Globalization: Markets,
Instututions & Policy
Professor O’Halloran
Lecture 6
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.
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 policymaking 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
Administration
President
Step 1
Disapproval
Resolution
Congress
Non-Markups
Implementing
Legislation
Step 4
Consultations
ITC
Departments
Committees
Step 2
Congressional
Committees
Private Sector
Advisory
Committees
Other
Chamber Floor
Step 5
Negotiations
Step 3
USTR
President
Congressional
Delegates
Law
Step 1: Disapproval Resolution
President
Step 1
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:
Consultations
ITC
Departments
Committees
Step 2
Enfranchises other actors into the
decision making process
Private Sector
Advisory
Committees
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.
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
Step 3
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.
Congress in consultation with the
executive drafts the implementing
legislation that enacts the trade
agreement into law.
Non-Markups
Implementing
Legislation
Step 4
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).
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.
Step 5
President
Law
Fast Track
Administration
President
Step 1
Disapproval
Resolution
Congress
Non-Markups
Implementing
Legislation
Step 4
Consultations
ITC
Departments
Committees
Step 2
Congressional
Committees
Private Sector
Advisory
Committees
Other
Chamber Floor
Step 5
Negotiations
Step 3
USTR
President
Congressional
Delegates
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
P1
P2
Political Action
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
 Brand-label
at Non-Markup Stage:
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
 Small
Promises:
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
 What
a post-NAFTA strategy for each firm
non-market issues were created by
NAFTA?
Strategic Analysis
Firm & Activity
Iowa Beef Processors
Magna International
Sony
Opportunities
Challenges
Strategies