Vermont Commission on International Trade and State Sovereignty

1. Vermont Commission on International Trade and State Sovereignty International Trade “Primer”/ What’s at Stake for Vermont? Elliot Burg Vermont Attorney General’s Office September 28, 2006

2. Overview • Why should Vermont care about international trade? • How did the international trading system evolve? • What parts of our economy are covered by trade rules? • (How) can state law be impacted by trade agreements? • What can Vermont do to respond to these challenges?

3. Why should Vermont care? (Opportunities) • International trade is a growing part of the economy • States that track the U.S.’s negotiating strategy may get the jump on new economic opportunities • Jobs in export sectors are generally higher-wage • Trade diplomacy is important for non-economic reasons

4. Why should Vermont care? (Dangers) • Foreign competition can negatively impact wages, and cost jobs at home • Free trade may undermine human rights, welfare abroad • International trade agreements can impact state legal authority • The federal government can preempt state laws by citing international trade commitments • Some agreements provide expanded legal protection for foreign investors

5. Evolution of the international trading system (1) 1944—At Bretton Woods, global economic institutions created • World Bank, IMF, GATT • Rejected an International Trade Organization 1958—EEC established • Another “free trade zone” 1979—Tokyo Round trade negotiations • 7th such round • Tariffs reduced, some non-tariff agreements

6. Evolution of the international trading system (2) In the U.S. … • 1974—“Fast-track” authority established, streamlining Congressional consideration of trade bills • 1979—Office of U.S. Trade Representative (USTR) created by Executive Order … part of Executive Office of President (not subject to Freedom of Information Act requests) … formally consults with states through Inter-Governmental Policy Advisory Committee (IGPAC) and State Points of Contact (SPOCs) … current USTR is (Ambassador) Susan Schwab

7. Evolution of the international trading system (3) 1994—“Uruguay Round” completed/World Trade Organization created • Now has 149 members • Ministerial Conferences take place every two years WTO agreements include: • Goods • Services • Government procurement • Agriculture • Intellectual property rights • A binding dispute resolution system • More than a dozen separate agreements

8. Evolution of the international trading system (4) Since the Uruguay Round… • North American Free Trade Agreement (NAFTA) • U.S. – Singapore Free Trade Agreement • U.S. – Chile Free Trade Agreement • U.S. – Australia Free Trade Agreement • Central American Free Trade Agreement (CAFTA)

9. “Alphabet soup” of trade agreements GATT = General Agreement on Tariffs & Trade [Goods] • Requires equal treatment for all foreign suppliers (national treatment and most favored nation) and bans limits on market access* • Technical regulations may “not be more trade-restrictive than necessary to fulfill a legitimate objective” GATS = General Agreement on Trade in Services • Contains similar rules (*) relating to “committed” services • “No more burdensome than necessary” to ensure quality of service (“domestic regulation”) GPA = Government Procurement Agreement • Contains similar rules (*) relating to procurement in “committed” sectors • Technical specifications (broadly defined) may not be adopted “with the effect of creating unnecessary obstacles to international trade” • The one agreement where the USTR has sought states’ “consent”

10. More “soup” FTAs = Multilateral free trade agreements • NAFTA, CAFTA, proposed Free Trade Agreement of the Americas (FTAA) BITs = Bilateral investment treaties • Over 1,800 BITs signed between 1959 and 1999 • NAFTA’s investor protection provisions (“Chapter 11”) are patterned after the BITs Text of agreements: http://www.wto.org/english/docs_e/legal_e/gatt47.pdf

11. International trade agreements: rules National treatment/Most favored nation • Bans discrimination in the provision of goods and services Market access • Prohibits quantitative limitations Domestic regulation • Requires laws to be “no more burdensome than necessary” (in flux) Minimum treatment (for investors) • Requires treatment consistent with international law Expropriation (for investors) • Requires compensation for loss of value

12. Summary of issues for the states • Investment • Pharmaceuticals • Gambling • Environmental regulation • Professional regulation • Utilities • Tobacco • Procurement standards

13. Investment (1)—rules NAFTA, CAFTA and most bilateral agreements provide a special dispute resolution process for foreign investors Expropriation—must compensate to regulate • U.S. constitutional standards don’t apply—real estate v. any investment interest Minimum treatment provisions • Standards not well defined International investment tribunals • Cases heard in secret by panels of international trade lawyers • State does not participate • Federal government may recoup damages, or preempt state

14. Investment (2)—court decisions The Loewen Group, Inc. v. U.S.: • Contract suit filed in Mississippi state court v. Loewen, Canadian funeral home operator… jury verdict of $550 million • Loewen filed an investor claim under NAFTA over national treatment, minimum treatment, and expropriation without compensation … panel dismissed on a technicality, but stated that the state-court trial was a “miscarriage of justice” in violation of minimum treatment under internationallaw Mondev International, Ltd. v. U.S.: • Mondev, of Montreal, embarked on commercial real estate development in Boston … city refused to allow option to acquire a critical piece of land … Mondev sued, won in trial court but lost before state supreme court on “sovereign immunity” grounds • Mondev filed an investor claim under NAFTA for $50 million … panel dismissed claim on a technicality, but U.S. did not contest notion that a judicial decision could be the basis for an international investment award Conference of Chief Justices: investor challenges “can undermine the enforcement and finality of state court judgments”

15. Investment (3)—environment Metalclad Corp. v. United Mexican States: • Permits issued for Mexican company to construct a hazardous waste facility … U.S.-based Metalclad bought the Mexican company • Mexican state and municipality objected to the facility, citing environmental concerns, and it never opened • Metalclad filed a NAFTA claim against Mexico for $90 million, alleging violation of minimum treatment and expropriation without compensation … NAFTA panel agreed and awarded $16.7 million S.D. Meyers, Inc. v. Canada: • Meyers, a U.S. company, had orders to treat PCB waste from Canada • Canada temporarily banned the export of PCB waste, forcing Meyers’ customers to have their waste handled by a higher-priced Canadian competitor • Meyers sought $20 million under NAFTA on grounds that Canada’s ban violated national treatment, minimum treatment, and expropriated without compensation … panel awarded $6 million for discrimination against Meyers

16. Pharmaceuticals U.S.-Australia Free Trade Agreement Annex: • Countries must “promote timely and affordable access to innovative pharmaceuticals” … this could mean that states cannot limit drugs on their preferred drug lists, based on cost-effectiveness • Requires an independent review panel for a manufacturer whose PDL application has been rejected … states’ role in process is unclear • Confirms right of patent holders to control resale or importation of their products … could conflict with efforts to ease drug importation • Eli Lilly is now challenging Australia’s refusal to put an osteoporosis drug on its formulary due to uncertain cost-effectiveness

17. Gambling WTO panel on Antigua’s GATS challenge to federal and state bans on Internet gambling decided: • U.S. commitment in “recreational” sector encompassed gambling, even though unintended • Ban on quantitative limits on market access under GATS includes absolute prohibitions (“zero quotas”) • Challenged federal anti-gambling laws violate U.S. commitment under GATS—but “saved” by GATS’ “public morals” exception due to gambling addiction, money laundering and fraud • Left open: whether state bans on land-based gambling might fall, if “public morals” are less relevant to that form of gambling Slot machines in Vermont?

18. Environmental regulation (1) Ethyl Corp. v. Canada—investor-state dispute: • Canada banned international sale of octane enhancer MMT, suspected of adverse health effects … Ethyl filed a NAFTA claim, alleging violation of national treatment and expropriation without compensation … Canada suspended ban and agreed to pay $13 million Glamis Gold Ltd. v. U.S—investor-state dispute: • Glamis, a Canadian mining company, target of large protests over forest destruction and water contamination in Honduras • Glamis proposed a massive open-pit cyanide “heap-leach” gold mine in California … pristine area, use of large amounts of water, near tribal ancestral sites • Clinton administration denied permit, Bush’s reversed, California passed a law requiring backfilling of open pit mines on or near sacred sites • In 2003, Glamis filed a NAFTA claim for $50 million, claiming violation of minimum treatment and expropriation without compensation • Still pending

19. Environmental regulation (2) Methanex Corp. v. U.S—investor-state dispute: • Canadian Methanex makes methanol, a key component of MTBE, a potential carcinogen … 2005 Vermont joint resolution noted problems with MTBE …in 1997, California ordered a phaseout of MTBE • In 1999, Methanex filed a NAFTA claim for $900 million: violation of national and minimum treatment (favoring ethanol) and uncompensated expropriation • 2005, decision: Methanex failed to prove discriminatory intent … a non-discriminatory regulation for a public purpose, enacted with due process, is not expropriation unless “specific commitments” are given by regulating government … also, one may not compare different products (MTBE and ethanol) • Remaining issues: What kind of “commitment” could lead to expropriation? What will other panels do?

20. Environmental regulation (3) GATS (non-investment)—What laws are “no more burdensome than necessary to ensure the quality of the service”? • Size limits on big-box stores? • Limits on development to protect historic or cultural sites? • Restrictions on outdoor advertising and signage?

21. Professional regulation The case of nursing • GATS proposal to add “hospital services” to 90 sectors where the U.S. has committed to GATS rules may encompass nursing services • GATS says that domestic regulations must be “no more burdensome than necessary to ensure the quality of the service” … could supersede state determinations that would otherwise be upheld • Could GATS: • Override curriculum diversity requirements? • “Federalize” or internationalize nursing qualification standards? • What about other professions—law, medicine, accounting? • Public education—in-state scholarships and state licensing could be at risk • Note potential breadth of “domestic regulation”—could turn trade panels into “super-legislatures”

22. Utilities In 1994, the U.S. made a specific GATS commitment on “services incidental to energy distribution,” which could affect: • State monopolies for distribution of electricity • Renewable portfolio standards that disadvantage foreign suppliers (such as Vermont’s definition of “renewable” hydropower, which excludes large-scale hydro)

23. Tobacco Grand River Enterprises Six Nations, Ltd. v. U.S. • Grand River is a Canadian corporation involved in the manufacture and sale of tobacco products, mostly exported to U.S. • In 2004, Grand River filed a claim under NAFTA for $340 million in damages allegedly resulting from the 1998 settlement agreement between state attorneys general and major tobacco companies (“MSA”), and state laws that implement the MSA • Grand River claims that state laws that require non-signatories to MSA to pay into escrow funds violate national treatment, most-favored-nation treatment, minimum treatment under international law, and cause expropriation without compensation • Case could undermine efforts to pursue “non-defendant” tobacco companies

24. Government procurement General Procurement Agreement (GPA): • Requires equal treatment of foreign suppliers … must use standards that are essential to fulfill contract—unclear how broad this is • Could prohibit: • Limits on off-shoring • Green procurement policies (recycling, fuel efficiency, renewable energy) • Prevailing or living wage agreements • Preferences based on human rights standards • USTR has chosen to ask states sign on, as a political matter • Q: Who decides at the state level? USTR has only asked governors  

25. How state laws could be undermined • Federal government can attempt to recoup trade panel losses from future state appropriations • Federal government can sue to preempt “offending” state law • States may decline to legislate in controversial areas

26. Solutions (1)—federal action • Congressional action—implementing legislation • November 2006, U.S.-Peru, U.S.-Colombia FTAs considered by Congress? • Implementation of agreements and oversight of disputes • Monitor trade/investment disputes that affect state authority • Contribute to “interpretive” notes to agreements • Be involved in stating limits on U.S. commitments under GATS • Be active on procurement matters • Join the debate on renewal of fast track (set to expire in June 2007)

27. Solutions (2)—networking Government associations • NCSL, NAAG, NGA, IGPAC, etc. States with active oversight committees on trade policy • California Maine North Carolina • Utah Vermont Washington Multistate working groups • Electricity Prescription Drugs • Investment Rural Development/Agriculture Non-governmental organizations • Unions Business associations • Environmental groups Civic groups

28. Solutions (3)—court challenges Two possibilities: • Are trade agreements consistent with the treaty clause of the Constitution? • Art. II, sec. 2: President “shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur” • But trade agreements pass by a majority of both houses of Congress (fast-track) • Challenge rejected by one appellate court, because it presented a “political question” • Do the investor-state dispute provisions violate Article III of the Constitution? • Sec. 1: federal judicial power shall be “vested in the Supreme Court and such inferior courts as Congress may create”… judges must posses lifetime appointment • Sec. 2: judicial Power extends to all cases “arising under … Treaties made, or which shall be made … [and] to controversies to which the United States shall be a Party” • But trade panels—which hear cases arising under treaties and to which U.S. is a party—are not created by Congress, nor do their members have lifetime appointments

29. Has the anti-discrimination agenda been “hijacked” by an anti-regulatory agenda?

30. Closing International trade matters to Vermont We need to be informed We need to be active