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Taking Aim at Federalism

The European Union, for example, requested that the U.S. federal government work to eliminate rules found in more than a dozen states that give state authorities the sole right to sell packaged liquor. But liquor sales contribute significantly to the revenue base in those states.

U.S. trading partners have also targeted residency and citizenship requirements used by states to govern conduct and licensing in particular professions--most notably in the sensitive fields of legal and financial services.

But it’s not only U.S. trading partners that have targeted the ability of states to regulate services. In a recent communication to USTR, the U.S. Council of Service Industries noted with displeasure that NAFTA had given states the ability to put forward “unlimited reservations” to trade disciplines. For future agreements, “CSI sees no reason to differentiate between federal and sub-federal obligations....subfederal measures [should] be covered in the same terms and within the same timeframe as are federal measures.”

Federalism emerged as a major concern of global trade negotiations in the mid-1990s, a time when the global trading system was in rapid flux. Completion of the Uruguay Round of negotiations was complicated by the differing positions that unitary and federal states took on whether or not trade disciplines should extend to local levels of government. Powerful negotiators like EU and Japan identified federalism itself as a problem.

Feeling the threat from both Uruguay Round and NAFTA negotiations, state and local government representatives raised concerns about how trade and investment rules found in these draft treaties could undermine their administrative powers.

When the trade agreements resulting from the Uruguay Round were presented to the U.S. Congress for ratification, Congress responded to state and local concerns by enacting legislation requiring the president and USTR to consult with states regarding trade negotiations. Canada also set up a system for federal-provincial dialogue.

Under NAFTA, both the United States and Canada “grandfathered in” existing state and provincial laws that didn’t conform to new NAFTA rules, so that these laws couldn’t be challenged. But NAFTA enabling legislation did not go so far as to preserve the right of states and municipalities to play their traditional role as “laboratories of democracy” without the fear of challenge from trade tribunals.

Actually, NAFTA’s Chapter 11 expands the possibility of legal challenges, since it gives private investors the right to challenge another NAFTA country’s state laws or local ordinances. And some say that the mere threat of a trade challenge has already had a “chilling effect” on public policy innovation at state and local government levels.

Federalism has other defenders at the WTO besides Canada and the United States. Active negotiators like Brazil, South Africa, Australia, and India also have a federal system of government. Several European Union member states do too, and this has affected how the EU negotiates in some areas.

Still, the thrust of current negotiations is to increase the number of trade and investment rule commitments that apply to state and local governments, in areas ranging from energy services to government procurement.

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