The Commerce Clause & the Ban on Economic Protectionism

imageA few weeks ago I posted an article about the efforts of small towns to protect their unique character and resist becoming another generic “Anywhere, USA.”  This is no small feat, in large part because the courts have said that it’s a violation of the Constitution’s Commerce Clause for local municipalities to protect their local businesses against non-local competition.  This ruling by the court has been a pebble in my shoe ever since I came across it because the wording of the Commerce Clause itself – that Congress has the power “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes” – does not mention economic protectionism.  Given the far-reaching effects on local economies, I had to wonder how this interpretation came to be. In my quest for answers, I came across the 1949 Supreme Court case HP Hood & Sons, Inc. v. Du Mond. In this case the Massachusetts-based Hood sued the State of New York for the denial of a license that would have allowed Hood to sell milk to New York dealers, threatening local milk producers.  In striking down New York’s licensing prohibition, the Supreme Court articulated the following:

 “The Commerce Clause is one of the most prolific sources of national power and an equally prolific source of conflict with legislation of the state. While the Constitution vests in Congress the power to regulate commerce among  the states, it does not say what the states may or may not do in the absence of congressional action, nor how to draw the line between what is and what is not commerce among the states. Perhaps even more than by interpretation of its written word, this Court has advanced the solidarity and prosperity of this Nation by the meaning it has given to these great silences of the Constitution.” “This principle that our economic unit is the Nation, which alone has the gamut of powers necessary to control of the economy, including the vital power of erecting customs barriers against foreign competition, has as its corollary that the states are not separable economic units. As the Court said in Baldwin v. Seelig, 294 U.S. 541, 527,“what is ultimate is the principle that one state in its dealings with another may not place itself in a position of economic isolation.””

Building upon this, the Court further explained in the 1978 case City of Philadelphia v. New Jersey, 437 U.S. 617 (1978):

 “The opinions of the Court through the years have reflected an alertness to the evils of “economic isolation” and protectionism, while at the same time recognizing that incidental burdens on interstate commerce may be unavoidable when a State legislates to safeguard the health and safety of its people. Thus, where simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected.

So that’s where the use of the Commerce Clause as an argument against local economic protectionism came from. As a result, local towns cannot use regulations as a tool to protect local businesses from outside competition (see Island Silver & Spice v. Islamorada Village as an example).  Now a few thoughts of my own on these rulings:

1) Is the Economic Unit Really the Nation? Taken on face value, the statement that “our economic unit is the Nation” makes intuitive sense. As a united country, we all use one currency and travel freely between states, and so it is reasonable to expect our goods and services to do the same. Yet in Cities and the Wealth of Nations, Jane Jacobs argues that cities, not nations, should be considered the primary economic unit:

 “Nations are flawed in this way because they are not discrete economic units, although intellectually we pretend that they are and compile statistics about them based on that goofy premise. Nations include, among other things in their economic grab bags, differing city economies that need different corrections at given times, and yet all share a currency that gives all of them the same information at a given time.” “Because currency feedback, at bottom, all has to do with imports and exports and the balance or lack of balance between them, the appropriate responding mechanisms for such information are cities and their regions. Cities are the specific economic units that can replace imports with their own production, and the specific units that cast up streams of new kinds of exports. It is bootless to suppose that amorphous, undifferentiated statistical collections of a nation’s economies perform those functions, because they don’t.”

Jacobs goes on to say that treating the nation rather than the city as a single economic unit cannot possibly provide each city specific enough information for each to be healthy. Just think about booming Silicon Valley and struggling Detroit, Michigan. Can one set of regulations really meet the needs of both?

2) Economic Protectionism is Evil?  The idea that economic protectionism is not just misguided but in fact “evil” in the eyes of the Supreme Court seems like a very lop-sided view. In reality, both protectionism and free trade create winners and losers in their own right and your preference greatly depends on where you’re standing. Generally, free trade benefits consumers and expanding multi-jurisdictional businesses by giving them more options and markets. Yet local producers and wage earners benefit from protectionist policies that keep prices higher and buffer them against outside competition. They are two sides of the same coin, and to brand one evil and insinuate that the other is good seems to me a gross over-simplification.

3) In Practice, A Double Standard I believe that a strange double-standard in the world of economic development has been the result of the Court’s ruling. Since local places can’t give preferential treatment to their own locally-owned businesses, they turn their attention to attracting outside development with, of all things, preferential treatment in the form of tax abatements, increment financing, infrastructure improvements, and other incentives. So in the end, the protection of locally-owned businesses is illegal while handing out incentives to outsiders is just considered good business. In this environment, it should come as no surprise that local businesses are forced into a defensive position.

There’s one additional twist to this Commerce Clause puzzle and that is the descriptive term usually added to its title: dormant. The Commerce Clause is usually referred to as the Dormant Commerce Clause because unless Congress itself acts in this realm, no one does (the power lies dormant), and Congress has in fact never acted. What is interesting to me is that Congress has the ability to delegate its power and authority to the local level if it so chooses.

Post-Script: It’s important to note that the Court’s interpretation of the Commerce Clause only applies to regulation and does not apply to how a government acts in its capacity as an independent player in the market. This is why government-run colleges and universities can set different tuition rates for in-state and out-of-state students or give preference to local firms when purchasing goods.

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3 thoughts on “The Commerce Clause & the Ban on Economic Protectionism

  1. Great job on this one Justin! That’s some pretty serious research you’ve done.

    From what I remember of my US Government and History, the commerce clause is a direct attempt to avoid the runaway protectionism that caused problems under the Articles of Confederation. The states were essentially their own sovereign beings, who all printed their own money and ended up levying tariffs on any goods coming in from other states. Completely on their own, none of the states had the resources to maintain a stable solo economy. Thus, when the federal powers got a nice beef-up in the Constitution, the interstate commerce clause was included so that no state could go to those kinds of extremes again. But as you aptly pointed out, the clause itself gives powers to CONGRESS, not the courts. The federal congress has seen fit to exercise this power in quite some time, for the simple reason that we know better now.

    Perhaps the best way to counter these rulings (and perhaps in the process build up a little judicial precedent on the opposing side) is to do exactly what you’ve championed all along: go local. The second case you site ends with the line: “Thus, where simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected.” State legislation, in this case a New Jersey Statue, is the culprit. As you pointed out in your post about cookie-cutter stores, there are a several city or town councils who have successfully enacted and defended local protection laws. And since we’re on the topic of localization, it would seen that a smaller scale would indeed be better.

    Liked by 1 person

    • Bryan – thanks for the comment! Really thoughtful and insightful!

      From my understanding, I think the issue during the Articles of Confederation was runaway inflation, not protectionism. This was due more to poor local monetary policy, fairly common in a post-war situation where inflation is used as an underhanded way of paying off war-debt. (this is a pretty interesting summary: http://en.wikipedia.org/wiki/Early_American_currency). If runaway protectionism was an issue during this time – I’d be really interested if you could pass some reading my way about it so I can dig deeper into this history.

      Also, I’m not sure about having to be a certain size in order to have a “stable solo economy”. Hong Kong and Singapore are two cities that have their own currency and their economy seems pretty healthy (I dive into this a little deeper here: http://wp.me/p4pJY8-3Y). Similarly, Switzerland is the size of some of our states. So in the end, I don’t think self-sufficiency is a pre-requisite to economic stability.

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  2. Hi Scott,

    You are are correct. After reading into this further, I realized that main reason that the commerce act came into place was the runaway inflation and the inability of states to control it while acting independently of each other. The hodgepodge of economic policies that existed in the states at that time were likely smaller problems that only aggravated the main issue. And so I stand corrected and informed.

    On a somewhat related note, the talk of smaller economies got me thinking about modern day secession movements, such as the Alaska Independence Party (http://en.wikipedia.org/wiki/Alaskan_Independence_Party) or the proposed nation of Cascadia (http://en.wikipedia.org/wiki/Cascadia_%28independence_movement%29)? I wonder what thoughts you have about these movements that try to replace a large (and distant) federal government with a more localized.

    More food for thought! (In case you have run out recently)

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