Home   »  TRADE TOPICS  »  Trade and Federalism

Trade and Federalism

This section explores how different actors in the trade debate try to use trade rules to limit the scope of state and local power in the United States.  Foreign nations, foreign corporations, and lobbyists on Capitol Hill and in the states cite trade agreements as reasons why certain laws shouldn't be passed, and why the federal government should preempt the states.  For a basic overview of how trade rules impact states and cities, see Writing Rules for the Global Economy

Federalism first emerged as a major concern of global trade negotiations in the mid-1990s, during the ‘Uruguay Round’ negotiations.  Completion of the round 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 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 ‘grandfathering’ existing laws is not the same as protecting the rights of states going forward. NAFTA effectively ‘froze’ legislation and regulatory policy at a particular point in time, limiting the ability of states and local governments to continue to respond to new policy challenges.

NAFTA’s Chapter 11 actually expanded the possibility of legal challenges, since it gives private investors the right to challenge another NAFTA country’s state laws or local ordinances.

The mere threat of a trade challenge has already had a “chilling effect” on public policy innovation at state and local government levels.

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

U.S. trading partners take aim at American federalism

“The United States operates a series of protectionist and monopolistic systems at state level for the distribution and marketing of wines and spirits.”

“…implementation of the GATS…for professional services has resulted in some improvement in market access.However, a number of problems, especially owing to regulation at the state level, remain to be tackled…”

“An important number of states also operate particularly proactive small business and minority set-aside policies….[we estimate that] such policies in Texas effectively exclude foreign firms from around 20% of procurement opportunities.”

A remaining impediment for EU insurance companies seeking to operate in the United States market is the fragmentation of the market into 56 different jurisdictions, with different licensing, solvency, and operating requirements.Each state has its own insurance regulatory structure…”

- March 2006 European Commission report - "United States Barriers to Trade and Investment"

Major U.S. trading partners regularly compile lists of ‘barriers to trade and investment’ in the United States and submit these lists to the World Trade Organization.  A major complaint of U.S. trading partners is what they call the “proliferation of rules” that characterizes the American federal system of government. In other words, U.S. trading partners are taking specific aim at the law-making authority of the states.

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.

Trade rules cited as reason for federal preemption of state law
Because the federal government is the signatory of trade agreements, and because most trade rules are binding on all levels of government, the federal government has promised U.S. trading partners that it will seek conformity between state and local laws and U.S. trade commitments.

There are two ways to ensure that conformity.  The first is for the Department of Justice’s Solicitor General to sue a state government to overturn that state’s law.  Congress made it clear that only the federal government has the right to sue--not foreign nations and not foreign corporations.  But the political costs of suing a state in a high-profile, Supreme Court case are such that the federal government has never taken this step.  It may never be necessary to do so—because of the other courses of action available. 

First, Congress can simply preempt state laws using the Supremacy Clause of the Constitution, and cite international trade commitments as the reason for doing so.  Another route is through the courts with industry plaintiffs.  The challenge to the ‘Massachusetts Burma Law’ was brought by a group of multinational corporations represented by the National Foreign Trade Council, which challenged the Common-wealth of Massachusetts’ right to penalize procurement bids from companies that also did business with the government of Myanmar, a notorious human-rights violator. The complaint against Massachusetts started life as a WTO complaint from Japan and the European Union, but the Clinton administration—perhaps fearing for the negative publicity that might attend a decision against Massachusetts in a WTO dispute setting—worked with the National Foreign Trade Council in this case in a successful attempt to overturn state law.

A third possibility is through the power of the purse: just as the federal government in the past withheld federal highway funds from states that didn’t bring their drinking age up to 21, so too is it possible for the federal government to withhold funds from a state or other subnational jurisdiction in order to compel compliance.  States have asked to be indemnified against such actions—basically, seeking a promise that the federal government would not withhold funds to compel compliance—but the federal government has declined to offer indemnification.  This is of particular concern in the case of international investment disputes, which allow for money damages.

General Content
National Association of State Legislators Resolution Affirming and Strengthening President Obama's Recent Order On Safeguarding Federalism In Trade Policy
NCLS has recently passed a resolution that asks the Obama administration to improve federal-state consultation in trade policy.
Maine Citizens Trade Policy Commission Letter to House Ways and Means Committee
Letter from Maine state legislators to the Ways and Means Subcommittee on Trade recommending changes to the federal-state consultation process.
Letter from Utah State Rep. Sheryl Allen to the US House Ways and Means Committee
Utah Representative and IGPAC Member Sheryl Allen recommends changes to the trade advisory system.
Vermont Commission on International Trade and State Sovereignty Letter to the US House Ways and Means Committee
In this letter, the Chairs of the Vermont Commission call for a brand-new federal-state consultation process co-managed with USTR that is simple in structure, respects principles of state sovereignty, and allows for additional state access to trade data and texts.
Taking Aim at Federalism
In submissions to the World Trade Organization over the past decade, U.S. trading partners have taken issue with the “proliferation of rules” that characterizes the American federal system of government. That is, these trading partners have taken specific aim at the law-making authority of the states.

IGPAC Reports
IGPAC Recommendations for Improving Federal-State Trade Policy Coordination
The InterGovernmental Policy Advisory Committee has proposed the creation of a Federal-State International Trade/Investment Policy Commission as a means to improve consultation on trade.

Forum Analysis
Examples of Trade and Federalism Conflicts: Technical Barriers to Trade (TBT)
This document analyzes at a pushback on public health regulations in Vermont and Maryland by China using the WTO Technical Barriers to Trade (TBT) agreement.

This document analyzes at a pushback on public health regulations in Vermont and Maryland by China using the WTO Technical Barriers to Trade (TBT) agreement.
China Alleges that a Maryland Bill to Protect Children from Lead Poisoning Could Violate WTO Rules
A look at the allegations by the Peoples Republic of China that a Bill, Introduced by Del. Jim Hubbard in the Maryland House of Delegates to Protect Children from Lead Poisoning, Could Violate World Trade Organization Rules.
State/Federal Consultation: Toward a New International Trade and Investment Policy That Protects Local Democracy
An outline of options for states and cities to work with Congress on safeguarding local democracy in trade agreements.

State Documents
Washington State Resolution
Washington's legislature supports the creation of a Federal State International Trade Policy Commission, as outlined in this Senate Resolution.

Letters to USTR
Concern for Federalism: National Associations Communicate with USTR
This letter from 2003 addresses the concerns of states and cities regarding federal-state consultation on trade, as well as particular concerns about investment agreements.

Unless otherwise expressly stated, all original material of whatever nature created by the Forum on Democracy & Trade website is licensed under a Creative Commons License. Privacy Statement | Sitemap