Globalization: Markets, Instututions & Policy Professor O’Halloran Lecture 6.

Globalization: Markets, Instututions & Policy

Professor O’Halloran

Lecture 6

Basic Approach Preferences In -- Policies Out

• Issues emerge,• Interests (preferences) are formed, and• Information is transmitted to the• Institutions of government, where policy may or may not change.

Preferences(interests)

Policies(legal constraints on economic or social activity)

electoral process

governmental process

Government

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.

Fast Track

ITC

Departments

Committees

Private Sector Advisory

Committees

Other

PresidentPresident

ImplementingImplementing LegislationLegislation

ConsultationsConsultations

NegotiationsNegotiations

USTR

CongressionalDelegates

Non-MarkupsNon-Markups

DisapprovalDisapproval ResolutionResolution

CongressionalCongressionalCommitteesCommittees

Chamber FloorChamber Floor

PresidentPresident

Law

Step 1

Step 3

Step 2

Step 4

Step 5

Administration Congress

Step 1: Disapproval Resolution

PresidentPresident

DisapprovalDisapproval Resolution Resolution

Step 1

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

ITC

Departments

Committees


Committees

Other


Step 2

Enfranchises other actors into the decision making process

Prior to entering into an international agreement, the president (USTR) is required to consult with:

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


USTR


Step 3

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

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 4: Non-Markups




Step 4

Congress in consultation with the executive drafts the implementing

legislation that enacts the trade agreement into law.

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).

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

Once the president signs the agreement, Congress must act.


PresidentPresident

Law

Step 5

Step 5: Floor Vote

The implementing legislation requires a majority of both houses and the

president’s signature to become law.

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.

Fast Track

ITC

Departments

Committees


Committees

Other

PresidentPresident




USTR



DisapprovalDisapproval ResolutionResolution



PresidentPresident

Law

Step 1

Step 3

Step 2

Step 4

Step 5

Administration Congress

Purpose of Fast Track

Veto over executive actionInitial disapproval resolutionReverse fast trackFinal floor veto

Provides Congress with informationParticipate directly in negotiationsCreates executive agents to oversee other

agenciesEnfranchise 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

MarginalBenefit

MarginalCost

Political Action

Cost/Benefits

P1 P2

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.

LaborEnviron.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 administrationAFL-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

Reps

Dems

For Against

132 43

234 200

102 157

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?

Strategic AnalysisFirm & Activity Opportunities Challenges Strategies

Iowa Beef Processors

Magna International

Sony

Globalization: Markets, Instututions & Policy Professor O’Halloran Lecture 6.

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