The Wall Street Journal (9/10, "US Trade Talks with Singapore. Chile Hit Impasse" by Neil King Jr.):

"Trade talks with Singapore and Chile are hung over a vexing question about the rules that govern the global economy: Should countries seeking free-trade deals with the US be forced to lift all controls over the flow of foreign money across their borders? The US treasury says they should. But Singapore and Chile, both generally regarded as market-economy success stories, object. The impasse imperils two agreements at the top of President Bush’s trade agenda and is causing a rift between the Treasury and US Trade Representative Robert Zoellick, who was unable to close a deal with Singapore because of these differences.

"‘This is puzzling, given that the US has been severely criticized for being too doctrinaire on the question of capital controls,’ says Edwin Truman, a former top international-economics official of the Federal Reserve and the Clinton Treasury."

With the cold fingers of deflation tightening on the throats of both the East Asian and Latin American economies, the question is asked why their countries should be denied the means that in its day were used by the United States itself to become master of its own destiny. Under Roosevelt – to combat deflation – Washington not only dropped the exchange value of its dollar to defend its exports and discourage imports, but made it compulsory for its citizens to surrender any monetized gold to the Treasury. Given the deepening gloom pervading the US economy, and Wall St.’s desperate need for "big deals," the growing trouble of US trade negotiators merely reflects a deepening cleft between speculative finance and the industrial sector at home.

"In the US, the tussle pits the interests of big banks and investment houses, which oppose all controls, against US manufacturers and other exporters, [and] are keen to see the trade deals signed and approved by Congress. To try to allay mounting concerns, Treasury’s undersecretary for international affairs, John Taylor, met with nearly 20 business leaders last week to explain why the US was holding fast to its position. ‘Reaction ran from strong support to consternation,’ said one industry participant.

"The difficulties come as US trade negotiators huddle in Washington for the final week of trade talks with Chile after years of sporadic negotiations. Top Chilean officials say that capital controls have emerged as the biggest hurdle.

"Both Chile and Singapore have used limited capital controls to protect their economies from instability that comes from big inflows of foreign money, particularly short-term loans or deposits, that can flee rapidly in a panic. For years, Singapore required foreign financial institutions to seek government permission before borrowing Singapore dollars. The rule prevented investors from borrowing money to speculate in currency markets as happened elsewhere in Asia."

But that is what helped fuel the Wall St. boom. Once the noose of foreign-currency-denominated debt was fastened on a country, it was at the mercy of the American financial conglomerates. It enabled them to dictate the slashing of social programs, the selling of domestic real estate and corporations for a song, and to enforce compulsory exports at whatever prices. That’s been a key factor in both the relative drop in perceived "inflation" within the US, and the disastrous deflation in both Latin America and East Asia. These countries are already under pressure from the massive export drives of China where wages are one tenth of those in Japan and one-fifth those of Singapore and other East Asian countries. However, the vulnerability of East Asia and Latin America translates into the possibility of massive bargain-basement buyouts and mergers that Wall St. is missing today. Washington’s aggressive stance on the removal of currency movements arises from its concern to solve Wall St.’s unemployment problem at the CEO level. It aims to do so at the expense of living standards in the emerging world.

"In Chile, the encaje system required companies bringing money into the country to deposit a portion of it in a non-interest-bearing account for a year, to discourage short-term borrowing from abroad. The levy topped 30% in 1998, but is now at zero. Economists say the system protected Chile during the financial turmoil of the late 1990s."

Our readers will note that the mechanism resembles strikingly a beefed-up version of the statutory reserves with which central banks were able to discourage inflationary booms until the early 1970s, without depending exclusively on raising short-term interest rates. Exchange volatility fueled by uncontrolled movements of speculative money across frontiers is the equivalent of shaking the dice in a casino.

"[Controls are] important for our own stability,’ says Ricardo Lagos, the son of Chile’s president and one of the country’s top trade negotiators. ‘We think we should keep various prudential measures in place, just in case, and the US doesn’t like it.’

"Treasury officials concede that the debate goes well beyond Singapore or Chile. ‘What’s important is that these are precedent-setting agreements for many agreements to come,’ said one Treasury official."

"Treasury’s Mr. Taylor insisted to the industry representatives he met last week that none of this is new. Demands that countries forgo capital controls, he noted, are already part of 45 US investment treaties with other countries as well as the 2001 free-trade deal with Jordan and the 1994 North American Free Trade Agreement with Mexico and Canada. But his critics point out that NAFTA permits at least some controls if a country faces a serious balance-of-payments crisis. With Chile and Singapore, Treasury wants to scrap that provision as well."

Quite understandably: since these earlier treaties were signed Wall St.’s unemployment problem at the CEO level has dramatically worsened, and by the nature of things, it is likely to receive more attention than that of ordinary jobless stiffs.

"Columbia University’s Jagdish Bhagwati says, ‘It is absurd after the Asian financial crisis and the 1994 [Mexican] crisis that the pressure is still relentless to open up and knock down every conceivable barrier on capital flows. These countries have good reasons to be cautionary.’"

US trade officials and many US companies say they have been surprised by how the capital-control issue has blown up out of nowhere. The Bush administration figured that both the Singapore and the Chile deals were in the bag weeks ago.

"The Chile agreement is about so much more than just Chile, a small economy whose trade with the US amounts to about $6.5 billion a year, counting both imports and exports. But a deal with Chile is seen widely as a step toward the US goal of having a free-trade bloc with every country in the Americas except Cuba by 2005."

On the other hand, securing the foreign exchange portal would empower countries to use their central banks in an emergency for domestic money creation to look after such needs as housing programs or food supply, while another department would control what foreign exchange was available to finance the acquisition items not available at home. What the Bush administration is doing is trying to prevent the world from drawing the necessary conclusions from the Argentine disaster. Having such a system in place would make it available for emergency use as the need arose. So long as foreign exchange was no great problem there would be few restrictions except in the case of short-term money. But since the world seems headed for deflation, the sudden stiffening of the US position is just a foretaste of the eye-gouging to protect Wall St.’s control of the world economy.

Since the above Wall Street Journal articles appeared, Washington has won its point with Chile and Singapore (WSJ, 16/01, p. 10). But such victories are doomed to be Pyrrhic. They merely store up a binful of crises throughout the world, to nurture Washington’s hope of reviving the Wall St. bubble. Nothing is more disastrous for society as a whole, than the efforts of those who profited from a failed system to tighten their hold.

— from Economic Reform, February 2003