Fast track authority: trade policy or politics?

Paola Conconi, Giovanni Facchini, Maurizio Zanardi 21 May 2008

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The success or failure of international trade agreements often depends on what happens in the U.S. Congress. A recent example is provided by the controversial vote cast on April 10, in which Congress suspended fast track procedures for the ratification of the U.S.-Colombia free trade agreement, thus reneging on the rules that have regulated the trade negotiations of the U.S. with its trading partners for over thirty years.

Article I of the U.S. Constitution empowers Congress “to regulate commerce with foreign nations”. Since 1974, Congress has recurrently delegated this power to the executive by granting fast track authority, now called trade promotion authority (TPA), to the President. Under TPA, trade deals made by the executive can only be approved or rejected without amendments within 90 days after the implementing legislation is presented to Congress. In the absence of TPA, there are no limits to Congressional debate and amendments.

Fast track procedures played a crucial role during the Tokyo Round and the Uruguay Round of multilateral trade negotiations, as well as in all but one of the free trade agreements signed by the U.S.1 Fast track authority, renamed “trade promotion authority” by the George W. Bush administration, was last granted in 2002 for five years, allowing the U.S. to implement several free trade agreements with countries such as Australia and Chile, and to negotiate additional bilateral trade deals with Peru, Panama, South Korea and Colombia. The expiration of TPA in July 2007 has caused much concern, since “without renewal of fast track… the prospects for completion of the Doha Round of global trade talks, as well as several proposed bilateral U.S. trade deals, remain bleak.” (Wall Street Journal, 29 June 2007).

A two-level game

Notwithstanding its importance for the outcome of international trade negotiations, the decision to grant TPA remains very much a “domestic” decision, driven by the effects it has on the legislators’ constituencies. In other words, the decision is the result of a “two-level game” (see Putnam, 1988), in which international and domestic considerations are intimately related. How can domestic institutions affect the outcomes of trade negotiations? This is not a new question in the international economics literature. For example, Grossman and Helpman (1995) have considered the role of domestic pressure groups in shaping international agreements.

The role of domestic institutional procedures is less well understood. What drives the behaviour of legislators in the U.S. Congress when a vote is called upon delegating trade negotiating power to the President? What are the effects of TPA on the United States and the world? In a recent working paper, we address these questions, examining the theoretical determinants of a congressional representative’s decision to vote in favour or against TPA. In our setup, the executive and the legislators represent the trade policy interests of their own electoral constituencies, which depend on the relative importance of import-competing and export industries located there. When voting in favour or against fast track, legislators anticipate the impact that TPA (or the lack thereof) will have on the outcome of the negotiations with the foreign country. In terms of their trade preferences, legislators can differ from each other and from the executive, as a result of an uneven geographical distribution of production activities: for example, compared to the President, representatives from districts that are specialised in the production of import-competing goods will be less willing to exchange reductions in domestic protection for reductions in foreign trade barriers. The opposite is true for representatives of districts that are characterised by higher stakes in export activities.

Our theoretical model predicts that congresspersons from constituencies with higher stakes in import-competing industries will tend to vote against TPA, while representatives of more export-oriented constituencies may vote in favour or against, depending on the degree of protectionism of the majority of Congress. To understand this result, notice that, when the executive lacks TPA, it is as if Congress were to negotiate directly with foreign executives. More “liberal” congressmen then realise that they may be able to extract better concessions from the partner country if they let a conservative majority negotiate rather than the President, since the latter is more willing to enter an agreement. This is in line with results obtained in the literature on strategic delegation, which show that principals may gain by delegating decision-making power to status quo-biased agents, to increase their “bargaining power” in negotiations (e.g., Schelling, 1956).

This argument also implies that the lack of TPA would result in more protectionist trade agreements, which might end up discouraging trade partners from starting to negotiate with the United States in the first place. This can explain, for example, why Chile finalised a free trade agreement with the United States in 2003, after the latest renewal of TPA, rather than during the period between 1994 and 2002, when the executive lacked such authority.

Is this theoretical argument consistent with the facts? In order to answer this question, we conduct an empirical investigation of the determinants of legislators’ voting behaviour on fast track authority since its inception in 1974. The results are consistent with our model; in particular, the degree of protectionism of the majority that would form in Congress to negotiate a free trade agreement is an important determinant of the voting decision. The empirical analysis also points out the role of additional factors, which can help explain the current situation. First, over time fast track authority has become less popular among U.S. legislators, reflecting growing concerns on the effects of “globalisation”. Second, members of the Democratic Party are much less likely to vote in favour of fast track. These two findings, combined with the fact that we are in Presidential election year, make it not surprising that the Democrat majority in Congress is now firmly against granting fast track to the outgoing administration.

What next?

If it is true that “the power of a negotiator often rests on a manifest inability to make concessions and to meet demands” (Shelling, 1956), the U.S. Congress may find little comfort in this theoretical argument. In particular, the tough negotiating stance of the United States may push away its trading partners. As Jagdish Bhagwati recently pointed out, “if we don’t have fast track, we are going to lose out in the race for bilaterals.” In this case, the United States would bear large costs.

Now that the U.S. President does not have fast track authority, many commentators have underlined the difficulties that future U.S. administrations will face in initiating and leading international trade negotiations. Even more worrying is the recent vote on the U.S.-Colombia free trade agreement, which suspended the 90-day limit for ratification of deals negotiated under TPA. Susan Schwab, the U.S. Trade Representative, called this move “pure, partisan politics”. Indeed, trade policy looks more and more like a “one-level game”, in which decisions are driven solely by domestic concerns. Congress seems to have very little consideration for the repercussions of its decisions on other countries, as well as on the international reputation of the United States, disregarding the recent warning of Condoleezza Rice: “the eyes of many nations are upon us, and let no one think that the choices we make will not echo around the globe.”

References

Conconi, P., G. Facchini, and M. Zanardi (2008). “Fast Track Authority and International Trade Negotiations,” CEPR Discussion Paper n. 6790.
Grossman G. M., and E. Helpman (1995). “Trade Wars and Trade Talks,” Journal of Political Economy 103, 675-708.
Putnam, R. (1988). “Diplomacy and Domestic Politics: The Logic of Two Level Games,” International Organization 42, 427-460.
Schelling, T.C. (1956). “An Essay on Bargaining,” American Economic Review 46, 281-306.


1 Since 1974, the US-Jordan free trade agreement is the only one that has not been negotiated under fast track rules.

 

 

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Topics:  International trade Politics and economics

Tags:  US Congress, Trade Promotion Authority

Associate Professor at ECARES and CEPR Research Affiliate

Giovanni Facchini

Professor of Economics, University of Nottingham and University of Milan and CEPR Research Fellow.

Reader in Economics, Lancaster University Management School