US Stand on Online Gambling Threatens WTO System

Observers have worried that the US’s protectionist threats toward China may eventually lead to sanctions that are forbidden under World Trade Organization rules. For example, the summary of a VoxEU, “Trade frictions with china: Do western policymakers have an end game?” by Simon Evenett, published December 15, reads:

If the US and EU continue down the path of confronting China directly, they will face a choice between piecemeal trade actions that highlights the divergence between their words and deeds, or the imposition of a blatantly WTO-illegal restriction on Chinese exports that would ruin their reputations as good WTO members.

It appears those concerns are baseless. The US is in the process of ruining its reputation as a good WTO member right now via its stance on online gambling. As a Bloomberg story recounts, one of the countries pursuing the WTO cases against the US, Antigua, is refusing to settle with the US and instead is threatening to rewrite its trade rules on digital software and entertainment in a similar fashion to the US’s move against Antigua. And the longer-term fear is the entire WTO framework will become riddled with similar repudiations. (Weirdly, Business Week coverage on the same story focuses on the fact that the US worked out a deal with other nations and misses the implications of the impending collision with Antigua). Welcome, Smoot Hawley?

From Bloomberg:

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.

The fight began a decade ago, after Jay Cohen, a former options trader from California, moved to Antigua. There, he set up a sports book that accepted online bets from around the globe. U.S. prosecutors said the enterprise was illegal, and Cohen returned to fight the charges. In 2000, a federal jury found him guilty, and he spent 17 months in a Las Vegas prison.

Returning to the Caribbean nation, Cohen persuaded the government to bring a WTO complaint against the U.S. The island’s booming gambling industry, which at its height in 2001 accounted for more than 10 percent of employment, helped finance the case, which Antigua filed in 2003.

The dispute dragged on, with Antigua’s gambling industry, led by Cohen, banking on a clean win that would open the U.S. market.

Instead, the conflict has multiplied, with other U.S. trading partners with online-gambling interests — including Japan, the European Union and Canada — following Antigua’s lead in demanding compensation from the U.S. If the U.S. can’t negotiate a package of concessions, it may face new litigation at the WTO from those nations.

The U.S. and EU agreed today on terms for compensation that include giving the 27-nation bloc’s service suppliers new trade opportunities in the U.S. postal and courier, research and development, storage and warehouse industries. The U.S. also made concessions in the testing and analysis services industries, said the European Commission, the EU’s executive.

“We would’ve written a check to Antigua, paid them to go away,” says John Magnus, a trade lawyer at Miller & Chevalier in Washington. “Instead, they pressed the point.”….

After the U.S. lost the case in 2005, the Bush administration invoked a WTO rule that allowed it to revise its trade obligations. “This is the trade equivalent of taking our ball and going home,” Representative Shelley Berkley, a Nevada Democrat, told the House Judiciary Committee in November. “You can be sure that if China one day decides that it shouldn’t have to comply with its WTO obligations, we will be the first to object.”….

The U.S. raised the ante in October 2006, passing a law placing further restrictions on online gambling. That hurt European firms such as PartyGaming Plc, Bwin Interactive Entertainment AG and SportingBet Plc.

Last month, EU Trade Commissioner Peter Mandelson visited Washington to encourage Congress to pass legislation liberalizing U.S. gambling laws.

The other twist in the case is that Antigua trades so few goods that it would be unable to collect enough compensation by raising tariffs, the way aggrieved trading partners typically resolve disputes.

Tourism is the main contributor to Antigua’s $875 million economy. The country exports about $40 million a year in goods and services to the U.S. and imports about $350 million, so taxing products from the U.S. would mainly hurt Antiguan consumers and businesses.

The island nation’s proposed remedy — WTO permission to waive intellectual-property protection on some software — raises concerns in Hollywood as well as among technology companies such as Microsoft. The Motion Picture Association of America says the U.S. should retaliate by stripping Antigua of any trade or foreign-aid preferences….

While software and technology lobbyists say it’s unlikely Antigua will get what it’s asking for, they say they are concerned nonetheless.

“The demand by Antigua is ridiculous,” said Morgan Reed, executive director of the Association for Competitive Technology, the industry trade group that includes companies such as Microsoft and eBay. “The scary thing is that they’re asking for it.’

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