Working Paper: NBER ID: w24427
Authors: Levent Celik; Bilgehan Karabay; John McLaren
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. \nWe offer a new interpretation of FT based on a hold-up 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.
Keywords: Fast-Track Authority; Trade Negotiations; Holdup Problem
JEL Codes: F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. negotiations of trade agreements (F13) | Partner country businesses invest in quality upgrades (F23) |
| Partner country businesses invest in quality upgrades (F23) | Partner country is locked into the agreement with diminished bargaining power (F55) |
| Congress's ability to amend the agreement after investments (F21) | Changes that harm the partner country (F35) |
| Fast-track authority (L92) | U.S. commits not to amend the agreement (F53) |
| Fast-track authority (L92) | Facilitation of negotiations (F51) |