The Protectionist State

Introduction

A state can regulate the conduct of businesses within its borders, licensing particular types of activity or occupational classes, regulating products, protecting consumers, and establishing standards for commerce.

But a state cannot use its regulatory power to disadvantage competitors from outside its jurisdiction or to intrude upon the national market in an anti-competitive manner. That principle, derived from the Constitution's grant to Congress of power to regulate commerce "among the several States," has long limited the scope of state economic regulation.

Although the Framers did not intend for states to be prohibited from regulating commerce with other states, modern interpretation by the Supreme Court has created limitations on state regulation of commerce.

The issue has arisen again as states regulate emerging industries in increasingly divergent ways.

On September 4, 2026, the U.S. Court of Appeals for the Fifth Circuit affirmed a Texas statute banning direct manufacturer sales of automobiles, rejecting a constitutional challenge from electric-vehicle manufacturer Lucid.

The case is the latest in a long line of disputes over when state regulations constitute legitimate economic policy and when they amount to unconstitutional interference with the national market.

The National Market

One goal of the Commerce Clause was to prevent the states from becoming economic fiefdoms. Under the Articles of Confederation, the states had effectively fragmented the national economy.

Commerce between states was subject to the whims of each individual state. The Framers' decision to delegate commerce power to the federal government rather than leaving it to the states to regulate trade was designed to ensure that the national market was not fragmented.

The Court has since developed the doctrine of the Dormant Commerce Clause, which holds that even when Congress does not expressly regulate a particular area of commerce, states are nevertheless prohibited from passing laws that "disadvantage out-of-state interests."

In other words, the national economy is a single market, and economic regulations may not be created simply because a state chooses to make itself more competitive against its neighbors.

Discrimination versus Regulation

One way to distinguish between permissible and impermissible state regulation is to distinguish between discriminate and non-discriminatory laws.

If a state were to impose a tax uniformly on an industry, regardless of where the firms are located, that would be different than imposing a tax on firms from other states while exempting local firms.

The former kind of regulation can be justified as a legitimate matter of economic policy; the latter kind runs afoul of the constitutional prohibition against protectionism.

The Supreme Court has recognized that distinction in several key decisions. In Philadelphia v. New Jersey, for example, New Jersey sought to ban the importation of most solid waste into the state. The Court held that the New Jersey law was invalid because it impermissibly discriminated against out of state commerce.

The constitutional prohibition against protectionism does not forbid all state regulation of the economy. A state can take measures to address a local problem, even if the measure incidentally regulates commerce. To return to the example, a state may impose reasonable restrictions on waste importation for the sake of environmental protection.

A state may not, however, adopt a policy that prevents out-of-state companies from entering the local market, whether directly or indirectly.

The Pike Balancing Test

Not all regulations that are not discriminatory are entirely valid. In cases presenting a non-discriminatory burden on commerce, the Supreme Court has articulated a test to determine whether a statute is permissible under the Commerce Clause.

In Pike v. Bruce Church, Inc., the Court held that when a statute regulates evenhandedly and serves a legitimate local purpose, it will be upheld against a challenge that it unconstitutionally burdens interstate commerce unless "the burden on [interstate] commerce is clearly excessive in relation to the putative local benefits."

The Court has thus consistently recognized that economic regulations will have some adverse effect on commerce. Laws regulating building safety, for example, will affect the operations of construction companies; laws requiring licensing will affect all kinds of businesses; and so on.

The Constitution does not forbid all of these laws, because they serve legitimate local purposes. It does forbid laws that have an effect on commerce that is clearly disproportionate to the local benefits.

A similar principle was invoked by the U.S. Supreme Court in National Pork Producers Council v. Ross in 2023, in which the Court rejected a sweeping reinterpretation of the Dormant Commerce Clause that would have allowed courts to invalidate any state law that incidentally regulated out-of-state commerce.

"The mere fact that a statute has significant extraterritorial effects," the Court wrote, "does not render a statute facially invalid under the dormant commerce clause merely because it incidentally regulates extraterritorial conduct."

The Court therefore continued to apply the traditional anti-protectionism principles to state economic regulation.

Protectionism

The issue becomes more complicated when states take actions that are explicitly designed to protect local industries over out of state industries. The Supreme Court has consistently been highly suspicious of protectionist measures taken by states.

In Hunt v. Washington State Apple Advertising Commission, the Court invalidated a North Carolina law regarding apple-container requirements as a violation of the constitutional prohibition against protectionism.

The Court reasoned that although states may regulate commerce within their borders, North Carolina was attempting to manipulate its regulatory scheme to advantage its local producers at the expense of out of state competitors.

The problem with economic protectionism is not that states lack the power to regulate their own economies. Laws affecting the economy are often desirable and indeed necessary.

The problem is that when legislators try to use the law to favor one group of producers over another group of producers, they run the risk that the law will not be entirely focused on protecting consumers and promoting the local economy, that is, the law will be primarily about favoring one business over another.

Laws are rarely enacted with completely selfless intentions. Often, legislators justify laws by appealing to consumer protection or some other public interest. Sometimes, those arguments are legitimate; sometimes, they are mere pretexts for protectionism. That is why it is important for courts to discern, in cases involving alleged protectionism, whether the purported justification for the law is a legitimate justification.

The Automobile Exception

The automobile industry presents an interesting case study in state regulation of commerce. Many states have laws forbidding automobile manufacturers from selling directly to consumers and instead requiring that all sales take place through independently franchised dealers. Texas is one of those states. Its law forbids manufacturers and their affiliates from "owning, operating, controlling, or acting on behalf of any dealer in the same type of vehicle," and requires that all sales "shall be made directly to the consumer by the manufacturer through an independent franchised dealer in the same type of vehicle."

The history of the conflict between franchised dealers and manufacturers is complicated, but in short, it involves a tension between the vertical relationships between franchisors and franchisees.

According to the Fifth Circuit's recent decision in the Lucid case, the tension arose because "many manufacturers possess substantial bargaining power over their independent franchised dealers; legislation limiting that power [was enacted] in order to prevent manufacturers from taking advantage of their dealers in the franchise relationship and thereafter competing in the retail marketplace."

In other words, states such as Texas want to prevent manufacturers from both "taking advantage of" their franchised dealers (from the manufacturers' perspective) and then competing against the dealers (from the dealers' perspective).

The Texas law is a reasonable law in its effort to prevent such practices. The question, as the Lucid litigation shows, is whether such a law may be applied to prevent practices when the manufacturer does not have any franchised dealers.

That is, if the law was intended to address a situation in which a manufacturer abuses its franchised dealers and competes against them, can it be applied to a situation in which the manufacturer has no franchised dealers to abuse?

The argument from Lucid is that the application of the Texas law to its situation would allow the state to favor existing independent dealers over potential direct sales dealers, in other words, to favor the existing industry structure over a different industry structure that might emerge.

This sort of argument is closely connected to the constitutional prohibition against protectionism. While states may regulate commerce, they may not do so in a way that creates barriers to entry or suppresses competition, unless the regulation serves a legitimate local purpose.

States May Still Regulate

The constitutional doctrine articulated in the cases discussed above should not be understood as a complete prohibition on state regulation of commerce.

States continue to have broad authority to regulate the conduct of businesses taking place within their borders. They may impose restrictions on safety, licensing, and fraud, among other things. They may impose taxes and regulations on the kinds of industries traditionally subject to regulation.

The problem comes when a state tries to use its regulatory power to protect local companies from out of state competition or otherwise impose restraints on the national market. It is a fine line, but the Court has consistently held that protectionist laws are invalid under the Constitution.

Local Interests

The most difficult cases occur when a state law serves both a legitimate local interest and a protectionist interest. In a hypothetical example, suppose that a state wanted to require that all online retailers maintain warehouses within the state.

Such a law might be intended to promote the local economy by creating jobs; at the same time, it would undoubtedly burden out of state retailers seeking to sell within the state, and therefore burden the national market as well.

A law such as this could pass constitutional muster if it was shown that the regulation was not motivated primarily by protectionist intent. But how can a court determine that intent?

Should a regulation be presumed to be valid if the government claims that it is motivated by a legitimate local interest? Or should the government bear the burden of proving that its motives are not primarily protectionist?

These questions have plagued courts for years; the problem is that if a law is valid whenever a legitimate local interest exists, then almost any law could be considered a legitimate law by defining it as one intended to further some local interests.

That is why it is important for courts to consider whether a regulation is truly intended to further local interests.

The Modern Problem

The rise of digital commerce has only exacerbated the problem of state regulations burdening the national market.

Companies that sell products or services online are often not subject to the same kinds of regulation as traditional brick-and-mortar businesses.

A company may be incorporated in one state, produce its goods in a second state, warehouse those goods in a third state, and sell those goods directly to consumers in dozens of other states. It becomes increasingly difficult to apply traditional concepts of state regulation to modern commercial practices.

State governments, on the other hand, continue to regulate businesses within their borders in much the same way as they have for centuries.

The application of such laws to modern commercial practices often creates a constitutional conflict between state regulation and national commerce. The Dormant Commerce Clause is a response to that conflict.

Why It Matters

The protectionist state doctrine is important because it ensures that the laws passed by states continue to serve legitimate local purposes rather than attempting to undermine the national market by erecting barriers to out of state competition.

But the constitutional doctrine cannot simply allow courts to invalidate any state regulation that has any effect on out-of-state commerce, as National Pork Producers makes clear.

In short, while the Constitution permits states to regulate commerce, it forbids states from regulating commerce primarily for protectionist purposes. When a state regulation serves a legitimate local purpose, deference to the state is appropriate; when a regulation primarily serves a protectionist purpose, deference is inappropriate.

Conclusion

The Framers of the Constitution gave Congress the power to regulate commerce because they understood that the United States could not function as fifty separate economies. By and large, that vision has been vindicated: the U.S. economy is a single national economy, and not a collection of fifty separate economies.

But the constitutional doctrine of the Dormant Commerce Clause is a response to the reality that as much as the Framers wanted to create a single national economy, the fifty states continued to regulate commerce nonetheless.

Perhaps that outcome is appropriate; the Framers did not envision a complete centralization of economic regulation. But it is important that states do not use their power to regulate commerce to favor local producers over out of state producers.

That principle is especially true in the automobile industry, where traditional dealer laws were designed to prevent manufacturers from both "taking advantage of" their franchised dealers and then competing against them in the local market.12

The rise of electric vehicles, however, has disrupted the traditional business model of the automobile industry, and manufacturers such as Tesla and Lucid have developed new direct-to-consumer business models that do not involve franchised dealers.

As a result, these manufacturers are at odds with states such as Texas that still have traditional dealer protection laws. The question is whether those laws continue to have a legitimate application to the modern automobile industry or whether they should be considered outdated and invalid under the Constitution.

It is important not only because of the economic implications for the automobile industry, but also because it reflects a larger tension in American constitutional law between the authority of the states and the authority of the federal government.

A state can create regulations to serve a legitimate local interest. A state cannot create regulations to favor local producers at the expense of out-of-state producers. A state cannot create a local economic fiefdom that operates contrary to the best interests of the national economy.