International Trade Agreements

Beginning in the 1990s, the United States entered into a series of international trade pacts, such as the North American Free Trade Agreement (NAFTA) and the trade agreements which resulted in the formation of the World Trade Organization (WTO). Under the terms of these agreements, state laws governing land use, education and procurement, as well as worker, consumer, public health, and environmental protections are subject to challenge in international tribunals by the other signatory countries in which such laws could be declared “barriers to trade.”

The WTO provides a venue for foreign governments—often at the behest of private industry—to challenge U.S. federal, state and local laws in closed-door international trade tribunals. If a tribunal rules against a law or regulation, it must be eliminated or amended to avoid trade sanctions. The federal government must take all available steps to force state compliance, including enacting preemptive legislation, filing lawsuits, or withholding federal funding. NAFTA has the same mechanism, and also allows companies to seek monetary damages in international tribunals to compensate them for diminution of their profits.

Canadian mining company Glamis Gold is using NAFTA to challenge California policies that safeguard the environment. Glamis Gold wants to avoid the requirement that companies return mining sites to their original condition so that it can operate an open-pit mine utilizing environmentally hazardous cyanide leach mining technology. Mexican candy producers threatened to act under NAFTA if the California legislature held Mexican candy to the state’s lead contamination standards. The California Department of Health had found that one-fourth of Mexican candy contained high levels of lead.1 When Massachusetts banned procurement from companies doing business in Burma, the European Union and Japan argued the law violated the WTO Agreement on Government Procurement. The challenge was withdrawn after the U.S. Supreme Court struck down the Massachusetts statute on different grounds. Australian pharmaceutical manufacturers argue that America’s free trade agreement with their country precludes states’ use of preferred drug lists to lower drug prices.2 State attorneys general were shocked when a Canadian tobacco distributor challenged the 46-state tobacco settlement as a “barrier to trade” and when a WTO ruling on Internet gambling declared that state anti-gambling laws violate the WTO.

Many international trade agreements prohibit states from favoring domestic companies over foreign ones in government procurement. Currently, eight states (AZ, IL, MI, MN, MO, NJ, NC, TN) have anti-offshoring laws or executive orders that may be subject to challenge. Other states have policies that favor local suppliers of goods and services. These too could be subject to challenge under the terms of WTO, NAFTA and other agreements.

The Office of the United States Trade Representative (USTR) negotiates trade deals for the federal government. Even when the USTR proposes terms that adversely affect the ability of states to protect their citizens, state legislators are left in the dark. The USTR provides infrequent, limited information to one liaison in each state—called a “State Point of Contact” (SPOC)—but that liaison represents the governor, not the legislature. In addition, international trade agreements sometimes give states the opportunity to “grandfather in” existing laws—but legislators are rarely informed of these options. And when the USTR asks states to endorse trade agreement procurement restrictions, those requests are made only to governors, even though state legislatures set procurement policies.

In 2006, Utah passed legislation that created an 11-member commission to study the impact of trade agreements on state policy. California and Maine have similar bodies. Legislation also can require the SPOC to share information with appropriate House and Senate committees. The committees can review pending trade agreements and determine their potential effects on state laws and regulations. In addition, states can pass legislation which requires the prior informed consent of the legislature before a state is bound to comply with the service sector, procurement, or investment constraints included in any trade agreement.

In the early 1990s, 37 governors (AZ, AR, CA, CO, CT, DE, FL, HI, ID, IL, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NH, NY, OK, OR, PA, RI, SD, TN, TX, UT, VT, WA, WI, WY) opted into an agreement that commits their states to give foreign companies in 23 countries equal footing with U.S. companies in government procurement decisions. More recently, only 19 states agreed to sign on to the procurement terms of the Central American Free Trade Agreement (CAFTA) and only eight have agreed to comply with the procurement rules of the U.S.-Peru Free Trade Agreement. In 2005, the Maryland legislature not only rescinded the governor’s consent to be bound to CAFTA’s procurement rules, it enacted a law mandating that the Maryland legislature—not the governor—holds the power to bind the state to comply with trade agreements. Rhode Island subsequently enacted similar legislation.