California Senate - Select Committee on International Trade
Agreements & State Legislation, Sen. Sheila Kuehl, Chair,
Committee on Banking, Commerce & International Trade,
Sen. Michael Machado, Chair

Presentation by Robert Stumberg* - May 16, 2001

* Professor of Law, Georgetown University Law Center,
address: Harrison Institute for Public Law, 1 I I F St., NW - Suite 102, Washington, DC 20001-2095,
phone: 202-662-9603, fax: 202-662-9613, email: <stumberg@law.georgetown.edu>.

Overview

1. Introduction: the balance of governing power

Agricultural quality	Food safety	Legal remedies for fraud
Banking & insurance	Fair competition policy	Purchasing preferences
Economic development	Fair labor purchasing	Sovereign immunity
Environmental protection	Growth controls	Taxation of multinationals

11. Roles for state and local government

I11. Example of roles on subsidies for economic development

A. Oversight ... Potential conflict on export promotion, agriculture, wood, film industries.
B. Lawmaking ... Multi-state subsidy reform on public accountability and disclosure.
C. Advice ... In the FTAA and GATS, use general exceptions to protect best practices.

IV. Where to start

A. Ask questions of USTR.
B. Develop state-level capacity.
C. Engage Congress, other states (through NCSL) and the public.

Balancing Democracy & Trade:

Local Roles in the Global Debate

1. Introduction: the balance of governing power

A. Local law may conflict with global agreements

Many state and local laws regulate trade or limit the use of land and other investments. International trade and investment agreements regulate governments in order to liberalize trade and foreign investment. A recent study by the Harrison Institute identifies 11 categories of state law in California that potentially conflict with trade or investment rules under NAFTA or the WTO agreements. There are over 100 examples of potential conflicts within these categories. By "Potential conflict", we mean that a state or local law appears not to comply with the international trade or investment rules. The following chart indicates the number of potential conflicts in each category of the California study.

Potential for Local-Global Conflict:
Preliminary Survey of California Law

Categories of State Law	Examples of Potential Conflict
Economic develop ment	333333333333333333333333333333333333333
Environmental.health	333333333333333333
Environmental resources	333333333333333
Agriculture & food safety	33333333333333
Land use control	333333
Business licenses	3333
Labor & human rights	333
Access to courts	33
Fair competition	33
Consumer protection	33
Taxation of multinationals	33

The chart on the following page takes a closer look at the categories of potential conflict. In only a few of the categories, such as export promotion, does the state explicitly aim to affect international trade. Most of the categories raise potential conflicts because the whole economy is increasingly global, and even local public policies can limit opportunities of foreign traders and investors.

This paper briefly addresses three questions. First, why are global agreements a state and local concern. In a word, the reason is "balance" -- because global agreements can shift the balance of power enjoyed by state and local governments in the U.S. federal system. Second, how do global agreements work in such a way that they affect local authority? Third, what are appropriate roles for state and local officials to play in terms of negotiating -- and coping with -- global agreements on trade and investment?

A Closer Look: Potential for Local-Global Conflict

Economic development - Agricultural development - Business development - Distressed area revitalization - Domestic procurement preferences - Export promotion - Small and minority business development - Technology research and development Environmental health - Environmental services - Groundwater protection - Pollution abatement - Toxic materials control Environmental resource conservation - Energy conservation - Environmental procurement - - Fish conservation - Recycled content markets - Waste reduction - Wildlife protection Labor and human rights - Goods made with forced labor

Agriculture and food safety - Commercial quality - Food safety Land use control - Development limits - Reclamation requirements Access to courts - Sovereign immunity - Bond requirement for appeal Business licenses - Liquor license requirements Fair competition - Antitrust enforcement - Rent control Taxation - Corporate tax basis Consumer protection - True weight labeling - Environmental representations

B. The broader issue is balance

1. Balance of power for state and local government

Federalism and its balance of political power are the target of trade and investment disputes.

1. Trade barrier complaints. Federal systems promote diverse and complex law-making, which runs counter to the uniformity that trade rules are designed to promote. The EU has described the U.S. federal system as "market fragmentation." The EU and Canada cite state and local laws as trade barriers. For example:
   - Taxation and licensing of alcoholic beverage sales.
   - Public procurement preferences.
   - Consumer health measures, including labeling.
   
   
2. Investor complaints. In the initial round of complaints under NAFTA's investment chapter, private investors are seeking compensation for exercise of traditional government authority at the state and local level. [see attached NAFTA claims-chart] These claims would not be viable in domestic courts without radical reforms that have been rejected by state legislatures. For example:
   

NAFTA claims against:	Are equivalent to:
Massachusetts sovereign immunity	constitutional reform
Mississippi common law remedies	tort reform
California police power	takings reform

2. Balance of public interests.

1. Support for trade liberalization. A national survey by the University of Maryland shows that a large majority of American people support trade liberalization. An equally large majority also feels that trade policy disproportionately reflects the interests of multinational corporations "too much," and the interests of working people "too little."
   
   
2. Support for environment, labor and public health measures. While Americans support expanded trade, they give equal support to limiting trade so as to protect the environment and humane working conditions. Americans support the authority of other countries to limit imports from the United States in order to protect public health and other interests. See the University of Maryland survey report at www.pipa.org.
   
   Public Attitudes on Trade
   

Support for free trade	Support for balanced policy
Support free trade 76%	74% Favor restricting imports based on environmental concerns
Favor trade agreements 62%	74% Favor restricting imports based on working conditions
Support more agreements 55%	81 % Support other countries= ability to require labels on genetically modified foods

C. How global agreements affect state authority

1. Global Rules Shift the Legal Balance of Power
   
   1. Overview -- Trade and investment agreements each empower different actors to bring economic pressure on trade-sensitive government measures. Global agreements have no direct legal effect unless a domestic government decides to enforce the agreements.
      
      - Trade agreements empower nation states to invoke punitive tariffs.
      - Investment agreements empower private corporations to sue nation-states for economic compensation.
      
      
   2. Trade rules -- Enforced by trade sanctions, some trade rules are analogous to constitutional limits on the law-making power of state and local government. However, the trade rules go significantly further to limit governing power.
      
      

      Type of Trade Rule	WTO Agreement
      No discriminatory effect	GATT, GATS, GPA, SPS, TBT
      Least trade-restrictive requirement	GATS, SPS, TBT
      Scientific basis and risk assessment	SPS, TBT
      Uniformity	SPS, TBT
      Performance-based purchasing	GPA
      Prohibited and actionable subsidies	SCM

      Examples of how trade rules change constitutional standards for lawmaking:
      
      (1) No discriminatory effect rules (national treatment and MFN).
      

      - More stringent than rational basis or classification requirement.
      
      Example of potential conflict: Liquor licensing and distribution laws.
      
      

      (2) Least-trade restrictive rules.
      

      - Much more stringent than rational basis test.
      - Replaces Arational basis@ with strict scrutiny.
      
      Examples of potential conflict: Requirement that insurance companies must not exclude coverage based on genetic information.
      
      

      (3) Prohibition on procurement that is not performance-based.
      

      - No constitutional precedent in domestic law.
      
      Example of potential conflict: Environmental purchasing preference.
      
      

      (4) Prohibition of export promotion subsidies.
      

      - No constitutional precedent in domestic law.
      
      Example ofpotential conflict: Export promotion subsidies and programs.
      
      

   3. Investment rules -- Enforced by private compensation claims, investment rules are also analogous to constitutional limits, but in practice, they are being used to dramatically revise those rules

   NAFTA Investment Rules
   

   Type of Investment Rule	NAFTA Provision
   No discrimination - purpose or effect text	NAFTA NAFTA art. 1102
   Compensation for expropriation	NAF NAFTA art. 1110
   Minimum treatment under international law	NAFTA NAFTA art. 1105
   Transfer of profits, payments, proceeds of sale	NAFTA NAFTA art. 1109
   Limits on performance requirements	NAFTA NAFTA art. 1106

   Examples of how investment rules change constitutional standards for lawmaking:
   
   

   (1) Expropriation under NAFTA.
   

   - Allows investors to expand concept of taking.
   
   

   Example of potential conflict: Phase-out of MTBE, a gasoline additive that pollutes groundwater, wells and lakes.
   
   

   (2) Minimum treatment.
   

   - Allows investors to make trade complaints.
   - Allows use of least-trade-restrictive test.
   - Analogous to strict scrutiny and substantive due process prior to the 1930s.
   
   Example of potential conflict: Sovereign immunity.
   
   

2. The power shift occurs at all levels
   
   1. Global disputes -- the threat of economic sanctions, the risk of retaliatory trade disputes, and the disruption of "foreign affairs."
      
      
   2. National preemption of local law -- the threat of government and private litigation.
      
      
   3. Local lobbying -- global economic and political pressure on local officials.
      
      

II. ROLES FOR STATE AND LOCAL GOVERNMENT

Overview -- There are three traditional roles in a new global context.

Oversight ... Monitor global agreements and assess their effect on local authority.
Lawmaking ... Adapt local lawmaking to the global economy.
Advice ... Advise the federal government on trade policy that affects local law.

A. Oversight -- Monitor global agreements and assess their effect on state authority.

Meaningful oversight means monitoring global agreements in order to assess their potential effect on local authority.

1. Current negotiations
   
   In 2001, there are no less than four negotiations or implementation processes that affect the powers of state and local government. The models for these negotiations include the WTO trade agreements and NAFTA's investment chapter.
   
   
   1. Free Trade Area of the Americas -- The FTAA is being negotiated by 34 countries to establish trade and investment rules for the Western hemisphere. The FTAA is expansive; it would have 12 chapters that affect law-making power, most notably in five areas:
      
      

      Investment
      Subsidies
      Procurement
      Services
      Trade in goods (technical barriers and food safety)
      
      

   2. WTO built-in agenda -- Even without agreement on a new "Seattle Round" of WTO negotiations, there is a built-in agenda for expansion and interpretation of two major agreements (services and agriculture) and implementation issues on others (notably subsidies).
      
      
   3. NAFTA interpretation of investor protection. A unique provision of NAFTA chapter 11 enables the NAFTA nations to write an interpretive statement on what the open-ended terms of investor protection actually mean (e.g., "expropriation," "minimum treatment," "fair and equitable treatment") without going through a process of formal renegotiation and legislative ratification of NAFTA in each country. The first round of NAFTA investment claims sparked suffcient alarm that inter-agency working groups are now analyzing the options.
      
      
   4. NAFTA harmonization. NAFTA created a on-going process of work by harmonization committees that address technical issues related to such issues as food safety, commercial quality, consumer protection and trucking regulations. The Western Governors' Association has complained that states are unable to participate in the work of these committees.
      
      
2. Assessing global impact on local authority
   
   
   1. Scope of oversight. The scope of current global negotiations is as broad as the scope of existing agreements. The Harrison Institute's survey of California law provides a blueprint for state and local governments to define the scope of a partial or comprehensive impact assessment. [see attached chart on scope of impact assessment] '
      
      
   2. Organization of oversight capacity. Global trade rules cut across jurisdictional boundaries. This makes oversight of trade policy complicated because traditional legislative committees and executive agencies try not to overlap each other's jurisdiction. The options for organizing oversight capacity include:
      
      
      • Piecemeal oversight. An individual committee or agency can certainly look at how a particular global agreement affects lawmaking under its jurisdiction. Economic development committees in Washington State are beginning their oversight at this level.
        
        
      • Joint oversight. A broader oversight committee would draw its membership from the other committees that are affected by trade policy. Staff from the trade oversight committee could then advise the other committees when they need to draw upon expertise in the relationship between trade law and policy and state-level lawmaking. The California Senate has already created such a committee. The proposals in New Hampshire and Massachusetts would create an oversight commission that includes the legislature and the attorney general.
        
        

B. Lawmaking -- Adapt local lawmaking to the global economy.

1. Adapt law-making to the global economy
   
   
   1. Avoid unintended global conflicts.
      
      
      • Repeal a conflicting law.
        
      • Harmonize a conflicting law with national or international standards.
        
      • Reform a conflicting law based on a multi-jurisdictional strategy.
        
        
   2. Modernize the laboratories of democracy. Most state and local governments are using a 19th Century process to make laws in a 21st Century economy. Instead of just waiting to see what happens, state and local governments can adapt their law-making process to keep up with the global economy. They can:
      
      
      • Draft new laws strategically so as to avoid unnecessary conflict or strengthen new laws against potential legal challenges.
        
        
      • Learn from trade agreements. Write committee reports to address trade standards of review (e.g., science, risk assessment, and consideration of less-restrictive options).
        
        
      • Strengthen law-making politically. Developing innovative (and thus not uniform) legislation in cooperation with other jurisdictions.
        
        
2. Address trade-sensitive priorities. For example:
   
   -- Reform subsidies.
   -- Control invasive species.
   -- Avoid unethical suppliers in procurement.
   -- Regulate energy, water, waste management.
   

C. Advice -- Advise the federal government on trade policy that affects state and local law.

State and local governments have expertise and a major stake in answering the major questions that are the subjects of current negotiations.

1. Procurement. Should the strict discipline-of the WTO procurement agreement be copied by the FTAA procurement chapter (purchasing limited to price and performance criteria only). If so, should there be any general exceptions for environmental preferences, human rights standards, or living wage conditions? Should procurement agreements be expanded from 37 states to all 50 states? Should procurement agreements be expanded to cover local governments as well?
   
   
2. Subsidies. How should the FTAA define the scope of a prohibition on "export promotion?" Should there be a general exception to safeguard "green light" subsidies for distressed areas, the costs of environmental compliance, or research and development? Should transparency requirements (disclosure of subsidies) be implemented as currently required by the WTO subsidies agreement? Should the fiscal burden of disclosure fall upon state and local governments?
   
   
3. Services. Should service disciplines in GATS or the FTAA be expanded to cover water and energy utilities? Should service disciplines in GATS or the FTAA apply to all government service sectors such as land and resource management, hazardous waste management, education, health care and prison management? If so, should these areas of government services or regulated services be limited to only those measures that are absolutely "necessary" to serve the public interest? Should the GATS "regulatory reform" give foreign governments a notice and comment period before any state or local legislation that affects services can be adopted?
   
   
4. Trade in goods. Should the FTAA chapters on technical barriers and food safety mandate a process of risk assessment? How much science should be necessary to establish the legitimacy of precautionary labeling for food and beverages? Should trade rules enable industry standards to preempt consumer choice programs like environmental certification and labeling?
   
   
5. Investment. Should NAFTA's investor-initiated dispute process be carried over into the FTAA investment chapter? How should NAFTA and the FTAA define international investor rights in terms of expropriation, minimum treatment, or fair and equitable treatment? Should state and local governments that can be affected by the outcome of a NAFTA investment case have a right to notice and consultation?
   
   

111. Example of roles on subsidies for economic development

A. Oversight

1. Assess the potential impact of the WTO subsidy agreements on California law. These include:
   - Agreement on Subsidies and Countervailing Measures.
   - General Agreement on Trade in Services.
   - Agriculture Agreement.
   
   
2. Areas of potential conflict on which to focus.
   
   
   1. Prohibited subsidies - export financing and promotion.
      
      
   2. Actionable subsidies - in areas that are already contested at the national level.
      - Cultural industries including film production.
      - Timber and wood processing.
      - Agriculture.
      

B. Lawmaking

1. Promote a bottom-up vision of subsidy reform to complement or compete with the WTO's vision of topdown subsidy reform.
   
   
2. Potential elements of a multi-state strategy.
   
   
   1. Definition of the public interest in each subsidy with full taxpayer accountability. For example:
      
      - Economic development of disadvantaged areas.
      - Development of small and minority business.
      - Environmental mitigation and compliance.
      - Energy conservation.
      - Worker training.
      
      
   2. Disclosure of subsidy investments including purpose, amount and results:
      - On a state-wide basis through an integrated development budget.
      - On a specific subsidy basis, particularly for the larger subsidy commitments.
      
      
   3. Legislative standards for sunset or review of all subsidy commitments.
      
      
   4. Legislative process for annual decisions to recycle or prune back subsidy commitments. This process should be supported with a menu of annual choices for reallocating the least effective and accountable subsidies with alternatives that are likely to be the most effective and accountable.
      
      
   5. Multi-state agreement or compact to minimize competition between the states and engage the support of Congress through positive incentives for reform.
      

C. Advice

1. As noted above, advise the federal government on negotiations:
   
   a. Implementation of the SCM and subsequent rounds of WTO negotiations.
   b. Subsidy rules under the GATS.
   c. Subsidy rules under the FTAA.
   
   
2. Major issues for each agreement include:
   
   a. Definition of prohibited subsidies, include scope of export promotion.
   b. General exceptions or "green light" subsidies.
   c. Disclosure obligations.
   

IV. Where to start

A. Ask questions of USTR

Examples of questions that have yet to be fully answered on a public record:

1. Do trade agreements preempt state law?
   
   
2. Do NAFTA's investor rights implement tort reform and takings reform?
   
   
3. Do trade agreements affect precautionary food safety laws like Proposition 65?
   
   
4. Do trade agreements affect state purchasing laws on recycled content and forced labor?
   
   
5. Could trade agreements affect state regulation of insurance, energy and other services?
   

B. Develop state-level capacity

1. Oversight - Engage legislative committees and executive agencies in assessing the potential impact of trade agreements on state law-making.
   
   
2. Law-making -Identify trade-sensitive priorities for future law-making and then adapt the law-making process to strengthen the laws against potential trade conflicts or avoid the conflict altogether.
   
   
3. Advice - Develop relationships and a set of mutual priorities with NCSL and other states that are interested in influencing the content of trade and investment agreements as they are being negotiated and implemented.
   

C. Share information with Congress, other states (through NCSL) and the public

1. Congress - The primary audience for work of the Select Committee is Congress, starting with the California delegation, more so than USTR.
   
   
2. Other states - The diversity of state economic and political interests means that coordination of oversight activities with several other states would magnify the results, both substantively and politically.
   
   
3. The public - The British Columbia Legislature proved that a provincial-level process for public participation in the trade policy debate can be both popular (hundreds of people participated in hearings) and effective (the Canadian government visibly shifted its position on investment agreements). Build it and they will come.
   

Scope of a Trade Policy Impact Assessment

Topics of State & Local Legislation	International Agreements
(examples)	Investment	Selected WTO Trade Agreements
	NAFTA	GATT	TBT	SPS	GATS	SCM	GPA
Access to Courts
Agriculture and Food
Business Licenses
Consumer Protection
Economic Development
Environmental Health
Environ. Resource Conserv.
Labor & Human Rights
Land Use Control
Taxation of Corporate Income

Investor Claims Under NAFTA Chapter 11

Plaintiff Investor & Home Country	Damages & Defendant	Business Sector	Cause of Action
Against the United States
Loewen Group Canada	$725 million U.S. - state, MS	Funeral homes and insurance punitive damg.	Expro: Size of $550 million punitive damage award. Natl Tmt: Plaintiff used anti-Canadian stmts in trial. Fair Tmt: Excessive appeal bond; excessive award.
Methanex Canada	$970 million U.S. - state, CA	Gasoline additive - phaseout.	Expro: Loss of future profits and value of company. Fair tmt: Ban on additive based on bad science, less-restrictive alternatives are available.
Mondev Intl. Canada	$50 million U.S. - state, MA	Real estate development -contract breach, tortious interfer.	Expro: Denial of jury award for contract/tort losses. Expro/due process: Appeal ct did not hear evidence. Natl tmt: Other states do not foreclose same claim. Fair tmt: Sovrgn immun is unfair denial of claim.
Against Canada
Ethyl Corp settled United States	$250 million $13 m settlemt Canada	Gasoline additive- ban on x-border trans.	Expro: MMT transport ban cost 50% future earnings. Natl tmt: MMTban favored alt. Canadian additives. Perf req: Forced refineries to use Canadian prod.
Pope & Talbot United States	$130 million Canada - fed.	Forestry- different quotas in different provinces	Expro: Quota stopped operations, lost profts. Natl tmt: Quota not best tmt avail in other provinces. MFN tmt: Quota not best tmt avail in other provinces. Perf req: Quota is a provincial content preference.
S.D. Meyers awarded United States	$20 million award pending Canada - fed.	Waste mgmt - ban on x-border.	Expro: Export ban stopped operations. Nat/ tmt: Ban did not afect similar Canadian firms. Fair tmt: Ban adopted in discrim, unfair manner.
Signa Mexico	$33 million Canada - fed.	Pharmaceutical- no approval.	Fair tmt: Failure to approve generic anti-biotic.
Sun Belt Water United States	$220 million Canada	Surface water- export ban.	Natl tmt: Less favorable tmt than Canadian firm. MFN tmt: Less favorable tmt that other investors. Fair tmt: Failure to use due process.
Against Mexico
Desona dismissed United States	$17 million Mexico	Waste mgmt - contract breach.	Expro: Breach of contract to operate landfill.
Feldman United States	$50 million Mexico - fed.	Tobacco import -no tax rebate	Expro: Denial of excise tax rebates, lost profit. Fair tmt: Denial of rebate violated judicial precedents.
Halchette United States	not disclosed Mexico-fed.	Airport concession	Not disclosed
Metalclad awarded United States	$65 million Mexico - state	Waste mgmt - no permit.	Expro: Failure to grant landfill permit and rezoning.
USA Waste United States	$60 million Mexico - city	Waste mgmt	Not disclosed.