28 August 1997
Journal of Commerce
John Maggs

Businesses battle state sanctions

Corporate leaders to file constitutional challenge

Move is in response to a flurry of state and city trade curbs that the group says usurps presidential authority.

WASHINGTON -- A group of big U.S. businesses is planning to file a constitutional challenge to a recent flood of state and local economic sanctions, despairing of the Clinton administration stepping in to halt such actions.

Massachusetts, New York City, Berkeley, Calif., and 27 counties and cities have adopted sanctions that bar government purchases from companies that do business in Burma, China and Nigeria.

California, Texas, New York, New Jersey, North Carolina, Connecticut and Rhode Island are considering such sanctions on an even broader assortment of countries.

While the United States has varying levels of economic sanctions on some of these nations, in all cases the state and local actions go beyond actual trade and investment with these countries to impose a "secondary boycott" on businesses that choose to trade with these regimes.

President Clinton has signed laws recently that impose such secondary boycotts on companies doing business in three countries -- Cuba, Iran and Libya. Nevertheless, because such boycotts are widely seen as illegitimate by the United States' top trading partners, these laws have been enforced very reluctantly, and so far have had a negligible commercial impact.

In this case, senior Clinton administration officials privately criticize sanctions, such as those imposed by Massachusetts on companies doing business with Burma, as an unconstitutional usurpation of federal powers.

Yet the administration itself will not challenge the sanctions out of fear of angering local political interests.

At the same time, U.S. trade officials are trying to convince Massachusetts to amend its law to avoid a showdown in the World Trade Organization, which prohibits local economic sanctions.

The constitutional case is being put together by lawyers hired by USA Engage, a coalition of 634 big businesses that have mounted a campaign against the use of unilateral trade sanctions of any kind.

It is not clear now whether the case will be financed by the full coalition or a group of the businesses.

Meanwhile, a top Clinton administration official sympathetic to the case has been meeting regularly with USA Engage officials.

Undersecretary of State Stuart Eizenstat asked representatives of the group to delay the lawsuit until after a debate in Congress this fall on granting President Clinton special trade negotiating authority.

The lawsuit will probably force the administration to take sides for or against local governments, and Mr. Eizenstat told the businessmen he's worried this possible conflict could become an issue in the uphill fight for negotiating authority.

Peacemaker role

Representatives of the business group made no commitment about the timing of its lawsuit, but said it will probably not be ready for filing until after the October congressional recess.

Yet many congressional aides and business lobbyists expect the debate over new trade authority to drag on into the spring, especially in the Senate, which has not actively considered the topic for several years.

As an undersecretary at the Commerce Department, Mr. Eizenstat took the role of peacemaker with the European Union, working to defuse a confrontation over U.S. sanctions on European companies that do business with Cuba.

More recently, he has sought to smooth relations with Switzerland, which faces a number of local sanctions efforts in the United States over its handling of claims that Swiss banks hid many millions of dollars in deposits from victims of the Nazi Holocaust.

Sanctions counterproductive

In congressional testimony, Mr. Eizenstat said, "Efforts by state and local officials around the United States . . . to impose various economic sanctions are inappropriate and counterproductive . . . They will complicate (the federal government's) ability to develop a healing and reconciliation process, hurt U.S. as well as Swiss economic interests, and increase strains in U.S.-Swiss relations."

The constitutional challenge by the business group is expected to turn on three arguments.

Three arguments

First, the companies will argue that the state and local sanctions would change U.S. foreign policy, which the constitution says can only be conducted by the president.

The lawyers have collected ample evidence that the sanctions imposed or proposed so far have already affected U.S. foreign policy, triggering a fight with the EU in the WTO, and threatening relations with Switzerland.

In three cases, state courts have in the past judged whether state and local sanctions related to South Africa abrogated federal foreign policy-making, and have struck down the sanctions in two of the three.

Federal pre-emption

The second argument is federal pre-emption: that the state actions, specifically the Massachusetts sanctions, pre-empt a federal action -- a partial embargo on Burma that was recently strengthened by President Clinton.

The Constitution and subsequent Supreme Court decisions have prohibited such pre-emption. The businesses will argue that Mr. Clinton could have imposed a secondary boycott, but chose not to, and thus the Massachusetts action pre-empts his decision.

Third, the lawyers will argue that the state and local actions would usurp the federal government's responsibility for regulating foreign commerce.

Just like a tariff, the Massachusetts law and others have the effect of restricting and even halting commerce with a particular company.

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