Judicial review of member-state regulation of trade within a federal or quasi-federal system: protectionism and balancing, da capo.

• Author: Regan, Donald H.

The topic of this Essay is not one Terry Sandalow has worked on, but he got me started on it by organizing, with Eric Stein, the Bellagio Conference on comparative constitutional economic integration in the United States and the European Community. For that, and for thirty-three years during which he has been an unfailingly stimulating and supportive colleague, Dean, and friend, I am deeply grateful.

1. INTRODUCTION

   In many federal or quasi-federal systems, the member-states retain significant powers of commercial regulation. The exercise of such powers can threaten the efficiency of trade between member-states. In pursuit of efficiency, the system will normally impose systemic limitations on the member-states' regulatory powers. By "systemic" limitations, I mean limitations that are embedded in the basic principles of the system, that are enforceable by courts or other dispute-settlement organs [hereafter simply "courts"], and that do not depend on specific pronouncements of the central legislative organs, if there are any. All of this is true of the United States, Australia, the European Union, and the World Trade Organization (WTO), for example.

   The most obvious systemic limitation, found in all the systems just named, is a prohibition on protectionism directed by one member-state against others. There is controversy, of course, about just how we should understand "protectionism." Is it primarily a matter of legislative purpose? What about discriminatory effect? Does nonprotectionism require the use of least trade-restrictive measures? And so on. But those issues I shall set aside for now.

   Another issue, no less controversial than the meaning of protectionism, is whether there should be any other systemic limitations on member-state trade regulation, over and above the prohibition on protectionism. One popular candidate for an additional sort of review is what I shall refer to as "balancing," though I mean to include also true "proportionality" review. The feature that defines "balancing" as I use the term is that it requires the court to identify and compare the local benefits and foreign burdens that result from the regulation under review. (1) The standard theoretical argument for balancing goes as follows: Member-state laws, even if they are not protectionist, may be costly to foreigners (that is, to residents of other member-states). But those foreigners are not represented in the member-state legislature that adopted the law. Their interests are therefore not taken into account when the law is adopted, and the cost of the law to the foreigners may well be greater than the benefit to locals. In order to avoid that sort of cost-benefit failure or Kaldor-Hicks inefficiency, we need to have a court compare the local benefits and the foreign costs of the law, and invalidate laws, even nonprotectionist laws, if the foreign costs are greater than the local benefits (balancing) or if they are too much greater (proportionality review). (2)

   I shall call this the "virtual representation" argument for balancing. On its face, it seems quite persuasive. The idea that when a social decision is made, all affected interests should somehow be taken into account is powerful and appealing, and it seems to require that when a legislative decision is made, interests that are not represented in the legislature should be given virtual representation by the courts. To be sure, we may well doubt courts' competence to identify benefits and costs in practice, and we may doubt the propriety of courts' deciding the evaluative issues that must be faced before, say, a local benefit to the environment can be weighed against a foreign loss of jobs. But to many people the theoretical case for judicial intervention seems so strong that they think we should suppress our doubts about judicial fitness for the task and simply instruct courts to wade in and do the best they can.

   There is a flaw in the argument, however -- a flaw in the theoretical argument that judicial supervision is needed, over and above protectionism review. Although the virtual representation argument has force in some contexts, we shall see that it has no force in the most common types of trade regulation case. I am tempted to say it has no force in any trade regulation case. But since "trade regulation" is not a term of art, and some later examples will reveal that the boundaries of the term are unclear, I content myself with the less dramatic claim about the "most common types" of trade regulation case. As I shall explain, so long as the regulation under review is nonprotectionist, the foreign interests in (most or all) trade regulation cases, even though they are not represented in the regulating state's legislature, are nonetheless fully and efficiently accounted for by another mechanism -- essentially the same mechanism by which a failure-free unregulated market integrates consumer and producer interests and generates efficient outcomes. Since the foreign interests are fully accounted for, there is no need for judicial "virtual representation" in these cases. Judicial intervention in the form of balancing review is at best unnecessary and at worst counterproductive. (3)

   Of course, eliminating the virtual representation argument does not by itself tell us what the rules for reviewing member-state trade regulation should be in any particular system. Each system has its own goals, and the judicial organs of the various systems must interpret different foundational texts in different institutional settings. Still, the foundational texts in all the systems named above leave a good deal to interpretation, and interpretation should be informed by sound theory. I am confident that many interpretive questions would look different if it were understood that balancing review is not necessary to protect out-of-state interests affected by the commonest sorts of nonprotectionist trade regulation.

   Spelling out the limits on the virtual representation argument is the project for Part II. In Part III, I offer some related new thoughts on the meaning and identification of protectionism. The considerations canvassed in Part II help us to see why we should understand protectionism in terms of discriminatory purpose. A variety of other factors that are sometimes thought to be the essence of protectionism are relevant as evidence on the issue of discriminatory purpose -- the use of an explicit domestic/foreign classification, (4) the presence of a disparate impact on foreign competitors, (5) the use of means that are not least trade-restrictive, and so on -- but in the end what matters is discriminatory purpose.

   Talking about the purpose of a corporate body like a legislature is to some degree metaphorical, and it makes many people uncomfortable. I shall explain in Section III.B how we can cash out the metaphor of legislative "purpose" in terms of other aspects of the legislative process. And doing so provides insight into a number of standard questions about purpose analysis: whether our concern should be with "subjective" or "objective" intent; how to deal with the fact that many individual legislators may have only "oblique" purposes like doing a favor for a political friend; what to make of cases where there are multiple purposes; and so on. I also explain in Section III.C why the inquiry into legislative purpose does not dissolve in hard cases into balancing, as is often claimed. Finally, there are two Appendices, one on "unconscious" discriminatory purpose and another on the logical relations between various forms of rationality review, less restrictive alternative analysis, and cost-benefit balancing or proportionality review. (6)

   A comment added at the last minute: I may have written this Essay too much as if efficiency were the unique goal of every economic union. I do not believe that, and I hope the reader will not be distracted from my arguments by disagreement with a proposition I did not mean to suggest. The virtual representation argument is about efficiency. It says that in trade-regulation cases, judicial cost-benefit analysis to protect foreign interests will promote efficiency. I explain why that is not so. Similarly, the most common reason given for suppressing protectionism is that it is inefficient. I explain why, if that is the objection to protectionism, protectionism should be understood in terms of legislative purpose. So, I am concerned in this Essay with the role of judicial review in promoting efficiency, which is surely a central value. I do not mean to suggest that efficiency is all that matters, or all that a court should ever aim at.

2. REFUTING THE VIRTUAL REPRESENTATION ARGUMENT

   A.

   Consider some simple examples:

   1. Widgets are a consumer product that can be made out of cardboard or plastic. Cardboard widgets are produced in the state of Calivada, plastic widgets in the neighboring state of Nefornia. No widget producers have significant market power. There are no known health, safety, or environmental dangers from either cardboard or plastic widgets. Cardboard widgets and plastic widgets are close substitutes, but some consumers prefer one and some prefer the other. Obviously, there is no case here for legislative or judicial interference with consumer choice in either Calivada or Nefornia. If we let each consumer buy the sort of widget he prefers, at prevailing prices, the unregulated market will generate an efficient result. The one thing worth noticing about this case, because it presages future claims, is that we get an efficient result even though the consumer gives no thought at all to the interests of producers, neither those he buys from, nor those he does not. He reacts to prices, which contain information about producer interests, but the connection with producer interests need never occur to him. The only interests he considers as such are his own.

   2. Now suppose the Calivada legislature is presented with new and convincing...