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World Trade and the Attorneys General ? Preemption Possibilities on a Global Scale

Karen Cordry, NAAG Bankruptcy Counsel

Among the other “hot topics” on the campaign trail in recent weeks, particularly in the battleground state of Ohio, has been trade agreements, such as the North American Free Trade Agreement (NAFTA), Central America Free Trade Agreement (CAFTA), and pending agreements with countries such as Columbia, Panama and Korea and their effect on the domestic economy. As controversial as those agreements have been, they have not had a large effect on the role of Attorneys General within the United States. That may change, depending on the outcome of negotiations currently underway with respect to the topic of “domestic regulation” under the General Agreement on Trade in Services (“GATS”) for World Trade Organization (“WTO”) members. The GATS has been in effect since 1995. Until recently, it only had placeholder language with respect to domestic regulations, requiring the parties to negotiate towards certain objectives, but without specific or enforceable language on those topics. For the last two years, however, WTO member nations have actually begun the process of trying to negotiate enforceable “disciplines” – and the outcome of those negotiations could have a major impact on what laws and procedures can be enacted and enforced with respect to the service sector in this country.

The service sector is now 80 percent of the U.S. economy, so restrictions on government authority in that area must, perforce, be of great interest and concern to Attorneys General, along with the rest of the executive, legislative – and even the judicial – branches. The ongoing dialectic between the values of uniformity – represented by the Supremacy Clause, and the values of diversity, experimentation and government by those closest to the people – represented by the “states’ rights” aspects of our federal system of government, remains at the forefront of Constitutional debate. On February 20, 2008, alone, the Supreme Court issued three preemption decisions – Rowe v. N.H. Motor Transport Ass’n, 06-457 (1994 Federal Aviation Administration Authorization Act preempts Maine laws that seek to prevent delivery of tobacco products to minors); Riegel v. Medtronic, Inc., 06-179 (state-law damages claims challenging the safety and effectiveness of medical devices with premarket approval preempted by 1976 Medical Device Amendments to Food, Drug, and Cosmetic Act); and Preston v. Ferrer, 06-1463 (Federal Arbitration Act preempts state law that refers contractual disputes to administrative forum, before arbitration). Those decisions, though, are part of a constitutional construct in which citizens can change Congress and thereby change the laws if they do not like the federal rules imposed by the Supremacy Clause. The ability to change trade treaties, though, to the extent that they impose controls in a sort of “International Supremacy Clause,” is far more limited. Those agreements are inherently structured to ratchet in only one direction – towards greater removal of trade barriers – and attempts to re-regulate can require compensation of countries and companies (as occurred with respect to the recent decision on Internet gambling). It behooves the Attorneys General then to closely review proposed language that would have the effect of preempting state and local regulatory initiatives and weigh in before those matters are agreed to.

To understand the issue, a little background on the GATS is important. Its requirements work on both an “opt-out” and “opt-in” basis, with an initial set of “general commitments” that are applicable to all areas of the service economy, unless the government specifically opts one or more service sectors out of the agreement. Three significant substantive provisions are: Article II – Most Favored Nation – which prohibits discrimination between foreign entities; Article III – Transparency – which states that all measures of general application should be published and countries should respond promptly to inquiries; and Article VIII – Recognition, which deals with cross-border licensing and qualification requirements, bars discrimination between various countries and generally speaks to the value of experience and education in the other country.

The topic of current interest, though, is Article VI – Domestic Regulation – which states that countries should maintain tribunals and procedures to review and remedy issues affecting trade in services. Article VI further provides that, for services sectors to which the country has committed itself (see below), all measures of general application are to be administered in a reasonable, objective and impartial manner, decisions on permit authorizations should be made within a reasonable period on the basis of adequate procedures to verify competence, applicants should be provided with information on the status of their application, and licensing and qualification criteria should comport with the recognition standards. Those general admonitions end with a commitment to negotiate further provisions:

    With a view to ensuring that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services, the [parties shall] develop any necessary disciplines. Such disciplines shall aim to ensure that such requirements are, inter alia:

  1. based on objective and transparent criteria, such as competence and the ability to supply the service;
  2. not more burdensome than necessary to ensure the quality of the service;
  3. in the case of licensing procedures, not in themselves a restriction on the supply of the service
It is that latter language that is now the subject of negotiations between the WTO parties and is of significant import. It does not merely provide that parties should negotiate on issues relating to domestic regulation, but, rather, commits them, in advance, to negotiating towards predetermined goals. While those goals may appear desirable at first glance – who could be against objectivity and transparency, or favor unduly burdensome regulation – they become problematic upon reflection. Sometimes, for instance, criteria may be inherently subjective – such as when aesthetics is one of the criteria or where numerous factors must be balanced to determine the “public interest” or what is “just and reasonable” in a given situation. Similarly, relieving a burden on the regulated party may impose very substantial costs on the regulators and society – but that is a choice that the Constitution allows governments to make, absent a lack of due process or choices that are totally irrational. This language would turn the normal review criteria upside down, and place all of those costs on the government and taxpayers.

Perhaps most troublesome is the notion that the criteria must explicitly relate to the “quality of the service.” To be sure, quality is a very important factor to regulate for – but what of a service provider that wishes to modify a building in a way that will increase the quality of its services, but will destroy the historic building in which it is located? Applied literally, this goal would bar the government from regulating to ensure historic preservation, protection of the environment, diversity in employment, and a myriad of other factors. Article IV does contain an exception for measures necessary to protect “public morals or to maintain public order” or to “protect human, animal or plant life or health;” but those factors leave out many bases on which governments frequently may choose to legislate. Moreover, those exceptions are subject to a preface that they may not be enforced if they are “a disguised restriction on trade in services” – a phrase that is used throughout the GATS and seems to endorse the idea that measures can be barred not just for their “discriminatory intent,” but also for their “discriminatory effect.” In other words, a provision that does not discriminate on its face may be precluded if, in practice, it serves to bar trade in a particular service – which, of course, any regulation may do to some degree or another. Thus, the extent of protection from this exception is far from clear.

The other aspects of the GATS are listed as “Specific Commitments.” These are opt-in provisions that apply to service sectors that the country chooses to submit to the GATS regime (and with such limitations and exclusions as the country chooses when it commits the sector). To date, the United States has commitments in more than 90 sectors. There are four forms of services covered – services to a consumer in another country (i.e., an American talks to an Indian call center), services provided in India to a visiting American, services provided from a business established in the foreign country (the Indian call center operator sets up an office in Iowa), and services provided in a country to those who have immigrated to that locale. One may open a sector to some or all of the four modes. The two primary substantive provisions are Article XVI – Market Access and XVII – National Treatment.

National Treatment is obvious – one must treat foreign providers like domestic providers. Market Access, on the other hand, bars limiting the numbers of service providers or amounts of service offered – even if such limitations are applied even-handedly, such as under “economic need” programs or the like. As such, this restriction runs directly counter to numerous well-established regulatory regimes and, hence, requires the government either to not commit to the sector at all or to establish substantial conditions and exceptions to its commitment. This is the provision that was at issue in the recent gambling case, where the WTO’s “Dispute Settlement Body” found that a ban on Internet gambling was the equivalent of a prohibited zero quota – and that the United States had failed to except gambling from commitment in a sector called “other recreational services,” and was eventually found to have violated the GATS and was required to compensate other members in order to withdraw that commitment in the future.

These provisions apply not just to federal laws but to all “measures” (which includes judicial actions as well) within the signatory country by all levels of government. While the complaints may only be brought against the federal government, it can be held liable for actions of sub-national governments, akin to laws that make parents liable for their children’s actions. Thus, to the extent that provisions in GATS are applicable to a particular area of regulation, they will affect what laws can be enacted by the states and how they can be enforced, at least if the states are to avoid embroiling the federal government in long and expensive litigation. To some extent, the federal government has consulted with states in determining which of their laws need to be protected by listing “limitations” in the GATS schedules and which sectors to exclude altogether from the three existing trade rules – Most Favored Nation; Market Access, and National Treatment. Market Access issues, in particular, have generally been addressed by the commitment process. The Article VI Domestic Regulation language, on the other hand, is part of the general commitments that can be applied across the board.

As noted, at present, this language is merely a hortatory directive to member countries as to how they should negotiate. And, until recently, in response to concerns raised by Attorneys General in prior sign-on letters and by other state and local organizations such as the Conference of State Legislatures, the National Governors’ Association, and the National Association of Counties, the United States Trade Representative (“USTR”) was able to reassure the states and localities that the talks had not yet begun. That changed in early 2006 when the chair of the GATS Working Party on Domestic Regulation began to turn the goals into proposed disciplines. He is now on his fourth draft and the various parties remain far apart. Partially in response to the urgings of the Inter-Governmental Policy Advisory Group (made up of representatives of state and local governments), and in recognition of the great range of regulation that might be affected by these goals, the USTR has consistently advocated for an approach limited to “transparency.” Others, though, such as Australia and Hong Kong have pushed for proposals that go much further and incorporate the most problematic aspects of the goals in Article VI.

The current chairman’s draft attempts to bridge some of those differences but still has many troubling aspects. This article can only touch on some, but this is an area that plainly warrants substantial attention. The draft (paragraph two) states that the “purpose of these disciplines is to facilitate trade in services by ensuring that measures relating to licensing requirements and procedures, qualification requirements and procedures, and technical standards are based on objective and transparent criteria, such as competence and the ability to supply the service, and do not constitute disguised restrictions on trade in services.” Thus, the initial goal is limited to “facilitating trade” – a worthwhile goal, to be sure, but one that legislatures may not view as the sole goal that they must take into account. This formulation revives the issues noted above – if one must “ensure” that standards are “objective,” what does one do about regulatory schemes that are not strictly “objective?” Similarly, how does one know when an apparently valid regulation may turn out to be a restriction on trade. On the other hand, restriction of some forms of trade may indeed be the purpose of a law, and this language may interfere with those normally valid forms of regulation.

This draft next states in paragraph three that it recognizes that countries may “regulate, and . . . introduce new regulations, on the supply of services . . . in order to meet national policy objectives.” While that recognition is useful, this draft drops a reference in the prior draft to “subnational” objectives – meaning that goals of states and localities would not be protected by this provision. This is one of the most crucial aspect of these discussions – many countries consider the whole federalist system in the United States, with its non-uniform state regulations, to be unduly burdensome and urge the federal government to agree to override those state laws. To its credit, the federal government continues to refuse to do so. As noted earlier, the political genius of this country is to balance the values of uniformity and diversity and to fight those battles out in the political process. Throwing an international agreement onto the scales in a way that inherently sides with eliminating regulations destroys that political balancing process.

Another problem with the draft is that the relationship between these provisions and the limitations and exceptions with respect to the Market Access and National Treatment provisions, as set out in paragraph 10, is totally ambiguous. The extent to which proposed disciplines would apply to measures that might conflict with Market Access or National Treatment commitments (or be excluded from those commitments) is simply undeterminable at this point.

The specific proposed requirements raise other concerns as well. Paragraph 11 states that measures shall be “pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply” – which could allow challenges to regulations that are valid and non-discriminatory but that don’t relate to the “supply” of the services, such as requirements for historical preservation or dedication of a portion of the facility to public space. Paragraph 13 deals with “transparency,” by starting with the existing requirements in GATS Article III and then adding a large array of new obligations. In addition to publishing regulatory codes, these include the duty to publish additional “detailed information” about how regulatory measures work with respect to appeals process, technical standards, public participation and the like. While they may represent “best practices” for operating an administrative system, governments now do not operate under threat of having their actions overturned if they do not subscribe to all of those provisions so long as the overall result does not violate due process. Equally problematic is that, after requiring that all of these rights should be given to the service providers, Paragraph 15 directs that only they, and not the public as a whole, should be allowed to comment on proposed measures and have their concerns addressed. A comment period open only to the regulated is surely unlikely to produce much support for the proposed regulations.

Paragraph 17 provides that licensing procedures should be as “simple as possible” – a valid goal but one that will surely be hard to define. Similarly, paragraphs 19 and 23 prescribe disciplines that apply “in principle,” such as providing a single licensing authority (not 50 state authorities) without defining what that means or what happens if that principle is not observed. Other matters in the succeeding paragraphs may be reasonable, but requiring that “authenticated copies should be accepted, where possible, in place of original documents” (paragraph 22) seems to be an unreasonably detailed intrusion into the normal administrative process. Finally, paragraph 26 bars imposition of licensing fees that are not “commensurate with the costs incurred,” even if such fees have been traditionally used as a revenue generator for legitimate purposes (i.e., duck license fees that are used to buy land for conservation). There are other issues as well with respect to standards for qualifying individuals as well as determining what attention must be paid to international standards in setting national technical standards.

All of these are the sorts of measures that are normal grist for legislative action. All are matters that one may wish to change from time to time rather than having them be enshrined in the rigid structure of trade agreements. None of them relates to overt discrimination against foreign trade because that is the purpose of the National Treatment provisions. In short, it is far from clear that these deal with fairness issues, as opposed to issues dealing with regulation as a perceived burden on trade, even if non-discriminatory. A decision on whether this should occur is one that plainly deserves substantial attention at all levels of government. If so, this is the time for states and localities to weigh in with the USTR to have their voices heard.

There is a GATS contact group maintained at NAAG by the author, and those wishing to receive more information and/or be part of discussions and action on this issue can contact the author at

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