Balancing Act: Free Trade and Federalism

By Waren, William T. | State Legislatures, May 1996 | Go to article overview
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Balancing Act: Free Trade and Federalism

Waren, William T., State Legislatures


CONSIDER THE FOLLOWING HYPOTHETICAL: Auto manufacturers in Michigan, encouraged by the state and federal governments, develop a cheap, high performance electric vehicle. No foreign manufacturer can match it. U.S. manufacturers begin to export their electric cars and trucks to Japan and Europe in large numbers.

As the United States begins to dominate the world market, European and Japanese governments suddenly impose a variety of new tax and regulatory measures. Britain slaps a 50 percent sales tax on electric vehicles. Japan, citing safety concerns unique to electric vehicles, imposes new regulations that would require the complete redesign of American-built electric cars and trucks. Germany bans the sale of most American electrics altogether on human rights grounds, alleging that some of their parts are manufactured in Mexico using child labor.

The United States brings a complaint to the World Trade Organization (WTO) in Geneva, Switzerland, charging that the new taxes and regulations are trade barriers inconsistent with the General Agreement on Tariffs and Trade (GATT). AWTO dispute resolution panel rules in favor of the United States and is sustained on appeal. Under threat of trade sanctions, authorized by the WTO, the Japanese and Europeans drop their barriers. The U.S. auto industry booms. Thousands of high-paying jobs are created for American workers.

Far-fetched? Maybe. Maybe not.

This is the way the new GATT is intended to work. This so-called Uruguay Round agreement substantially strengthens GATT, providing for a World Trade Organization and new tools to knock down barriers to international commerce. Many state legislators believe the agreement is essential to boosting employment and economic growth in their districts. States are counting on export industries to revive local economies, and they are counting on the WTO to open foreign markets for those industries.

Imagine another hypothetical example. Say the Oregon legislature in response to environmental advocates passes a law reducing state regulations and sales taxes on electric cars and trucks to encourage citizens to buy the new vehicles. Only Ford, GM and Chrysler manufacture electric vehicles.

Germany, Britain and Japan respond by filing a complaint with the World Trade Organization in Geneva, alleging that Oregon's policy discriminates against their manufacturers who export traditional gasoline-powered vehicles into Oregon. A WTO dispute resolution panel rules against the Oregon statute. When the United States balks at suing Oregon to preempt its statute, the WTO authorizes Germany, Britain and Japan to impose heavy tariffs on a variety of Oregon goods, principally timber products. Oregonians employed in the forestry and wood products industry descend on the legislature.

Again, far-fetched? Maybe. Maybe not.


The new GATT is a two-edged sword. Just as the United States can use it to attack foreign laws and policies that create problems for U.S. exporters, so foreign governments can challenge U.S. law at both the federal and state levels. The WTO will have the power to review state statutes and regulations and enforce trade sanctions if state law is found to be a trade barrier in violation of the agreement.

The agreement therefore raises a number of questions related to state sovereignty. Will the WTO frequently seek the preemption or coerced repeal of important state laws? Will foreign trade experts sitting on WTO panels have any understanding of how American federalism works or why state sovereignty is important? Will state laws be a convenient target of retaliation by foreign countries whose practices are being challenged by the United States?

State legislators have many grievances with the national government and the federal courts.

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