Writing Rules for the Global Economy
“We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.”
That’s how the World Trade Organization’s first Director-General, Mr. Renato Ruggiero, described his organization’s mission, shortly after the conclusion of the ‘Uruguay Round’ of international trade agreements that established the WTO.
How do the rules of this ‘single global economy’ impact state and local governments? How do trade rules interact with provisions of the U.S. Constitution?
How to trade rules impact states and cities?
The most common image of ‘trade’ is of goods moving across national borders. For most of human history, that’s what trade meant—the barter or exchange of material goods between nations, cultures, and peoples. Until the mid-1980s, ‘trade rules’ concerned themselves primarily with tariffs, which are at-the-border taxes levied on imports.
If ‘trade’ still meant only the cross-border movement of goods, then the issue of how trade impacts states and cities would barely come up in U.S. politics, because the Constitution prevents states from imposing taxes and tariffs on products coming from another state. But since the establishment of the WTO in 1995, trade rules have expanded into a number of areas that were traditionally within the purview of states and cities.
Rules and disciplines found in the WTO agreements and regional Free Trade Agreements create the framework for participation in the global economy. From technical standards to subsidies, from product categories to ‘national treatment’ provisions, these rules are binding on governments, telling them what they can and cannot do to pursue economic development and to regulate businesses.
Most international trade and investment rules are binding on all levels of government. The WTO requires that “Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the…[WTO] Agreements.” The U.S. federal government has ensured our trading partners that it will strive to enforce state and local-government conformity with trade rules.
Can trade rules 'trump' domestic law?
Trade rules are not “self-executing.” That means that the rules themselves cannot automatically overturn state laws or municipal ordinances. Only the federal government can do that. That’s why the Congress must pass ‘enabling legislation’ to give these trade rules domestic legal effect. The law that implements the WTO rules is called the Uruguay Round Agreements Act (URAA), and section 102(b) says:
“No State law…may be declared invalid…except in an action brought by the United States for the purposes of declaring such law or application invalid.”
Section 102(c)(1) of the URAA further clarifies that “[no] person other than the United States…shall have a cause of action or defense under any of the Uruguay Round Agreements…” Trade lawyers summarize these provisions by noting that WTO rules do not provide for a ‘private right of action’ against national, state, or local laws.
However, U.S. trading partners have often pressured states to change their laws. In 2004, Brazil challenged a Florida excise tax on processed orange and grapefruit juice. Brazil notified the WTO that it intended to bring a case against this state law. Florida changed the law before a WTO dispute panel was formed.
Another case involves a challenge by China to Maryland's proposed regulation of lead content in toys. Even before Maryland had adopted this law, China notified the WTO of its concerns. This dispute is ongoing; click here for more info.
Governor Schwarzenegger cited NAFTA rules when he vetoed a California 'crumb-rubber' bill designed to turn used tires into paving material. The proposed law seemed like a win-win--providing a source of inexpensive material for roadbeds while eliminating used-tire mountains in California--but because the bill appeared to discriminate against using tires from Mexico and Canada, it was vetoed.
Investment agreements such as found in NAFTA Chapter 11 constitute a special case and are discussed here.
In sum, trade rules cannot automatically overturn state and local laws. The federal government can sue states to bring their laws into compliance with WTO, NAFTA, and other trade-agreement provisions. Trade complaints by U.S. trading partners have led states to modify, or rescind, their laws. U.S. trading partners have registered concerns at the WTO about proposed state laws that are still in the drafting stage. And finally, Governors have cited trade concerns in vetoing legislation that otherwise were examples of smart public policy.