Biking Along the Fast Track

by Prof. Philip I. Levy

The nineties have been a time of trade liberalization for the United States. GATT and NAFTA have opened American markets to imports from all around the world. Unfortunately, Congress' recent postponement of fast track status for NAFTA expansion legislation could put a halt to this process of liberalization.

In late September, just over a month before Congress considered President Clinton's request for "fast track" authority, a remarkable Business Week/Harris poll was released. It showed that 54% of Americans surveyed thought that Congress should not pass fast track, while only 36% were in favor of passage (10% were honest enough to admit that they didn't know).
Why is this so remarkable? Because this strong sentiment is being expressed over a procedural congressional rule. Congress writes such rules all the time. They can limit the nature of amendments that may be offered to a bill or they can restrict the nature and length of a debate. For a parallel, imagine if the average woman on the street had passionate opinions about whether health legislation should go through the House Ways and Means Committee or through the Commerce Committee. It might be a more interesting world if Americans really were such political junkies, but I think this kind of sentiment about trade procedure instead reveals a great deal of misunderstanding and manipulation. Let me offer, then, a brief guide to the fast track debate.
Fast track is a means by which Congress partially delegates to the President its authority over trade policy. The Constitution of the United States, in Article I, Section 8, grants to Congress the power "to lay and collect taxes, duties, imposts and excises…[and] to regulate commerce with foreign nations…". Up through the Smoot-Hawley Tariff Act of 1930, Congress did exactly that. It regularly passed bills that raised or lowered tariffs. After the breakdown of international trade in the early 1930's, however, there was some sentiment that the old procedure for trade policy creation had failed because Congress was too susceptible to protectionist interests. In 1934, Congress passed the Reciprocal Trade Agreements Act, which granted the President limited powers to negotiate mutual reductions in trade barriers with trading partners. Fast track is the modern successor to this act and has been available to every president since Gerald Ford. It gives the President a limited time period to present Congress with a proposed trade agreement. If the President does so, Congress is obliged to vote for or against the agreement without amendments. Congress is not obliged to accept the agreement, just to vote on an unmodified version. Thus, to oppose fast track is to believe that Congress ought to be able to amend a negotiated trade agreement.

The Need for Fast Track There is a strong case to be made that trade negotiations would not be feasible without fast track. The difficulty stems from the unusual division of powers in the American political system. When the minister of another country with a parliamentary system makes a pledge during trade negotiations, other participants know that the minister is backed by a majority of the legislature and can generally fulfill the pledge. Without fast track authority, pledges from the President of the United States would not be credible. While he might have every intention of submitting an agreement as negotiated, Congress would be virtually certain to modify it, likely reneging on the President's pledges. Of course, the trading partner could then refuse to pass the agreement, but there is usually a significant political cost associated with offering reciprocal trade liberalization. In practice, other countries have refused to begin negotiations with the United States unless the President has fast track authority. Even if an opponent of fast track is aware of its procedural nature, there might still be a sense that such limitations shift too much power to the President and could force Congress to accept a "bad" agreement. This would be an odd conclusion, though, since Congress always retains the power to reject the final accord. Furthermore, presidents have too much prestige on the line when undertaking international trade negotiations to ignore the likelihood of passage. They are perfectly capable of counting votes in the Senate or the House and in past negotiations the administration has consulted regularly with Congressional leaders. If a certain member of Congress represents a "swing vote" necessary for passage of an agreement, that member has substantial power to shape the agreement during negotiations. If free trade agreements really required free trade, there would not be much to shape - countries would just abandon their trade barriers. In practice, negotiators include numerous loopholes and delays in the agreements (there is a reason that the NAFTA text runs for hundreds of pages). Many of these are constructed to appease congressional interests.

Top 15 Partners in Total U.S. Trade in 1996 (Census Basis; Foreign and Domestic Exports, F.a.s.+General Imports, Customs; Millions of Dollars) Source: http://www.ita.doc.govtrade.stats/  Country  1996 Canada 290,103 Japan 182,794  Mexico  131,089 China  63,440  Germany  62,440  United Kingdom  59,841  S. Korea  49,276  Taiwan  48,368  Singapore  37,063  France  33,101  Italy  27,122  Malaysia  26,375  Hong Kong  23,831 Netherlands 23,246 Brazil 21,491

Trade liberalization is like riding a bicycle: if you stop moving forward you fall over.

Why Fast Track Might Fail If Congress retains the power to shape and to reject agreements, why would anyone oppose fast track? The first, most obvious explanation is that the public has equated fast track with free trade agreements and Americans have soured on trade liberalization. The same Business Week/Harris poll mentioned earlier found that 54% of the sample opposed extending NAFTA to other Latin American countries (Clinton's express purpose in seeking fast track) and only 34% were in favor. The public feels threatened by cheap foreign labor and by imports. There are some important misunderstandings at work here, but let me postpone them for a moment.

The decision on fast track is made not by public referendum, but by Congress. Lobbies exert the most direct influence on this decision. There is an organized business lobby in favor of fast track (although it was slow to organize this time). Unions have also mounted very strong opposition. The rallying cry for the opponents - seeking to avoid the label of protectionists - is "fair trade, not free trade." Union opposition to fast track should cast doubt on the sincerity of this claim.
Consider the following question of lobbying strategy. A game will be played in three periods. In the first period, there will be a decision on fast track. If it passes, the President will go on to negotiate a trade agreement in the second period (and trading partners may change their laws however they wish). Congress votes on the agreement in the third period. The union can lobby in period one to oppose fast track or it can lobby in period three to oppose the agreement (or both). In period two we discover whether the agreement is a "good" or "bad" agreement (leaving those terms undefined).
Given that it is costly to mount a lobbying fight, is it better for the union to fight fast track or to fight an agreement? If the union's position is that it would like a good agreement but dislike a bad agreement, it is clearly optimal to postpone lobbying until period three. If there is a good agreement at that point, the union will not wish to lobby and will have saved itself a great deal. If there is a bad agreement, presumably it will be easier to persuade legislators to reject it than to reject fast track in the first period (since that holds some potential for resulting in a good agreement). Opposing the procedural vote in the first period only makes sense if the union considers any free trade agreement a bad agreement and therefore does not care about the outcome of negotiations.
Even then, it is not clear that it is the optimal course for the union. Since they lost the fight over fast track, they will have to fight all over again on any agreement that is proposed. Further, if they had blocked fast track, it could have been taken up again later. Why, then, did the unions strike now? One possibility is that unions believed the popularity of free trade agreements was at a nadir. That seems unlikely, given the strong economic conditions in this country. A second possibility is that the opponents of free trade saw this as a unique opportunity to upset the process of trade liberalization that has been ongoing since the end of the Second World War.
That is, they may subscribe to the "bicycle theory" of trade liberalization. The bicycle theory goes as follows: trade liberalization is like riding a bicycle: if you stop moving forward you fall over. The empirical support for this is shaky. The Uruguay Round of GATT negotiations was supposed to conclude in December of 1990, but the United States' failure to reach agreement with Europe delayed conclusion of the round. The delay did not seem to cause any permanent damage, since the Round was concluded several years later.

The Clinton Administration set itself up for this sort of challenge, however. It followed up on a Bush Administration initiative and proclaimed its intentions to create a Free Trade Agreement of the Americas by 2005. To conclude an agreement by that time, one must begin negotiating years in advance, and no negotiations can proceed without fast track. It is also commonly held that fast track would be more difficult to pass the more politically charged the atmosphere. In 1998, there will be congressional elections. By 1999, House Majority Leader Richard Gephardt and Vice President Al Gore will be thoroughly engaged in the fight for the presidency. Thus, the opponents of fast track may have felt that if they could have blocked its passage this fall, the United States would have been labeled as an unreliable negotiating partner for years to come - a well-placed stick in the spokes of the bicycle.

So how much does this all matter? Suppose the Administration does conclude a free trade agreement expanding NAFTA to Chile. Will we all be force-fed unsafe food? Will all American industry relocate to Santiago? Will unemployment skyrocket? No on all counts. The most dire predictions one heard about NAFTA and hears about the extension to the rest of Latin America are premised on the assumption that the United States currently has high trade barriers preventing trade with these countries. Those barriers, presumably, are all that stand between us and disaster. The Clinton Administration played into these misperceptions by claiming that great benefits would flow from NAFTA. Whether the effects are positive or negative, one might have concluded, they will surely be significant. In fact, U.S. trade barriers against Latin America are remarkably low. The nations of that region all receive Most Favored Nation status, ensuring that no other trading partner receives preferential treatment. If one counts by tariff line item, the United States has tariff rates of 10% or less on 83% of the goods it imports. Only 3.8% of goods are subject to tariffs above 20%. There are sectors that receive significant non-tariff protection, such as textiles and apparel and parts of agriculture, but the United States has already committed to liberalizing these sectors under the Uruguay Round accord.

This kind of sentiment about trade procedure instead reveals a great deal of misunderstanding and manipulation.

In this light, the dire predictions sound silly. If drastically looser environmental regulations and lower minimum wages in Latin America were enough to draw American industry and jobs away, this should have happened years ago. Instead, the economy enjoys the lowest unemployment rates it has seen in decades. While there is limited evidence that trade may have increased the wage gap between skilled and unskilled workers, it is unlikely that the small remaining reductions in protection the United States might offer Latin America would have much additional impact.
So what does the United States have to offer these countries? Relatively little. Perhaps some relief from protection in politically sensitive sectors, such as salmon or cut flowers. Mostly, I believe, the United States can offer some recognition for the strides the countries of Latin America have made in rationalizing their economies. In return, it would receive a lowering of significantly higher Latin barriers to trade.
Is all this worth the fuss? Actually, no. The fight over fast track has revealed how much political capital must be spent to achieve a regional free trade agreement. The recent fight and NAFTA both showed the extent to which a candidate partner country from Latin America also inspires prejudicial fears in the American populace. Instead, the administration would be better advised to concentrate its efforts on multilateral liberalization under the auspices of the World Trade Organization. Such liberalization would include Latin American countries but would also liberalize trade with the rest of the world. That, at least, would be a fast track to a place we really want to go.

Professor Levy is an Assistant Professor in Yale University’s Economics department.