Can A State Have Its Own Foreign Policy?

Corporate America challenges Massachusetts' rules on Burma

Over the past few years, a quiet storm has been sweeping through America's state and local legislatures. To the growing annoyance of Corporate America, 48 states and hundreds of municipalities have been making laws limiting where and with whom companies can do business. For the most part, these are buy-local ordinances and environmental laws, requiring states, for example, to avoid purchasing lumber from rain forests. But in 1996, Massachusetts moved into an area that looked dangerously like foreign trade policy--by limiting state purchases from companies that do business in repressive Burma.

That prompted U.S. corporations to declare war. Nearly 600 of them, from Apple Computer Inc. to Xerox Corp., banded together and took the state to court. On Mar. 22, the Supreme Court is scheduled to hear oral arguments in the case, which is shaping up as a historic clash between the rights of states and the rights of corporations, and what role Washington plays between them. Specifically, the court will decide whether states, by putting restrictions on purchases, are also making foreign trade policy, which, under the Constitution, is the duty of the federal government. The case has attracted among the highest number of friend-of-court briefs ever: more than 250, with 190 on the side of the states.

IMPLICATIONS. If the Court thinks the states are out of line, the ruling could affect at least 150 laws, if not more, that govern how state and local governments allocate taxpayer dollars. These include urging preferences for recycled paper, boycotts of Swiss banks, codes of conduct in Northern Ireland, and other issues of concern to local constituencies. "This goes to the heart of how the U.S. federal system is going to work in an era of globalization," says Simon Billenness, a senior analyst at Trillium Asset Management Corp., a socially responsible investment firm in Boston.

The U.S. companies, bringing suit collectively through the National Foreign Trade Council (NFTC) and backed by the European Union, argue that local purchasing restrictions, such as the Burma law, turn U.S. foreign policy into a Babel of conflicting rules, and that it's up to the federal government to ensure that the U.S. speaks with one voice. States, the NFTC says, should consider only price and performance when buying goods and services from corporations. Any other considerations about where or how products are made--such as whether they're made with recyclables, under codes of conduct, or by companies that do business with dictators--violate U.S. adherence to World Trade Organization rules. "Our system of government was not designed to allow the 50 states and thousands of municipalities to conduct their own individual foreign policies," argues Frank Kittredge, president of the NFTC, which also opposes the use of federal sanctions as a foreign-policy tool.

CHOICES. But the states reply that they're not making foreign policy, they're making purchasing decisions about how to spend their own taxpayers' money. They say the constitution--and WTO exemptions--guarantee their right to consider local values in spending choices. In the case of Burma, the U.S. government already has federal sanctions that ban new investment by U.S. companies in the military-run country. But the Massachusetts law, which has also been adopted by 23 cities, including San Francisco, goes further. Modeled on anti-apartheid laws aimed at South Africa in the 1980s, the Burma law limits the state's ability to contract with companies that sell products in Burma or have existing investments grandfathered in by the federal sanctions. Apple Computer, Eastman Kodak, Hewlett-Packard, Philips Electronics, and Japan's Obayashi have all withdrawn from Burma, citing the law and the resulting inability to do business with Massachusetts and the 23 cities.

The states also argue that they need to be free agents in international trade. States such as California, New York, and Texas have trade missions abroad designed to attract foreign investors. If they can engage in foreign trade, states argue, they can decide the conditions for disengagement, too. "The question is whether Massachusetts can choose business partners on moral grounds--and it's essential for all market participants to retain that right," says Robert K. Stumberg, a law professor at Georgetown University. "If the Court rules against the states, then private corporations would have greater rights in the marketplace than elected governments."

In an era of global procurement, such disputes are increasingly inevitable. No matter how the case is decided, it will be an important milestone in how states, multinational corporations, and the U.S. government forge ahead in a global era.

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