North Carolina Law Review

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Local Liability in International Economic Law

January 17, 2017

95 N.C. L. Rev. 261 (2017) 

 

On February 4, 2016, the United States and eleven other countries signed the Trans-Pacific Partnership (“TPP”)—the most far-reaching free trade agreement since the World Trade Organization’s founding in 1995. Unlike most prior trade agreements, the TPP’s purported benefits do not come primarily from reductions in tariffs paid on goods at the border. Instead, they flow from assumptions that so-called non-tariff barriers— such as discrimination against foreign investors or service providers—will fall significantly under the TPP. 

 

Yet to date, unnoticed among the TPP’s thirty chapters, schedules, and annexes, are provisions that exempt state, provincial, and local measures from compliance with many of the agreement’s nondiscrimination rules. Under the TPP, subnational governments such as California or Ontario— governments with substantial regulatory authority over regional economies much larger than many national economies—may continue to discriminate against foreign investors or foreign service providers indefinitely. These exemptions represent the multilateralization of a trend underway for a number of years in U.S. treaty practice: efforts to reduce the federal government’s liability for subnational action that the federal government often cannot control and of which it is frequently unaware. Indeed, forty-one percent of the claims brought under the investor-state dispute settlement (“ISDS”) provisions of the 1994 North American Free Trade Agreement (“NAFTA”) have challenged subnational government action. These exemptions also reflect a growing pushback against ISDS in countries such as Australia, France, Germany, and the United States. 

 

Contrary to U.S. treaty practice and ISDS’s critics, this Article argues that foreign investors or aggrieved trading partners should be able to make their claims directly against subnational governments, such as California, rather than only against national governments, like the United States. The case is made by presenting and analyzing international liability rules for local action. Governments use three kinds of local liability rules: (1) immunity, under which neither the subnational nor national governments are answerable under international law for the actions of a subnational government; (2) vicarious liability, under which nations are liable for the actions of their subnational units even if they do not control them as a matter of domestic law; and (3) direct liability, under which a claimant’s case is brought directly against the offending subnational government. Vicarious liability is the default rule under the international law of state responsibility. However, immunity—the rule under an increasing number of economic treaties, including the TPP’s investment and services chapters—is on the rise. Direct liability is rare, but exists in certain investment agreements and applies to the European Union. 

 

The choice among these liability rules is the most important front in efforts to reconcile a robust federalism with the increasing importance of local governments to international affairs—an ongoing battle in the United States, the European Union, and other federal nations. Direct liability best achieves the twin goals of fostering local governance and international cooperation for three reasons. First, direct liability would force subnational governments to internalize the costs of their actions, thereby deterring violations. Under vicarious liability, the costs of violations are borne by the national government, and under immunity, they are borne by the claimant who is left with no recourse. Second, a move to direct liability would have beneficial distributional consequences, ensuring that powerful federal nations do not force liberalization in developing countries while protecting discriminatory practices within their own countries. Third, a move to direct liability would recognize the considerably more important role subnational governments play in international affairs today. From climate change and renewable energy to international trade, subnational governments are incredibly active in tackling matters of international concern. They should also bear responsibility for their actions. 

 

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