Capital controls

Investors will have to get used to the acceptable face of protectionism

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Picture a blissful Ricardian paradise, one in which capital ebbs and flows across borders according to the laws of comparative advantage.

Now snap out of it. South Korea, for one, would rather not go there. By preparing the market for a series of measures designed to limit banks’ exposure to foreign exchange forwards, the G20 chair is signalling a lower tolerance for currency volatility. Imposing caps on forward positions as a percentage of equity, as rumoured, would not represent capital controls, in the classic sense. But the outcome should be much the same: a reduction in the nation’s short-term external debt, which stood at $155bn at the end of March. This, after all, was the root of Seoul’s troubles in late 2008, when a dollar-liquidity squeeze caused the won to fall more than regional peers. If the Fed continues to refuse to make its dollar swap lines permanent – despite the urgings of the Bank of Korea – then measures such as these are the next best option.

Trade protectionism, it seems, is a mostly imaginary threat. World Bank data show that new trade disputes have fallen by a fifth for two consecutive quarters year on year. There’s not much evidence of investment protectionism either: cross-border M&A accounts for a higher share of total deal value this year than the last decade’s average, according to Dealogic. Yet there is a growing consensus that surging capital inflows should be seen not as a sign of strength but as a source of instability. Last week’s G20 meeting in Busan, Korea, dissolved with agreement on “national, regional and multilateral efforts to deal with capital volatility and prevent crisis contagion”. Call it capital protectionism, or plain old capital account management. Either way, investors should get used to it.

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