Globalization: Markets, Instututions & Policy

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

2. Preferences (interests) Government Policies (legal constraints on economic or social activity) electoral process governmental process 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.

3. 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.

4. 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?

5. 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

6. 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.

7. 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.

8. Congress Administration Fast Track President Non-Markups Step 1 DisapprovalResolution ImplementingLegislation Step 4 Consultations ITC Departments CongressionalCommittees Committees Step 2 Private Sector AdvisoryCommittees Chamber Floor Other Step 5 Negotiations President USTR Step 3 CongressionalDelegates Law

9. Step 1: Disapproval Resolution Initial veto that Ways and Means and Finance Committees have over the use of fast track President Step 1 Disapproval Resolution • 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

10. Step 2: Consultations • Prior to entering into an international agreement, the president (USTR) is required to consult with: Consultations ITC Enfranchises other actors into the decision making process Departments Committees Step 2 Private Sector AdvisoryCommittees Other • 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.

11. 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. Negotiations of trade agreements conducted by the United States Trade Representative. But the president signs the agreement. Negotiations USTR Step 3 CongressionalDelegates

12. Step 4: Non-Markups • Once the president signs the agreement, Congress must act. Non-Markups ImplementingLegislation Congress in consultation with the executive drafts the implementing legislation that enacts the trade agreement into law. Step 4 CongressionalCommittees • 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.”

13. 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. Step 5 President Law

14. Congress Administration Fast Track President Non-Markups Step 1 DisapprovalResolution ImplementingLegislation Step 4 Consultations ITC Departments CongressionalCommittees Committees Step 2 Private Sector AdvisoryCommittees Chamber Floor Other Step 5 Negotiations President USTR Step 3 CongressionalDelegates Law

15. 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

16. 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

17. 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?

18. 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

19. Marginal Cost Cost/Benefits Marginal Benefit Political Action P1 P2 Consultation • Has the composition of private sector interests changed? • Yes: country is now in a recession

20. 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

21. 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

22. 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

23. Environ. Labor 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.

24. 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

25. 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

26. 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.

27. 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.

28. 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.

29. 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

30. 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….

31. 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

32. 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

33. 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

34. For Against Dems 102 157 Reps 132 43 234 200 Final Vote • Partisan Breakdown • Interest Group Breakdown • White Collar Districts: 70 - 30 • Agricultural Districts: 61 - 35 • Labor Districts: 18 - 77

35. 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?

36. 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?

37. Strategic Analysis