Could the world embrace not just trade tariffs but capital controls?

16th December 2011

More money from the BRIC countries will be seeking assets to invest in, although towards the middle of the century it will be India not China that may be a bigger source of such capital. When money from China poured into assets such as US Treasuries it fuelled the boom and resulting asset price bubbles ultimately threatening the world's financial system. 

Tett says that although global financial cooperation could mitigate some of this, it faces a big challenge and could lead to capital controls i.e. countries trying to slow down the global flow of money. So what chance agreements to stop this happening. 

Tett writes: "The chance of this emerging in today's world looks distant; after all, policymakers cannot even co-ordinate themselves within the single eurozone. Little wonder, then, that the Bank concludes that some countries may eventually resort to unilateral "macro prudential" policy measures, such as those capital controls. The only question – which the Bank tactfully ducks – is who might go first?"

It may of course be happening in small ways already. For example, as Icenews reports that the court of the European Free Trade Area – linking many non-EU and EU countries – has approved Icelandic controls, saying they are compatible with European law – though this was in an extreme situation. 

And the Wall Street Journal blog reports that despite the falls in the rupee India is resisting calls for controls of this type.

However, these are either small local difficulties or temporary results of the euro crisis. If big Western countries start to believe that they are facing a permanent imbalance that can do huge damage to their economies, the reaction of governments and electorates could prove very interesting long term. But generally free movement of capital has been seen as driving global growth. Most believe restricting it, rather than finding other ways to address these imbalances will make things much worse.

More from Mindful Money: 

The Lost Decade – Is it all doom and gloom?

Have emerging markets underperformed in 2011?

World fared better with Bretton Woods: BOE

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