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Do Trade Deals Infringe On States' Rights?

There's growing concern that international trade agreements could undermine states' authority in a host of areas, including regulation of important local industries.

MONTPELIER, Vt. (AP) -- A free-trade agreement between the United States and other countries around the Pacific Ocean might not seem like an obvious topic of discussion inside Vermont's Statehouse.

But in Montpelier and other state capitals, there's growing concern that such agreements could undermine states' authority in a host of areas, including regulation of important local industries, negotiations over health care costs and control over public utilities like water supplies.

Those watching the interplay of state laws and the provisions of international trade agreements acknowledge that some of their worries are speculative. Actual legal challenges, in which governments or corporations have brought complaints about government regulation to tribunals set up to resolve disputes under the trade deals, have been small in number.

But Vermont and other states should be vigilant, said Robin Lunge, a former staffer with the Vermont Commission on International Trade and State Sovereignty who now directs health reform efforts for Gov. Peter Shumlin.

"If it's not important today, it could be vitally important tomorrow," she said. "If you don't pay attention today, you won't know until you run into trouble."

The system of negotiating international trade agreements makes it tough for state officials to monitor or affect the terms of the deals, said a report last year by the state of Maine . It focused on the possible effects of international trade provisions on the state's efforts to regulate groundwater withdrawals for bottled water. In Maine, the bottled water industry includes Poland Spring, one of the nation's top-selling brands.

"The negotiating process lacks transparency and precludes states from any meaningful participation in the negotiations even though the agreements have significant potential impact on state regulatory authority," the report said.

In Vermont, Lunge was the main author of a letter Shumlin sent in June to President Barack Obama trying to raise an alarm about the Trans-Pacific Partnership, a free-trade agreement being negotiated among the United States and eight other nations: Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

Shumlin said the agreement and a previous pact with Korea could bring legal challenges to negotiations with drug companies over discounts, which save Vermont and other states millions of dollars a year in their Medicaid and other public health programs.

Shumlin echoed comments made last September in a letter from five state lawmakers from Maine, New Hampshire and Vermont that warned against "the continuation of an ill-conceived agenda to use trade policy to restrict foreign and domestic medicine pricing programs."

The agreements have required other countries to scale back their discount programs, but technical provisions have preserved discounts obtained by U.S. states' Medicaid programs.

The governor wrote that those discounts, as well as those obtained by federally subsidized health clinics and teaching hospitals like Burlington's Fletcher Allen Health Care, soon could come under attack as well.

Restricting other countries' ability to negotiate for better drug prices "could allow our trading partners to challenge cost controls" used in the U.S., Shumlin's letter said.

"These programs serve vulnerable populations in the U.S., and trade policy should not put them at risk."

Shumlin is raising an alarm needlessly, said Mark Grayson, spokesman for the Pharmaceutical Research and Manufacturers of America. Free-trade agreements are struck between national governments and do not impose requirements on states, he said, adding that a footnote in the Korea pact specifically says it won't affect state Medicaid programs.

"Nothing in a trade agreement can conflict with U.S. law," Grayson said.

But the trade agreements could open an avenue for drug companies to try to appeal a state decision to exclude a drug from a list of preferred drugs, said Sean Flynn, a professor at American University's law school who follows trade issues. The expense of defending against such appeals could weaken states' ability to negotiate lower prices significantly, he said.

Similar concerns have been voiced about trade agreements as they affect the ability of states and municipalities to regulate their water supplies and who should have access to them. A study commissioned by Maine in 2009 concluded that it was uncertain whether legal challenges could be mounted under internationaltrade agreements to a law in that state regulating water withdrawals for commercial uses.

"There are water issues around the world regarding trade and trade agreements," said Michael O'Grady, a lawyer with the Vermont Legislature's research staff and counsel to the state trade commission. "There is the potential in any regulatory field for a corporation from another country to bring an investment claim against the United States."

Corporations also can use international trade agreements to undermine federal law, said Robert Stumberg, a Georgetown University law professor who studies trade issues. Four of the five largest U.S. tobacco companies sued this past week to overturn new Food and Drug Administration requirements that cigarette packages carry labels showing graphic images of smoking's ill health effects. At the same time, Philip Morris International is challenging a similar Singapore law before an international trade tribunal.

If the companies lose their case in U.S. courts, "the argument that PMI is using against Singapore could be turned right around and used against the FDA's implementation of its authority," Stumberg said.

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