Globalization Markets, Instututions amp Policy.ppt

Globalization:Markets,Instututions&PolicyProfessor OHalloranLecture 4Basic ApproachuPreferences In-Policies OutIssues emerge,Interests(preferences)are formed,andInformation is transmitted to theInstitutions of government,where policy may or may not change.Preferences(interests)Policies(legal constraints on economic or social activity)electoral processgovernmental processGovernmentPivotal Politics Game uTwo Strategies to Pass Laws:FGet two-thirds of each House;orFGet a majority in each House and president.uImplicationsFPolicy change requires large majorities;FThere are numerous points along the process where legislation can be held up;FPolicy 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 DelegationuBut a lot of policy is made not by Congress directly.uRather,Congress delegates authority to the president or regulatory agencies.uExamples:FEnvironmental Protection AgencyFFood and Drug AdministrationFUSTRuThe same mechanisms that make it hard to pass policy,make it hard to check agencies.QuestionsuWhy does Congress ever delegate authority?uWhen it does,how and under what conditions will Congress delegate authority?uWhat are the implications for policy?Why Delegate?uPossible reasons:Save time/Reduce workloadTake advantage of agency expertiseProtect special interestsShift the blameuTwo factors that affect congressional decision making:Informational DistributiveInformational ConcernsuLegislation is complexBut legislators have only limited time and resources.uBureaucrats are expertsLegislators can solve this problem by delegating authority to regulatory agencies.So Congress delegates to take advantage of agency expertise.uOutcomesPolicy will be well informed and reflect the technical expertise of agencies.Distributive ConcernsuProcess creates legislative logrolls with lots of pork.FFor example,the 1988 OTCA.uInefficiencies arise because:FEach individual equates the marginal benefits and costs for his district,FWhile ignoring negative externalities imposed on other districts.uConsequence:FIf these externalities are small Congress may not care.FIf large,imposing high costs on taxpayers and consumers,then legislators may want to reduce costs.Example:1930 Smoot-Hawley Tariff ActSolution:DelegationuDelegate authority to a central agent who internalizes both costs and benefits.uTrade policy(first cut)FCongress solves collective dilemma by delegating to the president.FPresident has a national constituency and therefore trades off costs and benefits across all districts.FAuthority is subject to constraints.uKeyFGive agent incentive to take actions;FThen provide checks.Logic of DelegationuTwo alternative modes of policy makingCongress:FCommittee SystemRegulatory Agencies:FDelegation to ExecutiveuLegislators decide where policy is made.uSince legislators primary goal is reelection,policy will be made so as to maximize legislators reelection chances.Transaction Cost PoliticsuEach alternative mode of policy making has its own set of costs:Legislative Policy Making(Committees)FLogrolling,delay,informational problemsAgency Policy Making(Delegation)FPrincipal-agent problems of oversight1.So when deciding where policy will be made,legislators trade off these internal and external costs of policy production.Make-or-BuyuuCongresss decision to delegate is like a Congresss decision to delegate is like a firms make-or-buy decision.firms make-or-buy decision.Legislators can either produce policy internally,Legislators can either produce policy internally,OR OR Legislators can subcontract out(delegate)to the Legislators can subcontract out(delegate)to the executive.executive.Discretion Continuum Amount of discretion delegated to the executive balances these costs at the margin.Trade Off:Legislative PolicymakingAgency PolicymakingLow DiscretionHigh DiscretionLegislativePolicymakingAgencyPolicymakingvs.SummaryuLegislators seek reelectionuTwo choices of how to make policy Committees or Agencies(make-or-buy)uEach has costsuLegislators trade off these two options when deciding what to delegate and what to do themselvesDelegation GameFloor Voter(f)=Median LegislatorPresident(p)=Presidents ideal point Agency(A)=Agencys ideal pointDiscretion(d)=Amount of authority delegatedPolicy(p)=Policy chosenStatus quo(SQ)=Policy in effect State of the World(w)=UncertaintyOutcomes(x)=Combination of p and w.Nwx=pF+wAFFFPInstitutional ChoicePolicy Making ProcessFinal OutcomesAgency learns exact value of w,sets policy pA s.t.|pA|dPresident sets Agency ideal point AFloor sets discretion(d)status quo(SQ)x=SQ+pA+wDelegateDont DelegateFloor sets policy pFdd=0d=1xF=SQConservativeLiberalR-Rw w2w w3w w1 w w+d1=Strategic ProposalsuDepending 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.Range Outcomes Example w x-SQ-d w+SQ+d w1 x-SQ-d w xA-SQ+dxA w2 x-SQ+d R),Congress does not delegate at all.uWhen Congress does delegate,it constrains the president by setting dR.Tariffs over TimeuSince the 1934 RTAA,steep decline in tariffs.Delegation Is Not MonolithicuThe terms of delegation have changedFSometime Congress delegates broad authority (e.g.,RTAA).FSometimes Congress limits this authority(e.g.,fast track procedures).uDelegation is constrained by administrative procedures FSunset limitsFCongressional override proceduresFChanges in criteriauGives rise to procedural protectionismFThe politics is in the proceduresDoes Divided Government Impact Trade Outcomes?Divided GovtDelegationTariffuTheory:Divided government leads to less delegation.FPresident has less protectionist preferences than median member of CongressuSo less delegation leads to higher tariffsMajor Postwar Trade ActsMajor U.S.Trade Legislation,Divided Government,&Delegation,1948-1992 Effect of Delegation on TariffsNote:t-statistics in parentheses.*a .10.*a .05.Least Squares Estimates of the Effect of Delegation on the TariffDependent Variable:D Dlog(TARIFF)Tariff&Non-Tariff Barriers,1950-86uAs tariffs have declined,Non-tariff barriers have steadily increased.Structure of US Trade PolicyPetitions Under US Trade LawuThe administrative procedures associated with each trade remedy influence who uses them and the probability of success.Cement PoliticsuIn the early 1980s,west coast cement producers were facing serious competition from foreign imports,especially from Mexico.uMexican cement producers received oil from the government at discounted prices.May be seen as an unfair advantage uWhat are US firms options?US Firms StrategiesPolitical Feasibility?Calculating Antidumping DutiesUS plantU.S.customerUSterminalCemexterminalCemex plantCemexterminal.$12$10$20$2$17$80$10$7Mexicancustomer$85Sale priceTransportationTerminal&trans.CustomsOther(adm.)Mill Net PriceMexico$85 12 10 -11 52 U.S.$80 20 17 2 10 31Dumping margin=(52-31)/31=.68Outcomeu58 percent duties levied on Mexican exportsFAll other firms withdraw from US marketuCemex counterstrikesFAppeals in US courts(Loses)FLobbies legislators(Little impact)FFiles GATT petition(Wins,US overrides)FLobbies Mexican Government(NAFTA)FNAFTA Dispute Settlement(Loses)uCemex plays US domestic politics gameFSets up headquarters in Houston FPurchases a plant in Texas,employing 1,800FBuilds coalitions with consumers and representativesCemexs Options Session 13:Cemex and international tradeuObjectives To see an recent and ongoing instance of integrated strategy in an international settingmultiple institutionsuUS trade lawuGATTuNaftashifting interestscomplex informationTo step back and consider the nature of trade institutions more generallyCemexs Initial Market StrategyuObjective:to become a major international playeruActions(conventional,market strategy)Dominate in Mexico via acquisitions and investment in modern facilitiesExport to the US when economy is sluggishObtain capacity in other countriesFSpain,Venezuela,PanamauNonmarket consequence of the export component of the market strategyAntidumping petitionuWas this anticipated?Could it have been?Cemexs Revised StrategyuComply with all requests to maximize chance of winningFOutcome:lost.(58%duty)uSeek to overturn the decisionIn the courtsFOutcome:lostLobbyingFOutcome:min.influence:no rent chain;little US presenceuTry to reduce the duty in annual reviews(integrated)Withdraw from low-price markets in USMaintain the bulk(low-price)market in MexicoFOutcome:(e.g.)duty lowered to 42.74%in 1994uShift to a potentially neutral institutional arenaFile a GATT petitionFOutcome:won the battle,lost the warRevised Strategy(cont.)uMarket components consistent with nonmarketExport to US from Spain,which is not subject to the dutyExport from Mexico to Japan to utilize Mexican capacityAcquire capacity in the USFEstablishes a US presenceFSignals long-term commitmentFRaises prospects for coalition buildinguThe strategy is integratedMarket components lessen the nonmarket pain in the short termNonmarket components reflect long-term international objectivesCemex Update:ProblemsuCemexs inability to overturn antidumping decision created three problems in the 1990sPersistent complaining by US rivals at periodic ITA reviewsFRivals claim that dumping margin should be based on bagged(no bulk)cement,thus 111%FDoes Cemex have to fight just to keep the situation from getting worse?Stranded Cemex terminal and distribution facilities in USExcess capacity in MexicoResponses&Consequences:NonmarketuArgued that the US should abide by GATT decision no effectuRefused to supply data on bagged cementITA uses default procedure which takes the maximum(not weighed average)of margins;margin goes to 61.85%in May,1995uCemex files for NAFTA dispute resolution in July 1995Untried,but relatively good expectationsFCemex is winless within the US systemFUS Department of Commerce indicates that it thinks Cemex stands a good chance of winningUnfounded,though:summer of 1996uAt approximately the same time.uDemand in US is high,supply is low,prices riseuCemex acquires facilities in Venezuela and PanamauCemex exports from Mexican plants to Japan,Indonesia,the Philippines,Malasia,and TaiwanuCemex exports to the US market from its facilities in Spain and Venezuelaescapes antidumping margin at least in the short runuCemex purchases a plant in Texas,moves regional headquarters from Monterey to Houston,employs 1800 in USbuilding a rent chain;US domestic presenceResponses&Consequences:MarketNew Objectives,Strategy,ImplementationuObjectivesChange the way US calculates dumping marginsNegotiate a more favorable settlementuStrategy and implementationCoalition building with consumersFNational Association of Homebuilders(180,000 firms;better coverage than Cemex)Enlist allies to be policy entrepreneursFTom Delay(Republican whip from district with a Cemex plant);Gene Green(Democrat,also with 3 Cemex plants)LobbyingFHired Randy Delay&a DC public relations firmPublic advocacyFop ed in Wall Street JournalFads in Roll CallConsequencesuCounteractive lobbying by US manufacturersJoe Barton(Republican of Texas)writes to all House members asking them to opposeuCounter-counteractionGene Green gets 34 co-signers on a letter to Department of Commerce and USTR asking for a negotiated settlementuOngoing international struggle has evolved into an ongoing domestic political struggle,too.A Concluding PerspectiveNation ANation CNation DNation BInternational political economyDomestic politicsInterestsEfficiency gains(comparative advantage)DistributiveconsequencesGeneralizations from CemexuMarket rivals in international settings have rights to initiate antidumping proceedings against imports.uIt 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.uOn the surface,trade policy lies in the domain of governments and international relations.uBeneath the surface,trade policy is set and implemented in an environment of intense domestic politics.uIn 1990 Cemex had little influence on trade policy.As of 1996,its integrated strategy has increased its 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