International Trade, the Environment, and the States: An Evolving State-Federal Relationship

Journal of Environment and Development,
University of California, San Diego

1995

Paul M. Orbuch, WGA Trade Counsel
Thomas O. Singer, Ph.D., WGA Director of Research

The views expressed herein are those of the authors and should not be attributed to the WGA or its members.

INTRODUCTION

What is the appropriate relationship between states and the federal government when international trade policy intersects with traditional state roles in environmental protection, natural resource management, or consumer safety? U.S. trade policy is increasingly encroaching on such state responsibilities heretofore unaffected by international trade obligations. As global economic integration increases, trade rules and trade institutions are expanding their reach --subjecting state measures and practices to both scrutiny and economic sanction. As a result of these trends, there is growing imbalance between federal primacy in establishing and implementing trade policy and the obligations now being thrust upon the states.

The federal government is in the business of negotiating trade agreements, with 107 other countries in the case of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), and with two of our largest trading partners and geographic neighbors in the case of the North American Free Trade Agreement (NAFTA). Both of these agreements bind the states just as they bind the federal government, subjecting state laws and regulations to the basic trade principles of national treatment and non-discrimination. State measures are therefore subject to international challenge by any trading partner that believes a state measure to be violative not only of these principles, but also of numerous other technical trade rules.

One of the most significant areas of exposure for state environmental policy to international trade rules comes in the area of standards. States promulgate numerous technical, sanitary, and phytosanitary standards. These arcane measures regulate everything from highway safety inspection requirements for tractor-trailers to the amount and types of pesticide residues that can reside on a string bean. Often these state standards are more protective of citizens than those maintained by U.S. trading partners. Such standards can be subject to international trade challenge if they effectively prevent the sale of non-complying foreign goods.

State standards may also be compromised by the process of international harmonization of standards that is promoted by trade agreements. Harmonization seeks to reduce differences in standards among nations and make them equivalent in order to reduce barriers to the free flow of commerce. However, harmonizing standards can exert downward pressure on U.S. and state standards when the level of environmental, resource, and consumer protections maintained in this country are higher than those maintained by our trading partners. And, because state standards often exceed federal standards, state standards face even greater pressures to give way to the benefits of free trade.

Should a state's measure be faced with an international trade challenge, the consistency of state laws or practices with the governing trade rule would be determined by a panel of international trade experts likely to have little knowledge of the United States' federal system of government and likely to be biased toward the removal of trade barriers. States would be represented before these tribunals by the United States Trade Representative (USTR), who has pledged to work closely with states in the defense of their measures, but who also is predisposed toward promoting increased trade and smooth relations with our trading partners. Should a state's practice be found inconsistent with U.S. trade obligations, it would not be automatically preempted by the international ruling. Rather, a state would be urged in consultations with the federal government to voluntarily alter its law or enforcement practices to comply with the ruling, thereby furthering U.S. goals for a functionable international trading system. Should a state fail to see the writing on the wall and refuse to comply, it could be sued by the federal government, or even worse, federal funding could be withheld.

Beyond the issue of standards, another area where a smoothly-functioning state-federal relationship is critical is in the activities of the bilateral and trilateral institutions recently established by NAFTA. The missions of these NAFTA institutions intersect with a wide range of responsibilities within the purview of states. Whether structures and procedures established to provide for state input are adequate to protect state interests remains an open question.

Initially, this paper will describe some of the risks states face in an increasingly integrated global economy where national governments are the primary actors. Specific focus will be given to the standards' provisions of trade agreements, international harmonization processes, and dispute resolution. At particular risk are state practices in the areas of environmental protection, natural resource management, and consumer safety. In the United States, states are leading regulators in these fields, often setting standards that afford the public greater protections than standards set by national and foreign governments, or by international standard setting bodies. With their power to vary from national norms, states both accommodate regional differences and serve as important laboratories for innovation and change. Any policies that hinder the ability of states to fulfill these critical roles should be viewed with considerable concern. Next, the pre-NAFTA, NAFTA, and Uruguay Round consultation relationship between Washington and the states on these issues will be examined. The paper will then describe the new NAFTA institutions and state interaction with them. All of these issues challenge states to protect their sovereignty from national and international policymakers. Finally, the paper will detail the author's prescription for an improved state-federal relationship in each of these areas. The proposed relationship seeks a balance between new international trade rules applicable to the states and the sovereign powers of states bestowed by the Constitution.

STATES, TRADE AND THE ENVIRONMENT

State Standards, Trade Rules, and Harmonization

Historically, with its focus on tariff reduction, U.S. international trade policy has had little direct impact on matters relevant to state legislative and regulatory responsibilities. Yet as the scope of trade agreements has expanded beyond the reduction of tariff barriers to so-called technical barriers to trade, state actions have increasingly fallen within the scope of trade agreement rules. Of particular concern to states is their authority to regulate in the environmental, natural resource, and consumer safety areas. 1For simplicity and clarity, environmental, natural resource, or consumer safety measures or standards will hereinafter be collectively referred to as "environmental" or "environment" measures or standards.

States generally enact two types of environmental standards also regulated by trade agreements: technical standards, and sanitary and phytosanitary (S&P) standards. Technical standards can include environmental and safety regulations related to products, building codes, regulations concerning product packaging and shipping, and requirements for the testing and use of materials. S&P standards include all measures used to protect human or animal health from risks arising from the presence of contaminants or additives in food, and measures protecting human, animal or plant life or health from the introduction of pests or diseases. The ability of states to set and enforce technical and S&P standards is a critical state function that maintains significant popular support.

Domestically, state jurisdiction in these areas can be constrained by the U.S. Congress when it establishes a minimum federal standard, or if it preempts state jurisdiction in an area altogether. States are also subject to the Commerce Clause of the U.S. Constitution. The courts have interpreted the Commerce Clause to generally permit state jurisdiction if the regulation does not restrict interstate commerce or discriminate against out-of-state products, and if the national interest is not better served by uniformity of regulation. Despite these Congressional and Commerce Clause limits, states continue to maintain substantial jurisdiction over environmental regulatory regimes. This jurisdiction is now facing new challenges from the international trading system.

Standards rules in NAFTA and in the Uruguay Round Agreements are intended to regulate national and state technical and S&P standards. The standards language in both of these agreements invites scrutiny of state regulations that may have the effect of restricting international trade. For instance, the Uruguay Round text permits nations and their subnational entities to set their preferred levels of protection for S&P measures above levels established by international standard setting institutions such as the Codex Alimentarius Commission. 2According to the Congressional Research Service (CRS), nearly 20 percent of Codex Alimentarius standards on food safety are lower than comparable U.S. standards. Differences in the standards precluded comparison of 61 percent of U.S. and Codex standards. There was little comparison of state and Codex standards by the CRS. See Donna U. Vogt, CRS Report for Congress: Sanitary and Phytosanitary Measures Pertaining to Food in International Trade Negotiations, Sept. 11, 1992, at 22. However, this power is circumscribed in that a standard setter "shall avoid arbitrary or unjustifiable distinctions in the levels it considers to be appropriate in different situations, if such distinctions result in discrimination or a disguised restriction on international trade." 3Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, April 15, 1994 [hereinafter Uruguay Round Final Act], Agreement on the Application of Sanitary and Phytosanitary Measures, paragraph 20. The technical meaning of "discrimination" in GATT jurisprudence lends itself to the conclusion that any regulation that de facto disadvantages a foreign product's sales opportunities can be considered discriminatory and thus contrary to Uruguay Round rules. 4 See General Agreement on Tariffs and Trade, Oct.30, 1947, art. XXIII. See also Steve Charnovitz, "The World Trade Organization and Environmental Supervision," International Environmental Reporter, 89, 90, Jan. 26, 1994.

Other Uruguay Round standards language of concern to states includes such terminology as "necessary," "not more trade restrictive than necessary/required," "assessment or risk," and "scientific evidence" -- all terms that are poorly defined or previously defined by GATT panels in a manner that could lead subsequent panels to second guess the rationale underlying state standards. 5See Western Governors' Association Resolution 94-006, "Uruguay Round Legislation" (June 14, 1994). See also, Matt Schafer and Thomas Singer, "Multilateral Trade Agreements and the States - An Analysis of Potential GATT Uruguay Round Agreements", 26 Journal of World Trade 6, 44 (Dec. 1992) and "GATT Double Jeopardy: State Environmental Laws at Risk," Sierra Club, Feb. 1994, for a state-by-state list of laws potentially in conflict with Uruguay Round rules. For example, using a "not more trade restrictive than necessary" test, a trade panel could rule against a state environmental measure or resource management practice if an alternative is viewed as being able to accomplish the same purpose while having less of an impact on international trade.This reasoning, based on an interpretation of the word "necessary" in a different GATT article, was a basis for the ruling in the infamous GATT tuna-dolphin case between the United States and Mexico. See Dispute Settlement Panel Report on United States Restrictions on Imports of Tuna, GATT Doc. DS29/R (1993); See also Panel Report on United States - Section 337 of the Tariff Act of 1930, GATT Doc. L/6439, adopted Nov. 1989, para.5.26. There is some controversy over whether the WTO panel of the future would choose to interpret the word "necessary" in a manner different than their GATT predecessors, even if that term is drawn from a different GATT chapter.

NAFTA standards provisions present similar risks to states to those proposed in the Uruguay Round. 7NAFTA's S&P rules are immediately applicable to the states. However, as to technical standards, the NAFTA parties agreed only to "seek, through appropriate measures," state and provincial observance of these rules. North American Free Trade Agreement Between the United States, the Government of Canada and the Government of the United Mexican States, Dec. 17, 1992, 32 I.L.M. 289 (1993)[hereinafter NAFTA], Article 902. For example, NAFTA's S&P rule on risk assessments requires that the health risk that is being regulated be weighed against the producer's cost of meeting the regulation. California's pesticide residue standards, however, are based only on an assessment of the risk of birth defects. California did not calculate a producer's cost of compliance when it enacted its pesticide residue standard and therefore it could be found contrary to NAFTA. 8For a complete review of potential problems posed by NAFTA standards provisions, see, "The New Supremacy of Trade: State Authority & GATT/NAFTA Implementation," prepared for the National Conference of State Legislatures, Committee on International Trade by the Center for Policy Alternatives, Washington, D.C., July 25, 1994. See also, Housman and Orbuch, "Integrating Labor and Environmental Concerns Into the North American Free Trade Agreement: A Look Back and a Look Ahead," 8 American U. J. of Law and Policy 719, 735 (Summer 1993). In addition, language used in NAFTA is the same as that used in the Uruguay Round in many cases. GATT jurisprudence that defines the meaning of the terminology in a manner that has little sympathy for measures that can restrict trade is likely to creep into NAFTA dispute proceedings that will adjudicate conflicts over interpretation. Despite the supposed non-precedential value of trade panel decisions, subsequent panels have often drawn on interpretations handed down by preceding panels. This could be especially true under NAFTA given that the agreement explicitly affirms the parties "existing rights and obligations with respect to each other" under the GATT. NAFTA Article 103.1.

Despite these difficulties, NAFTA standards provisions are more protective of state sovereignty than those negotiated in the Uruguay Round in several respects. First, NAFTA places the burden of proof in standards disputes on the nation alleging that the environmental standard is an unlawful barrier. Under the Uruguay Round rules, the nation maintaining the standard has to show that it is consistent with trade rules. Second, both the Uruguay Round and NAFTA call for using generally lower international standards as guidelines for judging a standard in dispute. However, NAFTA provides for the use of international standards if levels of protection for the consumer and the environment are not reduced in the process. Additionally, NAFTA's call for harmonization of standards between the three countries does not include the Uruguay Round restrictions on maintaining nationally distinct standards.

In addition to the potential for disputes over standards language, states are also concerned about the promotion by trade agreements of the international harmonization of standards. 10For a review of international environmental harmonization efforts, see Steve Charnovitz, "Environmental Harmonization and Trade Policy," in Durwood Zaelke, Paul Orbuch, and Robert F. Housman, eds., Trade and the Environment: Law, Economics, and Policy (1993), [hereinafter Trade and the Environment]. International harmonization is a process that seeks to move different countries' standards toward uniformity. Unfortunately, since the U.S. maintains some of the highest technical and S&P standards in the world, any movement toward harmonization may necessarily require the lowering of U.S. standards.

Both NAFTA and the Uruguay Round establish international committees tasked with meshing standards between countries to smooth the flow of commerce across national borders. Harmonization committees are composed of federal agency representatives from each of the participating countries, and their meeting are private. Although subnational standards are within the mandate of the harmonization committees, there is no provision in trade agreements for subnational representation on these committees.

Of particular concern to states are NAFTA's harmonization committees that address standards-related measures, land transportation standards, S & P measures, and agricultural trade. 11See Western Governors' Association Resolution 94-008, "NAFTA Implementation and the Border Environment," June 14, 1994. For example, the NAFTA land transportation subcommittee is discussing the allowed weights and dimensions for tractor trailers that wish to transit all three countries. There is the possibility that U.S. safety standards for fully loaded trucks may be weakened to harmonize them with the heavier truck weights permitted in Mexico and Canada. This possibility alarms states and highway safety engineers, not to mention drivers.Harmonization has already forced some states to change standards. In accord with a Memorandum of Understanding Between the United States and Mexico, the United States issued a rule stating that Mexican commercial driver's licenses would be recognized in the United States. See Commercial Driver's License Reciprocity with Mexico, 57 Fed. Reg. 31,454 (1992) (to be codified at 49 C.F.R. 383). Despite the rule, California attempted to enforce its licensing standards on Mexican commercial vehicles. Reportedly, the federal government, under threat of withholding federal highway monies, convinced California to accept the Mexican licenses as equivalent to their own. See, State Government News, "NAFTA Rewrites Status of States," 10, 13, May 1994. Another example of the potential for downward pressure on U.S. and state standards from harmonization is illustrated by California's Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986. This popularly enacted standard requires manufacturers to warn consumers through labelling that a product contains a known carcinogen. Proposition 65 is much more stringent than standards maintained by our Mexican or Canadian trading partners. As efforts to harmonize standards-related measures among the nations commence, the Mexicans and Canadians will almost certainly raise Proposition 65 as a trade barrier, as they reportedly did during the NAFTA negotiations.

Uruguay Round harmonization committees will also pose similar threats to subnational standards. In addition to states being denied access to harmonization committees generally, the Uruguay Round Agreements provides that in harmonizing standards, the Committee on S&P Measures shall take into account "the exceptional character of human health risks to which people voluntarily expose themselves." 13Uruguay Round Final Act, Agreement on the Application of Sanitary and Phytosanitary Measures, Art. 5, para.5. Although this phrase is undefined, it may mean that the S&P harmonization committee will be able to take into account the level of risk accepted in citizens' daily lives when determining the risk they would accept when standards are harmonized. In any event, the process of global harmonization with nations as varied as those that signed the Uruguay Round Agreements, presents a challenge to states, and guidelines given to the S&P harmonization committee only heightens state concerns and their desire to participate in these processes.

When state enforcement of S&P or technical standards serves to effectively prevent the sale of non-complying goods from abroad, the state measure is exposed to trade dispute claims by an aggrieved trading partner using procedures codified by the terms of NAFTA or the Uruguay Round. An elaborate procedural and quasi-judicial dance between national governments commences when a trading partner initiates a trade dispute action. The first phase of the international dispute process requires the national governments to hold consultations regarding the matter. These diplomatic meetings often resolve the dispute, but the discussions are not public and the settlement reached need not be disclosed. Should these discussions fail to break a stalemate, an international (or trinational in the case of NAFTA) dispute panel consisting of three to five "jurists" would be convened. In a GATT dispute, the disputing parties select individuals of non-party nationalities from a roster of potential panelists kept on file by international trade agreement administrators. Historically, such panelists have had exclusively international trade backgrounds either as government employees, judges, lawyers, or academics. Little perspective has existed on either federalism or environmental issues. 14But see NAFTA Article 2009(2) that permits NAFTA panelists to have a broad range of experiences. Additionally, NAFTA permits a dispute panel to seek factual information from technical experts and scientific review boards in certain circumstances. See NAFTA Articles 2014 and 2015. NAFTA's U.S. implementing legislation also calls on the U.S. to encourage the selection of individuals who have expertise in environmental issues for NAFTA panels hearing challenges to U.S. or state environmental laws. North American Free Trade Agreement Implementation Act, H.R. 3450, 103d Cong. 1st Sess. [hereinafter NAFTA Implementing Legislation] Section 106(b). This structure, and the results of prior GATT cases, bear out the contention of many that these panels are predisposed to ruling against measures that limit trade regardless of the opposing values at stake. 15See e.g., John H. Jackson, "World Trade Rules and Environmental Policies: Congruence or Conflict?" in Trade and the Environment, 219, 230-232. See also, Report of the Panel on United States - Taxes on Automobiles, decided 29 Sept. 1994, DA 31/R, BISD ----, wherein a GATT panel held that the U.S. Corporate Average Fuel Economy standards establishing minimum fuel economy levels for automobiles sold in the United States were inconsistent with GATT.

Furthermore, GATT trade panels are notorious for operating in secrecy, and the Uruguay Round Agreements contain only minimal changes to this practice. 16See generally Uruguay Round Final Act, Annex 2, Understanding on Rules and Procedures Governing the Settlement of Disputes. Only the parties, typically represented by their national trade ministers, are permitted to submit information to a panel, participate in hearings, and have access to final decisions. 17 The United States has attempted to address these deficiencies in its implementing legislation for the Uruguay Round that is discussed infra. It remains to be seen how these provisions will actually operate or whether other GATT parties will permit non-national participation in dispute settlement to the extent envisioned in the legislation. Trade panels have precluded non-party interested persons from submitting amicus curiae briefs, in contrast to the practice in U.S. courts. Thus entities with a direct stake in those measures -- including states and their citizens who enact such measures through the democratic process -- are not included in GATT dispute proceedings. The Uruguay Round Agreements explicitly permit a party to make its own submissions public with certain restrictions, a practice that the United States has already embraced in some previous cases. However, the restrictions and the prior record of GATT parties respecting disclosure will likely limit the value of this provision. 18See Testimony of Robert Housman of the Center for International Environmental Law on behalf of the Sierra Club before the Trade Subcommittee of the House Ways and Means Committee, February 2, 1994 in which he notes that the U.S. is the only country that has made its briefs public in cases involving challenges to environmental measures. He also notes that these public briefs are of little use because the opposing party's arguments must be redacted.

A ruling by an international trade panel that a subnational measure conflicts with trade rules can have severe ramifications for states that do not voluntarily choose to alter their law or practice. In fact, a GATT panel has already ruled in a case involving the United States and Canada that national governments must take all necessary measures to bring their subnational entities into compliance with trade rules and rulings, including the use of the judicial process and the withholding of national funds. 19See Report of the Panel on United States - Measures affecting alcoholic and malt beverages, adopted 19 June 1992, DS23/R, BISD 395/206. Thus, depending on the federal reaction, trade panels and the remedies they prescribe have the potential to freeze, or even roll back, the environmental gains and authorities that U.S. states currently enjoy. The possibility of such trade conflicts can also have a chilling effect on the willingness of subnational entities to adopt strong environmental measures that may have international trade ramifications.

Moreover, the Uruguay Round Agreements will significantly up the ante in dispute resolution cases. The Uruguay Round creates the World Trade Organization (WTO) with substantial powers to use trade sanctions to enforce its dispute resolution decisions. Previously, GATT dispute panel decisions could be blocked by any GATT nation, including the party losing the decision. This veto power is removed by the Uruguay Round Agreements, making dispute resolution decisions almost determinative of WTO-authorized trade sanctions. 20Uruguay Round Final Act, Annex 2, Understanding on Rules and Procedures Governing the Settlement of Disputes, and Agreement Establishing the World Trade Organization.

Trade challenges to subnational environmental measures already have a significant history, and the United States has been involved in numerous cases. In 1991, the Puerto Rican government attempted to strengthen its health standards with respect to ultra-high temperature milk. Canada determined that the more stringent milk standard would prevent the continued sale of substantial quantities of Canadian milk on the island, and initiated a claim under the U.S.-Canada Free Trade Agreement (FTA) seeking to alter the new standard or to forestall its application. The United States argued that Puerto Rico was permitted to strengthen its standard within the terms of the FTA, and has prevailed so far, but the case has not been concluded. Conversely, the U.S. government has used domestic Section 301 trade rules to embroil Canadian provincial practices requiring beer to be sold in recyclable bottles (thus allegedly discriminating against U.S. canned beer) and has used its GATT-consistent countervailing duty law to attack a provincial ban on raw log exports (that was held to be subsidizing British Columbia lumber product manufacturers). The Canadians had been paying countervailing duties on lumber products exported to the United States as a result of the latter challenge until a binational U.S.-Canada appeals panel struck down the ruling that initially led to the imposition of duties. 2159 Fed. Reg. 42029 (Aug. 16, 1994).

These actual cases involving subnational environmental measures may reveal only the tip of an iceberg. Many of our trading partners have made numerous official and unofficial claims that subnational environmental measures constitute illegal trade barriers. The European Union, in its 1994 Report on United States Barriers to Trade and Investment, identified more than 2,700 state and municipal authorities whose standard setting practices may be inconsistent with the GATT standards code.1994 Report on United States Barriers to Trade and Investment, Services of the European Commission, Doc No I/194/94, Brussels, April 1994. The report identified several specific measures believed to be contrary to GATT rules, including California's Proposition 65 and California's requirement that glass containers have a minimum percentage of recycled glass in their composition. 23For a thorough review of the Uruguay Round's potential impact on California standards, see "Impact of GATT on California Statutes," Draft Working Paper, Center for Policy Alternatives, Washington, D.C. (July 29, 1994). The 1994 Canadian Register of United States Barriers to Trade claims that Canadian meat exporters are discriminated against by the regulations of four U.S. counties that prohibit the retail sale of meat that has not been graded by the USDA.Register of United States Barriers to Trade, 1994, Published by the Department of Foreign Affairs and International Trade. (Sorry, no other citation used) A draft of the 1995 document names as sectoral barriers to Canadian exports 13 state regulations and 18 state agreements with publishers regarding the use of recycled content in newsprint. Furthermore, raw log export bans such as those enacted in the states of Washington and Oregon have been publicly called GATT illegal by Japan in that they allegedly violate trade rules that limit the use of quantitative export restrictions. Trade disputes and threats directed at subnational measures are likely to increase as trade expands and states continue to maintain measures that protect the environment and citizens.Interestingly, state resource management measures are also being held up to scrutiny through environmental measures adopted abroad. The European Union's (EU) Council Regulation No. 1254/91 prohibits the use of leghold animal traps in the EU and the importation of certain animal pelts originating in countries that utilize leghold traps. If the EU regulation goes into effect on January 1, 1996, it will effectively ban the importation of certain furs from the United States. As states are the regulators of trapping of furbearers in the United States and a majority of them permit some use of leghold traps, states are accordingly the primary force behind USTR's attempt to alter the EU's regulation through negotiations. Formal WTO dispute proceedings regarding the measure have not yet been initiated by the United States.

Recent trade agreements make clear the need for states to be more prepared for and integrated into the process of their negotiation and implementation. From standard setting to dispute resolution to international harmonization, commitments made by the federal government regarding international trade are increasingly impacting states. In the next section, we review the consultative mechanisms that have been available in the past, and mechanisms in the NAFTA and Uruguay Round implementing legislation, that are intended to integrate the states into trade policymaking and trade agreement implementation.

STATE-FEDERAL CONSULTATION PROCEDURES

Pre-NAFTA Procedures

Prior to NAFTA, the formal mechanism for receiving state input on international trade matters was the Intergovernmental Policy Advisory Committee on Trade and Policy Matters (IGPAC). 26IGPAC was established pursuant to Section 135 of the Trade Act of 1974, 19 U.S.C. 2155 (as amended). IGPAC is one of eight sectoral advisory committees that consults with USTR on trade policy matters. Approximately 35 state and local government officials serve on the IGPAC by Presidential appointment, and the committee meets between two and three times per year. In addition to its advisory role, IGPAC prepares and submits reports to the Congress on trade agreements negotiated by USTR.

Until recent years, state concerns focused on the sectoral impacts of changes in tariff schedules, with their attendant income and employment effects, and on buy-local preferences in government procurement. Concerns about state regulatory impacts were rare, with little anticipation that state standards might soon be viewed as non-tariff barriers to trade. Yet with the rise of trade disputes and standards-related matters involving states, IGPAC's necessarily limited membership did not provide the forum necessary for the many non-member states to express concerns or offer input to USTR. Additionally, USTR used loaned federal executives at best, and most often graduate student interns to staff IGPAC. Accordingly, individual governors chose in most cases to rely on personal relationships and informal contacts with the Trade Representative and the President.

In a thinly disguised call for greater commitment to consultation with all the states on the part of USTR, the Western Governors resolved in 1992 as follows:

Implementation of trade provisions will have profound negative and positive impacts on specific industries, local communities, and states. States have a responsibility to be partners with the federal government in the development and implementation of trade agreements and the federal government has a responsibility to include them. 27Western Governors' Association Resolution 92-010, "U.S. Multilateral Trade Negotiations" (June 23, 1992) [emphasis added].

NAFTA implementing legislation presented the states with an opportunity to move beyond IGPAC and improve state-federal relations on trade matters.

NAFTA Consultation Procedures

Due to the inadequacy of IGPAC described above, states successfully sought new state-federal consultation procedures during the NAFTA debate. As a result, NAFTA implementing legislation required USTR to establish a formal mechanism for communications between each state and USTR on NAFTA matters. 28NAFTA Implementing Legislation, Section 102(b)(1). In accord with the NAFTA legislation and its accompanying Statement of Administrative Action (SAA), USTR has established and staffed within its offices a "NAFTA Coordinator for State Matters." The Coordinator carries out numerous consultative functions required in the legislation and serves as liaison for all contact between the federal government and the states on NAFTA-related trade matters.

The consultation procedures require that states be informed on a continuing basis of NAFTA issues "that directly relate to, or will potentially have a direct impact on, the states." States also are provided a continuing opportunity to submit information and advice to USTR on such issues. USTR is obliged to take this information into account when formulating U.S. policy. The legislation also requires that states be involved "to the greatest extent practicable" at each stage of development of U.S. positions on issues relevant to the states that will be considered by NAFTA committees or dispute settlement panels. 29Id.

A critical element in the consultation procedures is a provision in the NAFTA SAA that directs the Governor of each state to designate a single point of contact for USTR to contact on all NAFTA matters affecting state interests. In addition, for trade disputes involving state law, USTR is to contact the state's attorney general as well as the state NAFTA contact. As to harmonization committees, the SAA specifies that, "where feasible and appropriate," states will not only assist in the preparation of U.S. positions before these committees but will also be invited to attend their meetings as observers. States have been able to specify the harmonization committees in which they have keen interest to facilitate consultation with the U.S. representative to that committee, and roughly nineteen states have done so.

From a state perspective, the NAFTA state-federal consultation procedures were a substantial leap forward when compared to the pre-NAFTA scattershot approach to state consultation. Regular contact points had been established and guidance had been provided to help USTR determine when and how to involve states in trade policy matters. Yet, despite these improvements, the underlying tension in the state-federal relationship on trade matters involving state sovereignty remained. The NAFTA SAA illustrates this tension as follows:

The Administration has traditionally worked very closely with the states involved in any dispute settlement proceedings, both before and after any panel consideration, in a cooperative effort to determine the best course of action. . . . ultimately the federal government, through its Constitutional authority and the [NAFTA] implementing bill, retains the authority to overrule inconsistent state law through legislation or civil suit . . . . 30The North American Free Trade Agreement Implementation Act, Statement of Administrative Action, [hereinafter NAFTA SAA] Section A(2)(e).

Thus states remain in large part at the mercy of the federal government should a state measure be successfully challenged in a trade dispute proceeding. Moreover, states still have no direct role in other key NAFTA processes that have the potential to effect them so significantly, such as dispute proceedings and harmonization committees. Nevertheless, states now have new avenues to let their opinions be known to decisionmakers in Washington. How these decisionmakers will incorporate state views in their conduct of trade diplomacy with Canada and Mexico in the long run remains an open question.

With the NAFTA state-federal consultation process less than a year old, states were presented with an opportunity to redefine their relationship with USTR in legislation to implement the Uruguay Round Agreements of the GATT that the United States signed on April 15, 1994.

Uruguay Round Consultation Procedures

Uruguay Round implementing legislation further improves the state-federal consultative process. Consistent with NAFTA procedures, Uruguay Round legislation requires USTR to keep states informed and allow them to submit information for USTR to take into account on issues "relating to the Uruguay Round Agreements that directly relate to, or will potentially have a direct effect on, the States." 31See, H.R. 5110, Uruguay Round Agreements Act, 103d Cong., 2d Sess. (Sept. 27, 1994) [hereinafter Uruguay Round Legislation] Section 102(B). To effectuate this policy, USTR will name a "WTO Coordinator for State Matters." Unlike NAFTA, however, which simply requires state involvement to the greatest extent practicable in dispute settlement regarding a state measure, the Uruguay Round legislation establishes detailed state-federal procedures for any WTO proceeding involving the United States and any subnational measure (U.S. or foreign). 32States' desire to be informed of U.S. challenges to subnational measures abroad was in part precipitated by USTR's consideration of a NAFTA Chapter 20 proceeding against Canada for tax collection practices in the province of New Brunswick. The practices at issue were similar to those employed by the states, and thus the potential for Canadian retaliation was high. In a July 14, 1994 letter to United States Trade Representative Mickey Kantor, nineteen governors called for reconsidering the initiation of dispute proceedings with Canada on the issue. The Governors pointed out that "states were not consulted until, to all appearances, a decision to pursue the case had been made. This may be technically consistent with the NAFTA implementing legislation, but we believe it is clearly inconsistent with the spirit of that law." At the time of this writing, no final decision had been made by USTR on whether to pursue this matter.

These detailed procedures require USTR to notify the Governor and the Attorney General of a state within 7 days after a request by a WTO member for consultations on a state measure under the WTO dispute settlement rules. Within thirty days of the notification, USTR must begin consulting with state representatives to facilitate state involvement in the development of the U.S. position at each stage of WTO consultations and dispute settlement. Should consultations with the WTO member fail, USTR must notify a state within seven days of a request by a trading partner for a WTO adjudication. States will then have the opportunity to advise and assist USTR in the preparation of information and argumentation for any presentations by the United States in conjunction with WTO proceedings. If the WTO finds a state measure inconsistent with WTO rules, USTR must also consult with the state in developing a response to the decision. 33See, Uruguay Round Legislation, Section 102(b)(1)(C).

Uruguay Round legislation also adds a significant new element to the state-federal process. As consistent with NAFTA, the Uruguay Round SAA points out that the federal government, either through its Constitutional authority or the implementing legislation, retains the authority to overrule state law held contrary to trade rules. But, at least 30 days before the federal government can bring an action to overturn state law, Uruguay Round legislation requires USTR to report to and consult with the Senate Finance Committee and the House Ways and Means Committee regarding the proposed preemption.Id. at Section 102(b)(2)(C). Congressional involvement in any effort by the Executive Branch to preempt state law creates an additional layer of protection for states. Although some state interests sought statutory approval of Congress before preemption could occur, the reporting and consultation requirement should create the atmosphere necessary for a full public debate on the wisdom of federal preemption of state law based on an international trade dispute decision.

With respect to a U.S. challenge to a foreign subnational measure, USTR must notify and solicit the views of representatives of each state at least 30 days before requesting consultations in accord with WTO rules on dispute settlement. However, "in exigent circumstances" USTR may notify representatives of each state no later than 3 days after making a request for consultations. 35Id. at Section 102(b)(D)(ii). USTR would likely consider exigent circumstances to be present if subnational measures abroad are having an immediate and adverse impact on U.S. trade such that perishable or other time-sensitive goods are involved. In such a case, USTR may need to initiate consultations at once with the foreign nation, thus depriving it of the ability to give the statutorily required advance notice to states.

Regarding WTO harmonization committees, the Uruguay Round SAA addresses the state role. States will be involved "to the greatest extent possible in developing U.S. positions" in connection with the work of relevant harmonization committees.See, Uruguay Round Agreements Act, Statement of Administrative Action, Section B(1)(E). This procedure duplicates NAFTA procedures on these committees in that the authority for state participation is generated by the SAA 37The binding legal effect of commitments made in a Statement of Administrative Action is subject to controversy. Clearly, commitments made therein do not have the force of law of Congressional legislation, and they also may conceivably be altered or discarded by the Executive Branch without Congressional approval., but it also seems to improve state access based on the NAFTA language that only permits state participation "where feasible and appropriate." The WTO harmonization committees on technical barriers to trade, sanitary and phytosanitary standards, and subsidies and countervailing measures are mentioned by name in the SAA as appropriate committees for state involvement.

Uruguay Round legislation thus provides USTR with specific guidelines for involving states in subnational disputes brought by U.S. trading partners and those brought by the United States against subnational measures abroad. These improvements respond to specific criticisms regarding the operation of NAFTA procedures and their lack of time frames. Congressional involvement in preemption is also a new feature of the relationship that many state interests view as adding additional protections for state laws.

Their activities raise new challenges for governors, state legislatures, and communities in setting priorities and allocating resources, since most projects are expected to be jointly developed and funded by these institutions and states and localities. The institutions also raise challenges for state and local public works agencies that must coordinate their project planning and development activities.

The approval of NAFTA in December 1993 brought into existence three institutions meant to address environmental concerns expected to be heightened by NAFTA-designed North American economic integration. The North American Commission on Environmental Cooperation (NACEC) is a trilateral forum on environmental policy and environmental enforcement located in Montreal. The bilateral Border Environment Cooperation Commission (BECC) located in Ciudad Juarez and its counterpart, the North American Development Bank (NADBank) located in San Antonio are the other two NAFTA-inspired institutions. These organizations select and fund environmental public works projects along the U.S.-Mexico border. Like the trade agreements discussed above, the activities of these new institutions will have important repercussions for states.

The North American Commission for Environmental Cooperation

The NACEC is a trilateral body made up of a Council (the environmental ministers from each of the three NAFTA countries), a Secretariat, and a Joint Public Advisory Committee (JPAC). The NACEC was formed in large part to prevent NAFTA countries from weakening environmental enforcement to attract foreign investment or to boost competitiveness. In this role, the NACEC will administer consultations between the parties, dispute resolution procedures, and if necessary, monetary penalties and trade sanctions. Trilateral dispute panels will be charged with determining whether there has been "a persistent pattern of failure by the Party complained against to effectively enforce its environmental law." 38See generally, North American Agreement on Environmental Cooperation between the Government of the United States of America, the Government of Canada, and the Government of the United Mexican States, 1993. The NACEC will also be developing recommendations on environmental issues of continent-wide concern such as transboundary pollution, cooperation on conservation and ecosystem protection, environmental policy innovation including the use of market-based mechanisms, and environmental enforcement capacity building and technical assistance.

All of these NACEC roles and responsibilities have a bearing on matters important to states. State enforcement of environmental laws will be subject to NACEC dispute proceedings and therefore state priorities and resource allocation for environmental enforcement may be impacted. States constantly grapple with the transboundary dimensions of pollution and ecosystem management, from fisheries, timber, and water management in the northern United States to air and water pollution and habitat protection in the southern United States. States also are likely to be at the forefront of any efforts to test innovative environmental policy instruments emanating from the NACEC, such as life cycle costing or the regulation of process/production methods that have negative environmental effects. Finally, many states are engaged in providing technical assistance to Mexican environmental agencies and have cooperative border projects with both Mexican and Canadian entities. Accordingly, states must be considered key players in any cooperative environmental initiatives sponsored by the NACEC.

To articulate these substantial interests, states have a single representative appointed to the NACEC's JPAC, currently the Attorney General of the State of Texas. In addition, a U.S. governmental advisory committee established by Executive Order and administered by EPA presents a limited group of states with the opportunity to provide input to the EPA Administrator in his/her role as the U.S. voting member at the NACEC. 39Executive Order, Federal Implementation of the North American Agreement on Environmental Cooperation, May 13, 1994 [hereinafter NACEC Executive Order]. Of the 12 members of the governmental advisory committee, five are state level representatives, and the remainder are municipal and tribal. Through this latter committee, or through other means, federal officials are to inform states on a continuing basis of NACEC matters that directly relate to states, especially with respect to dispute settlement and other areas where states "exercise concurrent or exclusive legislative, regulatory, or enforcement authority." 40NACEC Executive Order The Executive Order also instructs federal agencies to provide states with opportunities to submit advice on such matters, and to involve states in the development of U.S. positions for the NACEC. Where appropriate, states are also to be included in the U.S. delegations to NACEC functions, including dispute panels. However, as with NAFTA and the Uruguay Round, the actual extent of state involvement is dependent upon the good faith of federal agencies to consult them and to consider state views. Because of the relative newness of the NACEC and the advisory committee, states have not yet been able to test the effectiveness of the consultation process in this context.

The Border Environment Cooperation Commission and the North American Development Bank

NAFTA-related negotiations also created the BECC and the NADBank, two bilateral institutions dedicated to alleviating the severe environmental degradation along the U.S.-Mexico border. 41See Agreement Between the Government of the United States of America and the Government of the United Mexican States Concerning the Establishment of a Border Environment Cooperation Commission and a North American Development Bank, 1993. The BECC will assist states, localities, public agencies, and private investors in the development of environmental infrastructure projects, including analysis of their environmental, social, economic, and financial aspects. The BECC will also assist in arranging the financing for such projects. Its key role is to certify applications for the financing of infrastructure projects to the NADBank. BECC's priorities are environmental infrastructure for wastewater, drinking water, and solid waste. The purpose of the NADBank is to promote capital market investment in BECC projects, to supplement such investment with NADBank loans and guarantees, and to provide technical assistance in the financing of BECC-certified projects. Approximately $8 billion in funding is expected to be available for border environmental infrastructure over the next ten years from all public, private, and multilateral sources. Highlighting the critical role of states, 25 percent of this amount is expected to come from state grants, state revolving funds, and state and local tax exempt bonds. NADBank is also authorized to use 10 percent of its paid in capital for NAFTA-related community adjustment assistance anywhere in the U.S. or Mexico.

States have a strong role within the structure of the BECC, perhaps reflecting recognition of their legitimate and critical role in BECC activities. A 10 member Board of Directors controls the BECC. The five U.S. members are the EPA Administrator, the U.S. Commissioner of the International Boundary and Water Commission, a representative of one U.S. border state (currently the Wildlife Commissioner of the State of Texas), a representative of a U.S. locality in the border region, and a member of the U.S. public who is a resident of the border region. The BECC also has a binational advisory council with 18 members. U.S. representation on the advisory council consists of six residents of U.S. border states and three members of the public. The NADBank is governed by a six person board. The three U.S. members are the Secretaries of State and Treasury, and the EPA Administrator. A Community Adjustment and Investment Program Advisory Committee, which does not have state representatives, advises the President on this program. 42See NAFTA Implementing Legislation, Section 543.

The BECC sets an important new precedent by providing for the direct representation of states on its decision-making board. Given adequate consultation among themselves, states should be well positioned to ensure that their interests are satisfactorily addressed by the BECC. The NADBank, on the other hand, does not establish consultative mechanisms for the states or for other interested parties with respect to its financing of border environmental infrastructure.

Clearly, direct representation by states on the decisionmaking body of the BECC represents a more appropriate model from the state perspective than prior advisory bodies or exhortations to the federal government to consult with the states. The states' direct role in decision making in this institution reflects a recognition of the legitimate stake states have in the business of the BECC. As trade agreements increasingly bind and impact the states, a similar recognition and rebalancing of consultation and decision making authority needs to occur in other areas of trade policy and implementation as well. In the next section, a new relationship is proposed that seeks to achieve a more appropriate balancing of powers and obligations between the states and the federal government in key areas of the trade policy arena.

TOWARD AN IMPROVED STATE-FEDERAL RELATIONSHIP

More trade liberalizing agreements involving the United States are on the way. NAFTA contains an accession clause that would allow other nations or groups of nations to join the basic framework of the agreement in accord with the applicable approval procedures in all of the countries. 43See NAFTA, Article 2204. First up to the NAFTA plate will be Chile, with other nations of the Western Hemisphere to follow. Hemispheric free trade by the year 2005 was a goal established at the Summit of the Americas. Asia Pacific nations will bat cleanup through processes begun in the context of the Asia Pacific Economic Conference (APEC) which has set a goal of 2010 for regional free trade among industrialized countries. Given these developments, states may have ample opportunities to shape a revised relationship with the federal government in trade and environment policymaking and trade agreement implementation. What should be state goals for a revised relationship with the federal government on these issues?

Dispute Resolution

First, states should look to demonstrate their sovereignty and capabilities while alleviating any uncertainty regarding the vigor with which the federal government can be expected to defend a state measure before an international dispute panel. Under current practice, if a state has an environmental standard challenged at the WTO or if a state has an environmental enforcement practice challenged at the NACEC, it would have to rely on USTR and EPA respectively. In accord with NAFTA and Uruguay Round domestic procedures discussed above, states would be able to participate in their own defense only to the extent permitted by the federal government. Whether these agencies or the federal government's perceived interest will be to include states to the fullest extent and to mount a no-holds barred defense in all cases is open to question. 44One has to recall that before the GATT tuna-dolphin case could occur, the federal government had to be sued by an environmental group to enforce provisions of the Marine Mammal Protection Act (MMPA) that Mexico subsequently proved were GATT-illegal. Many questioned the vigor of the U.S. defense of the MMPA at the GATT given U.S. disregard for and objection to enforcing the law in the first place and given GATT's non-public dispute settlement process. Accordingly, and given the substantial state interest at stake, states should have authority to conduct their own defense in all cases. 45The Canadian federal government and the provinces have already negotiated an accord whereby the provinces would be able to"co-manage" with federal officials the defense of their own practices before the NACEC. The Canadian Intergovernmental Agreement Regarding The North American Agreement on Environmental Cooperation is presently being reviewed by the provinces for their formal approval. Should multiple states be involved in an international dispute, states should still be afforded this opportunity, but they should seek a single representative if possible.

Not all states are likely to want to represent themselves before an international dispute panel. Nonetheless, affording a state the opportunity to defend itself will certainly alleviate the uncertainty that the federal government's defense of a state measure or practice may be less than vigorous, while providing an important demonstration of the principle of federalism in these matters. In the near term, as a transitional step toward direct state participation in dispute proceedings, states could be afforded the opportunity to submit an amicus brief independent of the briefs submitted to an international panel by the federal government. USTR has stated its intention to seek amicus procedures at the WTO, 46See Remarks to The Environmental Defense Fund, Ambassador Michael Kantor, New York City, April 21, 1994. and the Western Governors' Association has endorsed this goal for states when WTO challenges to their measures occur. 47See Western Governors' Association Resolution 94-006, "Uruguay Round Legislation," June 14, 1994. The Western Governors' Association (WGA) is an independent, nonpartisan organization of governors from 18 western states, two Pacific territories, and one commonwealth. WGA helps the governors develop strategies both for complex, long-term issues facing the West and for the region's immediate needs. Obtaining amicus opportunities at the WTO will be a difficult struggle given GATT's long tradition of excluding non-parties from dispute settlement proceedings. A valuable step in this direction would be for the United States to seek reform of NAFTA and NACEC dispute procedures in this manner. This would provide impetus for the concept of greater access to dispute processes among current NAFTA parties and parties that may eventually accede to the agreement.

Harmonization Committees

The second component of a revised state-federal relationship on trade and environment matters is guaranteed state access to the workings of international harmonization committees. States are necessarily concerned that the work of harmonization committees threatens to weaken state standards in a number of environmental areas where states presently legislate and regulate. These concerns are heightened by the fact that the work of harmonization committees is not publicly available, and because states may be excluded from their meetings unless the federal government determines otherwise.

Both the NAFTA and Uruguay Round SAA instruct federal agencies to obtain state input into the development of U.S. positions that will then be presented at harmonization committee meetings. If the federal government determines that it is "feasible and appropriate," state representatives can also attend as observers at committee meetings. However, given the direct state interest in the work of these committees, states should be given guaranteed and continual access to harmonization committee meetings. To cement this access, the federal government will need to negotiate for subnational access to harmonization committee meetings within the text of the trade agreement. The present arrangement, whereby the United States unilaterally provides for state attendance in the implementing legislation, permits trading partners to object and ask to exclude subnational representatives. Providing for state access to harmonization committees in trade agreements would provide a clear message to states, trading partners, and subnational entities abroad that subnational governments are integral to the harmonization process. To make state participation workable, interested states could either appoint a single permanent representative or attend the meetings on a rotating basis.

Consultation Procedures

State-federal communications on trade matters should also be further strengthened. NAFTA and Uruguay Round legislation each require that a single point of contact between Governors and USTR be named. However, since both agreements raise similar issues potentially affecting a large number of state agencies, Governors should select one individual to be the point of contact for all international trade agreements and issues. A single point of contact for all trade matters would ensure smooth communications with USTR and within the state, while also helping states recognize issues that cut across multiple trade agreements and agreements that cut across multiple agencies.

In addition, the single point of contact concept should be extended to an appropriate committee in each state legislature. At present, state legislatures are not included in NAFTA-related communications, and the Uruguay Round legislation provides only that the National Conference of State Legislatures may receive communications. State legislatures are on the front lines of grappling with the international implications of legislative proposals in such areas as the environment, commerce, and state purchasing. How they craft legislation and what they include in legislative history may determine whether a state measure will be ruled contrary to international trade rules. In order to best protect state measures, state legislatures should be part of state-federal communications on trade matters.

Finally, the single state point of contact should be the preeminent mechanism for state-federal communications on trade issues. While IGPAC serves an important purpose of quickly drafting reports to Congress on specific trade agreements, its necessarily limited number of members does not enable it to be a voice for each state. To make IGPAC more representative, it should be required to circulate draft Congressional reports among state trade contacts and include their comments. Further, IGPAC members and staff receive security clearance from USTR so that they may review trade agreement texts before they have become public. Similar access to confidential trade documents should be provided to interested state trade contacts.

NAFTA Environmental Institutions

Although it is too early to judge state-federal relations on the BECC, its institutional structure is one that clearly recognizes the need to incorporate subnational interests in order to successfully carry out its mission of cleaning up the U.S.-Mexico border. A state representative sits on the board; there is no federal layer that states must first penetrate and then rely on to forcefully and accurately present their views. However, in the BECC structure, non-member states must still rely on their single state member, and on members of the BECC's binational advisory committee, to reach out and represent their interests, as well as intrastate interests such as environment and public works departments, state and municipal financing authorities, and border region communities. These BECC representatives can be expected to focus primarily on their own state's needs. It remains to be seen how well they are able to represent other states and interests that do not have a seat on the BECC Board.

At the NACEC, it is also too early to know what level of sensitivity will be shown to subnational interests. While the JPAC is a novel attempt at involving states in an international environmental institution, decisionmaking power is still held by national governments, and states must first penetrate this federal level screen to have their views considered. Further, as with the BECC Board, the single state representative on the NACEC's JPAC will have their work cut out for them in representing other states' interests (although EPA's governmental advisory committee should increase the awareness of the EPA Administrator, the U.S. voting member, regarding state views). Again, it remains to be seen how well one state JPAC member will be able to represent state interests generally, and how well the NACEC reflects these interests in their decisions.

One key state interest that should be addressed immediately at the NACEC is dispute settlement relating to environmental enforcement. As discussed above with respect to GATT and NAFTA trade dispute settlement, states should be granted the opportunity to directly defend their own environmental enforcement practices within the NACEC. Over the longer term, issues that the NACEC will address such as transboundary pollution and wildlife habitat protection will require significant state involvement for effective solutions to be identified and implemented. As the NACEC takes up these issues, it will need to fully engage the state JPAC member and government advisory committee to obtain state participation and state acceptance of recommendations crafted by the NACEC.

CONCLUSION

Trade agreements and trade policy long ago moved beyond the narrow view that freer trade equals lower tariffs. Low or zero tariffs have already been achieved across a number of sectors. Non-tariff barriers are now the focal point of trade negotiations and policy, and rules maintained by states are as relevant as those of the national government. Given that many standards maintained by states are more stringent than those used by the international community, state standards will increasingly be viewed as an obvious target by U.S. trading partners. States also have to concern themselves with international institutions that have jurisdiction over many areas now controlled by states. In order to both take advantage of the international cooperation engendered by these institutions, and to ensure that they recognize legitimate state interests, states need direct access to decisionmaking at these fora.

The ideas presented here reflect the principal of state involvement commensurate with the state roles and responsibilities that are at stake. They bring more accountability and balance to the state-federal relationship in international trade policymaking and implementation than exist in current practice. Only a few years ago states had virtually no role in this area. As states within a federal system become increasingly bound by trade rules and trade policy, their involvement in the framing and implementation of their new roles must increase accordingly. The approaches outlined in this paper represent essential steps in this direction.

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Page last updated 10/10/1999