Posts Tagged NAFTA

Fostering Bad Legal Analysis

Among the more ill-conceived pieces of legislation to be passed by the Colorado Senate this year is Sen. Joyce Foster’s “Buy American” bill (SB12-004), that would give contractors bidding on government work a credit for using American-made materials.

So let me go back to the discussion when the Governor’s office came in and testified against this bill. They were terribly misinformed. I shared that information with them. And it wasn’t the Governor’s office that’s misinformed, it was these two people who testified that were misinformed.

Yesterday we heard also about a letter than many of us received from Canada. This will do NOTHING. This is part of the trade agreement. We have the trade agreement with Canada. We are doing business with Canada. We are doing business with Qatar and the fields in Qatar. This does NOTHING. And they were misinformed. When I tell you, friends, that I worked with the International Trade Office in 2000-2001, and my goal is to support international trade, I do!

It has NOTHING, it will do NOTHING to ruin our relationship with any other country that is part of the World Trade Organization. NOTHING. Other states, this is, as I said, Illinois put this together back in the 90s.

And I want to make another thing perfectly clear. Most of us are asked by different departments or different organizations or different agencies to come and lobby for them on their legislation, to bring legislation. This is my own legislation. You need to know that. This is my own legislation. My constituents have been coming to me for the last four years. “Joyce, why can’t we do something, why can’t we do something about bringing manufacturing back to the United States?”

Well, at least it’s good to know that Sen. Foster is finally sponsoring legislation that isn’t for the benefit of one or another of her family members.

But her contention that the bill won’t affect trade with countries covered by the WTO or NAFTA is simply incorrect. It’s based on two assertions. First, the fact that NAFTA and the WTO’s General Procurement Agreement (GPA) treat purchases from member nations as though they were domestic. Second, this passage in the bill:

(6) Nothing in this section is intended to contravene any existing treaty, law, agreement, or rule of the United States. No preference shall be granted under this section if the preference would contravene any treaty, law, agreement, or rule of the United States.

Let’s leave aside what the Supreme Court would do to a state that presumed to act otherwise, and to try to abrogate a treaty, and take the sentence at its word.

In fact, it can be completely true, contravene nothing, and still place WTO and NAFTA trading partners at a disavantage with respect to US firms, in several ways.

First, it’s important to understand that both the WTO GPA and NAFTA specifically exclude state-level governments from their procurement restrictions:

NAFTA Chapter 10 Procurement Obligations

Products produced in Canada fall within US government procurement obligations under chapter 10 of the NAFTA and the WTO GPA. Mexico, which is not a GPA signatory, is entitled to NAFTA protection. The essence of the NAFTA and GPA obligations is the same, as are most of the issues discussed above with respect to the GPA. NAFTA coverage applies to:

Goods, services and construction services whose country of origin is determined to be Canada or Mexico;
Federal government procuring agencies and “government entities” identified in the US NAFTA procurement annex (but not state and provincial procuring agencies, which are not covered by NAFTA chapter 10);
Contract values exceeding $50,000 for goods and services and $6.5 million for construction services; and
Contracts not excepted from coverage on grounds of national security or necessary to protect public order, life and health and intellectual property rights.

In point of fact, states have all sorts of restrictions of this sort which disadvantage Canadian companies, and the Canadian government keeps a comprehensive list of them.

NAFTA Chapter 10 coverage on government procurement is limited to the federal level. NAFTA Chapter 10 encourages, but does not require state, provincial or local buyers to provide equal treatment for offerors from outside their jurisdictions. Therefore, U.S. states may apply these preferences, which might disadvantage Canadian firms in their state and local government purchasing.

For reassurance, the US Trade Compliance Center agrees:

State and provincial government entities are not subject to Chapter Ten. The U.S. government encourages states to adopt NAFTA procurement disciplines, but the final decision rests with individual states. The Mexican and Canadian governments are currently working with their state and provincial governments to seek their voluntary, reciprocal participation.

Colorado would be adding to its list of preferences for in-state or American companies, and would, in fact, be further working against Canadian companies. This may or may not be wise policy, but to pretend this isn’t what the state is doing, or that it wouldn’t be allowed to do so under federal law, is simply factually incorrect.

The WTO GPA provisions are a little more complex. Only national governments are expressly included in its general application, but each accessory to the agreement has to file an Appendix 1, Annex 2 of which describes what sub-national organizations will be subject to its provisions, and to what extent. Thirty-seven US states are covered, including Colorado, “Executive Branch Agencies.” (This has since been extended to other US trade obligations, and became an issue when determining the degree to which the US could enforce US preferences under the stimulus package.)

It turns out that the WTO GPA was initially concluded in the mid 1990s under the General Agreement on Tariffs and Trade, an agreement, not a treaty. This means that is does not automatically become “the supreme law of the land,” in accordance with the Constitution. According to a study done by the Washington State legislature:

Under the Foreign Commerce Clause of the U.S. Constitution, Congress shall have the power to “regulate Commerce with foreign Nations, and among the Several States and with the Indian Tribes.”39In adopting the Fast Track legislation, Congress has delegated some of its power, albeit with defined limitations, to the President. However, Congress did not articulate a clear intent to legislate in an area traditionally held by the states’ government procurement.40Indeed, the Congress specifically evidenced the intent to not preempt state law in the case of the Uruguay Round Agreements.41As mentioned above, the failure to articulate such intent can be fatal to a federal attempt to override state law.

40See Bipartisan Trade Promotion Authority Act of 2002, P.L. 107-210.
41 See 19 USCS §3512(b)(2) (1999).

The obvious question is: why only 37 states, and how was their participation decided upon?

According to the National Conference of State Legislatures:

The United States is party to the World Trade Organization’s Agreement on Government Procurement (GPA). When negotiating the GPA, USTR solicited the state governors for permission to include state procurement and to bind state procurement processes to the GPA. USTR asserts that 37 states were voluntarily bound through this process to the GPA. In September 2003, USTR requested state governors to make similar commitments to several free trade agreements (FTAs) being negotiated at the time. NCSL recognizes that consultation with a limited number of governors is simpler than communicating with 7,500 legislators and that USTR has increasingly made these letters available publicly on the Internet. Nonetheless, the federal government must work with state legislatures to ensure that decisions about state procurement practices are made with their consent.

While different states may differ about whether or not the legislature in some way delegated trade authority to the executive, there can’t be much doubt that it hasn’t done so on a permanent and irrevocable basis. That is, the legislature should always, with an affirmative act, be able to modify the terms of a state’s participation in the WTO GPA. In 2005, in fact, Maryland undertook to do exactly that, passing HB514:

This bill prohibits the Governor and any other State official, without explicit consent from the General Assembly, from: (1) binding the State to the government procurement rules of an international trade agreement; or (2) giving consent to the federal government to bind the State to the government procurement rules of an international trade agreement. The bill also declares invalid any consent previously given by the Governor or other State official to bind the State to the government procurement rules of an international trade agreement.

The bill was passed over the governor’s veto, and a fuller exploration of the legal issues involved can be found in a 2005 opinion of the State Attorney General.

When I spoke with Sen. Foster personally about her bill, she couldn’t provide an answer as to how many contracts would be affected, the sum total of contracts affected, or the total cost to the state. It’s now apparent that Sen. Foster was as lazy in researching the law as she was in researching the economics.

Maybe she should stick to lobbyist-drafted legislation, after all.

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