"The simple fact is that highly skilled foreign-born workers make enormous contributions to our economy [...] The US will find it far more difficult to maintain its competitive edge over the next 50 years if it excludes those who are able and willing to help us compete. Other nations are benefiting from our misguided policies."
Bill Gates,
Testimony before the Committee on Science and Technology, US House of Representatives,
March 12, 2008.
by Edward L. Hudgins
The author is the director of regulatory studies at the Cato Institute and editor of Regulation magazine.
Some opponents of the freedom of Americans to trade believe that international agreements, particularly the General Agreements on Tariffs and Trade (GATT), the new World Trade Organization (WTO) that it created, and the North American Free Trade Agreement (NAFTA), sacrifice the sovereignty of the United States. There is legitimate concern about the terms and likely effects of any international agreement or organization to which the United States belongs. But it is also important to distinguish between a trade agreement that might be unsound and one that involves the sacrifice of a country's sovereignty. Fortunately, recent free-trade agreements, in addition to being mostly good economic policy, have preserved America's policymaking autonomy. Indeed, they have restored, in part, the sovereign right of individuals to use their property as they see fit.
Sovereignty: Federal versus State Governments
The term "sovereignty" means having the final say in a particular decision. In its political usage a country's sovereign is the individual, group, or body that makes and administers the laws governing the people in a given geographical area.
In the United States, American citizens, through the country's political institutions and elected officials, federal, state and local, are sovereign. Federal laws must be passed by members of Congress elected by the people and signed by the President.
The United States has 50 state governments and numerous local authorities as well as a federal government. There has been much well-founded criticism of federal usurpation of the powers reserved for the states by the 10th Amendment of the U.S. Constitution. But Article I, Section 8 of the Constitution clearly gives the federal government the power "To regulate Commerce with foreign Nations." Because the federal government has the exclusive authority to make the rules of international trade, neither NAFTA, GATT, nor other trade agreements infringe on the sovereign power of the 50 states. Those agreements have no such trade-regulating power.
If Congress and the President foolishly place a high tariff on certain goods entering the United States, the government of a particular state cannot grant foreigners an exemption from that tariff. And if the federal government allows the citizens of another country, for example, Mexico, freedom to sell their goods to individual Americans without first paying a tariff, a state government cannot impose a special tariff on such sales. There are, however, instances in which trade issues might infringe on state concerns, such as local health or licensing regulations. Those instances must be examined as special cases.
Sovereignty: Individuals versus Governments
The question "Who should be sovereign over particular decisions?" does not usually require a choice among federal, state, and local governments or some international organization. Most decisions in a free society should be left to the sole, sovereign discretion of individuals. An owner's use of his or her property belongs solely to the owner as long as the use does not materially harm someone else or another's property. The decision over whether two parties should exchange goods or services should require only the mutual consent of the parties involved, not of government officials or bureaucrats.
Some protectionists such as Pat Buchanan argue that America should not mix its economy with that of Mexico or other countries. But that is a collectivist premise, which one would expect to be rejected by supporters of free markets. The economy is not owned by some entity named "America" nor by the U.S. government. It is owned by millions of Americans, in the form of private property. Trade restrictions limit the sovereign right of individual Americans to use their property as they see fit.
Protectionists argue that Mexicans, Chinese, and other foreigners should not be allowed to sell their products freely in America. But that is simply another way of saying that willing, individual Americans should not be free to purchase products from a willing merchant. Trade restrictions limit the sovereign right of individual Americans to enter into voluntary contracts with others.
The Object of Treaties
Many international treaties and agreements concern relations between governments as they perform their proper roles. For example, neutrality, mutual defense, or extradition treaties concern the functions of national defense and criminal prosecution that generally are exclusive government functions.
Trade agreements, however, regulate commercial exchanges between private individuals and enterprises. Such commercial transactions should be at the sole discretion of individuals. The only exception might be cases of a clear and present danger to national security. Supplying weapons to a military enemy thus could be ruled out.
Unfortunately, governments historically have restricted international trade. The exercise of that power by national governments does not sacrifice a country's sovereignty. Rather, it restricts the sovereign rights of individuals. Thus, any agreement that frees up trade should be considered, prima facie, a valid restoration of freedom.
Indeed, the best trade course for the United States would be to remove unilaterally all of its trade barriers, whether other countries do so or not. Unfortunately, that is unlikely to happen soon. Still, any move short of total trade liberalization should be welcomed as a step in the right direction, not a sacrifice of national sovereignty.
The Federal Treaty Authority
Some critics of free trade argue that any kind of trade agreement that binds the United States to conduct its relations with other countries in a certain manner is an infringement on American sovereignty. Trade agreements that define what import and export policies the U.S. government is or is not permitted to pursue, and that establish international bodies to judge whether a country has violated a trade agreement, seem to take decisionmaking power out of the hands of Americans.
But all treaties are pledges by a country to conduct its affairs in a certain manner -- that is, to limit its actions. Those pledges are not surrenders of sovereignty but, rather, acts of sovereign governments. When the American people, through the President and Congress, for example, enter into a treaty with Canada, guaranteeing not to invade its neighbor to the North, there is no surrender of sovereignty. America judges the agreement to be in the country's interest. Such a treaty with Canada frees the United States from stationing troops on a 3,000-mile border, at a huge expense to the taxpayers.
Trade agreements mostly limit governments and restore freedom to individuals. When the U.S. government agrees to refrain from some actions, for example, giving subsidies to American businesses, those restrictions usually are to be welcomed.
The sovereignty issue involves the question of whether the United States can exit an agreement that ceases to serve its interest. The answer in the case of all the U.S. agreements is "yes." A vote of Congress and signature of the President will do it. With such an action the United States might well incur the wrath and distrust of other countries -- particularly regarding a treaty of a certain duration that America left before it expired. Other countries might act in response, and they certainly would be reluctant to enter future treaties if the United States sought to make them. There would be a cost to pay. But America's sovereignty would not be violated.
What Constitutes Surrendering
Sovereignty?
In the European Union (EU), actual surrender of sovereignty is exemplified. The member governments have ceded certain decisions to the ultimate judgment of a commission composed of representatives of those governments, with weighted votes based partly on the population of the countries. Some powers also have gone to an EU legislature, with members elected directly by the citizens of the member countries. But America's trade agreements do not operate that way.
NAFTA Environmental
Agreements
Critics of free trade have focused on the NAFTA environmental and labor side agreements as limits on American sovereignty. The side agreements established a North American Commission on the Environment. (This section details environmental agreements, followed by a section on labor agreements.) At the top is a council made up of high-level representatives from the three member governments. The council is assisted by a Commission for Environ-mental Cooperation (CEC), with a Secretariat and Executive Director having some independence from the NAFTA governments, to hear complaints that a country is not enforcing its own environmental laws.
Critics are correct that the foregoing mechanism was an unnecessary attachment to NAFTA. If it had worked the way some supporters had hoped, it could have been a threat to American sovereignty. Fortunately, the mechanism of the side agreements has not met the hopes of its supporters nor the fears of its critics.
The question of whether an American law is being correctly enforced should be determined by the U.S. Congress, courts, executive branch, and, ultimately, the American people. It can be validly argued that much of America's regulatory regime violates the letter of the Constitution: that legislators have abrogated their authority to unelected bureaucrats and to judges who have made themselves into legislators rather than interpreters of the laws.
But if at any time, for better or for worse, the U.S. Congress, the courts, and the executive branch enforce a certain policy as law, then that policy is the law of the land. A foreign government should have no role in determining whether the law is being correctly enforced. Thus, if the CEC established by NAFTA had the final say on whether the U.S. government was properly enforcing its own law, and if it could force the U.S. government to adopt its position, that indeed would be a breach of sovereignty. But a review of the powers and operation of NAFTA shows that U.S. sovereignty is not endangered.
There are two processes concerning the environment that can be undertaken through NAFTA: (1) fact-finding and (2) dispute settlement.
Fact-finding Process
The complaint. Private parties from the NAFTA countries can inform the CEC Secretariat about enforcement problems with a NAFTA country's own environmental laws. The Secretariat need not act on every complaint. But to proceed, the complaint must meet certain manditory criteria.
Seeking explanation from governments. If the Secretariat finds merit in a complaint, it asks the accused government for information. If that government indicates that there is an ongoing domestic case or legal proceeding concerning the alleged nonenforcement, the Secretariat must drop its inquiry. If the plaintiff has not sought remedy through the country's own legal system, the Secretariat could drop the inquiry. Other reasons that might cause the complaint to be dropped include enforcement that is inadequate due to lack of governmental resources. There are numerous reasons for a government to legitimately refuse to provide information to the Secretariat. The Secretariat has no subpoena powers.
Whether to fact find. If the Secretariat finds the government's explanation inadequate, then it asks the council of representatives of the three governments whether a fact-finding study should be undertaken. There must be an agreement of two of the three governments.
The study. The study is supposed to be nonjudgmental, focusing on the physical facts of the situation, presenting the critics' allegations and the government's explanation.
Issuing the report. Council members are given a draft report. Two of the three must agree to make the report public. If two deem the report inadequate for any reason or if the governments involved are satisfied that the problem is being dealt with, the report is voided and never issued.
After the report. When the report is released, the process ends. The report is meant to call attention to a country's failure to enforce its own laws. Operating is the belief that public exposure will pressure governments to abide by their own environmental laws. There is no power to force a country to change its policies and thus there is no breach of sovereignty.
Dispute Resolution Process
The consultation. If one of the member governments believes that another is engaging in (1) a "persistent pattern of failure to effectively enforce" its own environmental laws; and (2) that the pattern involves "workplaces, firms, companies, or sectors that produce goods or provide services traded between the parties or that compete with goods produced or services provided by another party," it can request consultations with that government. Patterns can only be judged beginning with NAFTA implementation -- that is, January 1, 1994. There is a time limit to the consultations. If the accused government convinces the other NAFTA government that the complaint is ill founded or that it is taking steps to reverse the pattern, the case ends.
Decision to investigate. If a plaintiff government is not satisfied in the consultative stage, it must secure the agreement of the other NAFTA government to convene an investigative panel.
The panel study. Panel members are selected from a prechosen roster of experts, some chosen by each of the three NAFTA governments. The expert panel prepares the report on the complaint.
Findings of violation. If a government is found to be engaging in a pattern of failure to enforce its own laws where tradable goods and services are involved, that government has 60 days to offer a remedy to the practice. The panel must certify the remedy.
The fine. If no remedy is agreed to, the plaintiff country can ask the panel to fine the accused government up to $20 million and again request a plan to remedy the offense. The funds from the fine would go into an enforcement trust fund, not to the plaintiff government.
Trade sanctions. Only if a country fails to pay its fine or carry out its remedy can another NAFTA country resort to tariffs to collect the value of the fine. If possible, the tariffs are to be levied on goods or services that were subjects of the case.
Sanction appeal. If a country believes that the tariffs levied against it exceed the value of the fine, it can appeal the fines to the panel.
The mechanism to resolve disputes resembles the one that has operated for decades under the GATT. Neither forces a country to change its policies, but only threatens sanctions if proscribed policies continue. (See discussion on the GATT later.) U.S. sovereignty is not violated. But there are two disturbing aspects of the NAFTA arrangement.
First, as discussed earlier, a country's domestic enforcement of its own laws is none of another government's business. It would be a legitimate issue for resolution if, for example, a country violated the GATT by erecting tariffs not sanctioned by the treaty against American products. But a country's policies that do not directly affect the movement of goods and services are not an appropriate issue for a trade agreement.
A second problem with the NAFTA approach to dispute resolution is the fine that could be levied against a country. Government power to levy fines is a dangerous tool. It should not be put in the hands of foreign governments with the U.S. government as its object. But currently there seems to be no danger of a true violation of American sovereignty, one that would have international bodies levying fines on individual Americans.
Nevertheless, the dispute settlement mechanism is so convoluted that there is little chance that it will ever reach the point of there being a fine levied or a trade sanction authorized.
Environmental Cases to Date
The mechanism established by the NAFTA environmental side agreements is truly a waste of money. Yet at least on paper it does seem to violate American sovereignty. How, then, has the mechanism operated in practice? So far, four complaints have been filed by private parties with the CEC. Two are still pending. None gives any indication of surrendered sovereignty. Explanations of the cases follow.
• The first complaint (SEM-95-001) was filed on June 30, 1995, against the U.S. government by groups led by the Biodiversity Legal Foundation. The complaint alleged that a Rescissions Act of 1995 resulted in a failure to enforce the Endangered Species Act. Specifically, the act prohibited the U.S. Fish and Wildlife Service from making final determinations concerning species or critical habitats for the rest of that year. The Secretariat did not request a response from the U.S. government, nor that a factual record be prepared. In essence, the complaint was summarily dismissed.
• The second complaint (SEM-95-002) was filed on August 30, 1995, against the U.S. government by groups led by the Sierra Club. The complaint alleged that the Fiscal Year 1995 Supplemental Appropriations Act eliminated private remedies for sales of salvage timber. That complaint met the same fate as the first.
• The third complaint (SEM-96-001) was filed on January 18, 1996, against the Mexican government by private Mexican groups. The complaint alleged that the Mexican government failed to make proper environmental impact evaluations on a development project in Cozumel. The Secretariat requested information from the Mexican government on its response to the charges, which that government provided, and requested creation of a factual record. The case is still being considered.
• The final complaint (SEM-96-002) was filed on March 20, 1996, against the Canadian government by an individual alleging that his government had failed to enforce wetlands laws. The investigation was suspended in June 1996 because a case on the matter was pending before Canadian courts.
NAFTA Labor Agreements
The North American Agreement on Labor Cooperation, NAFTA's other side agreement, established a Commission for Labor Cooperation that consists of a ministerial-level council of representatives of the three governments as well as a Secretariat. The Commission's task is to air complaints about member governments that do not enforce their own labor laws. Commission supporters maintain that it is not meant to replace domestic decisionmaking but only to facilitate education and understanding about policies, and to expose inadequate enforcement to public opinion.
Labor Complaint Mechanism
Although much of this mechanism is similar to that of the CEC, some notable differences render the labor mechanism weaker than the environmental one.
• Private plaintiffs cannot go to the labor Secretariat with a complaint, but must go to an office established by each member government, according to its own laws. In the United States, that is the National Administrative Office (NAO) in the Department of Labor. The NAO experts must judge whether a complaint warrants a fact-finding study.
• A dispute settlement process cannot be initiated by two of the three council members without the experts panel finding a failure to enforce its own labor laws where a trade issue is involved.
• It is also important to emphasize that the labor side agreement does not preclude changes in labor laws. For example, a U.S. Enterprise Zone law allowing a subminimum wage could not warrant NAFTA labor action.
Labor Cases to Date
As in the environmental side agreement, with the labor accord there is little danger to sovereignty, at least in theory, but what about in practice? So far there have been six labor complaints. Although critics might argue that the NAO process is a waste of money, it does not endanger sovereignty.
The Mexican NAO suggested ministerial consultations. As a result, the U.S. Department of Labor agreed to hold a public forum in San Francisco for interested parties to discuss the issue.
That last case came closest to infringing on American sovereignty, but it still was not very close at all. American employers and employees, courts, legislators, and government agencies -- not the Mexican government -- should deal with American labor policy. But in that case, and others, the worst result from a complaint is a meeting, forum, or report. Critics might correctly say that even these activities are not legitimate functions to be undertaken under NAFTA. But the bottom line is that they do not replace American sovereignty with dictates from foreign governments or agencies.
The World Trade Organization
Critics have maintained that the new WTO violates America's sovereignty in two ways: (1) through its mechanism for establishing new trade rules, and (2) through its dispute settlement mechanism. Nevertheless, in both situations, ultimate authority remains in the hands of the U.S. government.
Changing Trade Rules
Since the founding of the GATT in 1948, average world tariffs have been reduced from 40 percent to around 3 percent, and other trade barriers have been removed through a series of negotiating rounds. Under the new WTO, instead of the periodic rounds of negotiations, member countries will meet regularly to decide on changes to the GATT. But it is important to understand what the arrangement can and cannot do.
First, each country has one vote on proposed reforms, but a two-thirds majority is needed to pass a proposal. Second, each government still has the option of accepting or rejecting the change. In other words, if the U.S. Congress determines that the WTO proposal is not in the country's best interest and does not pass it into law, it is not law. The U.S. government still is sovereign.
The political dynamics within the new WTO also suggest that the United States has little to fear -- owing to its status as having the world's largest economy and as being the world's largest trading country. Other countries would have a strong incentive not to push reforms that the United States would ignore, but, instead, push those reforms that the United States is likely to agree with.
GATT Dispute Panels, Old and New
A GATT mechanism for dispute settlement has existed for decades. If one country accuses another of violating GATT trading principles, it can request a dispute resolution panel. But under the old system, an accused country could delay, indefinitely, a decision. If a ruling by the arbitrator was made against the accused, and if the party at fault refused to change its trade practices, the ultimate result was a trade sanction. That is, the accuser could retaliate by placing a punitive tariff on goods from the country at fault. Such a sanction, of course, would harm the complainant country's own people and industries by limiting their access to foreign goods and services.
Under the WTO, trade disputes must be heard in a timely manner and a decision must be rendered. But the ultimate sanction, as under the old GATT, remains the same. That is, if a country is found to be acting contrary to GATT principles and refuses to change its policies, the plaintiff can place a trade restriction on the other country's goods. The WTO cannot override an American law now and will not be able to do so in the future.
Under the old GATT there were findings against the United States that the government refused to act on. For example, a GATT panel found that restricting imports of Mexican tuna because the fish were not caught in dolphin-friendly nets violated GATT principles. The United States kept its ban and, in that case, Mexico decided not to retaliate, probably because it was seeking passage of NAFTA. No violation of American sovereignty was involved.
In a recent case under the new dispute resolution mechanism, the United States was found in violation of the GATT because it levied a special tax, for environmental reasons, on certain petroleum imports from Venezuela and Brazil, but not on the same products from American producers. Under the GATT the United States must treat all similar products in a similar manner. In the foregoing case, it should have levied a special tax on all the products or on none. The United States has not decided whether or not to change the policy. Because such a tax is a bad idea, it would be good policy simply to repeal it. If the United States keeps it, Venezuela and Brazil will be allowed to place trade sanctions against American goods. In any case, the ultimate choice is up to the United States. Its sovereignty remains intact.
Regulations Robbing Sovereignty
Some critics of freedom to trade worry that international bodies rather than the federal, state, and local governments of the United States will make regulations for America. Ironically, some fear that foreign bodies will override health and safety laws, whereas others fear that those bodies will impose harsh laws that will destroy jobs and businesses while producing little good for the public.
Regulations do indeed pose a danger. But the potential for problems is not with NAFTA, WTO, or other international agencies or arrangements. Rather, it stems from the American regulatory regime itself. Sovereignty, it can be argued, is not being taken from the American people by a foreign power. It is being taken by the federal bureaucracy.
Article I, Section 1 of the U.S. Constitution states that "All legislative Powers herein granted shall be vested in a Congress of the United States." Thus, the executive branch and its officers, whether career bureaucrats or political appointees, outside the duties specifically assigned to it by the Constitution, can act only pursuant to authority granted specifically by Congress. The executive branch is not supposed to make the law. But Congress for decades has delegated broad, unspecific powers to unelected bureaucrats who essentially make the laws of the land. Those laws are never voted on by Congress. The sovereign grant of powers to Congress has been abrogated by Congress itself.
How does that situation influence the issue of sovereignty and trade agreements? If executive branch officials claim to be acting pursuant to some policy prescription made by an international body, the first question should be "Do they have the authority or discretion, granted by Congress, to act in such a manner?" If Congress has granted them this discretion, then, presumably, they can judge the proposed policy on its merits, and accept or reject it. If the officials seem to act either without the consent of Congress or on abrogated authority, the problem is not with international agreements; it is with the regulatory system that allows for abuses no matter what justification executive branch officials may give.
Conclusion
The danger to America's sovereignty from the NAFTA, GATT, and WTO has been overrated. So far there have been no instances in which the United States was forced to change a policy because of the ruling of an international body. Still, the NAFTA environmental and labor agreements do set a bad precedent. Judgments concerning a country's enforcement of its own laws should rest solely with the government of that country.
The real limits on sovereignty come from other quarters. First, trade barriers limit the freedom of Americans to trade and to dispose of their property as they see fit. Second, America's out-of-control regulatory regime stems from Congress's delegation of its lawmaking power to the executive branch. Critics who are concerned about sovereignty would do well to address those problems, to restore the sovereign right of individuals to trade.
References
Cobb, Joe, "New GATT Agreement," Regulation, Vol. 17, No. 3, 1994.
1995 Annual Report: Commission for Labor Cooperation. Dallas: Commission for Labor Cooperation, 1995.
North American Agreement on Labor Cooperation: Annual Report. Washington: U.S. National Administrative Office, Bureau of International Labor Affairs, U.S. Department of Labor, January, 1995.
North American Agreement on Labor Cooperation: Public Report of Review. NAO Submission #94003. Washington: U.S. National Administrative Office, Bureau of Inter-national Labor Affairs, U.S. Department of Labor, April 11, 1995.
Registry of Submissions on Enforcement Matters: Submission I.D.: SEM-95-001. Montreal: Commission on Environmental Cooperation, 1995. http://www.cec.org/english/citizen/reg9501.htm Registry of Submissions on Enforcement Matters: Submission I.D.: SEM-95-002. Montreal: Commission on Environmental Cooperation, 1995. http://www.cec.org/english/citizen/reg9502.htm.
Registry of Submissions on Enforcement Matters: Submission I.D.: SEM-96-001. Montreal: Commission on Environmental Cooperation, 1995. http://www.cec.org/english/citizen/reg9601.htm.
Registry of Submissions on Enforcement Matters: Submission I.D.: SEM-96-002. Montreal: Commission on Environmental Cooperation, 1995. http://www.cec.org/english/citizen/reg9602.htm.
Report on Ministerial Consultations on NAO Submission #940003 under The North American Agreement on Labor Cooperation. Washington: U.S. National Administrative Office, Bureau of International Labor Affairs, U.S. Department of Labor, June 7, 1996.
Freedom to Trade: Refuting the New Protectionism is Copyright 1997 by the Cato Institute. All rights reserved.
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