IELP | 31 May 2022
UK, Texas and other US States should proceed carefully, but not abandon, trade deals
by David Gantz, Law Professor
I. Introduction: Economic and Political Motivations
The United Kingdom, presumably frustrated by the reluctance of the Biden administration to conclude the free trade agreement negotiations begun by the Trump administration, or even to seek the essential congressional authorization to do so, has announced through its trade policy/international development minister Penny Mordaunt that it will pursue commercial arrangements with up to 20 individual US states, including Texas, Indiana and California. (Farouq Suleiman, William James, and Chris Gallagher, “Britain Targets First State-by-State U.S. Trade Deals Next Month,” Reuters, April 21, 2022, https://www.reuters.com/world/uk/britain-targets-first-state-by-state-us-trade-deals-next-month-2022-04-21/) An arrangement could be concluded with Texas by October 2022. Other states, such as Indiana, have moved more quickly; Indiana and the UK signed an MOU on May 27, 2022. (https://www.gov.uk/government/publications/uk-and-indiana-trade-and-economic-memorandum-of-understanding/memorandum-of-understanding-on-economic-cooperation-and-trade-relations-between-indiana-and-the-united-kingdom.) More will likely follow. The eight states currently targeted combined account for 20% of the US economy, and based on recent events, the Texas state government among others evidently sees few downsides to moving forward.
It is no surprise that UK officials have included Texas among the initial targets for a trade MOU. If Texas were a sovereign nation, it would be the ninth largest economy in the world, just ahead of Brazil, and California’s GDP is even larger.
The UK is still suffering from an economic downturn largely caused by its withdrawal from the European Union at the end of 2020, making enhanced international commercial relationships, however circumscribed, attractive. According to UK data, Texas (in 2001) exported $9.4 billion worth of goods to the UK (including oil and gas, aerospace products, petroleum and coal products, basic chemicals, and computer equipment) and $5.5 billion worth of services (including business management and consulting, travel and tourism, passenger fares, equipment installation, maintenance and repair, and industrial royalties). This made the UK one of Texas’ largest export markets, partly as a result of excellent air transportation to the UK, the absence of corporate and personal income taxes, and high economic security, along with the expanding Port of Houston and Texas’ excellent rail and road infrastructure. Moreover, UK subsidiaries in Texas reportedly accounted for nearly 120,000 jobs, and exports to the UK supported more than 63,000 jobs.
Texas and other targeted US states are well aware that the UK despite its withdrawal from the European Union is the fifth largest economy in the world. For the UK, it is economically difficult to reject the idea of agreements with selected US states, particularly when the Biden administration has effectively taken itself out of the business of negotiating trade agreements. (Although the concept of the “Indo-Pacific Economic Partnership” was formally unveiled by President Biden recently, it would explicitly not include any market-opening measures on the part of the United States, which, in the opinion of many observers, could doom it to failure.)
Thus, even if no political considerations were motivating either the UK or Texas or Indiana, the prospect of enhancing an already robust commercial relationship is attractive (even to blue states such as California).
II. US Legal and Constitutional Constraints
In an interesting historical footnote, in 1838 England and the then-independent Republic of Texas concluded three treaties, one of which was a “treaty of commerce and navigation” that entered into force in 1842. (https://tarlton.law.utexas.edu/treaty) Unfortunately for the UK and Texas, today’s legal and constitutional issues are much more complicated than 180 years ago. Most significantly, the Commerce Clause of the Constitution (Article I, sec. 8, clause 3) gives Congress the exclusive power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” With regard to agreements with foreign nations, Article I, sec. 10, clauses 1 and 2 of the Constitution are also restrictive:
- No state shall enter into any treaty, alliance, or confederation ...
- No state shall, without the consent of Congress ... enter into any agreement or compact with another state, or with a foreign power.
Still, there have been multiple instances where US states have entered into less formal arrangements, often termed “memoranda of understanding” (MOUs), with foreign states or governments that appear to have been generally accepted if they are considered non-binding. For example, after the Trump administration withdrew from the Paris climate accord, California, among other US states, concluded widely publicized MOUs with other nations, e.g., with China in November 2018 and April 2022, effectively promising to follow the requirements of the Paris accord. (https://www.gov.ca.gov/wp-content/uploads/2022/04/4.18.22-China-CA-MOU.pdf) Both the 2018 and the 2022 MOUs specifically note that they are voluntary, not legally binding, as was the Paris accord, and must comply with “all applicable laws.”)
Some eyebrows were raised in mid-April 2022 when Texas Governor Greg Abbott concluded MOUs with each of the four Mexican states bordering Texas, including Nuevo Leon, with the alleged intention of reducing illegal immigration, drug trafficking on their highways, and potential terrorism. (https://gov.texas.gov/uploads/files/press/EL_GOBIERNO_DEL.pdf) Still, the governor’s office, if pressed, could have reasonably argued that they are only MOUs and not international agreements (suggesting form is more important than substance) and are not legally binding. Most of the criticism of these actions—including from the White House and many Republicans as well as Democrats in Texas—focused on the enormous disruption of cross-border trade that cost businesses hundreds of millions of dollars and further encouraged inflation. Critics also pointed to the fact that immigration law and policy is the exclusive province of the US federal government but chose not to mention the alleged constitutional violations of such agreements.
Less controversial arrangements have been concluded as MOUs between adjacent border states in the past. For example, the states of Arizona and Sonora (which have cooperated on a variety of issues of mutual interest since the Arizona-Mexico Commission was founded in the 1950s) have concluded a series of non-binding MOUs. For example, the Arizona Department of Commerce and the Secretariat of the Economy of the State of Sonora formed a partnership in 2018 to “drive innovation, entrepreneurship and technological advances in the region.” (https://www.azmc.org/media/1432/economic-development-mou.pdf) That agreement is also termed an MOU and specifically states that “it is non-binding and does not create any legal or binding obligations between the states.” The MOU also states that “Nothing in this Memorandum of Understanding should be read to conflict with the laws and regulations of the United States of America or the United Mexico States (or any state or local jurisdiction), or with any relevant international agreements.”
III. What Could a UK-Texas (or Indiana or California) MOU Lawfully Address?
It seems likely that the UK and the US state governments are well aware of the legal constraints and will seek to conclude MOUs that do not violate any US federal constitutional or legal regulations, particularly those relating to tariffs and dealing with standards that are currently addressed at the federal level in the United States, but they could inter alia treat areas such as the mutual recognition of professional qualifications and the elimination of existing barriers to doing business in each other’s territories.
One approach that could be considered would be to draw on the failed negotiations between the United States and the European Union aimed at a mammoth free trade agreement in 2014-2016, the “Transatlantic Trade and Investment Partnership” (TTIP), and certain provisions of the USMCA, limiting the discussion in each case to areas that are not reserved for the US federal government. While the majority of the chapters of both accords are related to matters within the exclusive control of the US federal government—such as customs and competition policy—many other areas are ripe for closer cooperation.
As the first of the MOUs (with Indiana) is now public one can reasonably assume that an MOU with Texas and other US states will contain many similar provisions, with a similarly wide range of objectives and issues to be addressed. In this first MOU, the Participants endorse sustainable growth and the importance of research, technology and innovation, mentioning in passing an effective recovery from COVID-19. Substantive section headings include enhancing cooperation; accelerating development of low emissions technology; removing barriers to trade and investment; cooperation in economic development, investment, workforce development, innovation and regulatory cooperation; and academic cooperation. Priority is to be given to advanced manufacturing and materials, aerospace and aviation, life sciences, agriculture and agbioscience, the automotive industry including low emissions technology, energy and infrastructure. Interestingly, after the the UK reaffirms its obligations under the WTO’s Government Procurement Agreement, Indiana commits to MFN treatment of UK suppliers (other than with states bordering Indiana), with both agreeing to maintain an open dialogue and to prioritize bilateral opportunities in government procurement.
In the key Section 5, “forms of cooperation,” elements include the expected development missions and public sector visits, information sharing, promoting cooperative research, joint symposia and seminars along with other consortia and summits. Participation from municipalities, research institutions, universities and NGOs is to be encouraged. Another key section (6) focuses on implementation, with the commitment to form a joint working group, a tracking mechanism, information sharing and confidentiality. Intellectual property rights arising out of the MOU are be protected in accordance with national law.
Perhaps significantly, “This MOU is not legally binding and does not create any legal, equitable, or financial rights, obligations, or liabilities for the Participants.” There is no dispute settlement mechanism other than consultations and negotiations, with third party mechanisms barred; the Participants are “committed to acting in good faith.” The UK-Indiana MOU became effective when signed on May 27.
One obvious question is whether UK MOUs with Texas, Indiana, California and ultimately many other states along these lines would have economic significance. The answer may be probably “not a great deal” but ultimately depends on the effectiveness of implementation in each case. Inevitably, some provisions might be useful to individual stakeholders. In an era when the US federal government is unwilling or unable to conclude trade agreements, US state-to-foreign-government arrangements, if structured to avoid violating the US Constitution and US. law, are worth considering. After all, for many government officials and other stakeholders, some freer trade is better than none.