The Conundrum of Shifting Orthodoxies: FTAs and Korea's Currency Controls

Abstract

The financial services regime, comprising the General Agreement on Trade in Services and bilateral free trade and investment agreements, reflects the ‘orthodoxy’ of highly liberalized and lightly regulated financial markets that has supported the ascendancy of financialization. That orthodoxy has fractured as the post-2007 global financial crisis exposed systemic instability in the financialization model and the failings of the associated regulatory regime. Yet, binding and enforceable financial services and investment agreements tie governments to that regime. Although international institutions and commentators increasingly advocate alternative strategies, such as the imposition of currency controls, governments that adopt them risk legal challenges for breaching their trade obligations. This risk is illustrated by assessing South Korea’s capital controls of June 2010 against the market access, national treatment and transfers obligations, investment protections and prudential exceptions in Korea’s free trade agreements with the USA and the European Union. To date, states whose firms dominate global finance have resisted high-profile calls within and outside the World Trade Organization to revisit the financial services regime. If they maintain that position, these embryonic tensions seem likely to intensify. Placing unacceptable constraints on national governments could propel the trade in financial services regime towards a crisis of legitimacy.