The Federalism Project

American Enterprise Institute



The Federalism Project
American Enterprise Institute

Tuesday, June 26, 2001



Michael Greve

Director, Federalism Project
John G. Searle Scholar, AEI  



Mark Gordon

Associate Professor, Columbia University 

Adjunct Fellow, Demos 


Earl Fry

Professor, Brigham Young University

David Aaron
Senior International Advisor, Dorsey & Whitney LLP  



MR. MICHAEL GREVE:  Today’s session is about the tension between globalization and our domestic federalist arrangements.  I shall make a few brief points about that tension.  First, this is a genuinely new issue.  There is an inescapable tension between the two, one that has the potential to scramble the partisan political alignments to which we have become accustomed.

However, to say that this tension between globalization and domestic federalism is a new issue is not to say that it is unprecedented.  In the very early years of the republic, the U.S. had treaties with foreign countries, including Britain, which came into conflict with state laws.  In many cases, arising mostly out of land disputes, Virginia courts said, "Treaties?  What treaties?  Constitution?  What Constitution?  We have our own laws in Virginia, and if we don't have them, we'll make them up."  (They were early precursors of the Florida Supreme Court.)

In 1920, there was a very famous case—to this day, probably the most famous Supreme Court case on this issue—Missouri v. Holland, which was the Court’s endorsement of international treaty obligations and their capacity to trump domestic federalist arrangements.  But there have been very few such cases, and they are not a sustained theme in American law or in American politics.

However, in the last two decades, this issue has become pressing.  This is because our foreign obligations and interactions have taken a quantum leap forward, giving a new urgency to this issue.  This quantum leap has come while, on the domestic front, we have seen a modest renaissance of federalism.  The tension between globalization and our domestic federalist arrangements is thus inescapable. 

Some have tried to avoid this tension.  If you want to wipe out the entire international-law establishment of the United States, go to one of their conferences and yell, "federalism!"—they would all have heart attacks.  Nevertheless, the states are still there.  You cannot make them go away, and they are eager to declare their autonomy, assert their influence, and preserve their domains. 

On the other hand, if you join the Pat Buchanan brigades or the black-helicopter crowd in northern Idaho, you'll soon discover that your pickup was produced in Japan and its gun rack comes from Bangladesh.  You cannot run away from the fact that we're part of an international economic and political network.

The tension between domestic federalism and globalization has the potential to scramble our customary partisan alignments.  Lori Wallach, the Director of Public Citizen’s Global Trade Watch, a liberal advocacy group, writes one eloquent piece after another decrying NAFTA and the WTO as egregious infringements on states’ rights. But that same complaint would get her in hot water at cocktail parties.  Her friends from Amnesty International would very quickly tell her that “states' rights” is just the excuse of latter-day Bull Connors bent on protecting outmoded domestic policies, such as the death penalty, from emerging international norms.  This duality occurs among conservatives, too.

The current lack of partisan consensus on either side means that we have a chance to think seriously about domestic arrangements and international integration before everyone digs in his heels and the sides become ossified. 

Here to do some of the thinking with us is Professor Mark Gordon of Columbia University.  Professor Gordon previously served as General Deputy Assistant Secretary for Community Planning and Development at the United States Department of Housing and Urban Development.  He wrote a book called Democracy's New Challenge: Globalization, Governance, and the Future of American Federalism.  This book was commissioned by Demos, a New York-based think tank and advocacy firm, and I am pleased to announce that Miles Rapoport, the President and CEO of Demos, and David Callahan, its Director of Research, are here to join us.  I thank them very much for their cooperation in organizing this event.

Earl Fry is a Professor of Political Science at Brigham Young University, where he is the Endowed Professor of Canadian Studies.  He has served as a Fulbright lecturer, as an International Affairs Fellow with the Council on Foreign Relations, and as a Special Assistant in the U.S. Trade Representative office, where he specialized in international investment issues and United States-Canada trade relations.  We are very grateful that Professor Fry has joined us, all the way from Utah.

David Aaron is a Senior International Advisor at the law firm of Dorsey & Whitney.  He served as the Undersecretary of Commerce for International Trade and negotiated with the European Union on privacy issues.  (As you might recall, Europe is the continent where politicians think that the information economy scares some people and, therefore, we ought to shut it down.)  David Aaron was the negotiator for the United States, a man of truly biblical patience and great integrity, and we are pleased to have him here.

Each speaker will speak for about 15 minutes.  We will then open the proceedings to questions from the audience.  Mark Gordon, please.

PROFESSOR MARK GORDON:  Thank you very much, Michael.  Thank you, AEI, for having me, and thank you also to Demos for commissioning the work that I did in this area.

Michael's comments about how globalization is scrambling political alliances are easily proven by the fact that somebody with my background is here and agreed with a good portion of what he had to say.  The title of this discussion—"Free Trade vs. States' Rights"—is apt, because the thesis here is that there really is a tension—one could even say, a collision—between these two very important concepts.

In my book and in my paper, I tried to be quite even-handed about this.  Harry Truman used to say, "Give me an attorney with only one arm, so he can't keep saying, `On the other hand.'"  In my paper, I think I said, "Well, on this hand and on the other hand."  I will try to be a little more provocative here by making the argument about the collision between states' rights and free trade in a much more explicit fashion. 

Let me be clear: there is no requirement that free trade, as a theoretical concept, must collide with states' rights.  Rather, free trade, as it is currently structured and as it has been understood under both Democratic and Republican administrations, seems to be on a collision course with states' rights.  Both of these concepts represent important strands in our national history.

I will first make the argument for the collision, then step back and discuss some of the tensions involved and the trends to keep in mind.  Let me give you several things to think about, ways in which globalization and free trade, as they are currently structured, present problems for states' rights.

First, under the current structure of globalization, there is a whole series of trade agreements—WTO, NAFTA—containing all kinds of restrictive trade regulations that directly limit what states can do.  (When I say “states,” I'm actually referring to both state governments and local governments.)  By their own terms, many of these agreements apply to state and local government rules.  They were negotiated with minimal state input and they have far-reaching effects, not only for Lori Wallach’s liberal-environmental concerns, and not only for Pat Buchanan’s labor-related concerns, but also for more conservative concerns as well.

Speaking about these concerns can become a parade of horribles; we're trying to intuit what might happen in the future as these agreements get interpreted.  But though there is no way of knowing precisely how they will be interpreted, we can see a series of problems that might arise for state flexibility and state autonomy. 

For example, let's say that a state wants to subsidize its local businesses by providing tax breaks, loan guarantees, or other forms of subsidy, either in order to attract new business or to encourage future business development.  In many cases, these kinds of subsidies could be held by the WTO to be contrary to the SCM agreement on subsidies and countervailing measures. 

Or, let's imagine that a state wants to streamline its operations.  It might be concerned about red tape in government procurement, so it exempts certain state purchases from bidding processes.  Such a policy probably would be contrary to the WTO’s agreement on government procurement.

There is even a case, Loewen v. O’Keefe, in which the basic tort law of Mississippi is being challenged under NAFTA by a Canadian funeral-services company which lost a judgment in Mississippi.  Whether you end up agreeing or disagreeing with the substance of that challenge, the notion of having an entire state's tort law put at risk or thrown out because of what goes on in an international trade tribunal should give you some pause. 

Second, beyond these existing trade agreements, there are several other areas, traditionally considered areas of state authority, in which broader federal trade policies either interfere or threaten to interfere with state flexibility.  This is happening in areas such as financial services, insurance regulation, banking, and tourism.

The classic case of this interference is the negotiations for the General Agreement on Trade and Services, or GATS.  GATS was a part of the Uruguay Round, which was approved by Congress in 1994.  Those negotiations are continuing, and they reach into areas where we have always assumed that states would be able to make decisions on their own authority, such as professional accreditation and certification of competency, university accreditation, hospital licensing, and waste-disposal permitting.

Depending on how the GATS negotiations turn out, there could be a situation in which a state’s licensing test for doctors and nurses that keeps out many foreign-trained or foreign-licensed practitioners could be challenged.  Or a state’s certificate-of-need provisions to limit hospital beds could end up being challenged under federal trade regulations.  In fact, states or localities which decide to privatize their operations could find that their exclusive contract with a provider—specifically, the fact that that is an exclusive contract—could make them subject to challenge under GATS.

You might agree with having international pressures for privatization, or with letting foreign companies be able to sue states against expropriations of their property, because those might lead to a more robust takings law domestically.  But I would hope that these issues would raise some concerns for you.  These decisions are not made by state leaders.  They are not even made by national leaders.   Rather, they are made by international or supranational organizations.

We now have a situation in which the federal government has many new incentives to interfere in state policy-making processes, as well as series of new sticks to enforce its decisions.  Because various state laws could violate WTO or other international agreements, the federal government has a good excuse to say to a state, "You really shouldn't adopt that law, because, if you do, it will put us at risk of being challenged by one of our trading partners."

This should be a concern if you are truly interested in states' rights and the Tenth Amendment.  Even when the federal government devolves power, it may do so in a way that ends up limiting state flexibility and influence.  If power is devolved from the federal government to the marketplace, not to another level of government, then the Tenth Amendment protection of states does not necessarily work, because you're dealing with problems in the marketplace.  

In many ways, this dynamic also changes politics within the federal government.  In deciding exactly how it will defend various state laws that are challenged, the executive branch ends up having much more power than the legislative branch. 

Of course, this happens at a time when states face all kinds of new challenges, especially that of maintaining their sales tax revenues because of the spread of the Internet and various other revenue sources that upset traditional taxing arrangements.  New actors are entering the arena to compete with states for business.  As I say in my paper, if you are a state governor, you are probably reaching for the Prozac at this point because of your concerns.

Admittedly, there is an argument for the other side, which says that states, rather than reaching for the Prozac, are really on Viagra.  Certainly, the Supreme Court is particularly solicitous of state prerogatives.  The federal government is all for devolution, and that's true whether you were listening to Bush or to Gore last year. 

There are many new opportunities for states to become players in trade and in foreign investment, as Professor Fry has made clear.  States have all kinds of new opportunities to serve as providers of the raw materials of globalization, since they, in fact, control the educational system and other infrastructure important for globalization.  There are all kinds of new international networks through which states can operate. 

How do we think about this?  On the one hand, there are all of these problems for states.  On the other hand, there are new potential avenues of influence.  Let me suggest three things we need to focus on, both on the practical level and on the theoretical level.  What makes this such a rich area for discussion is that the theoretical questions raised here force both the right and the left to question some of their underlying assumptions about federalism. 

The first thing I would like to discuss is the Supreme Court’s federalism decisions.  Looking at the Court, you could say that it is acting to protect states and states’ rights. But I would argue that what the Court is doing might, in fact, end up undercutting state autonomy rather than protecting it.  Mr. Greve pointed out the special role of treaties in constitutional jurisprudence; the federal government can do through treaties things that it cannot do through its interstate commerce power or other domestic powers. 

The increasing role of treaties and trade agreements over the last decade and a half shows no signs of abating.  At the same time, the Supreme Court is telling Congress that various things it  used to do, it can no longer do through the Commerce Clause.  What incentive does that give to Congress?  Congress can hold back, or it can do through treaties what it used to do through the domestic political process.  In the second case, the states’ situation is actually worse.  Under Commerce Clause regulation, they at least have the ability to intervene in the legislative process through their role in the Senate.  If things are done through treaties, despite the Senate’s role to advise and consent, that role is seriously diminished.

This leads to an interesting irony.  The Supreme Court was attacked for not protecting federalism in the 1985 Garcia decision, where it said, "We're not going to police encroachments on states' rights—this is better handled by the political process.”  Now the Supreme Court is being heralded for protecting states’ rights because it is moving away from the Garcia decision.  But it's doing so, ironically, at the time when the procedural protections of the Garcia decision are what the states really need, since they are increasingly being bypassed by policy-by-treaty.  So, in fact, a very activist Supreme Court in terms of states’ rights may end up being, on the practical level, less supportive of states’ rights 

We also see this in the Supreme Court's concern with commandeering.  The Supreme Court says to Congress, "You cannot direct states to implement your policies."  This, in a sense, creates a box for the federal government.  If you believe in devolution of power, and if you believe in having the U.S. live up to its international legal obligations, then this is a problem.  Unless you can commandeer the states, how can you devolve power to them in any area covered by a trade agreement while ensuring that the U.S. will be able to live up to its international obligations?  By taking away the ability to commandeer, the Supreme Court has virtually said that it is willing to let the states control whether the United States violates international trade agreements. 

That's a way of talking about these Supreme Court holdings that is very different from the way they are normally perceived, but it's the way that we are driven when we think about the interplay between globalization and federalism. 

The second thing to consider is our understanding of federalism in general.  We have always spoken about federalism as a dynamic between the states and the federal government, assuming these levels are in some kind of creative tension.  We now might have to start thinking about federalism differently, as a three-level game in which there are the states, the federal government, and an international level.  In this situation, it's not clear exactly where the tension is and where the competition is.   

The third thing to think about is federalism values.  It has always been very difficult to figure out exactly what federalism and states’ rights should mean in practice without reverting to the values that federalism is supposed to encourage.  There are many different values involved, including liberty, democracy, and citizen participation.  Michael Greve has written a lot about federalism’s role in maximizing choice and utility through state and local competition, and the value of states as laboratories of democracy.  These are all different values that federalism furthers.  However, the nature of these values is affected by the global economy and by globalization.   

For example, if the states are supposed to be the laboratories of democracy, how does that change in a globalized era?  Maybe they are helped as laboratories because there is an easier exchange of information about their experiences, and they can now exchange information with states around the world, not just within America.  There are new things to experiment on, which is good.  But there are also real problems.  Some of the WTO requirements push towards standardization and convergence of rules.  In this situation, the notion of states-as-laboratories comes into real conflict with the requirements of international trade.  

If we are now in a different stage of federalism because of globalization, how are the values of federalism going to change?  The values of federalism have changed throughout American history.  Will our states’ rights values remain the same in this century?  Here we can have a robust debate about what, exactly, were the federalism values that the Founders really cared about.  We will be forced to ask ourselves about the extent to which the Founders saw federalism as protecting the balance among all levels of government, including the international level.  We also will have to ask ourselves about the diffusion of power.  To what extent were the Founders concerned with concentration of power in the federal government?  To what extent was that really a reflection of their concern with concentration of power generally, at any level of government or in any entity?  We will have to ask what was at the heart of their concern.  We will have to ask about their civic republicanism and their notion of the public good, which was very different from the aggregation of all kinds of private interests.  How do their notions play out, now that we’re in a world of globalization? 

We face a very different world, in which the political dynamics and alliances have changed.  We can make states’ rights arguments both for conservative policies and for liberal policies, and we can make free trade arguments both for conservative policies and for liberal policies.  There is a 225-year-old debate on federalism that has remained unresolved, and now there is a new debate about the globalization of free trade.  These debates affect one another.  Can we imagine a globalized system in which free trade and states’ rights are not in conflict?  I think that we can, and this is our challenge.  But we must recognize honestly—on both ends of the political spectrum—that the system we are currently creating is one in which tensions between globalization and federalism exist and are very real.  Thank you very much.

PROFESSOR EARL FRY:  It's a pleasure to be here today, and Mark's paper gives us a lot of food for thought. 

Let’s define globalization: it is an increasing interdependence and interconnectedness among nations and peoples.  We’re at record levels of this now.  It also means a growing overlap of what we call domestic policy and international policy.  It's very difficult to distinguish between the two any longer. 

Globalization occurs in many dimensions.  Today, we're talking about economic globalization, but there are many other dimensions of globalization.  For example, we can think about energy and how important British Columbia and Alberta are to getting California through the summer without many brownouts.  California is increasingly dependent on natural gas and hydropower coming from those Canadian provinces. 

Another dimension of globalization is disease.  Over just the past 20 years, we've seen the spread of the HIV virus and AIDS, Ebola, and Hepatitis C.  Because we have record-high levels of the movement of people and goods across national boundaries, these diseases are no longer limited to specific areas.  Also, immigration is at record levels and, in fact, has tripled over the past 20 years.  All of these are dimensions of globalization that have to be taken into account. 

In the economic dimension, the United States is still somewhat sheltered compared to other nations.  About 45% of Canada's GDP is linked to export activity, and about 40% of that GDP is linked to export activity to one country: the United States.  Only about 12% or so of the U.S.’s GDP is linked to exports, though we're still the world's leading importer. 

We're the world's leading exporter, exporting over $1 trillion for the first time ever, in the year 2000.  We're the world's leading foreign direct investor, but we're also the world's leading host nation for foreign direct investment.  We're the world's leading source of international tourists, but we're the world's number two recipient of international tourists (and by far the world's leading nation for spending by foreign tourists).  Also, we're the world's leading host nation for immigrants, with about 1 million documented and undocumented immigrants entering the United States every year. 

Speaking of federalism itself, we’ve battled about federalism through our history.  The Articles of Confederation didn't work because they were too decentralized.  That led some very brilliant people to gather in Philadelphia in 1787 to come up with a new Constitution, basically tearing up our original and creating a new one which they felt would be more workable.   

One of the great accomplishments of Philadelphia was the creation of not just a national government that would work, but also a national economic union, something we take for granted today.  If you're in Canada, you can't take it for granted, because a significant number of barriers still exist among the provinces, particularly in the form of government procurement policies.  Some even argue that there is freer trade between Canada and the United States under NAFTA than there is among the provinces of Canada.   

I estimate that there are 18 million U.S. jobs now directly tied to the international economy, and this is, by far, a record number.  Roughly 12 million jobs are linked to export activity, and almost 7 million jobs are held by U.S. residents working within the United States for foreign-owned companies.  Another million are linked to international tourism.  (There is a little bit of overlap between export activity and foreign direct investment because some of these foreign-owned companies are also leading exporters).

The leaders of the states have come to the conclusion that they must be a part of this ballgame, that they must be integrally involved in it.  Four states had opened overseas offices by 1980; now, over 40 states have more than 250 overseas offices.  Roughly, there are 1,000 to 1,100 state employees who work in the international sector.  Half of the governors lead international trade missions every year.  Combined state spending on their international programs is about $100 million, though that excludes the investment incentive packages that they might give to foreign companies.  (For example, the cost to Alabama during the life of the incentive package which it has given Mercedes will be about $200 million.) 

Is this a lot?  To put it in perspective, the Province of Quebec alone spends more than all 50 states on its international programs.  It has about the same number of employees, about 1,100, working on its international programs, even though Quebec has a population the size of North Carolina's and a GDP about the size of Colorado's.  $100 million, when you look at the total spending by states, is really a drop in the bucket.  So, while such spending has gone up dramatically, it remains a relatively small amount.  There is also growing international involvement on the part of our large cities, which I'll discuss in a moment.

Professor Gordon has given us a good overview of concerns about protecting the interests of the states in our federal system.  But one thing we have to keep in mind is that these states are not the Sisters of the Poor.  The following graphic is the United States of America in 1999.  Instead of labeling the states with their actual names, I've labeled each state with the name of a country which has an equivalent production of goods and services.



If each U.S. state were a separate country, three U.S. states would make the list of the top ten nations in the world economically.  California, for example, now has the fifth largest economy in the world, just behind that of France.  Compared to NAFTA nations, California has a larger population base than Canada’s and it has a larger GDP base than those of Canada and Mexico combined.  Ranked by GDP, the three states in the top 10 nations would be California, New York, and Texas.  Twenty U.S. states would make the list of the top 25 nation-states, there would be 36 states in the top 50, and all 50 U.S. states would be included in the top 72.  America’s states are, potentially, significant international economic actors.

Globalization provides many challenges and opportunities that favor the states.  Comparing the services that the states and the federal government provide in the new economy, the states have much more flexibility.  The states are better adapted to the information technology revolution.  We can and should have positive competition among states to become better prepared to compete internationally.  States understand the local turf issues.  They are successful at “subsidiarity,” which is a European Union term denoting that responsibility should be devolved to the lowest level of government capable of carrying out a task.  In addition, the key roles of education and training are clearly state and local government prerogatives.  Local infrastructure development is largely left to our states.  All of these features make the states important in an age of globalization.

Let me mention some problems to keep in mind about the states.  First, there is the problem of duplication of services.  If there are 250 state offices overseas in addition to the federal government’s own offices, aren't there times when they're wasting taxpayers' money? 

Second, we sometimes find protectionism among the states.  It's not as bad as many other federal systems, but it's still there.  I often warn states not to give out incentive packages.  All of our research shows that foreign companies are coming to the U.S. without them.  But their response is, "We have to compete against New York and California.  We need to offer these incentive packages."  Because of the nature of federalism and competition, taxpayer money goes into expensive incentive packages for some foreign companies.  (Such subsidies may be necessary within NAFTA, however, as states have to compete against Canadian provinces and Mexican states.) 

Third, our business community is frustrated by the lack of national standards as it tries to move forward quickly in the information age.  Fourth, we have strained intergovernmental relations at times.  Fifth, we have uneven economic development at times.  Compare the problems faced by Detroit, Newark, and St. Louis over the past 15 to 20 years to the success of Silicon Valley.  We will probably have to take into account these differentials in development patterns when we consider the states’ role in international trade.

Let me make a couple of concluding points.  First, to Professor Gordon’s three-layer idea of federalism, I would add a fourth layer.  He combined state and local governments, but I would distinguish the metro areas as another level.  Local governments are creatures of the states; but three-quarters of Americans now live in communities of over 250,000 people.  We need to consider what’s going on in these areas.  I am a part of a major study out West, looking at the effects of globalization on five municipal areas: Seattle, Silicon Valley, San Diego, Los Angeles, and my area, the Wasatch Front, in Utah.  We’re finding, in some of these areas, that the percentage of jobs linked to the international economy is in the teens to the low twenties, which is surprisingly high.  But we're also finding that there's little cooperation among cities within metropolitan areas; between city and county governments; and among city, county, and state governments, not to mention the federal government.

Second: almost invariably, when I meet with state officials, they're saying, "The Feds don't listen to us.  It's all unidirectional.  They're telling us what we need to do."  But in an era where the responsibilities given to our states by the Constitution are affected by these international treaties—whether WTO, NAFTA, or the proposed Free Trade Agreement of the Americas—there needs to be more dialogue.  So far, there has been either a monologue or nothing at all.  We need to create a more dynamic federal system, having people at all levels of government get together to talk about the repercussions of our international responsibilities and engagements.  That's the message I would like to leave with you.

Globalization is more intense than ever before, and it's being accelerated by the information-technology revolution.  We need to make our federal system even more responsive, so that we will be more competitive in the years ahead, so that all of our people will have the jobs that will maintain our high quality of life and standard of living.  Thank you very much.

AMBASSADOR DAVID AARON:  Thank you very much.  For a book on federalism, I've been working on a chapter about globalization and federalism.  I’d like to preview a few points that tie into many of the things said so far about globalization, its impact on federalism, its impact on the federal government, and its impact on state governments and on the relationship among them.

The most important thing to recognize is that globalization is not new.  Paleontologists and archaeologists have established that long-distance trading took place as early as 2400 B.C.  The Renaissance saw an enormous expansion of the European economy into the world.  Many people believe that the inventions of the 19th century—steam power, electricity, the telephone—created the basis for the globalization that took place in the 20th century.  And it's my understanding that only recently has the total volume of world trade reached the level that it reached shortly before the First World War.

What is new about globalization is the scale of investment taking place.  If trade has only recently reached the level of the early 1900s, then investment has vastly exceeded what it was in the past.  There is a significant amount of interpenetration among the world’s various national economies.  Local events have an enormous impact on companies and they have impact on places where those companies are in fact located.  That means that individual companies and their home countries have an intense interest in each other's domestic rules.   

The conclusion to draw from this was mentioned earlier by Professor Fry: the domestic has become the international.  We have all seen examples, particularly in the environmental area, but in other regulatory areas as well, where the European Union’s decisions have had direct and immediate effects on our economy, our companies, and on various states.  For example, EU rules about genetically-modified organisms have had an enormous impact on the activities of our agricultural states.

Globalization is enormously important for our future.  Without the growth that it brings us, we will not be able to sustain our standard of living, not just in this country, but also worldwide.  In the next 50 years, the population of the earth will double.  There then will be 12 billion people on this planet, and, if we don't have substantial growth that at least matches population growth, the net demographic and economic effects will be quite disastrous. 

But there are downsides to globalization.  I will focus on three things: globalization’s impact on the economic losers in this country, its impact on crime, and its impact on the drug war. 

First, the losers.  One of this country’s great scandals is that we do virtually nothing for those harmed by it, those who lose their jobs and have no opportunities as a result.        There is no creative or significant allocation of resources to help the losers.  The amount of money spent on adjustment to trade problems is, compared to the economy’s GNP gain, quite small: only four ten-thousandths of a percent of that gain has been spent to do something for the losers. 

There are a lot of questions about how to do that “something.”  There’s a lot of disillusionment with federal programs that haven't worked very well; they are rightly derided by the unions as a sort of burial insurance.  If sufficient resources were made available, the states would do a much better job than the federal government has ever done—they're closer to the problems, they're closer to the issues.  But the money has to come from the federal government, because the benefits are nationwide whereas the losers tend to be concentrated.  For example, West Virginia does not have the resources appropriate to respond to the collapse of its steel-making industry.

Another, related point comes in response to Professor Fry’s remarks about state trade promotion programs.  He wondered why we would have a national program if the states have their own.  Well, I ran those programs for the Commerce Department, and the fact of the matter is that the states really don’t have the infrastructure to carry out their trade missions.  I remember that we set up a coordination effort with a state trade mission so we could brief them, do advance work for them, and so forth.  When I asked that state’s governor, "How’s the preparation for this trade mission going?" he said, "It's really great.  Fifty percent of the people going on the mission are businessmen."  Who were the other 50 percent?  Well, they were political friends.

The lesson here is that it is the federal government that really provides the infrastructure for these state trade missions.  There is a very close relationship between the state missions and the Federal Commerce Department’s missions abroad.  Indeed, in many counties, they are co-located. 

The second issue is crime, which is now international.  Major criminal activities cannot take place without a globalized economy, especially its communications, transportation, and financial infrastructure.  Crime exploits the lacuna that exists between national jurisdictions.   

One of Washington’s primary activities is to find threats, and, as the Cold War has ended, there has been an enormous amount of activity here finding new ones: weapons proliferation, terrorism, biological warfare, and so forth.  I'm not against that—I used to be in that business myself.              But there has not been a serious effort by Congress or the executive branch to look at the issue of international crime.  Some work in this area is proceeding.  The Financial Action Task Force works on money laundering, and the G-8 has a subcommittee dealing with Internet crime, but little else is happening.  More resources have been devoted to Interpol in recent years, but it is still basically a clearinghouse and not much more.  Some new thinking would really be useful in this area. 

Third, the drug trade is a major area of international crime.  The war on drugs is an international effort by the federal government, but the war to try to fight drug addiction is a local responsibility, and the states are overwhelmed.  There isn't a state in the country that has the resources to meet the rehabilitation needs of its drug-addicted citizens.  This is a cost of globalization.  Because widespread drug addiction wouldn't exist without globalization and the benefits it brings, the federal government has a responsibility to provide more resources to the states.   

However, for reasons like those in the case of people put out of work by globalization, the federal government itself should not be providing rehabilitation.  While the federal government is not very innovative, state governments have come up with a lot of different ways to deal with drug addiction.  In Arizona and California, your first drug bust lands you in rehab, not in jail.  The current administration supports rehabilitation, but only in jail, and I don't know how many people will volunteer to go to jail for rehab. 

To address these downsides of globalization, the relationship between states and the federal government must change in the following way.  More federal resources should go to the states to help them meet the challenges that globalization poses, but the federal government should not tell them how to spend that money.  Globalization poses very difficult problems, and we need all the experimentation and creativity that we can get. 

MR. GREVE:  Thank you very much, David.  We go to questions. 

AUDIENCE MEMBER:  I'm from the National League of Cities, and my question is for Professor Fry.  The NLC does not see free trade and local authority as mutually exclusive, but we're concerned that there hasn't been much of a dialogue with the U.S. Trade Representative.  We would like to see some safeguards and protections similar to the Green Light subsidies that recently expired.  Other than going through Congress, how do we get the attention of the USTR? 

PROFESSOR FRY:  You have introduced another element, that is, how to ensure that state governments represent the interests of their cities.  Oftentimes, a state government wants to go directly to Washington.  It should represent the cities, and, constitutionally, it probably has the right to do that.  Pragmatically, though, a state needs to have advance discussions with its cities and, perhaps, have city representatives in its delegation (if, in the first place, the USTR is willing to have a delegation come in to really talk about these issues). 

We need to set up a forum where this can happen, where both states and cities are represented.  (Again, the cities are where most of the jobs are located, particularly the jobs linked to international trade and investment.)  There needs to be much more of a dialogue, not only with Washington, via the USTR, but also with state representatives, to make sure that all levels are represented.  This is easier said than done—the situation is imperfect for the moment, and I understand your concerns.

AUDIENCE MEMBER:  The subject at hand is "Globalization and the Challenge to Local Democratic Government."  Today’s points are well taken, but it's still not clear just how much of a challenge there is.  First, trade and investment have been growing by leaps and bounds.  Most of the increase is the result of getting rid of border restrictions.  But eighty percent of trade is not in services—it’s in manufactures.  Exporters to the U.S. and foreign investors here know that they have to deal with state and local laws on health and safety, the environment, technical standards, etc.  It's just not clear what the problems are in the growth of trade and investment. 

Second, Professor Gordon mentioned that one way to get around the states is to use treaties.  He said there have been a lot of those lately, but I'm not sure what they are.  NAFTA, including all its employment, dispute settlement, investment services, bidding, and bilateral investment agreements, has been coming in dribs and drabs for a decade, but it’s almost all about what we get developing countries.  So where are these treaties that are now so much more important?

Third, getting beyond border restrictions, the issue is national treatment.  Can you discriminate between foreign and domestic companies?  Would any of you address how that stands in legal terms, and how big a problem is it?  Two or three years ago, I was engaged in an issue, involving Burma, about whether our local governments can discriminate between companies.  It was a constitutional issue about foreign policy, and it was resolved in favor of the federal government, but it was resolved on very narrow grounds. 

PROFESSOR GORDON:  I agree with my colleague, David Aaron, that we’ve had globalization for as long as we've had a globe.  But there are some real, qualitative differences now, not only in the movement beyond trade toward investment, but also in the specific requirements in a series of international agreements.  Here I speak specifically of NAFTA and the WTO agreement, which have a bite, affecting local autonomy in ways that other agreements never did.

Previous agreements had focused on limiting tariffs.  Now, partially because that battle has been fought and won, the issue of tariffs has been put aside.  Now, the concern is about much more specific limitations which affect the kinds of things that state and local governments do all the time.  That leads to the questioner’s concern with preferential treatment.  We also should be concerned about the market access requirements in these treaties, because they cut much more broadly.  Anything that a state might do that limits market access or somehow burdens trade could end up being held in violation of an international agreement.

So there has been a real change over the last 10 to 15 years, and we're just starting to see judicial decisions by international panels that reflect it.  The first one was the “Beer Two” decision in the late 1980s.  That ruling dealt with the regulation of alcohol distributors, which, under our Constitution, has clearly been a state's right since the end of Prohibition.  But a panel created by an international agreement disagreed, saying that the states don't have a right to impose certain requirements.   

AMBASSADOR AARON:  One of the reasons why these kinds of issues will be so important in the next round of trade negotiations is partly because we’re going to be focusing on services. (Interestingly enough, there hasn't been a conflict over that issue yet.) Services is very important because it’s a big part of our exports.  But, because our tariffs are very low, we won't have much bargaining power in this next round.  We basically have three things: our trade laws; our tariff peaks on very few items, like shoes and textiles; and the preferences and activities of our state governments.

So this will be a very big issue in the next round of talks.  I was struck by the suggestion that we need some kind of an advisory group for the USTR, or even the White House, on those issues that have an impact on the states.  Part of the problem for the states is that it may be difficult for them (a) to stay involved and know what's going on, and (b) to analyze the impacts.

AUDIENCE MEMBER: My concern is about the focus of this panel or, rather, what is not being considered.  Services is the fastest growing part of our economy, and we have a lot of people in this country who would like to offer their services abroad.  But if we want to have access to foreign jurisdictions to do our business, for our telecommunications companies, banks, lawyers, accountants, nurses, doctors, and so on, we have to ensure that foreigners will have the same access here.  One of the biggest remaining barriers to that access is a hodgepodge of local rules regulating lawyers, accountants, and other professionals.  These are essentially guild restrictions seeking to protect local turf from foreign competition.  They are inconsistent with our notion of free markets, and they are deleterious to our effort to open foreign markets.  We shouldn’t be protecting them, but seeing how rapidly we can dismantle them. 

PROFESSOR GORDON:  You have described the tension beautifully.  We have many of these rules exactly because it is in our interest to have them; yet, we want to export all kinds of services, so the U.S. fights for liberalization of trade in these areas.  Liberalization of trade is a great thing, but, at the same time, that’s telling the states that they no longer have the authority to make these rules on their own.  Even if you agree with the policy outcome in such cases, there remains the question of whether you like the ultimate outcome of that process—letting the federal government, through trade negotiation, take away a whole range of things which we have always left up to the states. 

People here have spoken about how to influence the federal government through the USTR or the White House, which are in the executive branch.  I would remind you that the Constitution says that the best way for the states to influence that national government is through the legislative process, through the Senate.  We need to think of a way to include that aspect in the process.

AUDIENCE MEMBER (PROFESSOR JONATHAN ADLER):             I have two related questions for Professor Gordon.  First, other than the Beer Two decision, is there any evidence that the trade provisions of various treaties will pinch the states more than the Supreme Court's dormant Commerce Clause jurisprudence, in terms of limiting the ability of states to privilege their own versus outsiders? 

Second, in a couple of decisions, the Supreme Court has made it reasonably clear that the United States' treaty obligations are subject to the constraints of the Bill of Rights.  Given the recent series of federalism decisions, is there any reason to believe that, Missouri v. Holland notwithstanding, treaty obligations will be subject to the constraints, if not of Article I, Section 8, then at least of the Tenth Amendment? 

PROFESSOR GORDON:  There’s no way to predict which direction the Supreme Court is going to go on this or on many other issues.  Especially in this area, most of its decisions have been decided 5-to-4, which means that the change of one justice could totally change everything. 

Of course, there is the possibility that the Supreme Court will look at Missouri v. Holland again and, in light of its federalism decisions, restrict its holding.  But there is no certainty that the Court would do that; in fact, there are constitutional reasons why the Court would not do it. Missouri v. Holland was based very much on the notion that, since the states historically never had the right to enter into treaties, the treaty power is not a right that states gave to the federal government.  That line of reasoning takes the treaty power outside of the area to which the Tenth Amendment applies. 

But let's say that the Court didn't agree with that, instead deciding to subject treaties to the same kind of analysis it uses for the Commerce Clause.  Many in this room would probably cheer such a limitation of the treaty power.  But    I would argue that you’d be cheering a little too quickly.  Such a decision would probably put so much pressure on the Court’s reading of the Commerce Clause that all of the limitations it has put on “commerce” so far probably would be blown up.  Also, it is quite unlikely that the Court would come up with a doctrine essentially requiring the U.S. to pull out of most of these trade negotiations or not play the active role that it has so far.

As to your first question, there are not many cases that one can point at.  Beer Two is the obvious one, though a number of others are working their way up.  There are NAFTA challenges under Chapter 11, which could have a major impact, far greater than that of any dormant Commerce Clause holdings.  And we should remember that any dormant Commerce Clause holding has the problem that it can be overridden by Congress.  There would be no such protection in a trade case.

MR. GREVE:  Sooner or later, every panel at AEI reaches the conclusion that it's Sandra Day O'Connor's world.  The rest of us just live in it.  

AUDIENCE MEMBER:  We often hear that the states compete head-to-head to attract foreign investment.  How much of this competition is really happening?  How big is it?  What's involved?  What are these incentive packages?  And, above all, is this destructive competition, is it inefficient, or is it healthy competition? 

PROFESSOR FRY:  There's no doubt that some of the competition is healthy, but we do find that certain foreign corporations are playing the states against one another.  Before it settled on Alabama, Mercedes identified three finalist states.  It then invited the three governors to make final incentive package offers.  I'm not quite sure that’s in the national interest.

For both states and cities, the best advertisement to attract new investment, whether domestic or foreign, is to have a business community that is relatively satisfied with the current regulatory climate, tax regime, and overall quality of life for its workers.  If states would put their money into education, infrastructure improvements, and programs like that, rather than the current incentive packages, they would get much better results.

The worst incentive package that I've ever seen was created by New York City, which paid some of the largest corporations in the world (some U.S., some foreign) just to keep them from moving to Connecticut or New Jersey.  Having to pay corporations to keep them from moving away means that there's something wrong with New York City’s overall regulatory and tax structure and this issue must be addressed directly by city officials.

AUDIENCE MEMBER: Professor Fry, you suggested that the size of state economies relative to other nations’ economies implies significant power on the world stage.  However, all of the institutional trends, especially those mentioned by Professor Gordon, seem to indicate a weakening of their political voice.  Some mechanisms do exist: we at the National Governor’s Association are involved in the USTR's IGPAC, the Inter-Governmental Policy Advisory Committee, as well as their State Points of Contact program.  But can any of the panelists envision a situation in which the three or four levels of a federal system, particularly the states and local governments, truly have an important voice in negotiations? 

PROFESSOR FRY:  We have a workable model: that of Canada prior to the Canada-U.S. Free Trade Agreement.  Each provincial government sent its own team to Ottawa, creating its own position paper before going, to state what it felt should be included in the free trade agreement with the United States.  Unfortunately, that model was not followed to the same extent in Canada’s WTO negotiations.  When all the state and local leaders get together to talk about their interests, then have discussions with the appropriate federal leaders, compromises can be reached. 

AMBASSADOR AARON:  There needs to be a more continuous relationship.  States should be represented in Geneva by governors or, perhaps, by some new institution that includes the cities.  It will become very clear that the interests of the various states are not the same.  But the first step is understanding what's going on, getting that information to the states, getting it down to local communities, and organizing in order to have influence 

PROFESSOR GORDON:  There is another model, which the Founders of the Constitution had in mind.  The states should not just try to represent their interests through the institutions of government; if they think that the national government is going off in the wrong direction, they should become more activist, using their persuasive influence over both their national representatives and their citizens.  Citizens, in turn, are voters in national elections, a role that they really haven't used in the ways that they could. 

MR. GREVE:  Please join me in thanking the panel for a very instructive and helpful discussion.