Massachusetts Law Sets Off Trade Flap

What does the Commonwealth of Massachusetts have against Unilever’s soaps and shampoos, and why do the White House, Burmese freedom fighters and the leaders of Western Europe care?

The short answer is that the Britain-based Unilever does business in the Southeast Asian nation of Myanmar, formerly Burma, and Massachusetts won’t buy from companies active in that allegedly repressive country.

Now the affair threatens to balloon into an international trade dispute affecting governments--and corporations--on three continents. This week, the European Union may file a complaint charging that the Massachusetts law violates agreements on international trade.

The White House, trapped by conflicts in its own hodgepodge of policies on trade, Cuba and Myanmar, hopes the whole thing will go away. But even if it does, similar disputes over territoriality are already coming down the pike.

Laws like Massachusetts’ are nothing new--local and state officials have long voiced their disapproval of other nations’ policies. But the threat to their right to do so is increasing geometrically with the globalization of the world’s economy and the emergence of the World Trade Organization, a new international entity with powers that some think are far too great.

“Here you have the EC saying this [Massachusetts law] is extraterritorial,” said Simon Billenness, a senior analyst at Franklin Research & Development Corp. of Boston, a self-described socially responsible investment group. “What’s more extraterritorial than having a bunch of European Commission bureaucrats telling Massachusetts legislators how they should spend their own taxpayers’ money?”

Indeed, some critics say the treaty creating the WTO amounts to a new “economic constitution”--changing the role of the federal government from an advocate to a potential adversary of the states and giving other countries a new weapon to challenge state laws.

“Under this new economic constitution, the U.S. government is no longer simply the representative of the states in our federal system but is a referee between the states on one side and multinational companies and countries on the other,” says Professor Robert Stumberg, director of Georgetown University’s Center for Policy Alternatives.

In California alone, Stumberg has identified as many as 90 laws that could be challenged under the WTO, including measures designed to promote food safety, environmental health and energy conservation.

While it is unlikely foreign countries would challenge most of these laws, because they have their own WTO-vulnerable statutes, such state measures could be potential targets in a trade war, Stumberg warns.

If the EU files its complaint with the WTO, it would be the first time a state action has been challenged under the new global trade treaty. Thirty-seven states, including California and Massachusetts, signed on to a section of the WTO agreement prohibiting the use of political criteria when awarding government contracts.

But Massachusetts officials deny their Burma law violates WTO rules, arguing that it treats foreign companies the same as it treats domestic firms.

The Europeans--still angry about the U.S. Helms-Burton sanctions law aimed at foreign companies doing business in Cuba--are particularly unhappy that the U.S. government, a primary champion of the WTO, has not taken steps to force Massachusetts into line.

By failing to put a halt to congressional or state actions that reach outside U.S. borders, such as the Helms-Burton penalties and the Myanmar selective-purchasing laws, the United States is shirking its promises to the WTO, according to the EU.

A number of European companies, including Philips Electronics, have pulled out of Myanmar rather than risk losing lucrative Massachusetts state contracts. Other companies, such as Netherlands-based ABN Amro Bank, Nestle SA of Switzerland and Germany’s Siemens, are on the state’s blacklist.

The stakes extend far beyond Myanmar, a poor country with a relatively small foreign presence. In recent years, there has been a noticeable increase in passage of these selective purchasing laws--including proposed measures to punish Indonesia for human rights violations in East Timor and the Swiss government for its alleged role in hiding Nazi gold.

U.S. corporations are also crying foul, calling the state and local sanctions ineffective and potentially illegal because the U.S. Constitution gives the federal government authority over foreign commerce.

Yet a White House court challenge of the Massachusetts law appears unlikely. In spite of its concerns about the spread of this grass-roots activism, the Clinton administration, which has itself banned new U.S. investment in Myanmar, isn’t interested in taking its ideological compatriots to court, according to an administration official who spoke on background.

Instead, U.S. officials have been quietly meeting with state officials to “assist them in crafting legislation that takes into account U.S. international obligations,” according to a June 5 letter by U.S. Trade Representative Charlene Barshefsky to Sir Leon Brittan, vice president of the European Commission.

Barshefsky warned the Europeans that filing a WTO complaint would “frustrate our efforts in Massachusetts to reach a satisfactory result.” If the WTO found against the United States, it could appeal the decision, change the offending law or pay a penalty.

U.S. officials are also anxious to avoid a high-profile battle that could trigger a populist backlash against trade agreements, particularly when it is embroiled in tough battles to win congressional support for renewal of most-favored-nation trade status for China and to extend the North American Free Trade Agreement to other parts of Latin America.