Could Economic Development Become Illegal in the New World Order?

By William Schweke, Corporation for Enterprise Development

In the past, state and local governments have been able to design and run their economic development efforts without worrying whether they may conflict with international law. Now all of this is changing because organizations like the World Trade Organization. (WTO) and agreements like NAFTA are starting to declare that some state activities restrict foreign commerce.

A lot of what is currently practiced as state and local economic development could become illegal in the future. State and local programs that could be affected include:

• community reinvestment acts,
• living wage ordinances,
• use of public pension funds for development,
• governmental use of social and human rights criteria for investments or purchases,
• minority, women-owned or “buy local” business procurement, and
• recycled content buying preferences.

International agreements (current and proposed) collectively seek to protect private investments by:

• not allowing governments to discriminate against foreign investors in relation to domestic investors for any purpose, including procurement practices that use any criteria but price and quality.
• singling out certain practices as illegal, including efforts to improve export performance, use domestic content and foster import substitution.
• creating new rights to sue governments and alternative dispute systems. NAFTA, for example, includes a provision that empowers foreign investors to sue national governments if federal, state or local policies nullify the investor’s expectations of future profits. A Canadian company is using this NAFTA provision to bring a suit against U.S. government, claiming a California ban on a toxic substance may hurt the company’s profits.

To make their voices heard on these issues, state and local policymakers should:

• encourage their trade associations, such as NCSL, and relevant state legislative committees to track these issues and communicate directly with the Office of the U.S. Trade Representative, Congress and other involved actors.
• discuss how these agreements could be better designed to (1) aid and not hinder the “best practices” in domestic economic development, (2) better balance the respective goals of promoting global commerce, while still maintaining cost-effective and publicly accountable state and local development policies, and (3) continue America’s use of state and local governments as the chief means of delivering economic development services and acting as “laboratories of democracy.”

To guide global subsidy reform, the Corporation for Enterprise Development (CFED) recommends we ask how international agreements could:

• increase the transparency of state and local subsidy programs?
• curb the use of wasteful subsidies for attracting large mobile investment projects?
• be formed so they cannot deter initiatives that promote development in economically disadvantaged areas, assist small business development, promote minority and women business ownership, spur technological innovation and productivity, and promote more environmentally friendly development?

For more information, contact Bill Schweke at CFED (919-688-6444; [email protected]) or Bob Stumberg at the Harrison Institute of Public Law at Georgetown University (202-662-9603; [email protected]). For research reports that examine these issues visit CFED’s Website Globalization and Economic Development.

International agreements can threaten state environmental actions

NAFTA and other international agreements can also threaten local and state environmental regulations. A recent international lawsuit in connection with a California environmental regulation illustrates the conflict over states’ efforts.

Methanex Corporation, a Canadian manufacturer of a gasoline additive, is suing the U.S. government because of California’s ban on the additive, considered toxic and a possible carcinogen. Methanex claims that California’s ban violates NAFTA provisions and will result in a loss of profits for the company.

Since the Methanex brought the suit, the California legislature passed a resolution (HR 8) that the lawsuit threatens its duty and sovereign right to protect public health. HR 8 recommends that the federal government integrate states into international efforts to create more uniform legal systems.