Globalization _ International Economic Policy

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					Globalization: Markets,
 Instututions & Policy
    Professor O’Halloran

         Lecture 4
                       Basic Approach
   Preferences In -- Policies Out

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

                                    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
 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.
 Why does    Congress ever delegate
 When  it does, how and under what
 conditions will Congress delegate
 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
 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
         While ignoring negative externalities imposed on other

 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   to Executive

 Legislators   decide where policy is made.

 Since  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.
 Congress’sdecision to delegate is like a
 firm’s make-or-buy decision.
  – Legislators can either produce policy internally,
  – Legislators can subcontract out (delegate) to the
          Discretion Continuum

      Legislative                         Agency
     Policymaking                       Policymaking

       Low Discretion              High Discretion

    Trade Off:    Legislative vs.   Agency
                 Policymaking     Policymaking

   Amount of discretion delegated to the
    executive balances these costs at the
 Legislators   seek reelection

 Two    choices of how to make policy
  – Committees or Agencies (make-or-buy)

 Each   has costs

 Legislatorstrade off these two options when
  deciding what to delegate and what to do
                                Delegation Game
                                                               Floor sets policy pF
                         Don’t           F                                                                x=p F+w
     N                   F           d

                                         F                     P                    A                     x =SQ+pA+w
                                                Floor sets         President sets        Agency learns
                                              discretion (d)       Agency ideal         exact value of w ,
                                             status quo (SQ)          point A           sets policy pA s.t.
                                                                                            |pA|  d

         Institutional Choice                                  Policy Making Process                          Outcomes

Policy (p) = Policy chosen                             Floor Voter (f) = Median Legislator
Status quo (SQ) = Policy in effect                     President (p) = President’s ideal point
State of the World (w )= Uncertainty                   Agency (A) = Agency’s ideal point
Outcomes (x) = Combination of p and w .                Discretion (d) = Amount of authority delegated
                Strategic Proposals

       -R w 1         [w1+d]
                               xF=SQ w 2 xA= xP   w3        R
    Liberal                                        Conservative

      Range                       Outcomes        Example

    w < xA - SQ -d                  w+ SQ + d          w1

    xA -SQ- d < w < x A- SQ + d        xA              w2

    xA -SQ+d < w                   w+ SQ - d           w3

 Depending   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.
Discretion & Inter-branch Conflict
                       Discretion declines as President’s
                        ideal point moves away from the
                        median legislative voter.

      Median                              R        President’s
  Legislative Voter                                Ideal Point
       Summary of Results
 Congress  benefits from delegating (through
 informational gains or the elimination of
 inefficient logrolls) at some distributive cost.

   the president moves farther away,
 As
 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

                                                  Tariffs/Dutiable Imports
                                                  Tariffs/Total Imports
Tariff Rate






               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
      Sunsetlimits
      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
               has less protectionist preferences than median
      President
       member of Congress

 So less   delegation leads to higher tariffs

                    –                     –
                            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
   1962 Trade Expansion Act        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          Reagan         Divided   Decreased
   Competitiveness 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                 0.032
                                             (0.92)                (1.24)

        log(GNP)t-1                         -0.67                  -0.85
                                            (-1.00)                (-1.28)*

        log(UNEMPLOY)t-1                     0.045                 0.040
                                             (0.73)                (0.62)

        log(PPI)t-1                         -0.44                  -0.49
                                            (-1.44)*               (-1.63)**

        DELEGATIONt-1                                               -0.024

        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

   Astariffs have declined, Non-tariff barriers
   have steadily increased.
            Structure of US Trade Policy
                              Escape Clause             National Security             Retaliation               Countervailing             Anti-Dumping
                                                             Clause                                                Duties
U.S. Law:                 Section 201                Section 232                Section 301                Section 303                Section 731
                          1974 Trade Act             1962 Trade Act             1974 Trade Act             1930 Tariff Act            1930 Tariff Act
Modified:                 1979, 1984, 1988           1974, 1979, 1988           1984, 1988                 1974, 1984, 1988           1974, 1979, 1984
Rule:                     Increased imports          Imports threaten to        Barriers restrict US       Export subsidy             Price below “fair
                          cause or threaten to       impair national            commerce                   causes or threatens to     market value” causes
                          cause substantial          security by weakening                                 cause material injury      or threatens to cause
                          injury                     vital domestic industry    No injury test                                        material injury
Penalty:                  Duty, quota, OMA or        At president’s             Determined by USTR         Tariff which offsets       Tariff which raised
                          trade adjustment           discretion                 subject to direction of    subsidy or negotiated      price to fair market
                          assistance or other                                   president                  settlement                 value or negotiated
                          action                                                                                                      settlement
Investigating Agency:     ITC                        Commerce (ITA)             USTR                       Commerce (ITA) and         Commerce (ITA) and
                                                                                                           ITC                        ITC
    Recommendation        6 months                   270 days2                  12-18 months1              160-300 days               2235-420 days
Decision-maker            President, based on        President                  USTR, subject to the                         Commerce (ITA)
                          ITC’s proposed                                        direction of the
                          remedy                                                president
    Decision Due          60 days                    No deadline                Included in                             Upon recommendation
                                                                                recommendation, 30
                                                                                day implementation
Congressional             Yes, within 90 days if     No                         No                         No                         No
Override                  president rejects

  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.
  In 1983, recommendation was due in 12 months.
        Petitions Under US Trade Law
                                                                                                                                            Pending as of
    Type of Action      Years included          # of Petitions           Successful           Success Rate           Unsuccessful1          Most Recent
201                       (1958-1977)                  87                     15                    .17                     72
Escape Clause             (1975-1984)                  53                     18                    .34                     35                      1
232                       (1962-1983)                  14                     3                     .21                     11                      0
National Security
                                                         2                        3
301                       (1975-1987)                 43                     32                     .74                      6                      4
Foreign Trade
303                       (1979-1984)                 235                     27                    .11                    189                     19
731                       (1979-1984)                 175                     48                    .27                    127                     60

  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.
  Twenty-six agricultural cases were excluded.
  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 theearly 1980s, west coast cement
  producers were facing serious competition
  from foreign imports, especially from
 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         Cons
US trade laws (AD,


Challenge on
Environmental grounds

Joint law suit
Challenge EIS
Stabilize Prices
                        Political Feasibility?
Options                 Congress   President   Agency   Courts   Likelihood of Success
US trade laws (AD,


Challenge on
Environmental grounds

Joint law suit
Challenge EIS

Stabilize Prices
Calculating Antidumping Duties
                                                                             Mexico      U.S.
                                                             Sale price       $85        $80
                                                             Transportation    12         20
                                                             Terminal & trans. 10         17
                           U.S.                              Customs            --         2

                               . .
                                                             Other (adm.)
                                                             Mill Net Price

 Mexican                           .
                                                  US plant        Dumping margin =


                                                                  (52 - 31) / 31 = .68

  $10                    $20

terminal       $12   .
 58 percent     duties levied on Mexican exports
      All   other firms withdraw from US market
 Cemex      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
      Setsup headquarters in Houston
      Purchases a plant in Texas, employing 1,800

      Builds coalitions with consumers and representatives
                        Cemex’s Options
                            Pros          Cons
Appeal Decision


Challenge on
Environmental grounds

Joint law suit
Challenge EIS
Stabilize Prices
      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
           Outcome: lost. (58% duty)
 Seek      to overturn the decision
   – In the courts
           Outcome: lost
   – Lobbying
           Outcome: min. influence: no rent chain; little US presence
 Try   to reduce the duty in annual reviews (integrated)
   – Withdraw from low-price markets in US
   – Maintain the bulk (low-price) market in Mexico
           Outcome: (e.g.) duty lowered to 42.74% in 1994
 Shift     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
   – Export from Mexico to Japan to utilize Mexican
   – 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
  Cemex Update: Problems
 Cemex’s  inability to overturn antidumping
 decision created three problems in the
  – Persistent complaining by US rivals at periodic
    ITA reviews
      Rivalsclaim 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
   – 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
 Counteractive   lobbying by US
  – 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,
                A Concluding Perspective

                                Efficiency gains
                Nation A    (comparative advantage)   Nation B


                                    Nation C                        Nation D

                                  International political economy
                                  Domestic politics
     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

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