Trade agreement trade-offs; international trade tribunals challenge state law and policy.

• Author: Waren, William T.

Blackjack, roulette, baccarat, craps, poker. It's all available on the Internet. And some state legislators don't like it. Many states are cracking down on Internet gambling in response to concerns about organized crime, money laundering, gambling by minors and the effect of gambling on public morals generally. But now, some state legislatures and law enforcement officials find that they themselves may have broken the law--international trade law that is--by seeking to curb Internet gambling.

As it happens, the United States crackdown was a major blow to the Internet gambling industry on the island nation of Antigua and Barbuda, population 67,000. In 2001, 119 offshore Internet casinos employing 5,000 people operated from the Caribbean islands. Today, after the crackdown, fewer than 30 online casinos, with fewer than 1,000 employees, are still operating.

So, Antigua and Barbuda sued the United States in an action brought before a World Trade Organization (WTO) tribunal, alleging that federal law and the laws of all 50 states regulating Internet gambling violate international trade law.

In late March, the WTO tribunal issued a confidential interim ruling and found that measures adopted by U.S. federal and state governments that restricted Internet gambling violate the WTO's General Agreement on Trade in Services (GATS). The United States is now appealing the decision.

The reaction to the WTO ruling was swift. "This unwarranted interference by an international body in domestic legislation erodes our sovereignty," says U.S. Senator Jon Kyl of Arizona. "It has absolutely nothing to do with free trade, but would deny us the right to set our own social policy."

Many state legislators also express concern about the Antigua case and similar cases brought against the United States based on allegations that state law and policy violate international law. But they also often argue for a balanced response that takes into account the benefits to American business and the economy that are promised by the North American Free Trade Agreement (NAFTA), WTO and other agreements.

Representative Peter Lewiss of Rhode Island puts it this way: "We support international trade agreements that generate jobs and economic growth in our communities, provided that the agreements respect the constitutional and traditional authority of state governments."

THE LIMITS TO STATE POWER

As the Antigua case demonstrates, NAFTA, the WTO and subsequent trade agreements, the so-called "post-1994 agreements," do place limits on state government. Prior to 1994, states had little reason to monitor the course of trade negotiations closely because they focused on tariffs, quotas and similar "at the border" discrimination against foreign products, almost always the business of the federal government. The post-1994 agreements deal not only with "at the border" discrimination, but also impose strict rules related to government regulation, taxation, purchasing and economic development policies that are regarded as non-tariff barriers to trade by the drafters of the agreements. In other words, a large number of measures within state policy jurisdiction are now affected by international law.

In addition, the pre-1994 agreements had no effective enforcement mechanism. But NAFTA, the WTO agreements and other post-1994 agreements (in combination with federal implementing legislation) do. The federal government may bring lawsuits to preempt state and local measures found to violate international law (though private suits are barred). Or even if the reds decline to sue, legislatures may be compelled to repeal or amend state law simply as a result of the political and economic pressure resulting from WTO or NAFTA sanctions. In this sense, with their power to authorize sanctions, WTO and NAFTA serve the "constitutional" function of regulating legislatures at the federal, state and local levels. Indeed, Renato Ruggiero, the past director general of the WTO, has been widely quoted as saying, "We are writing the constitution of a single global economy."

International tribunals that find state laws to be in violation of international trade agreements now have the power to authorize retaliatory trade sanctions, like higher tariffs on U.S. exports, until the United States complies. In investment cases under NAFTA's Chapter 11 and similar agreements, tribunals can order the United States to pay monetary damages. For example ill one NAFTA Chapter 11 case, Methanex v. United Slates, a Canadian corporation is seeking $1 billion in damages from the United States because of its alleged loss of future profits resulting from the California Legislature's ban on the toxic gasoline additive MTBE.

RECENT AND PENDING CASES

Methanex is only one of several NAFTA investment cases that have proved controversial. NAFTA's Chapter 11 on investment...