GATT and Preemption of State and Local Laws

By Wallick, Ruth | Government Finance Review, October 1994 | Go to article overview

GATT and Preemption of State and Local Laws

Wallick, Ruth, Government Finance Review

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). …

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