Globalization: Markets, Instututions & Policy

Professor O’Halloran Lecture 6

Basic Approach

 Preferences In -- Policies Out Preferences (interests)

Government

electoral process governmental process

Policies (legal constraints on economic or social activity) • • • •

Issues

emerge,

Interests

(preferences) are formed, and

Information

is transmitted to the

Institutions

of government, where policy may

or may not

change.

Overview: Steps of Analysis

 Identify the decision making process and what purpose they serve.



Procedural Arrangements

define the sequence of events and strategies available to each player at the various stages of the decision-making process.

 Application  For a particular example, one must show how this strategic interaction shaped behavior and outcomes.

 Caveat  Sometimes the effect of procedures will be obvious, like a presidential veto.

 Other times, it will not be so obvious, as when the mere threat of presidential veto changes the behavior of actors.

Questions

 How does Congress design the policy making process?

 How do these procedures shape the behavior of actors? – Who has influence in the decision-making process? (Congress, President, Interest groups.)  What effect does this process have on policy outcomes?

Overview of Fast Track

 Definition – Enacted as part of the 1974 Trade Reform Act – A special congressional procedure for implementing international trade agreements.

 Limits congressional debate  Prohibits floor amendments  History – Grew out of problems in implementing the Tokyo Round Agreements  American Selling Price – Response to growing importance of non-tariff barriers  Requires changes in domestic laws

Purpose of Fast Track

 Reduces Uncertainty – Decreases the probability that a negotiated agreement will failed to be ratified  As happened with the Senate’s failure to ratify the 1979 East Coast Fishing Agreement between the US and Canada  Fast track requires a majority in Congress, while a treaty requires 2/3rds of the Senate.

 Limits Product-Specific Protectionism – Closed rule prevents trade agreement from unraveling on the floor.

 This does not mean that legislators don’t get certain benefits for their constituents.  But on average the total amount will be less than when Congress makes policy itself.

5 Steps to the Fast Track



Disapproval Resolution

 Congress has an initial veto over the use of fast track.



Consultation

 Private sector committees, congressional oversight committees, even state and local agencies all have input into the decision-making process.



Negotiations

 President enters into an agreement with the foreign country.



Non-markups

 Congress drafts the implementing legislation.



Floor vote

 Congress has a final veto over the agreement.

Administration

President Step 1 Disapproval Resolution Step 2 Consultations ITC Departments Committees Private Sector Advisory Committees Other

Fast Track

Congress

Non-Markups Implementing Legislation Congressional Committees Chamber Floor Step 4 Step 5 Step 3 Negotiations USTR Congressional Delegates President

Law

Step 1

Step 1: Disapproval Resolution

President Disapproval Resolution

Initial veto that Ways and Means and Finance Committees have over the use of fast track

 Before the president can begin negotiations under fast track procedures, – He must request permission from Ways and Means and Finance Committees.

 If either committee passes a

disapproval resolution

within 30 days, – The president must seek alternatives means to implement the agreement.

 Treaty  Separate Implementing Legislation

Step 2: Consultations

 Prior to entering into an international agreement, the president (USTR) is required to consult with: Step 2 Consultations ITC Departments Committees Private Sector Advisory Committees Other

Enfranchises other actors into the decision making process

 These

consultations

help identify early on in the process what the probable impact of the agreement will be, and who will favor and oppose the negotiations.

Step 3: Negotiations

 The USTR is the chief

negotiator.

– Has cabinet level status – Resides in the Executive Office of the President  Negotiation team may also include representatives from other executive agencies.

 Members of Congress, appointed by the Speaker of the House, act as

ex officio

members.

Step 3 Negotiations USTR Congressional Delegates

Negotiations of trade agreements conducted by the United States Trade Representative. But the president signs the agreement.

Step 4: Non-Markups

 Once the president signs the agreement, Congress must act.

Non-Markups

Congress in consultation with the executive drafts the implementing legislation that enacts the trade agreement into law.

Implementing Legislation Congressional Committees  Committees can Recommend: – Changes that bring domestic law into conformity with the international agreement.

– Specific provisions (e.g., exemptions for industries or requirements for future negotiations).

Step 4  If chambers don’t concur on revisions then they hold a “Non-Conference.”

Step 5: Floor Vote

 Before an international agreement can become law under fast track, bicameral approval and presentment is required: – Debate is limited to 20 hours, equally divided among proponents and opponents.

– The bill is considered under a closed rule-- no amendments are allowed.

Chamber Floor

The implementing legislation requires a majority of both houses and the president’s signature to become law.

President Step 5

Law

Administration

President Step 1 Disapproval Resolution Step 2 Consultations ITC Departments Committees Private Sector Advisory Committees Other

Fast Track

Congress

Non-Markups Implementing Legislation Congressional Committees Chamber Floor Step 4 Step 5 Step 3 Negotiations USTR Congressional Delegates President

Law

Purpose of Fast Track

 Veto over executive action  Initial disapproval resolution  Reverse fast track  Final floor veto  Provides Congress with information  Participate directly in negotiations  Creates executive agents to oversee other agencies  Enfranchise key constituents into policy process

Fast Track and NAFTA

 What is the decision making process ?

– Defines key actors and sequence of events  Who controls the key veto gates ?

– Composition of committees – Party of the president – Majority control of House and Senate  Who has access to the decision-making process?

– Interest group lobbying – Private sector advisory committees

Exercise

 Suppose you were hired as a consultant by the Mexican government. Knowing what happened in the US-Canada FTA, what information would you need to predict the outcome of NAFTA?

– i.e., what were the key features of US-Canada, and what has changed since then?

Initial Veto

 Has the composition of the committee changed?

– Yes: Democrats control both Houses now  What do they want?

– Represent Eastern manufacturers, not Western agriculture and forestry  So steel, textiles, auto producers & suppliers are key constituents – Democrats are more protectionist  Gephardt ran on anti-trade platform in 1988

Consultation

 Has the composition of private sector interests changed?

– Yes: country is now in a recession

Marginal Cost

Cost/Benefits

Marginal Benefit

Political Action P 1 P 2

Negotiations

 Have the preferences of the negotiators changed?

 Not much: Bush instead of Reagan  Primary objectives include:  Reduce tariffs and NTB’s, harmonize regulations  Protect intellectual property rights  Liberalize Mexico’s foreign investment regulations  Free up government procurement practices  Expand trade in services, telecom, financial services

Non-Markups

 Tariff Barriers: Not a major issue  Immediately eliminate tariffs on:  telecommunications, computer services, financial and management services.

 Phase out others over 10-15 year period  Non-Tariff Barriers: More difficult to deal with  US has AD actions against Mexico pending in:  Auto Supplies  Elementary Metals  Steel and Light Manufactures  Apparel and Clothing  These will be exempted or compensated in non-markups

Floor Vote

 Does Congress have new checks on the use of fast track ?

 Yes: Reverse Fast Track, from1988 OTCA  If presidents does not consult, can repeal fast track  Has median voter shifted?

 Yes: Senate is now Democratic  Means Bush will have an ever harder time than Reagan getting legislation passed  Overall Assessment:  NAFTA will be more precarious than US-Canada

Getting Congress To Go Along

 Bush had two hurdles to overcome: – Disapproval resolution (February, 1991)  Passed Ways & Means and Finance with little opposition.

– Extension of Fast Track (May, 1991)  1988 OTCA allowed for a 2-year extension of fast track if president requested and neither House disapproved.

 Set up coalition of environmentalists, human rights advocates, and organized labor in opposition.

Environ .

Labor

The Action Plan

 Bush responded with an “Action Plan:” – Snapback provisions if industries are injured – Strict rules-of-origin requirements – 50% domestic content on automobile imports – Won’t negotiate lower standards for health & safety – Can bar entry on products that don’t meet standards – Parallel negotiations on environmental problems .

Broke the coalition opposing the agreement

Final Agreement

 Winners – Telecommunications, Financial Industry – Agricultural items still protected: orange juice, peanuts, sugar, broccoli(!), garlic, cantaloupes  Losers (Compensated) – Extended reduction period for ceramic tile, glassware, watches, footwear – 10-year phase-out for dyes, bicycles, eggplants – Textiles and apparel retain quotas for 10 years

Safeguards and Compensations

 Snapback  US can revert to pre-NAFTA tariffs for up to 3 years if industry proved increased imports caused serious injury.

 US must compensate Mexico or face equivalent tariff.

 Trade Adjustment Assistance (TAA)  Retraining and assistance to workers who lose jobs due to increased international competition.

 Domestic Rules of Origin  Prevent products manufactured outside of North America from using Mexico or Canada as a pass-through to US.

Clinton Takes Over

 Congressional Opposition Eases:  Sen. Riegle (D-MI) drops efforts to derail fast track  Wrote letter cosigned by 24 Democrats urging tough side agreements  Gephardt described pact as “reasonable and a good thing for US, Mexico and Canada to do.”  Interest Group Opposition Softens:  Six environmental groups reach a compromise with the administration  AFL-CIO aims for side agreements on labor, rather than trying to kill NAFTA altogether.

Clinton Builds a Coalition

 Clinton announces five unilateral measures;  TAA to workers adversely affected by imports  Environmental protection through cleanup & investment  Assistance for farmers hurt by imports  Citizen-initiated suits against bad environmental practices  Protection for workers against strike breakers  As side agreements were being negotiated, two facts became apparent:  Countries were reluctant to relinquish control over their internal labor markets .

 US environmental groups were more willing to work with administration than was labor.

Side Agreements

 Environmental side agreement was stronger  Environmental practices could be challenged on any ground ; – Labor practices only if they pertained to worker safety, child labor, or minimum wage issues  Once an environmental protest was lodged, an investigation began unless 2 of 3 countries objected .

– Convening a labor panel required the active assent of 2 of 3 countries

Gore-Perot Debate

 Interest Groups polarize over NAFTA  Six major environmental groups support the agreement, including Audubon Society & NRDC  Labor intensifies its opposition  Ex-Presidential candidate Perot is also strongly against the agreement.

 Administration takes the unusual step of having Vice-President Gore debate Perot on Larry King Live.

 And the winner is….

Implementing the Agreement

 Debate splinters labor opposition and signals to Congress to move ahead.

 Clinton still had to implement agreement  Used three methods to accommodate congressional demands: – Add-On Amendments to Implementing Legislation – Last-Minute Deals with Mexico – Unilateral Promises by Clinton

Add-On Amendments

 Provisions Added at Non-Markup Stage:  Brand-label protection for Tennessee Whiskey  No accelerated reductions in tariffs without approval of US producers  Stringent record-keeping to prevent Australian or New Zealand beef from entering US through Mexico  Easier snapback relief for makers of household appliances  Trade in tomatoes, peppers, fresh fruits, vegetables and cut flowers monitored to detect surge in imports  Imported peanuts held to same standards as domestic ones

More Deals...

 Last-Minute Negotiated Agreements:  Immediate post-ratification talks to accelerate reductions of tariffs on brandy, wine, car window glass, bed frames  North American Development Bank established to provide border cleanup funds  Imports containing high fructose corn syrup count against the sugar quota (for Louisiana and Maryland)  Unilateral Promises:  Small business pilot program for Flake (D-NY)  Dredging project for King (R-NY)  Retaliatory action against Canada if wheat and peanut disputes were not settled (Oklahoma and Georgia)  Protect Florida tomato growers from increased imports

Final Vote

 Partisan Breakdown For Against Dems 102 157 Reps 132 43 234 200  Interest Group Breakdown  White Collar Districts: 70 30  Agricultural Districts: 61 35  Labor Districts: 18 77

Analysis

 Coalition  Republicans already supported the agreement  Needed to accommodate moderate Democrats  Formed coalition of agriculture and high-tech white collar workers  Would Bush have built the same coalition?

 Would have accommodated more Republicans at the margin  Would have more trouble with moderate Democrats  What does this tell us about the policy making process?

Case: Regarding NAFTA

 Three firms in post-NAFTA environment – Iowa Beef Processors – Magna International – Sony Nuevo Laredo Plants  How will each firm benefit from NAFTA?

 What challenges does NAFTA pose?

 Develop a post-NAFTA strategy for each firm  What non-market issues were created by NAFTA?

Firm & Activity

Iowa Beef Processors

Strategic Analysis

Opportunities Challenges Strategies

Magna International Sony