International Capital And Investment

- Bill Rosenberg

This is a chapter of the book “No Ordinary Deal: Unmasking The Trans-Pacific Partnership Free Trade Agreement”, edited by Jane Kelsey. It is reproduced with permission from the publisher, Bridget Williams Books. It costs $39.99. To order it, contact the publisher at Jeremy Agar’s review of it was in Watchdog 125, December 2010, The book was published in 2010, so obviously Bill wrote this chapter some time ago. Please bear that in mind when reading it. Ed.

After decades of unfettered foreign investment in New Zealand, the tide has begun to turn. The prospect that overseas interests could become absentee landlords of large areas of New Zealand farmland has prompted a backlash against the hands-off approach to foreign investment that has prevailed since the mid-1980s.Wary of the political fallout, the National-led government repeatedly delayed the release of a review that was widely expected to weaken the already-feeble rules even further (and when it was finally announced, in September 2010, the review recommended precisely no change to the Act. It introduced two new measures to the Act’s accompanying Overseas Investment Regulations and they both apply exclusively to investments in sensitive land: a new “economic interests” factor allowing Ministers to consider whether NZ’s economic interests are adequately safeguarded and promoted; and a new “mitigating” factor enabling Ministers to consider whether an overseas investment provides opportunities for NZ oversight or involvement e.g. by appointing NZ directors or establishing a head office in NZ. Some media commentators have labelled these as giving Ministers “veto powers” over foreign investment in large tracts of farmland [actually, for as long as there has been an Overseas Investment Act - since 1973 - Ministers have always had veto powers over all aspects of foreign investment. What’s been lacking is any political will or courage to actually use them. But let’s not spoil a good story]. Ed.)

The timing is highly significant in terms of the Trans-Pacific Partnership Agreement (TPPA) negotiations. New Zealand and Australia removed most of their traditional barriers to trade, such as tariffs for goods and agriculture, a long time ago. They want the US to do the same for its highly protected agricultural sectors of dairy and sugar. Both countries will face enormous pressure to guarantee new and far-reaching rights to American businesses in other commercially lucrative areas, especially services and investment, with no guarantees that the US will open its sensitive agricultural markets in return. Conceding to those demands in the present climate could have major political ramifications. The Annual Reports from the US Trade Representative (USTR) on the purported barriers to its investors in New Zealand foreshadow US objectives in the TPPA negotiations.(1) New Zealand has already conceded some of these in various free trade agreements, but large and litigious US corporations present a much greater risk that the provisions will be used to New Zealand’s considerable disadvantage.

Minimalist Overseas Investment Act

One target will be the minimalist Overseas Investment Act (OIA). At the least, the US will demand the same liberal treatment for its investors in New Zealand as Australian investors enjoy, which means exempting most foreign investment from the vetting regime. New Zealand will be expected at least to match the threshold of $A800 million for vetting US investments that Australia agreed to in the Australia–US Free Trade Agreement (AUSFTA). The few special restrictions that apply to foreign holdings, specifically in Telecom New Zealand and Air New Zealand and to fisheries and land, will also come under attack.

US investors will also want the right to take the New Zealand government directly to an international tribunal to challenge new laws, administrative actions and court decisions that reflect New Zealand’s national interest, but that US corporations say undermine the commercial value of their investments. Even threats to initiate such legal actions can have a chilling effect on Government regulation. Their leverage over Government decisions may be further boosted by so-called “transparency” provisions that require governments to consult with affected overseas investors before making changes to administrative procedures, regulations or laws.

The US will also demand greater liberalisation of the financial services sector and associated free movement of capital into and out of New Zealand. This could prevent the introduction of measures like a financial transaction tax to stem speculative capital flows. But financial services and investment are also closely intertwined. Deeper liberalisation in financial services would guarantee investment rights to US financial giants with dubious histories, such as AIG or Citigroup, which could enforce those rights through investor–state dispute mechanisms. Such an agreement would further limit the tools available to governments to address systemic financial instability and manage international financial movements, at a time when the lessons of the global financial crisis show stronger rather than weaker regulation is required. This chapter examines the implications for New Zealand of a TPPA with particular reference to the overseas investment regime and constraints on the Government’s right to regulate investment, finance and capital flows.

Overseas Investment In New Zealand

Overseas investment is a very significant part of New Zealand’s economy. In recent years, New Zealand has accumulated one of the largest net international liabilities of the Organisation of Economic Cooperation and Development (OECD) countries in proportional terms. The debt is mostly private, not public. The income foreign investors receive from New Zealand is more than the contribution to New Zealand’s Gross Domestic Product (GDP) made by agriculture, forestry and fishing combined. It is obviously in the national interest to ensure that New Zealand is obtaining the greatest possible benefit from overseas investment, given the huge outflow of resources that investment generates.

Cross-border investment takes two principal forms: foreign direct investment (FDI) and financial movements. FDI has been the subject of explicit though weakening controls in New Zealand, Australia and elsewhere for many years. International financial movements, whether in the form of longer-term debt or short-term (often speculative) flows, bring challenges to both financial and macroeconomic stability. These have been highlighted by the global financial crisis. Short-term flows are particularly relevant in the case of New Zealand: the Bank for International Settlements (BIS) reported that, in 2007, New Zealand’s dollar was the 11th most traded currency in the world, accounting for 1.9% of average daily turnover in the global financial markets,(2) despite the country ranking around 50 to 60 by size of economy and producing about 0.2% of world output. The two forms of cross-border investment are not always distinct: private equity investment, for example, which was probably the predominant form of FDI during the 2000s and is a major investor in privatisations and public–private partnerships, is financially driven with high debt loadings and can involve rapid movement of capital.

Foreign Direct Investment

Foreign direct investment in New Zealand is regulated by the Overseas Investment Act 2005, which distinguishes three main forms of foreign investment for the purposes of regulation: land, fishing quota, and other foreign direct investment. There are relatively detailed requirements for ownership of certain types of land. The Act calls land that is subject to these requirements “sensitive land”. It encompasses non-urban land, land on islands other than the North or South Islands, the foreshore or seabed, the bed of a lake, conservation and park land, and land registered under the Historic Places Act. Overseas investors also require consent to acquire a 25% or more interest in fishing quota and other entitlements to catch fish, or in a company that has such interests.

The largest part of FDI by value is, however, business investment – such as ownership of banks, telecommunications, media, supermarkets, elderly care facilities and transport firms. Despite its significance in the economy, business FDI is subject to minimal control under the OIA, and there is no regulation at all if the value of an investment falls under a threshold. The threshold has been raised on several occasions over the years and now stands at $NZ100 million. Under a new Closer Economic Relations (CER) Investment Protocol, the threshold for Australian companies has risen to $NZ477 million. The result of this hands-off regime is that most business FDI is exempt from oversight.

The only criteria for approving business FDI under the Act are that the investors have business experience and acumen relevant to that investment, and have demonstrated financial commitment to the investment, and that all the individuals with control over the investment are of good character. The weakness of these provisions is obvious, and they appear to have rarely, if ever, been used to prevent an investment. The fact that an investor is making an investment can be used as evidence of both their relevant business experience and acumen and their financial commitment; the good character requirement is routinely satisfied by the individuals providing statutory declarations that they are of good character.

For land and fishing quota, there are more rigorous conditions. For sales of the fishing quota to foreign interests, the Fisheries Act 1996 (which the OIA refers to) specifies that the sale must be “in the national interest”. For foreign investment in land, the OIA requires that the sale “will, or is likely to, benefit New Zealand” and for non-urban land exceeding five hectares, the “benefit will be, or is likely to be, substantial and identifiable”. Factors for assessing the benefit to New Zealand include: job creation or retention of job opportunities; introduction of new technology or business skills into New Zealand; increased export receipts for New Zealand exporters; added competition, efficiency or productivity; enhanced services; and increased processing within the country of New Zealand’s primary products in the case of farmland, or fish or aquatic products in the case of fishing quota. Other provisions in the Act push investors into making commitments such as: pest control, erosion control or covenants over the land; protecting trout, salmon and game; improving walking access to the public; or offering foreshore, sea-, river- or lake-bed to the Crown. Farm land must be first offered on the open market to buyers who are not overseas investors before sale to an overseas investor can be approved. It is significant that, for foreign investment in both land and fishing quota, the OIA and Fisheries Act allow the relevant ministers to specify additional factors through regulations, and in the case of fishing quota, to take into account any other factors they think fit.(3)

Crafar Farms

Concerns about the regulation of overseas ownership of land are particularly topical with widespread concern in New Zealand following the offer by a company with Chinese shareholding for 16 (mainly dairy) farms owned by the Crafar family after it went into receivership. The substantive concerns were the strategic nature of land ownership for New Zealand, especially in dairying. Fonterra Chairman Henry van der Heyden, for example, expressed concern that “New Zealand’s economic future could, in fact, be in jeopardy if we allow our dairy industry to slip from our control”, and Prime Minister John Key warned that New Zealanders could “become tenants in our own country”.(4 )The controversy highlighted the inadequacy of the OIA to take a strategic view of such sales. Instead, it considers sales in a fragmented manner on their individual merits (in December 2010, the Overseas Investment Office took the very rare step of rejecting the application, on the grounds that the individuals involved with the Chinese company were not of good character. Other Chinese buyers have now applied to buy the Crafar farms. Ed.)

There were 1,629 decisions made by the Overseas Investment Commission and its successor the Overseas Investment Office from 2001 to 2009. Because of the high value threshold at which business investment requires approval and the weakness of the criteria for judging such investment, the vast majority of decisions since the OIA was reviewed and the current statute came into force in 2005 have involved land (1,561) and just one has involved fishing quota. There were only 44 refusals, all with regard to land acquisitions.(5) The most important recent refusal (i.e. before the Crafar farms refusal. Ed.) was that of the 2008 application by the Canada Pension Plan Investment Board to acquire up to 40% of the shares of Auckland International Airport Limited. This included 1,548 hectares of land. Ministers refused the application, finding that on balance there was not substantial and identifiable benefit.(6) It was crucial that there was sensitive land involved in this proposed investment, otherwise the Ministers would have had no power to consider the balance of benefits. This case is discussed further below.

In summary, the Overseas Investment Act is completely ineffectual with regard to most decisions on foreign investments that are economically important to New Zealand, unless there happens to be sensitive land involved and, as noted, there is growing public concern over its weaknesses regarding sensitive land. There is also considerable evidence that the OIA does not ensure that New Zealand is getting value for money for its high levels of inward foreign direct investment. A significant part of the foreign direct investment coming into New Zealand is of low quality.(7) A large proportion of FDI in the 1990s was privatisation, some of which has had to be reversed because of its problems to the wider economy, and some of which is still problematic. While there is little data to enable a clear picture to be drawn, a significant part of the more recent FDI has been takeovers in the form of leveraged buyouts for short-term capital gain through private equity financiers. They are typically investing for at most three to five years and have no interest or expertise in any particular industry or sector, as long as they can see opportunities for profit. Kerry McIntosh, the New Zealand representative of private equity investor Ironbridge, rejected concerns that the company had no media experience when it took over MediaWorks (the owner of free-to-air television channels TV3 and C4 [now rebranded as Four. Ed.] and one of New Zealand’s two largest commercial radio networks, RadioWorks), on the grounds that: “Ironbridge did not know much about waste either before buying EnviroWaste”, a major waste management company.(8) It is questionable whether New Zealand is seeing direct benefits, let alone indirect positive “spillovers” of new technology, skills, jobs and increased competition from such investment. Greenfield investment, considered by some experts to be more desirable than takeovers, is relatively rare: the United Nations Conference on Trade and Development (UNCTAD) estimates there were only 20 to 30 a year in New Zealand between 2004 and 2008.(9) There is therefore a very arguable case for much more selective policies to control FDI coming into New Zealand.

However, New Zealand’s foreign investment regime is locked in by existing trade and investment agreements. In 1994, New Zealand made commitments under the General Agreement on Trade in Services (GATS) in the World Trade Organisation (WTO). These commitments permit the continuation of the Overseas Investment Act regime as it was in 1994; the only changes allowed must preserve or increase that level of access to New Zealand by foreign investors in the services sectors that are covered by New Zealand’s schedule of commitments. There are exceptions for enterprises that were in state ownership in 1994 and for more favourable treatment for Maori business.

Also under the WTO, New Zealand is party to the Agreement on Trade-Related Investment Measures (TRIMS), which prohibits requirements on foreign investors to use locally produced goods, for example, or to limit the amount of imported content. Options for regulation of FDI have been further constrained by the CER agreement with Australia and subsequent free trade and investment agreements. The 2001 Singapore–New Zealand Closer Economic Partnership Agreement, for example, expanded the services sectors to which GATS-like restrictions applied. It also gave Singapore investors in economic activities other than services the right to the best treatment New Zealand gives investors of any other nation, most importantly Australia under CER.

Investor–State Disputes

In the TPPA negotiations, the US is expected to demand an investor–state disputes procedure. This power for investors to challenge legislation and actions of the State is not available to New Zealand investors, let alone ordinary citizens, although it is similar in many respects to proposals in the highly controversial Regulatory Standards Bill currently before the New Zealand Parliament.(10) However, empowering corporations through “trade treaties” has even greater constitutional implications than the proposed domestic law, as it subjects New Zealand’s regulation of FDI to decisions of international panels of trade lawyers, negotiators and academics. Those panels routinely take an overwhelmingly trade-related view that relegates or ignores wider social, economic and environmental considerations. Conflicts of interest have also been a concern.(11) While many decisions are never made public, there is an increasing stream of adjudications, some of which have awarded hundreds of millions of dollars to investors. Such cases have overruled laws and court decisions in relation to public health and are instrumental in undermining democracy.

The US is meeting increasing opposition at home to such investor powers. The inclusion of investor-initiated enforcement was successfully resisted by Australia in the Australia–US Free Trade Agreement. Regrettably, New Zealand governments have already accepted such enforcement in the Association of Southeast Asian Nations (ASEAN) agreement, in free trade agreements with Singapore and China, and in an investment agreement with Hong Kong. Legal claims made by foreign investors using these powers commonly concern two provisions on investment: “indirect expropriation” and “fair and equitable treatment”. The US is likely to want to strengthen these in a TPPA, though with some finessing to reduce the risk of damage to its own domestic regulatory powers.

Indirect Expropriation”

One ground used for claims is “indirect expropriation” – that is, actions “equivalent” to expropriation or nationalisation. This has been invoked, for example, in a toxic waste case involving the US Metalclad Corporation, decided in 2000. The decision of a Mexican municipality to demand a construction permit before the company could begin building a toxic waste facility was successfully challenged as illegal under the North American Free Trade Agreement (NAFTA). The Mexican government was ordered to pay $US15.6 million in damages because the corporation had lost the value of its investment. This was regarded as equivalent to expropriation even though no expropriation had taken place. The tribunal that heard the case stated that it “need not decide or consider the motivation, nor intent of the adoption of the Ecological Decree”.(12)

Recent corporate complaints in New Zealand against an emissions trading scheme illustrate the possibilities of similar legal action. In May 2008, for example, the corporate-led Flexible Land Use Alliance accused the Government of “destroying” $NZ3 billion to $NZ4 billion worth of land value when the Government announced its intention to impose retrospective liabilities on those who harvest pre-1990 forests and convert the land to other uses. The Alliance spokesperson said that if the Government did not back down on the matter, the group wanted full compensation.(13) The emissions trading scheme was set up to recognise the real costs of activities that increased the rate of global warming. If all such costs were compensated, the point of the scheme would be lost. Yet under expropriations provisions of an investment chapter, a corporation from another TPPA party might well have been able to mount a case against the New Zealand government, undermining the scheme and privileging overseas investors at the same time.

Similarly, business groups such as the New Zealand Business Roundtable have repeatedly asserted that Government actions to force Telecom New Zealand to open its network to competitors (referred to as “unbundling”) amount to expropriation and require compensation.(14) In response to US concerns that indirect expropriation provisions were undermining desirable social and environmental protections, the US drafted an interpretative statement that it included in its revised model bilateral investment treaty (BIT) in 2004.(15) A similar statement appears also in annexes to the New Zealand–China and ASEAN–Australia–New Zealand free trade agreements. The New Zealand–China statement, for example, requires the indirect expropriation to be severe or for an indefinite period and disproportionate to the public purpose behind the Government’s action. There is more likely to be an indirect expropriation when the measure discriminates against the investor or is in conflict with the State’s prior binding written commitment to the investor. The interpretative Annex then states that: “Except in rare circumstances [to which the criterion of discriminatory measures that conflict with binding commitments applies], such measures taken in the exercise of a State’s regulatory powers as may be reasonably justified in the protection of the public welfare, including public health, safety and the environment, shall not constitute an indirect expropriation”.(16)

The US model BIT from 2004, with its similar interpretative note, is currently under review. Several members of the review committee still objected to the investor–state disputes procedure and to the indirect expropriation provision on a number of grounds. They recommended clarification that “… an indirect expropriation occurs only when the Government acts indirectly to seize or transfer ownership of an investment, and not when the Government merely acts in a manner that decreases the value or profitability of an investment”.(17)

These supposedly clarifying statements are yet to be tested in a dispute, so their effect is as yet unknown. They allow the dispute panel to make a judgement, potentially overruling that of the Government, as to whether the Government has exercised its powers in a “reasonably justified” way. The statements are also relatively recent inclusions in trade and investment treaties. The US will certainly be claiming wide-ranging “most favoured nation” status in the TPPA, which would mean that US and other aspiring investors from TPPA countries could “jurisdiction shop” to find older agreements to rely on that do not contain such modifications. New Zealand’s 2005 FTA with Thailand(18) and its 1995 bilateral investment treaty with Hong Kong(19) are examples, although the latter is currently being renegotiated.

“Fair And Equitable Treatment”

The second common area of action by investors has been to allege a breach of “fair and equitable treatment”. This is frequently a demand for treatment different from that received by domestic investors or citizens, and is an attempt to escape Government decisions made in the public interest. In a current case affecting public health, US-based tobacco company Philip Morris has filed an action complaining about Uruguay’s tobacco control policies, claiming both expropriation and breach of fair and equitable treatment; the tobacco company is demanding compensation and suspension of Uruguay’s new policies.(20) In another case, European investors in South African mining are challenging legislation aimed at increasing the participation of historically disadvantaged South Africans as being in breach of “fair and equitable treatment”.(21)

As noted earlier, the New Zealand government became concerned in 2008 at the proposal by the Canada Pension Plan Investment Board to acquire up to 40% of the shares of the company owning New Zealand’s most significant airport, Auckland International Airport. The Government created a new regulation allowing consideration of “whether the overseas investment will, or is likely to, assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land”. This regulation and the Government’s refusal of the Canadian proposal (a decision that did not rely on the new regulation) were described by a variety of business commentators and lobbyists as unfair and undermining the value of the airport company. Indeed, the Wellington Regional Chamber of Commerce and the New Zealand Business Roundtable complained about the regulation to Parliament’s Regulation Review Committee,(22) saying that “major business organisations were deeply concerned about the pattern of ‘ill-justified confiscation of property rights in New Zealand”’.(23) The Regulation Review Committee considered that the change should have been made through law rather than regulation but did not consider it unlawful. Treasury had advised the Government that a change in law risked being in breach of New Zealand’s international trade obligations.

The Government’s action had widespread support, including that of the majority of the board of the airport company. Arguably the Government had little choice but to intervene in the national interest. Yet, if any of the existing foreign shareholders of the partly-privatised company had been able to access investor-rights provisions of the kind that US corporations want in the TPPA, they could have claimed a breach of fair and equitable treatment and expropriation, and sought financial damages and pressed for reversal of the regulation. Put another way, the TPPA would have allowed a corporation from one of the non-New Zealand parties to the agreement to attempt to overturn a democratically mandated Government action along with a valid regulation and law, and to extract potentially many millions of dollars from the Government for its actions.

While US corporations are obvious potential beneficiaries of investor rights provisions, the largest proportion of foreign direct investment in New Zealand comes from Australian businesses. Under the Closer Economic Relationship (CER) agreement with Australia, these businesses gain certain privileges (particularly the higher $NZ477 million exemption from oversight under the new protocol), but the CER agreement does not provide a mechanism to enforce CER rules. This power would be a significant gain for Australian investors from Australian membership of the TPPA.

As an example, Australian companies have acquired numerous retirement villages, rest homes and hospitals for the elderly in New Zealand. There is increasing concern at the quality of care in privately owned facilities, including the Australian-owned chains, with a succession of cases of unacceptable treatment of their frail residents.(24) State intervention could well be necessary, with requirements for increased staffing levels, better qualifications of staff and tenure guarantees for residents; these would, however, be seen as reducing the value of those assets. That could be grounds for action under a TPPA as indirect expropriation, with investors potentially challenging whether such requirements are “proportionate to the public purpose” and “reasonably justified”. In effect, overseas investors could be privileged over the needs of the elderly.

Financial Investment

The current global financial crisis is one in a series of recent international financial crises, distinguished mainly by its size. It is unlikely to be the last. As a result, respected economists such as Joseph Stiglitz are once again advocating management of international financial movements to reduce the risks inherent in open international capital markets.(25)

Managing Capital Flows

In analysing the systemic risks posed by liberalised and deregulated financial markets, Joseph Stiglitz, José Antonio Ocampo and Shari Spiegel note that capital flows, particularly short-term speculative flows “… have been at the heart of many of the crises in the developing world since the 1980s. Even when capital flows were not the direct cause of the crises, they played a central role in their propagation. They have also made it difficult for policymakers to respond to the crises with traditional economic tools aimed at smoothing business cycles”.(26)

In the light of the financial crisis, even formerly staunch opponents of capital controls such as the International Monetary Fund (IMF) are now conceding that such controls have value. For example, a staff paper published in February 2010 states: “A key conclusion is that, if the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory, then use of capital controls – in addition to both prudential and macroeconomic policy – is justified as part of the policy toolkit to manage inflows. Such controls, moreover, can retain potency even if investors devise strategies to bypass them, provided such strategies are more costly than the expected return from the transaction: the cost of circumvention strategies acts as ‘sand in the wheels’”.(27)

This argument is especially pertinent to New Zealand. Despite a common perception that New Zealand has been relatively untouched by the post-2007 international crisis, the country is extremely vulnerable to destabilising capital flows in various ways. Investors routinely threaten capital flight when elected governments pursue policies that investors consider to be against their interests. Open capital markets have created an almost unlimited availability of funds that have fuelled rising house prices and inflation. Speculation by foreign currency traders is a major contributor to the volatility of the New Zealand dollar. None of these problems is likely to be resolved without managing capital movements.(28)

In light of the economic and financial challenges that face New Zealand, the Government should be defending its ability to adopt a range of international capital management policies, such as minimum stay periods for capital movements in and out of the country, particularly at times of crisis, and limits on the volume of overseas borrowing in both foreign currency and New Zealand dollars. A small financial transactions tax (“Tobin tax”) could discourage speculative financial market transactions; Brazil has had such a tax over several decades and reintroduced it in 2008, increasing the level to 2% in October 2009 to prevent speculative trading in the Brazilian currency. Alternatively, governments could regulate the end-use of overseas borrowing, such as to limit the use of foreign currency bank loans for domestic purposes. In June 2010, South Korea required bank loans in foreign currency to be used only for overseas purchases.(29) Other options are to set minimum maturities (terms) of overseas borrowing, and other steps to match maturities between borrowing and lending. Stricter rules could apply to foreign direct investment where it is largely a financial transaction, as distinct from investment that includes substantial introduction or creation of physical assets or knowledge. Measures that give greater stability to the value of the New Zealand dollar than the current free float, but short of a fixed exchange rate, would involve consideration of corresponding currency regulations. Regulation of the financial sector might overlap, be a precondition for, or strengthen these measures.

Some of these measures could be put into effect immediately; others would require careful phasing in, accompanied by additional policies to allow the economy to adjust. They would not be applied across the board; they can be used selectively by type of investment and by economic and financial circumstance. The very consideration of some of these policies may lead to threats of capital flight and deliberate destabilisation; that risk should be anticipated and tools for both regulatory and political counteraction need to be available to protect the country from such reactions.

Capital Controls And FTAs

International free trade agreements have progressively and deliberately proscribed most such measures to manage capital movements. All capital controls are already potentially affected by the GATS. It contains a wide-ranging provision (footnote 8 to Article XVI) which requires that foreign investors in services, including foreign financial institutions, must be allowed to transfer capital into New Zealand without restriction for any service sector that the Government has committed under the Agreement. Further, the Government must allow both inflows and outflows of capital when such services are provided from offshore. These obligations would prevent management of capital in a variety of ways, most obviously when used to stabilise the monetary system or the exchange rate. New Zealand is party to the GATS Understanding on Commitments in Financial Services, under which it commits to allowing both foreign investments in banking and New Zealand residents to purchase across borders all banking and other financial services, except for some forms of insurance. Banks in New Zealand could therefore insist that they have the right to borrow without constraint overseas, as that is simply purchasing a financial service across borders. GATS Article XI also guarantees unrestricted “current” payments and transfers such as company profits, which could be used as a cover for significant movements of funds. The same article (XI:2) prevents restrictions on capital movements that are “inconsistent with [the country’s] specific commitments” to GATS rules in various sectors, especially financial services. That could preclude controls over bank operations, such as borrowing and lending and the capital transfers required to set up or expand an overseas investment. The GATS allows an exception in times of balance of payments or external financial difficulties; such actions are subject to oversight by the WTO and the IMF.

The investment provisions of the free trade agreements New Zealand has with China and ASEAN go further. They guarantee free capital transfers in either direction, although they make provision for regulation of matters including issuing, trading or dealing in securities, futures or derivatives, provided that regulation does not discriminate between domestic and foreign investors. There are exceptions to some of these provisions in the GATS and FTAs for prudential measures, but their interpretation is contested and they by no means cover all capital controls that may be desirable. If the exceptions were comprehensive, there would be no point in the US and other countries seeking to liberalise capital movements further in their trade negotiations. Indeed, the US forced Chile to withdraw some of its short-term capital controls in their bilateral trade and investment agreement signed in 2003 and it seems likely to seek even greater restrictions on the abilities of Chile and other aspiring TPPA parties to control international capital flows than apply now.

One likely target is a standard exception in investment agreements and in the GATS that allows temporary control of capital movements in the case of a balance of payments or external financial crisis. The US has refused to accept this exception in recent bilateral trade agreements and can be expected to do the same in the TPPA negotiations. A senior counsel in the Legal Department of the IMF described this step as “draconian”.(30) The strength of this condemnation is indicated by the fact that it was made in 2004 at a time when the IMF itself was strongly opposed to capital controls.

Implications For The Reserve Bank

New Zealand’s current capability to regulate financial flows to and from the country is very limited, and in many cases has been retained for purposes other than financial capital management as such. Firstly, some foreign direct investment such as private equity investment is largely a financial transaction and to that degree comes under the OIA, discussed above. Secondly, the financial flows at some point enter New Zealand’s registered banks or non-bank deposit takers, and therefore come under the oversight of the Reserve Bank.

The Reserve Bank Act 1989 allows for regulation of financial flows in two main ways. It provides powers for the Reserve Bank to deal in foreign exchange, to set exchange rates, and to suspend trading by the registered banks in foreign exchange “if necessary to avoid disorder in the foreign exchange market”. The Reserve Bank also has wide powers to regulate both registered banks and non-bank deposit-takers, such as finance companies, in ways that influence their use of foreign funds. The Reserve Bank has an overall responsibility for “promoting the maintenance of a sound and efficient financial system; or avoiding significant damage to the financial system that could result from the failure of a registered bank”.

Despite its foreign exchange market responsibilities, the Reserve Bank has few powers to carry them out. While it can fix the exchange rate, the only options it has to defend a fixed rate are to maintain unaffordably high levels of reserves, or suspend trading of foreign exchange. It would be very difficult under those constraints for the bank to do more than manage the exchange rate for very short periods or, as it is currently directed to do, marginally reduce the peaks and troughs of long-term cycles.(31) It would require capital controls to do more.

The Reserve Bank has wider powers with respect to the regulation of registered banks and non-bank deposit takers. When considering an application for the registration of a bank, the Reserve Bank may take into account aspects including its ownership structure, the standing of the applicant itself and its owner, suitability of directors and senior managers, size, and other matters which may be prescribed in regulations. Overseas-owned applicants must meet further criteria. That requirement is important given that their home financial authorities may have weak prudential or bank regulation requirements, and may place constraints on their providing support to their New Zealand subsidiaries or branches, as is the case with Australian-owned banks that have restrictions on the amount of capital they can transfer in time of need.

The Reserve Bank can require financial entities to maintain their capital and capital ratios above prescribed minima, maintain prescribed liquidity requirements, hold a credit rating above a minimum, restrict exposure to related parties, comply with governance requirements and other matters. For a registered bank, it can regulate the size and nature of the bank’s business, loan concentrations, risk exposures, separation of the banking business from other business, risk-management systems and policies, outsourcing, as well as other matters prescribed in regulations.

These powers could, on the face of it, be challenged under trade in financial services rules of a TPPA. The different rules for considering overseas-owned applicants for registered bank status could potentially breach “national treatment” provisions, while the Reserve Bank’s use of size and ownership structures as criteria for registration, its regulation of governance and the separation of banking from other business might breach “market access” provisions. These are arguably prudential powers; however, financial services providers could dispute the application of the prudential exception, depending on the context in which the regulatory measures are applied.

For example, large-scale, short-term borrowing by the four dominant Australian-owned banks created a high risk for the New Zealand economy at the height of the global financial crisis when international money markets froze. The Reserve Bank felt forced to take action to bolster the banks’ liquidity by providing funding sources itself, and through the Government guarantee for depositors and banks’ wholesale funding. Since then, the Reserve Bank has used its powers to regulate the liquidity of registered banks in order to pressure them to reduce their very high reliance on this borrowing.32 In its own words: “The Reserve Bank considers that the New Zealand banks have, across the system, held insufficient stocks of liquid assets in recent years, and have become too reliant on short-term, overseas funding. The new liquidity requirements are designed to address these concerns”.(33) It is too early to tell whether this liquidity policy will in fact reduce banks’ use of overseas funding. Whether or not it succeeds, the policy is arguably intended as a measure to control international capital flows bound up into a prudential tool. It could be challenged as not being in fact a prudential measure or serving a dual purpose of favouring local funding services.


There is a strong likelihood that a TPPA would give the most powerful government in the world and some of the most powerful global corporations the legal capacity not only to block the re-regulation of foreign investment and capital movements, but also to force their further deregulation. In one sense, the TPPA would simply add another set of chains to an already crippled regulatory structure. However, it would be irresponsible to remove what few protective measures remain. In light of the lessons of the global financial crisis, governments should be looking to remove the existing leg-irons rather than reinforcing them through dangerous free trade deals. Specifically, negotiators should be examining ways for the TPPA to pull back from existing arrangements and provide a clear regulatory space for controlling capital movements and allowing selectivity in accepting FDI. Unfortunately, a more likely outcome is that New Zealand will lose further capability to cope with financial crises and to rebalance and re-energise its economy.

1 Ron Kirk, “2010 National Trade Estimate”, Office of the US Trade Representative, 2010,, accessed 28/3/11.
2 Bank for International Settlements, Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007, Bank for International Settlements, Basel, Switzerland, December 2007, p11,, accessed 14/3/10.
3 For further details, see Bill Rosenberg, ‘Look Ma, No Hands. Overseas Investment: Myopic Deregulation’, Foreign Control Watchdog, 123 (May 2010),, from which some of the material in this paper is also drawn.
4 Karyn Scherer, “Selling The Family Farm?”, New Zealand Herald, 9/8/10,, accessed 29/8/10.
5 Overseas Investment Commission and Overseas Investment Office, “Statistical Information On Decisions For December”, various years.
6 Clayton Cosgrove and David Parker, “Overseas Investment Act 2005: Reasons For Decision By Relevant Ministers”, New Zealand Government, 2008,, accessed 14/3/10.
7 Rosenberg, “Look Ma, No Hands”.
8 Gareth Vaughan, “Agent For Private Equity In NZ’, Press, 22/8/07, pC4.
9 UNCTAD, World Investment Report 2009: “Transnational Corporations, Agricultural Production And Development”, World Investment Reports, New York and Geneva: United Nations, 2009, p212,, accessed 14/3/10, Annex table A.I.1.
10 For a discussion of the proposed Regulatory Standards Act, see Policy Quarterly 6, no. 2 (May 2010).
11 See for example “Arbitrator Challenges And Recusals – Investment Arbitration Reporter (IAReporter)”,, accessed 29/8/10; Jernej Sekolec, “ICS Inspection And Control Services Limited (United Kingdom) (the ‘Claimant’) – and – The Republic of Argentina: Decision on Challenge to Arbitrator, 2009,, accessed 29/8/10.
12 Cited in Catherine Yannaca-Small, “’Indirect Expropriation’ And The ‘Right to Regulate’ In International Investment Law”, Working Papers on International Investment, Organisation for Economic Cooperation and Development, September 2004, p15.
13 Dan Eaton, ‘“Rich Pricks’ Bemoan Treatment”, Press, 15/5/08, section A, p4.
14 E.g., Roger Kerr, “Do Economists Agree on Anything?”, New Zealand Business Roundtable, Wellington, 2008, pp. 33, 52, 62, 90, accessed 18/4/10.
15 Office of the United States Trade Representative and the US State Department, “2004 Model BIT”, Office of the United States Trade Representative and the US State Department, 2004, p38,
16 Free Trade Agreement Between The Government of New Zealand And The Government of the People’s Republic of China, Annex 13: Expropriation, paragraph 5,
17 US State Department, “Report of The Advisory Committee On International Economic Policy Regarding the Model Bilateral Investment Treaty”, US State Department, 2009, Annex B, p5,
18 Thailand-New Zealand Closer Economic Partnership Agreement, 2005,, accessed 28/3/11.
19 Agreement between the Government of Hong Kong and the Government of New Zealand for the Promotion and Protection of Investments, 1995.
Juan Antonio Montecino and Rebecca Dreyfus, “Philip Morris vs. Uruguay”, Foreign Policy in Focus, 2010,, accessed 6/4/10; Luke Eric Peterson, “Philip Morris Files First-known Investment Treaty Claim Against Tobacco Regulations”, Investment Arbitration Reporter, 2010,, accessed 6 April 2010.
21 Luke Eric Peterson, “More Details Emerge of Miners’ Case against South Africa”, Investment Treaty News, 2007; Damon Vis-Dunbar, “Suspension Extended in Piero Foresti, Laura de Carli and Others v. Republic of South Africa”, Investment Treaty News, 2009, p3.
22 Regulations Review Committee, “Complaint Regarding The Overseas Investment Amendment Regulations 2008 (SR 2008/48): Report of the Regulations Review Committee”, Report of the Regulations Review Committee, New Zealand House of Representatives, Wellington, September 2008, p45,, accessed 17/4/10.
23 Denise McNabb, “Govt Tackled On Airport Rule Changes”, The Independent, 1/10/08,, accessed 16/4/10.
24 For example, Jessica Wilson, “Failing To Care”, Consumer, 2009, pp31-33; Rebecca Todd, “Company Denies Understaffing”, Press (Christchurch), 10/10/09, pA3; Jessica Wilson, “Rest Home Roulette”, Consumer, 2009, pp 26–29.
25 Joseph Stiglitz and José Antonio Ocampo, “Capital Market Liberalization And Development”, Oxford University Press, 2008; Stephany Griffith-Jones, José Antonio Ocampo and Joseph E. Stiglitz, “Time For A Visible Hand: Lessons From The 2008 World Financial Crisis”, Oxford University Press, 2010.
26 José Antonio Ocampo, Shari Spiegel and Joseph E Stiglitz, Chapter 1: “Capital Market Liberalization And Development”, in “Capital Market Liberalization And Development”, pp. 1–47, at p1,, accessed 1/9/10.
27 Jonathan D Ostry and others, “Capital Inflows: The Role of Controls”, International Monetary Fund Staff Position Note, International Monetary Fund, 19/2/10, p 5,, accessed 1/9/10.
28 For further details, see Bill Rosenberg, “Financial Crises, Trilemmas, And A Time To Rethink”, Foreign Control Watchdog, 120 (May 2009), pp5–22,
29 Ministry of Finance of the Republic of Korea, “New Macro-Prudential Measures To Mitigate Volatility Of Capital Flows’, 14/6/10, , accessed 28/3/11.
30 Deborah E Siegel, “Using Free Trade Agreements To Control Capital Account Restrictions: Summary Of Remarks On The Relationship To The Mandate Of The IMF”, ILSA Journal of International and Comparative Law 10 (2004), pp297–304.
31 Reserve Bank of New Zealand, “Foreign Exchange Intervention Options”, Reserve Bank of New Zealand, 2004,, accessed 5/4/10.
32 Reserve Bank of New Zealand, “Liquidity Policy, Document BS13”, Reserve Bank of New Zealand, 2010,, accessed 5/4/10.
33 Reserve Bank of New Zealand, “Regulatory Impact Assessment: RBNZ Liquidity Requirements For Locally Incorporated Banks”, Reserve Bank of New Zealand, 2009,


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