Fast-Track Authority: A Hold-Up Interpretation

68 Pages Posted: 26 Mar 2018

See all articles by Levent Celik

Levent Celik

National Research University Higher School of Economics

Bilgehan Karabay

RMIT University, School of Economics, Finance and Marketing

John McLaren

University of Virginia; NBER

Date Written: March 2018

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 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.

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Suggested Citation

Celik, Levent and Karabay, Bilgehan and McLaren, John, Fast-Track Authority: A Hold-Up Interpretation (March 2018). NBER Working Paper No. w24427. Available at SSRN: https://ssrn.com/abstract=3149233

Levent Celik (Contact Author)

National Research University Higher School of Economics ( email )

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Bilgehan Karabay

RMIT University, School of Economics, Finance and Marketing ( email )

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Melbourne, 3000
Australia

John McLaren

University of Virginia ( email )

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