Timothy Meyer (Vanderbilt University Law School) has posted Local Liability (95 North Carolina Law Review (2017 Forthcoming)) on SSRN. Here is the abstract:
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. The TPP’s potential ratification promises to be one of the major fights during the last months of the Obama Presidency. 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 TPP.
Yet to date unnoticed among the TPP’s 30 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 indefinitely continue existing discriminatory policies against foreign investors or foreign service providers. These exemptions represent the multilateralization of a trend underway for a number of years in U.S. treaty practice: efforts to eliminate the federal government’s liability for subnational action that the federal government often cannot control and of which it is frequently unaware. Indeed, 41% 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.
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. I make the case 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 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.