Globalization: Markets, Instututions & Policy Professor O’Halloran Lecture 4 Basic Approach Preferences In -- Policies Out Preferences Government (interests) electoral process Policies (legal constraints on economic or social activity) governmental process • • • • Issues emerge, Interests (preferences)
Download ReportTranscript Globalization: Markets, Instututions & Policy Professor O’Halloran Lecture 4 Basic Approach Preferences In -- Policies Out Preferences Government (interests) electoral process Policies (legal constraints on economic or social activity) governmental process • • • • Issues emerge, Interests (preferences)
Globalization: Markets, Instututions & Policy Professor O’Halloran Lecture 4 Basic Approach Preferences In -- Policies Out Preferences Government (interests) electoral process Policies (legal constraints on economic or social activity) governmental process • • • • Issues emerge, Interests (preferences) are formed, and Information is transmitted to the Institutions of government, where policy may or may not change. Pivotal Politics Game Two Strategies to Pass Laws: Get two-thirds of each House; or Get a majority in each House and president. Implications Policy change requires large majorities; There are numerous points along the process where legislation can be held up; Policy will therefore be a compromise among key decision makers. Policy will change incrementally, if at all, and will satisfy many competing interests. Policy Making Via Delegation But a lot of policy is made not by Congress directly. Rather, Congress delegates authority to the president or regulatory agencies. Examples: Environmental Protection Agency Food and Drug Administration USTR The same mechanisms that make it hard to pass policy, make it hard to check agencies. Questions Why does Congress ever delegate authority? When it does, how and under what conditions will Congress delegate authority? What are the implications for policy? Why Delegate? Possible reasons: – Save time/Reduce workload – Take advantage of agency expertise – Protect special interests – Shift the blame Two factors that affect congressional decision making: – Informational – Distributive Informational Concerns Legislation is complex – But legislators have only limited time and resources. Bureaucrats are experts – Legislators can solve this problem by delegating authority to regulatory agencies. – So Congress delegates to take advantage of agency expertise. Outcomes – Policy will be well informed and reflect the technical expertise of agencies. Distributive Concerns Process creates legislative logrolls with lots of pork. For example, the 1988 OTCA. Inefficiencies arise because: Each individual equates the marginal benefits and costs for his district, While ignoring negative externalities imposed on other districts. Consequence: If these externalities are small Congress may not care. If large, imposing high costs on taxpayers and consumers, then legislators may want to reduce costs. – Example: 1930 Smoot-Hawley Tariff Act Solution: Delegation Delegate authority to a central agent who internalizes both costs and benefits. Trade policy (first cut) Congress solves collective dilemma by delegating to the president. President has a national constituency and therefore trades off costs and benefits across all districts. Authority is subject to constraints. Key Give agent incentive to take actions; Then provide checks. Logic of Delegation Two alternative modes of policy making – Congress: Committee System – Regulatory Agencies: Delegation Legislators Since to Executive decide where policy is made. legislators’ primary goal is reelection, policy will be made so as to maximize legislators’ reelection chances. Transaction Cost Politics Each alternative mode of policy making has its own set of costs: – Legislative Policy Making (Committees) Logrolling, delay, informational problems – Agency Policy Making (Delegation) Principal-agent problems of oversight So when deciding where policy will be made, legislators trade off these internal and external costs of policy production. Make-or-Buy Congress’s decision to delegate is like a firm’s make-or-buy decision. – Legislators can either produce policy internally, OR – Legislators can subcontract out (delegate) to the executive. Discretion Continuum Legislative Policymaking Low Discretion Trade Off: Agency Policymaking High Discretion Legislative vs. Agency Policymaking Policymaking Amount of discretion delegated to the executive balances these costs at the margin. Summary Legislators Two seek reelection choices of how to make policy – Committees or Agencies (make-or-buy) Each has costs Legislators trade off these two options when deciding what to delegate and what to do themselves Delegation Game Floor sets policy pF F Don’t Delegate x=p F+w d=0 N w F d d=1 Delegate F Floor sets discretion (d) status quo (SQ) Institutional Choice Policy (p) = Policy chosen Status quo (SQ) = Policy in effect State of the World (w)= Uncertainty Outcomes (x) = Combination of p and w. x =SQ+pA+w A P President sets Agency ideal point A Agency learns exact value of w, sets policy pA s.t. |pA| d Policy Making Process Final Outcomes Floor Voter (f) = Median Legislator President (p) = President’s ideal point Agency (A) = Agency’s ideal point Discretion (d) = Amount of authority delegated Strategic Proposals -R w 1 Liberal [w1+d] xF =SQ w 2 xA = xP Range w < x - SQ -d A xA -SQ- d < w < x A- SQ + d xA -SQ+d < w Outcomes w+ SQ + d xA w+ SQ - d w3 R Conservative Example w1 w2 w3 on the value of w, the president will set policy as close to his ideal point as possible, subject to limits on discretion set by Congress. Depending Discretion & Inter-branch Conflict Discretion Median Legislative Voter declines as President’s ideal point moves away from the median legislative voter. Discretion R President’s Ideal Point Summary of Results Congress benefits from delegating (through informational gains or the elimination of inefficient logrolls) at some distributive cost. As the president moves farther away, Congress delegates less authority. – If the president is too far away (P>R), Congress does not delegate at all. When Congress does delegate, it constrains the president by setting d<R. Tariffs over Time 70 60 Tariffs/Dutiable Imports Tariffs/Total Imports Tariff Rate 50 40 30 20 10 0 9 77 85 93 01 09 17 25 33 41 49 57 65 73 81 89 6 18 18 18 18 19 19 19 19 19 19 19 19 19 19 19 19 Year Since the 1934 RTAA, steep decline in tariffs. Delegation Is Not Monolithic The terms of delegation have changed Sometime Congress delegates broad authority (e.g., RTAA). Sometimes Congress limits this authority (e.g., fast track procedures). Delegation is constrained by administrative procedures Sunset limits Congressional override procedures Changes in criteria Gives rise to procedural protectionism The politics is in the procedures Does Divided Government Impact Trade Outcomes? Theory: Divided government leads to less delegation. President has less protectionist preferences than median member of Congress So less delegation leads to higher tariffs – Divided Gov’t – Delegation Tariff Major Postwar Trade Acts Major U.S. Trade Legislation, Divided Government, & Delegation, 1948-1992 Legislation Administration Divided Delegation 1948 Extension of the RTAA Truman Divided Decreased 1949 Extension of the RTAA Truman Unified Increased 1951 Extension of the RTAA Truman Unified Decreased* 1953 Extension of the RTAA Eisenhower Unified Increased 1954 Extension of the RTAA Eisenhower Unified Increased 1955 Extension of the RTAA Eisenhower Divided Decreased 1958 Extension of the RTAA Eisenhower Divided Decreased Kennedy Unified Increased 1974 Trade Reform Act Nixon Divided Increased* 1979 Trade Agreements Act Carter Unified Increased 1984 Trade and Tariff Act Reagan Divided Decreased 1988 Omnibus Trade and Competitiveness Act Reagan Divided Decreased 1962 Trade Expansion Act Effect of Delegation on Tariffs Least Squares Estimates of the Effect of Delegation on the Tariff Dependent Variable: log(TARIFF) Independent Variable Model 1 Model 2 CONSTANT 0.023 (0.92) 0.032 (1.24) log(GNP)t-1 -0.67 (-1.00) -0.85 (-1.28)* 0.045 (0.73) 0.040 (0.62) -0.44 (-1.44)* -0.49 (-1.63)** log(UNEMPLOY)t-1 log(PPI)t-1 DELEGATIONt-1 -0.024 (-2.10)** Number of Observations 42 42 R2 0.17 0.19 Note: t-statistics in parentheses. * a < .10. ** a < .05. Tariff & Non-Tariff Barriers, 1950-86 As tariffs have declined, Non-tariff barriers have steadily increased. Structure of US Trade Policy Escape Clause National Security Clause Retaliation Countervailing Duties Anti-Dumping U.S. Law: Section 201 1974 Trade Act Section 232 1962 Trade Act Section 301 1974 Trade Act Section 303 1930 Tariff Act Section 731 1930 Tariff Act Modified: 1979, 1984, 1988 1974, 1979, 1988 1984, 1988 1974, 1984, 1988 1974, 1979, 1984 Rule: Increased imports cause or threaten to cause substantial injury Imports threaten to impair national security by weakening vital domestic industry Barriers restrict US commerce Export subsidy causes or threatens to cause material injury Price below “fair market value” causes or threatens to cause material injury Penalty: Duty, quota, OMA or trade adjustment assistance or other action At president’s discretion Determined by USTR subject to direction of president1 Tariff which offsets subsidy or negotiated settlement Tariff which raised price to fair market value or negotiated settlement Investigating Agency: ITC Commerce (ITA) USTR Commerce (ITA) and ITC Commerce (ITA) and ITC 6 months 270 days2 12-18 months1 160-300 days 2235-420 days President, based on ITC’s proposed remedy President USTR, subject to the direction of the 1 president Commerce (ITA) 60 days No deadline Included in recommendation, 30 day implementation limit1 Upon recommendation Yes, within 90 days if president rejects No No Recommendation Due: Decision-maker Decision Due Congressional Override 1 No injury test No No In 1983, penalty was determined by the President, who was the decision maker in 301 cases. The USTR’s recommendation was due between 9 and 14 months, depending on the nature of the unfair practice. The decision was due 21 days after the USTR’s report to the president. The OTCA of 1988 gave this authority to the USTR. 2 In 1983, recommendation was due in 12 months. Petitions Under US Trade Law Type of Action 1 Pending as of Most Recent Year Years included # of Petitions Successful Success Rate Unsuccessful 201 Escape Clause (1958-1977) (1975-1984) 87 53 15 18 .17 .34 72 35 1 232 National Security (1962-1983) 14 3 .21 11 0 301 Foreign Trade Barriers (1975-1987) 43 2 32 3 .74 6 4 303 Countervailing Duty (1979-1984) 235 27 .11 189 19 731 Antidumping (1979-1984) 175 48 .27 127 60 1 Cases that were withdrawn by petitioners after the investigation began were coded as unsuccessful; these included 51 anti-dumping cases, 64 CVD cases, 3 301 cases, and 1 national security case. 2 Twenty-six agricultural cases were excluded. 3 In 20 cases, a negotiated settlement was reached; in 12 cases the president retaliated. The administrative procedures associated with each trade remedy influence who uses them and the probability of success. Cement Politics In the early 1980s, west coast cement producers were facing serious competition from foreign imports, especially from Mexico. Mexican cement producers received oil from the government at discounted prices. – May be seen as an unfair advantage What are US firms’ options? US Firms’ Strategies Pros US trade laws (AD, CVD) Quota Challenge on Environmental grounds Joint law suit Challenge EIS Stabilize Prices Cons Political Feasibility? Options US trade laws (AD, CVD) Quota/NTB Challenge on Environmental grounds Joint law suit Challenge EIS Stabilize Prices Congress President Agency Courts Likelihood of Success Calculating Antidumping Duties U.S. customer . . . . $80 $7 US terminal Mexico Sale price $85 Transportation 12 Terminal & trans. 10 Customs -Other (adm.) 11 Mill Net Price 52 $10 Mexican customer $17 . Cemex terminal $85 $10 Cemex terminal $2 . US plant $20 $12 . Cemex plant Dumping margin = (52 - 31) / 31 = .68 U.S. $80 20 17 2 10 31 Outcome 58 percent duties levied on Mexican exports All Cemex other firms withdraw from US market counterstrikes Appeals in US courts (Loses) Lobbies legislators (Little impact) Files GATT petition (Wins, US overrides) Lobbies Mexican Government (NAFTA) NAFTA Dispute Settlement (Loses) Cemex plays US domestic politics game Sets up headquarters in Houston Purchases a plant in Texas, employing 1,800 Builds coalitions with consumers and representatives Cemex’s Options Pros Appeal Decision Quota Challenge on Environmental grounds Joint law suit Challenge EIS Stabilize Prices Cons Session 13: Cemex and international trade Objectives – To see an recent and ongoing instance of integrated strategy in an international setting » multiple institutions US trade law GATT Nafta » shifting interests » complex information – To step back and consider the nature of trade institutions more generally Cemex’s Initial Market Strategy Objective: to become a major international player Actions (conventional, market strategy) – Dominate in Mexico via acquisitions and investment in modern facilities – Export to the US when economy is sluggish – Obtain capacity in other countries Spain, Venezuela, Panama Nonmarket consequence of the export component of the market strategy – Antidumping petition Was this anticipated? Could it have been? Cemex’s Revised Strategy Comply with all requests to maximize chance of winning Seek Outcome: lost. (58% duty) to overturn the decision – In the courts Outcome: lost – Lobbying Try Outcome: min. influence: no rent chain; little US presence to reduce the duty in annual reviews (integrated) – Withdraw from low-price markets in US – Maintain the bulk (low-price) market in Mexico Shift Outcome: (e.g.) duty lowered to 42.74% in 1994 to a potentially neutral institutional arena – File a GATT petition Outcome: won the battle, lost the war Revised Strategy (cont.) Market components consistent with nonmarket – Export to US from Spain, which is not subject to the duty – Export from Mexico to Japan to utilize Mexican capacity – Acquire capacity in the US Establishes a US presence Signals long-term commitment Raises prospects for coalition building The strategy is integrated – Market components lessen the nonmarket pain in the short term – Nonmarket components reflect long-term international objectives Cemex Update: Problems Cemex’s inability to overturn antidumping decision created three problems in the 1990s – Persistent complaining by US rivals at periodic ITA reviews Rivals claim that dumping margin should be based on bagged (no bulk) cement, thus 111% Does Cemex have to fight just to keep the situation from getting worse? – Stranded Cemex terminal and distribution facilities in US – Excess capacity in Mexico Responses & Consequences: Nonmarket Argued that the US should abide by GATT decision – no effect Refused to supply data on bagged cement – ITA uses default procedure which takes the maximum (not weighed average) of margins; margin goes to 61.85% in May, 1995 Cemex files for NAFTA dispute resolution in July 1995 – Untried, but relatively good expectations Cemex is winless within the US system US Department of Commerce indicates that it thinks Cemex stands a good chance of winning – Unfounded, though: summer of 1996 At approximately the same time... Responses & Consequences: Market Demand in US is high, supply is low, prices rise Cemex acquires facilities in Venezuela and Panama Cemex exports from Mexican plants to Japan, Indonesia, the Philippines, Malasia, and Taiwan Cemex exports to the US market from its facilities in Spain and Venezuela – escapes antidumping margin at least in the short run Cemex purchases a plant in Texas, moves regional headquarters from Monterey to Houston, employs 1800 in US – building a rent chain; US domestic presence New Objectives, Strategy, Implementation Objectives – Change the way US calculates dumping margins – Negotiate a more favorable settlement Strategy and implementation – Coalition building with consumers National Association of Homebuilders (180,000 firms; better coverage than Cemex) – Enlist allies to be policy entrepreneurs Tom Delay (Republican whip from district with a Cemex plant); Gene Green (Democrat, also with 3 Cemex plants) – Lobbying Hired Randy Delay & a DC public relations firm – Public advocacy op ed in Wall Street Journal ads in Roll Call Consequences Counteractive lobbying by US manufacturers – Joe Barton (Republican of Texas) writes to all House members asking them to oppose Counter-counteraction – Gene Green gets 34 co-signers on a letter to Department of Commerce and USTR asking for a negotiated settlement Ongoing international struggle has evolved into an ongoing domestic political struggle, too. Distributive consequences A Concluding Perspective Nation A Efficiency gains (comparative advantage) Nation B Interests Nation C International political economy Domestic politics Nation D Generalizations from Cemex Market rivals in international settings have rights to initiate antidumping proceedings against imports. It is difficult to win in administrative processes that are governed by mandates, due process, openness, and court reviews. Legislation or strong legislative oversight are usually required for nonmarket success. On the surface, trade policy lies in the domain of governments and international relations. Beneath the surface, trade policy is set and implemented in an environment of intense domestic politics. In 1990 Cemex had little influence on trade policy. As of 1996, its integrated strategy has increased its influence.