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
1
president
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 days
160-300 days
2235-420 days
President, based on
ITC’s proposed
remedy
President
USTR, subject to the
direction of the
president1
Commerce (ITA)
60 days
No deadline
Included in
recommendation, 30
day implementation
1
limit
Upon recommendation
Yes, within 90 days if
president rejects
No
No
Recommendation
Due:
Decision-maker
Decision Due
Congressional
Override
1
2
No injury test
1
12-18 months
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
Pending as of
Most Recent
Year
Years included
# of Petitions
Successful
Success Rate
Unsuccessful1
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)
432
323
.74
6
4
303
Countervailing
Duty
(1979-1984)
235
27
.11
189
19
731
Antidumping
(1979-1984)
175
48
.27
127
60
Type of Action
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.
