Fast-Track Authority: A Hold-Up Interpretation.
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.
We acknowledge the support of the National Science Foundation, Grant # 27-3388-00-0-79-674. We are grateful for helpful comments from seminar participants at Stanford, the University of British Columbia, the Leitner Political Economy Seminar at Yale, Fundação Getulio Vargas in Brazil, KIEP in Sejong, Korea, the Australasian Trade Workshop, the International Trade and Urban Economics Workshop in St. Petersburg, DEGIT XXIII in Moscow, the University of Calgary, Hong Kong University, the University of Richmond, Indiana University, the St. Louis Fed Macro-Trade Workshop, and the NBER. Particular thanks go to Rod Falvey. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.