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Trade Agreements and State Service-Sector Regulations

At the December 2005 World Trade Organization (WTO) Ministerial Conference in Hong Kong, U.S. federal trade negotiators agreed to push for an expansion of WTO powers, potentially risking an alarming array of existing and future U.S. state and local laws to challenge in closed-door WTO tribunals. As part of a proposed expansion of WTO service sector rules that the U.S. federal government has agreed to negotiate, foreign countries would be empowered to use the WTO dispute resolution system as an international venue to challenge a range of commonplace U.S. state and local policies that multinational service sector firms argue are WTO-illegal barriers to their plans for global expansion.

The WTO agreement in question – the General Agreement on Trade in Services (GATS) – went into effect in 1995 as one of the original 17 Uruguay Round agreements enforced by the WTO. The WTO GATS goes far beyond our traditional concept of trade rules, such as tariffs and quotas on goods. Instead, the WTO GATS sets international rules to which every signatory government must conform their domestic policies regarding control and ownership of public services and regulation of private-sector service providers. The current GATS rules can be used to second-guess state and local decision-making in many areas of traditional state and local authority under the U.S. system of federalism, such as zoning and land use, health carehigher education and gambling.

At issue in the ongoing WTO expansion talks is both what service sectors will be covered by GATS rules and what the rules will require. Federal trade negotiators are currently working to expand the GATS by signing up more sectors of our service economy to the restrictive rules contained in the GATS. Already GATS rules prohibit governments from limiting the number of foreign service-providers – for instance limiting the number of beach front hotels or liquor outlets – and discourage the creation of new public services or exclusive service contracts. They also prohibit certain domestic policies that have the unintended effect of disadvantaging foreign firms, even if those policies were applied equally to domestic and foreign firms. New services now at risk include higher education, public libraries, and construction services.

The WTO requires signatory countries to ensure that domestic policies conform to GATS rules. To ensure this conformity, any signatory country, on behalf of business or other interests, can challenge any other WTO country's policies as violating the rules in WTO trade tribunals. Countries must change or eliminate laws found WTO-illegal by these closed tribunals or face trade sanctions. Indeed, the federal government is required to take all constitutionally available measures (including passing preemptive legislation, withholding highway funds and suing state or local governments) to force the compliance of state and local governments with WTO tribunal rulings – or face trade sanctions!

Thus, the WTO GATS, when applied to areas of traditional state and local authority, such as land use, health care, utilities, higher education and more, treads on the delicate balance between the federal government and the states established by the U.S. Constitution. Unfortunately, over the decade-long track record of the WTO, tribunals have revealed repeatedly their judgment that the U.S. system of federalism is largely irrelevant when it comes to the WTO's enforcement of global "trade" rules.

State officials must act now to stop this backdoor form of international preemption at the WTO.

For more information on how to prevent the erosion of state and local government authority in your state, contact Sarah Edelman at (202)454-5193.

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