In 1947, following the end of World War II, the United States and its allies signed the Bretton Woods Agreements which included the first General Agreement on Tariffs and Trade (GATT). The GATT was designed to reduce national tariff barriers to world trade. It operates through the "round," a process that takes years, in which member states negotiate tariff and quota reductions for individual products with their chief trading partners and then extend the reductions to all other GATT members. GATT has just completed the "Uruguay Round" (named for the host country). It is scheduled to take effect at the beginning of 1995 but must be approved by Congress through implementing legislation before it applies to the United States.
Because of its success in reducing world tariffs and preventing tariff wars, the GATT in the 1970s turned to nontariff barriers (NTBs). NTBs comprise an array of national laws, procedures, regulations, permits, standards and other government requirements. In the American federal system, many NTBs also result from the exercise of powers by state and local governments. Since state and local governments are bound by the national Supremacy and Foreign Commerce Clauses of the Constitution, rulings by GATT dispute settlement bodies carry the potential for preemption of state and local government laws and regulations. For example, in a 1991 dispute settlement, a GATT panel upheld a Canadian complaint against a constitutionally sound Minnesota tax favoring small breweries (the so-called "Beer II" case), which effectively nullified the Minnesota tax. Additionally, while the GATT dealt only with trade in goods and covered sales, use, excise and other transactional taxes, the Uruguay Round includes for the first time a General Agreement on Trade in Services (GATS) that will make parts of the service sector subject to the GATT and will cover income, inheritance and property taxes as applied to international service industries.
Thus, the language and structure of the current Uruguay Round agreements, the inclusion of GATS and the precedent-setting "Beer II" case have raised serious concerns on the part of state and local governments that their laws may be automatically preempted by decisions of GATT bodies. Federal laws will not automatically be preempted under the new GATT because the United States has carved out a so-called "reservation" under the treaty that requires that such preemption can occur only through specific action by Congress.
Protection for State/Local Laws
There are several ways that GATT decisions can preempt state and local laws or otherwise undermine state and local government authority. As shown in the "Beer II" case, the ruling of the GATT panel is binding on Minnesota because it, in turn, is bound by the Supremacy and Foreign Commerce clauses of the Constitution. Foreign firms could seek to reduce their state and local tax bills, for example, by having their country lodge a complaint with the World Trade Organization (WTO) being set up under the Uruguay Round. The WTO would form a dispute settlement body composed of trade experts who would not necessarily have any expertise in the U.S. Constitution, the country's system of federalism, or its tax systems. State and local governments would have no guaranteed standing before dispute settlement bodies to ensure that their views will be presented and that the claims of trading interests be balanced with state and local government rights under the Constitution.
Furthermore, since GATT represents U.S. foreign policy, foreign parties would be able to seek enforcement of a GATT ruling by bringing suit against a state or local government under the Foreign Commerce Clause. One of the reasons the U.S. Supreme Court ruled recently in favor of California's method of taxing multinational companies was because the foreign multinationals who brought the suit had no treaty on which to base their claim (Barclays Bank v. Franchise Tax Board). Without protections for state and local laws in the GATT, the GATT would give such companies the legal ammunition they want.
Another effect of GATT could be the potential for state and local governments to be blindsided by retaliatory actions brought by foreign governments against their laws. The "Beer II" case is, again, an example. The Canadian government brought its unfair trade practice claim in retaliation for an earlier ("Beer I") case that the U.S. brought against Canadian provincial laws without consulting the states.
Supporting State and Local Interests
Nineteen state governors recently wrote U.S. Trade Representative Ambassador Mickey Kantor urging him to reconsider his decision to bring a claim against Canada under the North American Free Trade Agreement for actions taken by the province of New Brunswick. Canadian customs agents collect provincial sales and use taxes on goods brought into the province by returning New Brunswick residents who have purchased the items in the United States, but New Brunswick does not apply similar tax enforcement procedures to goods, particularly mail order and other direct-marketed goods, brought into New Brunswick from other Canadian provinces. U.S. goods are allegedly being denied national treatment because of the disparate collection efforts. The governors fear that if the United States prevails in its case, it will lead to a retaliatory case against the United States. Many states in the U.S. use information collected at the international border to enforce state sales and use taxes on goods brought in from Canada and other countries, but there is no similarly effective mechanism to collect tax on goods moving among the states.
After studying the Uruguay Round agreements, several organizations representing state and local governments, including GFOA, attempted to persuade the office of the U.S. Trade Representative (USTR), which has a lead responsibility in developing GATT implementing legislation, to provide in that legislation the same protection for state and local laws that exists in the treaty for federal law. Having been unable to obtain such a commitment from the USTR, the organizations turned to the Congress.
Once the GATT implementing legislation has been officially sent to Congress, it is on a "fast track," meaning that it must be acted on by both chambers in 45 days with straight up or down votes without amendment. Even with this restriction, and although the GATT implementing legislation is developed by executive branch agencies, Congress still plays a role in shaping the legislation. The Senate Committee on Finance and the House Committee on Ways and Means each develops its own "mock" implementing legislation. A conference committee of the two committees resolves the differences between the two versions and sends the consensus document to the executive branch as indicative of what Congress would like to see in the implementing legislation.
In the Senate Finance Committee's "mock" legislation, Senator Kent Conrad (D-ND) took the lead, with the support of Senators Charles Grassley (R-IA) and Max Baucus (D-MT), in providing for the inclusion of protections for state and local laws. The senators' work, while not achieving the same preemption protection that federal laws have under the treaty, did result in strong language to block private sector and foreign government preemption of state and local laws and provides some congressional role in executive branch preemption. Following are the key elements of the Finance Committee language.
No Unilateral Federal Preemption of State or Local Laws. The executive branch, and the executive branch only, would be given the power to sue a state or local government to force changes in state and local laws. The burden of proof that the law violates GATT would be on the executive branch. At least 30 days before such action is brought, the Senate Committee on Finance and the House Committee on Ways and Means would have to be notified of the proposed action, along with a report of efforts by the USTR to resolve the matter with the state concerned by other means.
No Private Sector or Foreign Government Preemption of State or Local Laws. The Finance Committee provision includes strong language that no state or local law may be declared invalid as inconsistent with the GATT except through an action brought by the United States. Any person other than the United States is precluded from bringing any action against a state or local government.
No Retroactive Preemption or Tax Refunds. The language bars any retroactive impact as a result of suits brought by the executive branch.
Right of States and Localities to Notice and Information about Disputes. States and localities are to be notified at least 30 days before the USTR begins proceedings about the subfederal laws of another nation and within seven days after the USTR receives notice of proceedings from a foreign nation about a state or local law.
Right of States and Localities to Defend Their Laws Before WTO Panels. The committee language strengthens the role of state and local governments in defending their laws by providing that state and local governments shall be consulted about foreign challenges to their laws, given the opportunity to advise and assist the USTR in the preparation of information and argumentation, and play a role in the development of a response to an adverse WTO panel decision. In addition, when a U.S. action is planned against a foreign subfederal law, the USTR is required to solicit the views of each state.
While the Senate Finance Committee language does not achieve all that the state and local government groups sought, it represents a vast improvement over past practices under the GATT by blocking private sector and foreign government preemption of state and local laws and by providing some congressional role in executive branch preemption. The language is supported by the state and local government groups working on this issue and is acceptable to the House Ways and Means Committee and to the administration.
OUTLOOK FOR GATT
As this issue of Government Finance Review goes to press, a conference committee of the Senate Finance and House Ways and Means Committees is working to iron out differences between the two committees' "mock" implementing legislation for GATT. The Clinton administration and the leadership of the Senate and House are eager to complete action on GATT in this Congress so the treaty can go into effect with respect to the United States on January 1, 1995. It is not clear that this can be accomplished in the few weeks remaining in the 103rd Congress, however, because there are differences between the two committees' versions, as well as with the administration's position on certain issues. These differences are not related to the issue of preemption of state and local laws, but relate primarily to 1) how the $12 billion cost of the GATT will be paid for and 2) whether to grant the administration's request for continued "fast track" authority over the next several years. GFOA members interested in the GATT may wish to follow these two issues in the local and national press.
Author RUTH WALLICK is legislative counsel for the GFOA's Federal Liaison Center.…