Fast-track authority: A hold-up interpretation

Abstract

A central institution of US trade policy is Fast-Track Authority (FT), by which Congress commits not to amend a trade agreement that is presented to it for ratification, but to subject the agreement to an up-or-down vote. We offer a new interpretation of FT based on a holdup problem. If the US government negotiates a trade agreement with the government of a smaller economy, as the negotiations proceed, businesses in the partner economy, anticipating the opening of the US market to their goods, may make sunk investments to take advantage of the US market, such as quality upgrades to meet the expectations of the demanding US consumer. As a result, when the time comes for ratification of the agreement, the partner economy will be locked in to the US market in a way it was not previously. At this point, if Congress is able to amend the agreement, the partner country has less bargaining power than it did ex ante, and so Congress can make changes that are adverse to the partner. As a result, if the US wants to convince such a partner country to negotiate a trade deal, it must first commit not to amend the agreement ex post. In this situation, FT is Pareto-improving.

The costs and benefits of rules of origin in modern free trade agreements

“…The heterogeneous incidence echoes both early and new work on ROOs (e.g., Grossman, 1981;Celik et al, 2020;Head et al, 2022), which show that a ROO matters only for particular levels of the supply curve and there are three cases to consider. In our model, we can classify the cases according to supplier productivity.…”

“…For example, as Krueger (1999) forcefully notes, ROOs can be imposed for protectionist reasons and constitute a source of economic inefficiency in FTAs. In turn, Celik et al (2020) study the optimal design of ROOs when countries use them to affect the distribution of gains from an FTA. More generally, Maggi et al (2022) show that there is a rationale for using non-tariff barriers -such as ROOs -when trade agreements restrict the use of tariffs.…”

Global supply chains, trade agreements and rules of origin

“…For example, see Ju and Krishna (2005) and Chang and Xiao (2015). 17 Unlike Chang and Xiao (2015) and Celik et al (2018), there is no fixed cost of meeting RoO requirements in my model.…”