Commentary

Time to Double Down on Online Gambling

By Sallie James
This article appeared on TCSdaily.com on April 13, 2007.

Amid the recent hullabaloo over the United States’ trade agreement with South Korea, the unveiling of the Democrats’ plans for trade policy, and new legal cases on intellectual property rights and countervailing duties on goods from China, another important development in U.S. trade policy has gone largely unnoticed. On March 30, a World Trade Organization tribunal handed down a potentially significant finding against U.S. restrictions on internet gambling.

The panel was set up at the request of Antigua and Barbuda, who complained that the United States had not complied with the WTO’s earlier decision that it must change the way it regulates gambling over the internet. The previous ruling, in April 2005, found that while the United States was within its rights to restrict the import of goods and services on “public morals” grounds, as it had argued in its defense, those rules must be applied in a non-discriminatory manner. If the United States finds online gambling offensive, it must be consistent in its restrictions and apply them equally to domestic and foreign providers.

And therein lies the rub: the United States allows interstate online betting on horseracing. The United States had also agreed during the Uruguay Round to open its markets to foreign suppliers of gambling and betting services, although the United States Trade Representative (through a spokesman) claimed in 2004 that the previous administration “clearly intended to exclude gambling from U.S. service commitments” when they signed the deal. Both of those inconsistencies lost it the original case.

The United States Congress passed the Unlawful Internet Gambling Enforcement Act in October 2006, ostensibly to bring its laws into conformity with the April 2005 ruling. But the compliance panel ruled that the United States has taken no satisfactory remedial action that would bring its laws into conformity with its previously-established obligations. Moreover, it appears that the United States applies its laws in a discriminatory manner, by prosecuting foreign gambling entities more than it does U.S. gaming firms. Game, set and match: Antigua and Barbuda.

There is still no official word from the USTR about whether the United States will appeal this latest decision. If they do not, though, the United States would need to change its Federal law either by closing the loopholes allowing domestic online gambling, or by freely allowing gambling online without any restrictions.

Of course, the United States could also choose to ignore the ruling, although it has a good record of complying with previous rulings against it. Antigua and Barbuda would in that case be entitled to retaliate against the United States, however their options appear limited. As a tiny island nation of 80,000 people, the normal recourse of WTO members who have had their rights infringed—the ability to increase tariffs on the perpetrating country’s exports—will probably be ineffectual, not to mention economically damaging to Antiguans themselves. One option that has been suggested is for Antigua and Barbuda to ask for permission from the WTO to “cross-retaliate”: to suspend its obligations to protect the intellectual property rights of U.S. companies.

Establishing a haven for software, music and movie piracy would presumably get the attention of the United States, although it may be an undesirable industry for Antigua and Barbuda to encourage if it leads to other more nefarious activities such as money-laundering, and may threaten Antigua and Barbuda’s preferential access to the United States market under the Caribbean Basin Initiative. Presumably, though, the access granted to the United States under the CBI is less lucrative than would be a resolution to the gambling dispute in Antigua and Barbuda’s favor.

If market expectations are any guide, though, the United States will likely end up allowing its citizens to gamble online. In the hours after the WTO ruling was announced, stocks in online gaming companies lifted. Investors clearly see the writing on the wall, even if the U.S. government does not.

Sallie James is a policy analyst with the Center for Trade Policy Studies at the Cato Institute and author of “U.S. Response to Gambling Dispute Reveals Weak Hand.”