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Possible Threat to WTO Structure Defused

Readers may recall that a row between the US and Antigua over online gambling threatening to pull the WTO house down. By way of background, the US had lost a WTO case on online betting , and the Bush Administration acted under a WTO stipulation that allows it to set its own trade rules. But while permitted, this sort of selective opting out is never done in practice, because then other nations would similarly ignore rulings they didn’t like, and the WTO system would be gutted.

Antigua and Barbados didn’t like this finesse, and decided to go to the WTO to get relief on another front. As Bloomberg explained:

The U.S. refusal to comply with a World Trade Organization decision on online gambling is threatening to undermine the entire set of rules binding the international trade system.

The WTO is to decide soon on a demand from the tropical nation of Antigua and Barbuda for $3.4 billion in annual compensation from the U.S., whose law banning Americans from wagering on Internet gaming sites was first ruled illegal by the WTO in 2004.

The implications of the case go far beyond Antigua, a nation of 69,000. That’s because, instead of rewriting its gambling laws, the U.S. rewrote its trade rules to remove the issue from the WTO’s jurisdiction. The prospect that other nations, including China, may take a similar tack if cases don’t go their way has spooked the international trade community.

“This is by far the most significant WTO case ever,” says Naotaka Matsukata, a policy adviser in Washington with Alston + Bird LLP and a former U.S. trade official.

Meanwhile, Antigua, which has rebuffed U.S. overtures to settle, wants WTO permission to waive intellectual-property protection on digital software and entertainment so it can collect its compensation. That is raising alarm among trade associations that represent such companies as Microsoft Inc., General Electric Co.’s Universal Pictures and Time Warner Inc.’s Warner Bros., as well as among groups such as the Recording Industry Association of America.

“Antigua literally is the mouse that roared,” says Robert Lighthizer, head of the international trade practice at Skadden, Arps, Slate, Meagher & Flom LLP.

Well. the mouse has been defanged. WTO arbitrators gave their ruling today, and awarded Antigua puny damages of $21 million. While their $3.4 billion damages request was overreaching, one has to wonder how much the size of the sanctions has to do with the merits of the case, versus WTO arbitrators wanting to discourage future actions of this nature.

From the Associated Press:

The United States faces a token $21 million in annual trade sanctions as a result of its online betting ban, the World Trade Organization said Friday in awarding Antigua and Barbuda the right to target U.S. services, copyrights and trademarks.

The decision is a setback for the Caribbean island nation, which sought the right to impose $3.4 billion in retaliatory measures against U.S. commercial services and intellectual property.

Washington acknowledged its Internet gambling restrictions were ruled illegal by the WTO, but argued that Antigua should only be compensated for about $500,000 for lost annual revenue.

The case has drawn the attention of a number of U.S. industries, partly because of the ways Antigua has proposed retaliating against the much larger U.S. economy. Washington’s attempt to escape its legal loss by proposing a revision of the WTO’s key treaty on trade in services has also fueled interest.

The office of the U.S. Trade Representative noted that Antigua was seeking sanctions worth more than three times the size of its entire economy.

“Antigua’s claim was patently excessive,” it said in a statement. “The United States is pleased that the figure arrived at by the arbitrator is over 100 times lower than Antigua’s claim.”

The U.S. and Antigua cannot appeal Friday’s decision.

Realistically, it would have been very difficult for a country the size of Antigua’s to implement hundreds of millions of dollars worth of trade sanctions on the U.S. without harming its own economy and the welfare of its citizens. Ecuador was awarded similar retaliation rights in a bananas dispute with the European Union in 2000, but failed to come up with an effective way to introduce countermeasures.

The WTO arbitration panel said it had to adopt its own approach to come up with a fair retaliation figure in view of the wide difference in how the U.S. and Antigua estimated the economic effect of the gambling ban.

“In doing so, we feel we are on shaky grounds,” the panel said in an 88-page decision.

Washington stopped U.S. banks and credit card companies last year from processing payments to online gambling businesses outside the country. The decision closed off the most lucrative region in a growing market worth about $15.5 billion last year. About half of the world’s online gamblers are based in the U.S.

The arrest in 2006 of two British Internet gambling executives while traveling through the United States also highlighted the U.S. government’s escalation of its battle against the industry.

The WTO, however, upheld in March previous rulings striking down the U.S ban.

The trade body found that the U.S. had the right to prevent offshore betting as a means of protecting public order and public morals. But it said Washington was violating trade law by targeting online gambling without equal application of the rules to American operators offering remote betting on horse and dog racing.

Antigua, the smallest country to successfully litigate a case in the WTO’s 12-year-history, had hoped the ruling would lead the U.S. to revoke the restrictions.

The former British colony of about 80,000 people had been promoting electronic commerce as a way to end the country’s reliance on tourism, which was hurt by a series of hurricanes in the late 1990s. There are 32 licensed online casinos in Antigua, employing 1,000 people and generating a yearly revenue of around $130 million. Seven years ago, its casinos had an annual income closer to $1 billion.

But Washington responded to its legal defeat by announcing it would take the unprecedented step of revising the conditions under which it signed the WTO’s 1994 General Agreement on Trade in Services, or GATS. That allowed a number of countries to seek compensation under a separate process.

The U.S. has since agreed on deals with the 27-nation European Union, Canada and Japan to change the treaty — but has failed to do so with Antigua, Costa Rica, India and Macau.

Until it gains the approval of all 151 members of the WTO, the U.S. online betting ban is illegal under international trade rules.

As a result, Antigua will have the right to penalize U.S. services and intellectual property until the U.S. government either permits Americans to gamble over foreign-based sites or eliminates exceptions for off-track betting on horses, including over the Internet.

British gambling companies — which bankrolled Antigua’s efforts and heavily lobbied Brussels for tough action — were disappointed earlier this week when the EU announced that it had received some minor U.S. trade concessions in exchange for accepting the U.S.-proposed revision to the GATS.

The deal fell far short of the $100 billion in new commercial opportunities the Internet gaming sites claimed the United States owed.

Update 12/22, 12:15 AM: Interestingly, the New York Times sees the ruling for Antigua as more significant, since the precedent of permitting piracy, even on a limited scale, might induce the US to come up with a better settlement:

In an unusual ruling on Friday at the World Trade Organization, the Caribbean nation of Antigua won the right to violate copyright protections on goods like films and music from the United States — an award worth up to $21 million — as part of a dispute between the countries over online gambling.

The award follows a W.T.O. ruling that Washington had wrongly blocked online gambling operators on the island from the American market at the same time it allowed online wagering on horse racing.

Antigua and Barbuda had claimed damages of $3.44 billion a year. That makes the relatively small amount awarded Friday, $21 million, something of a setback for Antigua, which had been struggling to preserve its gambling industry.

The United States argued that its behavior had caused $500,000 damage.

Yet the ruling is significant in that it grants a rare form of compensation: the right of one country, in this case Antigua, to violate intellectual property laws of another — the United States — by allowing it to distribute copies of American music, movie and software products.

“That has only been done once before and is, I believe, a very potent weapon,” said Mark Mendel, a lawyer representing Antigua, after the ruling. “I hope that the United States government will now see the wisdom in reaching some accommodation with Antigua over this dispute.”

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6 comments

  1. NC Jim

    The trade body found that the U.S. had the right to prevent offshore betting as a means of protecting public order and public morals.

    Isn’t it just peachy that Bush is protecting my morals.

    Where is the Libertarian wing of the GOP? This smells of religious social engineering. If Democrats tried to impose similar controls on business (as opposed to personal) activity, they would be labeled communists and Kudlow would howl for a month. A more cynical explanation is that this action is to remove competition with Vegas and other domestic gaming sites.

  2. Yves Smith

    nc jim,

    Agreed, I didn’t like the way the AP story characterized the row. The Bloomberg story, which the earlier post cited at greater length, made it clear the US position was pretty undefensible.

    And yes, one has to be suspicious about the morality argument, when we have casinos and lottos galore.

    The WTO decisions smells of being a cowardly way out, of succumbing to the US’s intransigence. Even if the WTO wanted to de-escalate the fight, I wish they had settled on more meaningful sanctions, which would probably be 5-10 times higher.

  3. Anonymous

    How is this defused? The real threat wasn’t that Antigua would become a pirate haven but that other countries would imitate the US. Which is now much more likely since it can be done with financial impunity.

    Antigua could still make $21 million go a long way by seeding very small quantities of DRM-disabled intellectual property and then sit back and watch the real pirates handle further distribution. In other words, they could cause economic losses out of proportion to their own economic gains.

  4. Yves Smith

    Anon or 2:40 PM,

    You are right, I didn’t explain the logic per the press very well, and the logic is somewhat defective. The US’s original disruptive act still stands. The supposed “defusing” is the WTO claiming it’s OK for the US to defend its values, but even trying to limit the damage of the US action that way still leaves a very large loophole that other countries can exploit.

    The NYT (and your comment re DRM) suggests the US may come back to the table, but the problem is undoing (or limiting) the original action isn’t trivial, particularly since the US reached a settlement with most other nations (the usual recourse, BTW).

  5. Steve

    public order –> casino lobby
    public morals –> 41 state-sponsored lotteries
    offshore –> untaxed winnings

  6. Yves Smith

    Steve,

    Agreed, this has much more to do with taxes and domestic interests than the fig leaf of morality.

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