I wonder if readers would agree with the following preliminary analysis of whether the NAFTA "prudential carveout" applies to except capital controls from the provisions regarding free transfer of investments. Capital controls for limited purposes are becoming more popular among economists, including those at the IMF.
First, using a post-financial crisis evolutionary interpretation of "for prudential reasons" in Article 1410.1 of NAFTA, it seems possible, although not certain, that “for prudential reasons” could include capital controls. But we still must examine the specific context in which the prudential carveout appears.
First, Article 1410.1 of NAFTA specifies that “nothing in this Part” shall be construed to prevent a party from adopting measures for prudential reasons. Part 5 of NAFTA (“this Part”) includes Chapters 11-16: investment, services, telecoms, financial services, competition, and temporary entry for business persons. So from a practical standpoint, the prudential exception initially applies at least to investment and services liberalization and protection provisions. However, we must examine Article 1410.1 in context, which includes Article 1410.2.
The existence of Article 1410.2 suggests an understanding that the prudential carveout of Article 1410.1 does not include monetary policy. This is because Article 1410.2 specifically excepts monetary policies, which would seem to include capital controls. But it specifically provides that its exception does not extend to the obligation to permit transfers under Article 1109. Using this context, and also considering the interpretive principle that the specific controls the general, this would tend to suggest that Article 1410.1 does not include an exception for capital controls that would violate Article 1109. An alternative, but less plausible, reading would say that because Article 1410.2 contains an explicit exclusion of Article 1109, and because Article 1410.1 does not, we can infer that Article 1410.1 was intended to cover, and provide an exception to, Article 1109. This is less plausible because the inference would be that discriminatory capital controls are excepted under Article 1410.1, while non-discriminatory ones are not.
So, while it is not free from doubt, the better argument appears to be that the prudential carveout of Article 1410.1 does not apply to except capital controls from the free transfer requirements of Article 1109. A next step might be to review the negotiating history of these provisions.
On the other hand, it may be that the exception of Article 1410.2 would apply to except capital controls from any free trade in financial services provisions that might otherwise restrict capital controls. This is because Article 1410.2 does not exclude from its exception any provision of Article 14. So, much would depend on the scope of the definition of investment, and the definitional boundary between “investment” and “trade in financial services.” Article 1101.3 states that “this Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services).” Note, however, that under Article 1401.2, Article 1109 is incorporated by reference in Chapter 14. Thus, it is possible that a panel might understand the exclusion of Article 1109 from Article 1410.2 to exclude the version of Article 1109 that is incorporated by reference in Chapter 14. A panel might use a purposive interpretation to reach this conclusion.
In sum, although it is not free from doubt, it is possible, and perhaps plausible, that an arbitral panel would determine that neither Article 1410.1 nor Article 1410.2 provides an exception for capital controls.
