Commentary

Raw Deal

Hollywood had better hope that a services liberalization deal reached Dec. 17 between the United States and the European Union holds. Without a successful resolution to the long-running Internet gambling dispute, American movies, music and software could be vulnerable to copyright infringement.

The deal is the latest twist in the World Trade Organization wranglings over American restrictions on online gambling. In 2005, the United States lost a case brought against it by Antigua, which asserted that the United States was flaunting international trade rules by prosecuting Internet gambling firms based overseas. Antigua had requested that it be allowed to collect its damages by, among other things, suspending the protections it is required to provide for U.S. copyrights and trademarks.

It’s not as far-fetched as it sounds. Ecuador was allowed to suspend intellectual property rights protections after it won a case against the EU a decade ago, but so far has chosen not to execute that right.

After losing the Antigua case, the United States sought to withdraw from the contract it signed with other WTO members to provide access to its approximately $100 billion a year gambling and betting services market. Under WTO rules, members can withdraw or modify its commitments so long as they offer equivalent compensation to other members affected. So those members — the EU, Japan, Macau, Costa Rica, Canada, Australia and Antigua — asserted their rights to compensation. Canada, Japan and Australia have reportedly already “settled out of court” on undisclosed terms, and then comes this week’s deal, the first of its kind.

The economic effects of this week’s agreement will determine the extent to which American consumers and European commercial interests are compensated for the closure of the U.S. online gambling market. The deal could conceivably open the U.S. postal and courier market to European companies, delivering the benefits of increased competition to American consumers. Gretchen Hamel, a spokeswoman for the U.S. trade representative, said Dec. 17 that the United States has agreed to maintain its commitments in “warehousing services, technical testing services, research and development services, and postal services relating to outbound international letters.”

But these markets are already fairly open. The EU Internet gambling industry is said to be underwhelmed by the terms of this deal, suggesting that the European Commission had sold out too cheaply. U.S. statements imply that it has only committed to providing market access it’s already offered before. But the European Commission insists that there are commercially meaningful new goodies in the deal, perhaps in postal delivery. The case also says important things about the ability of the WTO to promote a rules-based, open trading system. If jilted members negotiate for market openings in many different sectors, then in theory the market openings could add up to quite a package. Other countries still negotiating with the United States may reject deals similar to the EU’s. Antigua, for example, is reportedly not as willing — or able, given the structure of its economy — to accept market openings in areas other than gambling and betting services. On Friday, the WTO - much to the chagrin of the United States - awarded Antigua and Barbuda the right to target U.S. services, copyrights and trademarks. The sanctions are expected to cost the United States $21 million, a token amount compared to the $3.4 billion in retaliatory measures against U.S. commercial services and intellectual property Antigua had originally sought.

Even if WTO members agreed that the United States could close its gambling and betting services markets without any punishment — a highly unlikely and undesirable course — unless and until the U.S. withdraws market access through WTO consensus and, arguably, congressional agreement, American commitments remain in place and aggrieved members like Antigua can expect compensation for infringements on their rights.

WTO members do not pay damages in the traditional sense if they are found to be violating their obligations to other members. They are instead subject to retaliatory tariffs for the damages they cause. This is an insane way of inflicting damage, since it punishes the citizens of the “wronged” country by increasing the cost of imports, but it is a useful political tool.

So Hollywood now finds itself in a tough spot, threatened with footing the bill for government policy on another industry altogether. Of course, injustice begets injustice: the problem would never have arisen if the U.S. government would allow American citizens to gamble freely online.

Sallie James is a trade policy analyst at the Cato Institute.