” is that nations should eventually and sequentially open their capital accounts (IMF, 2012b).  This is indeed in contrast with its view in the 1990s that all nations should be uniformly required to open their capital accounts regardless of the strength of a nation’s institutions.  The IMF now recognizes that capital flows also bring risk, particularly in the form of capital inflow surges and sudden stops that can cause a great deal of financial instability.  Under such conditions, and under a narrow set of circumstances, according to the new ‘institutional view’ the IMF may recommend the use of capital controls to prevent or mitigate such instability in official country consultations or Article IV reports.  In other words, the IMF now sanctions staff and management to recommend the use of capital controls to nations under certain circumstances. And under a very narrow set of circumstances a nation may receive recommendations to discriminate capital flows based on residency.

IMF view and trade and investment treaties

The IMF is aware of the fact that they may recommend capital controls to nations that do not have the policy space to deploy such instruments because they would be deemed actionable under a trade agreement or investment treaty.  In the final report the IMF states:

“As noted, the Fund’s proposed institutional view would not (and legally could not) alter members’ rights and obligations under other international agreements. Rather, conformity with obligations under other agreements would continue to be determined solely by the existing provisions of those agreements. Thus, for example, even where the proposed Fund institutional view recognizes the use of inflow or outflow CFMs as an appropriate policy response, these measures could still violate a member‘s obligations under other international agreements if those agreements do not have temporary safeguard provisions compatible with the Fund‘s approach (IMF, 2012b, 42).”

This echoes what the IMF stated in a board report earlier this year:

“The limited flexibility afforded by some bilateral and regional agreements in respect to liberalization obligations may create challenges for the management of capital flows. These challenges should be weighed against the agreements’ potential benefits. In particular, such agreements could be a step toward broader liberalization. However, these agreements in many cases do not provide appropriate safeguards or proper sequencing of liberalization, and could thus benefit from reform to include these protections (IMF 2012a, 8).”

Indeed, the IMF suggests that the new IMF institutional view could help guide future trade treaties and that the IMF could serve as a forum for such discussions.

“In particular, the proposed institutional view could help foster a more consistent approach to the design of policy space for CFMs under bilateral and regional agreements. Recognizing the macroeconomic, IMS, and global stability goals that underpin the institutional view, members drafting such agreements in the future, as well as the various international bodies that promote these agreements, could take into account this view in designing the circumstances under which both inflows and outflows CFMs may be imposed within the scope of their agreements. Similarly—and depending on the stages of development of the relevant signatories—the sequenced approach to liberalization under the integrated approach could be taken into account to guide the pace and sequencing of liberalization obligations, and the re-imposition of CFMs due to institutional considerations (IMF, 2012b, 33).”

Which nations will be the most affected?

At a symbolic workshop in Argentina during the summer of 2012 (Argentina has been subjected to numerous investor-state cases for measures it took to mitigate its 2001 crisis), economists, policymakers, legal scholars and members of civil society met to conduct a “compatibility review” regarding the extent to which nations have the flexibility to regulate cross-border finance under global trade and investment rules (Gallagher and Stanley, 2013).

The review found numerous incompatibilities between trade rules and efforts to regulate cross-border finance.  The group saw regional and bilateral deals are far more incompatible with the ability to regulate cross-border finance than is the World Trade Organization (WTO) regime.

But there are still a number of concerns about the WTO. Under the WTO’s General Agreement on Trade in Services (GATS) and under United States’ trade and investment treaties nations must to some degree liberalize their capital account.  Nations must partially do so in order to allow trade in financial services under their GATS commitments (though many countries have not made commitments for financial services) and absolutely allow all transfers of investments to occur ‘freely and without delay” in US treaties.  So for each case the use of capital controls would be actionable.  The question is whether these treaties have ample safeguards for the prudential use of capital controls.

The GATS has both “prudential carve-out” and a “balance of payments safeguard,” but there is real concern that the conditions under which nations can evoke such safeguards are overly narrow. Scholars and policymakers point to the language in these safeguards that say nations must take measures in the event of “serious balance-of-payments and external financial difficulties or threat thereof” as only pertaining to controls on outflows in the middle of a crisis and not on the measures on inflows that the IMF prefers (Hagan, 2000; Viterbo, 2012).  Others express concern that prudential measures must be temporary and that they may have to undergo a “necessity test” by the WTO to see if an alternative measure should have been used.

These concerns have implications well beyond the WTO, as WTO language becomes the foundation for numerous regional and bilateral trade and investment treaties that go even deeper than the WTO. The Trans-Pacific Partnership (TPP) under negotiation between the US and numerous Pacific Rim nations, as currently proposed, would mandate that all forms of cross-border finance be allowed to flow “freely and without delay.”

The draft treaty (like most US treaties) has language similar to the WTO’s prudential carve-out but makes the circumstances under which it can be evoked even more limiting—and there is no balance of payment safeguard whatsoever (Anderson, 2011). Moreover, the TPP would allow private investors to directly file claims against governments that regulate them, as opposed to a WTO-like system where nation states (i.e., the regulators) decide whether claims are brought. Therefore, under investor-state dispute settlement those sectors that may bear the cost have the power to externalise the costs of financial instability to the broader public while profiting from awards in private tribunals.

Toward a reconciliation of financial regulation and the trading system

The IMF view recommends that the Fund collaborate with other international organizations to coordinate positions on capital flows.  The Task Force mentioned earlier discussed four ways that the inconsistencies between capital account regulations and trade and investment treaties could be reconciled:

Refrain from taking on new commitments in regimes incompatible with the ability to deploy capital account regulations (CARs).  Nations could refrain from making Mode 1 and Mode 3 commitments under GATS altogether, and refrain from signing FTAs and BITs without proper safeguards and dispute settlement.

Adopt ‘interpretations’ of existing treaty language.  Both the WTO and FTAs-BITs allow for ‘interpretive notes’ or amendments that could clarify or change existing language in current treaties.

Amend existing treaties to reconcile current incompatibilities.  Another route to reform would be formal amendments to existing treaties. Amendments to the GATS can be submitted to the Ministerial Conference by a member or by the Council for Trade in Services, and be adopted by consensus or with a two-thirds majority vote.  For an amendment to enter into force it has to be ratified by two-thirds of WTO members.

Design new rules for future treaties.  Treaties currently under negotiation or those that may occur in the future could be designed to have a narrower definition of investment, negative list negotiations, adequate balance of payment and prudential carve out exceptions, special and differentiated treatment, and dispute settlement procedures that exhaust domestic remedies and have state-to-state dispute settlement in consultation with macroeconomic and monetary authorities and experts.

The current negotiations for a Trans-Pacific Partnership are an opportunity for reform.  Indeed, emerging market negotiators have proposed language to that would broaden the policy space for the use of capital account regulations within the treaty.  Ironically, the US remains officially opposed to such proposal, even though the US approved the institutional view on capital flows at the IMF.

Author: Kevin Gallagher is Associate Professor, Department of International Relations, at Boston University.


Anderson, Sarah (2011) Capital Controls and the Trans-Pacific Partnership, Washington, Institute for Policy Studies.

Gallagher, Kevin P. and Leonardo Stanley (2012), “Global Financial Reform and Trade Rules: The Need for Reconciliation,” Boston University, Pardee Task Force on Regulating Capital Flows.

Gallagher, Kevin P. and Leonardo Stanley (2013), Capital Account Regulations and the Trading System: A Compatibility Review, Boston University, Pardee Task Force on Regulating Capital Flows.

Hagan, Sean (2000), Transfer of Funds, Geneva, United Nations Conference on Trade and Development.

International Monetary Fund (2012a), Liberalizing Capital Flows and Managing Outflows, Washington, IMF.

International Monetary Fund (2012b), The Liberalization and Management of Capital Flows: An Institutional View, Washington, IMF.

Viterbo, Anna Maria (2012). International Economic Law And Monetary Measures, Limitations to States’ Sovereignty and Dispute Settlement, London: Edward Elgar.