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Can States Set Trade Policy?

Legal Times
17 August 1998
by Deirdre Shesgreen

In 1996, state lawmaker Byron Rushing pushed a bill through the Massachusetts slate legislature that restricts the state's ability to contract with companies that do business in Burma.

Rushing hoped the measure would give his state a small role in the movement to restore democracy to the East Asian country where political repression, forced labor, and humans rights abuses have been rampant since a 1988 crackdown on pro-democracy demonstrations.

Instead, the sanctions law has become the focus of a pitched legal and political battle one that has sparked debate inside the State Department and raised constitutional questions.

A powerful Washington pro-business lobby group, the National Foreign Trade Council (NFTC), has mounted an intense campaign in a Massachusetts court and among Washington policy-makers to overturn the law.

In April, the NFTC, which represents about 580 American companies, filed a federal suit against Massachusetts, arguing its sanctions law is unconstitutional.

More recently, the NFTC's members have turned their energies to the State Department in an effort to persuade the state to weigh in on the suit and possibly reverse a Justice Department opinion from the l980's.

The dispute has implications far beyond Massachusetts' borders. It strikes at the question of whether cities and states can take actions that may have an impact on U.S. foreign policy.

And it could dull efforts by U.S. companies to do business or invest in Burma. That's why the foreign trade council is pressing its case so energetically.

Rushing's law requires state procurement officials to reject bids from companies that do business in Burma-unless the bid is more than 10 percent below that of the next-lowest bidder.

"There are now 31 state and local sanctions laws on the books and another l2 pending," says Frank Kittredge, the NFTC's president. "Because of that proliferation, we felt it was very important to challenge the law and provide a test case to show that these laws are unconstitutional."

Kittredge says that he has met with State Department officials, including Stuart Eizenstat, under-secretary of state for economic, business, and agricultural affairs, to "talk about all aspects of the case." He declines to elaborate, but another industry source confirms that "the issue's been raised with the State Department frequently."

In response, a collection of environmental, labor, and human rights groups called the Ad-Hoc Coalition for the Defense of the Massachusetts Burma Law have banded together to show support for the law.

In a July 27 letter to Secretary of State Madeleine Albright, the coalition blasted the industry's lobbying activities and pressed its own case.

"We are disturbed by reports that industry representatives have recently pressured the Administration, and especially the State Department, to publicly support the NFTC's challenge to the Massachusetts law," the letter says.

Michael Dolan, field director of Public Citizen's Global Trade Watch, which is part of the ad hoc coalition, says his group is concerned that its members don't have the same access to State Department officials that the NFTC has.

"The hearts and minds of the policy staff are in play right now," Dolan says. "There's a fairly lively debate [inside the State Department about what to do in this case."

A leading opponent of measures like the Burma law, say Dolan and others, is Eizenstat. The undersecretary was not available for comment, but he has made public statements indicating that he finds state and local sanctions laws problematic.

In June testimony before the House International Relations Committee, for example, Eizenstat said that state and local sanctions "are likely to be counterproductive."

In addition, critics note, other State Department officials have lobbied local governments against passing such measures. Earlier this year, when Maryland was considering a sanctions measure against companies that had ties to Nigeria, Deputy Assistant Secretary David Marchick traveled to Annapolis to testify against it.

While Marchick skirted the constitutional issue, he told Maryland legislators that such laws "can have the practical effect of interfering with the president's ability to conduct our foreign policy." Maryland has since shelved the Nigeria proposal.

The NFTC also has some international players on its side. Japan and the European Union have both taken issue with the Massachusetts law, saying it conflicts with international procurement codes.

Still, supporters of the Massachusetts law and similar measures also have allies in high places. For one thing, Dolan notes, Albright hasn't been shy about criticizing Burma. And in some of her public statements, she has appeared sympathetic to consumer boycotts.

"We have a secretary of state who has put a lot of pressure on the military government in Burma," says Rushing, the Massachusetts legislator.

In the July 27 letter to Albright, Dolan and his coalition colleagues reminded her of a 1995 article she wrote for the New Republic: "Democracies should be ashamed to encourage their business people to be 'first with Burma,' for this would provide the [Burmese government] with the booty it needs to resist mounting pressure for a political opening."

In early August, a bipartisan coalition of congressional lawmakers tried to attach an amendment to the Commerce, State, and Justice appropriations bill that would have prevented the Justice Department from spending money to challenge state and local laws on the ground that the measures are inconsistent with international agreements. The amendment wasn't tailored specifically to the Burma provision but had a broader goal of preventing the U.S. government from siding with international bodies, such as the World Trade Organization, in court challenges to state and local sanctions laws.

The measure lost by a slim margin, and congressional sources say Eizenstat personally lobbied to kill it. Its sponsors, including Reps, Dennis Kucinich (D-Ohio) and Bernard Sanders (I-Vt.), have pledged to bring it up again.

But the ad hoc Burma coalition's most powerful support in this dispute may come from an unusual US. precedent.

In the 1980s, local and state governments across the country passed divestiture and sanctions measures against companies that did business in South Africa in an effort to cripple the apartheid government there.

In 1986, under then Attorney General Edwin Meese III, the Justice Department evaluated those laws and decided that they passed constitutional scrutiny. Under the "market participation doctrine," states and local governments may not be subject to the commerce clause, says the 1986 opinion from the Office of Legal Counsel. The opinion also concluded that the laws did not interfere with the federal government's foreign affairs power or pre-empt federal sanctions against South Africa.

"The divestment laws do not place an impermissible burden on foreign commerce," the opinion says. "We therefore do not believe that the United States should file suit to invalidate these laws or file any amicus brief on behalf of those seeking to invalidate them."

The Burma coalition members haven't missed the opportunity to seize on this opinion - and on the fact that business groups now find themselves opposing the views of a key official in the Reagan administration.

"You have these supposedly free-market organizations who are essentially saying the federal government should intervene in the free market and stop Massachusetts from exercising its rights." says Simon Billenness, coordinator of the Massachusetts Burma Roundtable. "If this suit prevails, does that mean the federal government will be able to micro-manage state and local procurement?"

The NFTC's Kittredge says he doesn't think Meese's interpretation is correct, and "our lawsuit will show that," (Meese was out of town last week and not available for comment.)

In the suit, the NFTC charges that the Massachusetts law is unconstitutional on three grounds. Using arguments similar to those rejected by Meese l2 years ago the suit claims that the Burma law impinges on the federal government's exclusive authority to conduct foreign relations, violates the foreign commerce clause, and conflicts with sanctions the administration already has in place.

And while the State Department has not yet taken a position on the constitutional questions, it has launched a review of the Issue, indicating an openness to reversing the Meese opinion. "It's under study by legal officials," says an agency spokesman.

A hearing on the merits of the NFTC's case is set for Sept. 23. in the meantime, Kittredge says, the NFTC's members we already feeling the economic pinch of the law.

"A number of our member companies have withdrawn from doing business with Burma in order to continue doing business in Massachusetts," he says. "And some of our members have withdrawn from doing business with Massachusetts in order to keep doing business with Rim." (Because of "boycott threats and public relations meltdowns," he says, the NFTC won a protective order to keep confidential the names of companies that have been affected by the law.)

But supporters of the Burma law say much more is at stake than either corporate profits or questions about states' involvement in foreign policy.

After all, Dolan noses, the law was crafted to wipe our political repression and human rights violations in Burma, which were highlighted by the suspended five-year prison terms handed out last week to 18 foreign activists who were arrested for passing out pro-democracy leaflets.

"There's a constitutional dimension here. but there's a life-and-death situation there," he says.

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