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E-M:/ Bottled water and trade issues

I wanted to make another plug for a post I did on the Great Lakes Town Hall website.  This one deals with the Compact, bottled water, and international trade issues. Here's a link, where you can also post a rebuttal or other comment.  (the full text is far below.)



I will also note that I posted on nuclear energy on Monday, eating fish on Tuesday (already circulated), a possible insufficiency of coverage on Lake Superior on Wednesady.  For tomorrow, I plan to post about how people concerned about protecting the Great Lakes should also be concerned about development in China. 

Daniel Wendt


The Compact, Bottled Water, and Trade Agreements

I am going to assume that you are familiar with the passage of the Great Lakes Compact (“Compact”) and the argument made during its passage that the Compact contains a bottled water loophole. After following this debate, I want to make two short points about trade issues relevant to the Compact: (1) Disputes under trade agreements are like civil suits with damages, not like Constitutional litigation over whether laws are illegal; and (2) From a trade perspective, there is a big difference between bottling water and bottling beer. (I’ll say up front that this is a non-technical post, and that I aspire to write something much more technical for those of you who may be interested.)

Disputes Under Trade Agreements Are Like Civil Suits With Damages, Not Like Constitutional Litigation Over Whether Laws Are Illegal. During the Compact’s passage, there was a lot of debate -- which I cannot even summarize here -- from both sides (e.g., whether the Compact should be passed with or without other clarifying statements) about the effect of the Compact’s passage on any future disputes under trade agreements on water withdrawal restrictions. The agreements most at issue are the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) Agreements.

Let’s assume that restrictions on bottling water or shipping bottled water outside the Great Lakes basin violate the trade agreements. (I don’t necessarily agree, but I am only slightly informed on this topic.) And let’s assume that another government or an investor from Canada or Mexico would want to challenge these regulations. (Again, I don’t necessarily agree because (1) any export restrictions would probably be passed with the cooperation and blessing and Canada; (2) I don’t think other countries would try to force Canada and the United States to export water from the Great Lakes region; and (3) the most well known investor in bottling operations in Michigan is not from Canada or Mexico.)

Even with those assumptions, a dispute under the NAFTA or the WTO Agreements would determine only if bottled water restrictions are inconsistent with the trade agreements. That is very different from determining if the restrictions are illegal (in which case, a court could strike them down). Even if an American restriction on bottled water is inconsistent with the trade agreements, U.S. courts are still generally obligated to give priority to the national law. This is true because when Congress approved the NAFTA and the WTO, it made sure that the trade agreements would not have the same effect as American statutes in our domestic courts.

As a result, inconsistencies with trade agreements cannot be resolved through the Courts. Instead, any inconsistencies have to be resolved through one of these ways. (1) Congress or a state legislature changes the domestic law to make it consistent with the trade agreement. (2) The United States negotiates a change to the trade agreement to make it consistent with the domestic law. (3) The United States loses benefits provided for under the trade agreement (i.e., goods exported from America are subject to higher tariffs in some countries), either in part through the dispute settlement process or in total by withdrawing from the Agreement.

In the third case, the United States could be perfectly free to maintain the bottled water restrictions, but American export-oriented businesses may suffer through the loss of trade benefits. But this point should make clear that the United States is always able to pursue the regulation it deems necessary. The trade agreements do not make such regulations illegal. Instead, the trade agreements only make the regulations potentially more expensive.

Thus, the question shouldn’t be simply whether or not a bottled water restriction would violate a trade agreement. This is only the first question. Other important questions should be (A) whether another government or investor would in fact be likely to challenge the consistency of the new bottled water restriction; and (B) how much it would cost the United States (either directly in payments to investors or indirectly through the loss of trade privileges) if the United States lost the dispute.

From a trade perspective, there is a big difference between bottling water and bottling beer. A lot of people have argued recently over whether there is any difference between shipping a bottle of water to Georgia (for example) versus sending a bottle of beer or pop to Georgia. I want to add my short point that there is a big difference from the international trade perspective.

Imagine that a tanker fills up with water near the Mackinac Bridge (in U.S. waters) and delivers the water to Sarnia in Ontario for processing. If the water was bottled in Sarnia and then returned to the United States, the water would most likely still be considered water from the United States (and therefore not subject to tariffs such as the merchandise processing fee). This is because the water did not undergo a “substantial transformation” in Sarnia. Instead, the product (water) was only repackaged. This conclusion is also supported by the fact that the water -- when exported to Canada and returned to the United States -- would be classified by Customs using the same tariff code category.

On the other hand, if the water is shipped to Sarnia and used to brew beer in Canada and then returned to the United States, the imported goods would be considered beer from Canada, even if more than 90% or more of the volume (i.e., the water) was from the United States. That is because the water is considered to have undergone a substantial transformation through the brewing process. Also, Customs would certainly classify the beer under a different tariff code than it would use for water. The same analysis is probably true if the water was used to make Coke or Pepsi in Sarnia, although the case may admittedly be weaker.

I do not claim that this should settle any debate, but I think it is worth noting that there is a difference between the two types of bottling operations within the world of international trade law.