U.S. Response to Gambling Dispute Reveals Weak Hand

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Antigua and Barbuda, a tiny island nation with about 70,000inhabitants and an annual gross domestic product of $900 million,would seem to be no match for the United States in any conflict.But the results so far in a landmark World Trade Organizationdispute over Internet gambling support Antigua and Barbuda's claimthat it is being unfairly treated by U.S. policies.

Introduction

The dispute centers on U.S. restrictions on gambling over theInternet and whether the United States has fulfilled itsobligations to open its market to foreign suppliers of gamblingservices. Antigua and Barbuda now dispute that recent U.S.policies, including the recently enacted Unlawful Internet GamblingEnforcement Act of 2006, correct the errant policies. A report fromthe WTO about whether the United States has complied with theoriginal rulings is due mid-November.

The U.S. government restrictions on Internet gambling raise manyquestions about America's approach to the supply of gamblingservices over the Internet. To what extent should Congress regulatethe private activities of adults? What scope exists for a WTOmember to forbid foreigners to export to it services that domesticcompanies can provide? What forces are behind the recent ban onInternet gaming? And, in the event that a member (in this case, theUnited States) is found to be acting in a manner that contravenesits obligations under the WTO, what can other countrieslegitimately do to effect a resolution?

The Dispute So Far

The dispute between Antigua and Barbuda and the United Statesstarted in 2003, when Antigua and Barbuda, following consultationswith the United States in a failed attempt to resolve the matterbilaterally, requested the establishment of a WTO panel (aquasi-judicial body of experts who examine the case and makerecommendations). The director general of the WTO composed thepanel on August 25, 2003.

According to Antigua and Barbuda, the cumulative effect ofmeasures imposed by the United States and various regional andlocal authorities was to prevent the cross-border supply ofgambling and betting services. The American crackdown on Internetgambling was threatening the livelihood of the thriving onlinebetting services industry in Antigua and Barbuda, where Internetgambling is legal. Antigua and Barbuda alleged that the policies ofthe United States were inconsistent with its obligations under theGeneral Agreement on Trade in Services, and with the specificcommitments that the United States had made under the terms of theGATS to open its market in "recreational, cultural and sportingservices."1 TheUnited States, on the other hand, argued that its policy was inplace to protect "public morals and public order," an allowableexception to the WTO rules under certain conditions. The mostimportant of those conditions is nondiscrimination: that, should amember wish to prevent certain goods or services from entering itsmarket, then the restrictions apply to domestic as well as foreignsuppliers. According to the panel and the subsequent Appellate Bodyruling, however, those conditions were not met by the UnitedStates, mainly because the Interstate Horseracing Act of 1978discriminated against foreign providers of Internet gamblingservices.2 The WTOgave the United States until April 3, 2006, to fix the errantpolicy.

The Legislative Response of the United States

In response to the adverse ruling, the president of the UnitedStates signed the Unlawful Internet Gambling Enforcement Act inOctober 2006. That act, attached to a law on port security, expandsthe 1961 Wire Act's prohibition on gambling entities' use ofwire-based communications for transmitting bets to include theInternet. The act also forces financial institutions to identifyand block gambling-related transactions transmitted through theirpayment systems. According to a recent article, the United Statesis an important and lucrative part of the global Internet gamblingmarket, worth $15.5 billion in "spend" value (the amount thatgambling entities win from their clients).3

Doubly irritating for foreign-based Internet gambling providersis the exemption the bill grants for transactions made inaccordance with the Interstate Horseracing Act (for example,intrastate online bets made on domestic and some overseashorseracing through U.S. sites such as YouBet.com) and remotegambling conducted by Native American tribal groups. Thoseexemptions would seem to back the claim by Antigua and Barbuda thatthe U.S. laws are aimed at discriminating against foreign Internetgambling interests rather than at restricting gambling in general.In short, the new law does not appear to lessen the problem thatsparked the dispute in the first place.

There are several things wrong with the U.S. response so far.First, it reeks of hypocrisy. Is online gambling any more or lessimmoral if the server is located abroad? Allowing state and tribalentities to engage in online gambling (not to mention lotteries andhorseracing) but prohibiting foreign operators from runningessentially identical operations on "moral" grounds is dubious tosay the least.

Second, allowing financial institutions to examine and blocktransactions that are related to gambling seems a gross trespass oncitizens' privacy. To the extent that some aspects of gambling area government concern at all, surely allowing companies to set uplegal sites in the United States, under proper supervision andregulation to prevent, say, children, from accessing sites, is aless blunt way of limiting the "social ills" that politiciansinsist come from gambling. The British government, for example, haslegalized and licensed Internet gambling and recently hosted agambling summit to discuss regulating the industry to protectchildren and otherwise prevent fraud and other crimes such as moneylaundering. The United States did not participate in thatsummit.4

Third, the ban on Internet gambling and the electronic transferof funds to finance it provides protection from import competitionfor the domestic gaming industry at the expense of consumers.Offshore online gambling operations would seem, from the domesticindustry's point of view, to cut into their market share. Assumingthere is a fixed demand for gambling services, presumably domesticgaming interests would prefer to have a captive audience and lesspressure from competitors to increase their payout rate toconsumers.

More indirectly, eBay was a chief proponent of the new act thatprohibits online gambling and monetary transfers to pay forit.5PayPal, asubsidiary of eBay, has already promised lawmakers that it will barits customers from using PayPal accounts for Internet gambling andother "adult-oriented" goods and services. Having excluded itselffrom the market for those types of money transfers, PayPal willgain from this act to the extent that it prevents competitors fromgaining market share. To be sure they are complying with the newact's provisions on identifying and eradicating gambling payments,it is possible that many of PayPal's competitors will simply banall transactions with offshore financial payment services. AsRadley Balko points out, "Offshore companies like Neteller andFirePay . . . are safe and reliable . . . but aren't subject toU.S. law, and so can be used for all sorts of goods and servicesthe U.S. government has determined American's aren't grown upenough to purchase . . . [including] Internetgambling."6Limiting competition in online financial services will be a boon toPayPal but a loss for U.S. consumers.

Options for Antigua and Barbuda

The WTO established another panel in August 2006 to rule onwhether the United States has complied with the original WTOrulings. No doubt the new panel will consider the provisions of therecently passed Unlawful Internet Gambling Enforcement Act of 2006in is deliberations. The report of the compliance panel is duemid-November 2006. If, as expected, the compliance panel finds thatthe United States has not complied with the rulings, then Antiguaand Barbuda can proceed to the next stage of disputesettlement--retaliation.

Retaliation, whereby WTO members are given permission to suspendtheir obligations (such as a commitment not to increase tariffs)under WTO agreements, usually involves increasing tariffs againstimports from the noncompliant member. The object of traderetaliation is to pressure the noncompliant member to reform itserrant policies; the sectors targeted for retaliatory tariffs will,according to this theory, provide a counteractive lobby forremoving the noncompliant measure.

WTO rules encourage complaining parties to suspend obligationsin the same sector in which the original violation occurred. Thatprevents unlawful distortions in one market from spawningdistortions in other markets. However, WTO rules allow thecomplaining party, should it consider it "not practicable oreffective" to suspend concessions or obligations in the samesector, to engage in "cross-retaliation": to suspend obligationsunder other agreements.

Complaining parties are more likely to receive authorization tocross-retaliate if the injured sector is sufficiently important tothe complaining member to justify cross-retaliation and the newdistortions it introduces. Gambling and betting services are thesecond-largest industry in Antigua and Barbuda, after tourism, soit seems likely that the WTO would allow cross-retaliation in orderto elicit corrective action from the United States.7

Antigua and Barbuda is reportedly planning to ask for permissionto allow intellectual property rights violations against U.S. firmsto occur unabated on its territory.8 Antigua and Barbuda is hesitating to imposepunitive tariffs in "retaliation" for the United States' illegalmoves because such tariffs would hurt Antigua and Barbuda's economymore than they would the American economy and would in any case gounnoticed by the United States. Not enforcing intellectual propertyrights, however, is more likely to elicit a response from theUnited States because the powerful motion picture industry andsoftware firms that stand to lose from that sort of activity wouldpresumably put pressure on the U.S. government to reform itsInternet gambling laws and settle the dispute.

Two drawbacks of retaliating through intellectual propertyrights may give pause to Antigua and Barbuda. First, if piracy isindeed a breeding ground for money laundering and terroristoperations, then encouraging the development of a safe haven forintellectual property rights violators may not be in Antigua andBarbuda's interests. Second, Antigua and Barbuda may decide thatsuspending its obligation to protect the intellectual propertyrights of American companies is not in its trading interests. As arecipient of preferential access (lower tariff rates than themost-favored-nation, or general, tariff rates) to the United Statesthrough the Caribbean Basin Initiative, Antigua and Barbuda isobliged to protect the intellectual property rights of U.S.companies in order to receive the preferences. Because the CBI is aunilateral (voluntary) program, the United States is free to changethe conditions of the preferences, or indeed to suspend the programto any country, at its will and without multilateral consequences.The latest report to Congress on the CBI says that "the Presidentis also authorized to give discretionary weight, in designating CBIbeneficiaries, to the extent to which a country provides adequateand effective legal means for foreign nationals to secure,exercise, and enforce intellectual property rights and the extentto which a country prohibits its nationals from broadcasting U.S.copyrighted materials without permission."9

Antigua and Barbuda may, under these circumstances, decide thatits preferential access to the U.S. market through the CBI is toovaluable to risk losing through retaliatory action.

Conclusion

The ban on Internet gambling is a policy that is not in theinterests of the United States. It overreaches into the privatelives of citizens--telling them what they can do in their own timein their own homes and with their own money. Second, it is probablycounterproductive. Banning gambling sites will likely push Internetgambling from jurisdictions where it is legal and regulated intoareas where it is not. If the United States legalized onlinegambling for adults, then it would be more likely to be able tooversee the industry to prevent adverse possibilities, such aschildren accessing the sites. Third, and on a broader level,failure to comply with WTO rulings that show U.S. policies to beagainst the rules that the United States helped to design paintsthe United States as hypocritical and undermines faith in thesystem--a system that depends on the perception that all players,rich and poor, big and small, have rights, as well as obligationsand responsibilities. The interests of the United States would bebetter served by legalizing Internet gambling, with appropriateregulations, and allowing foreign as well as domestic entities toserve the market for online gaming services.


1 United States ofAmerica, Schedule of Specific Commitments, GATS/SC/90, 15 April1994.

2. United States-MeasuresAffecting the Cross-Border Supply of Gambling and Betting Services,report of the Appellate Body, WT/DS285/AB/R, 7 April 2005.

3 Jane Wardell, "BritainCriticizes U.S. Online Gaming Ban As It Prepares for InternationalSummit," October 27, 2006, http://www.signonsandiego.com/news/tech/20061027-0853-britain-onlinegambling.html.

4 Ibid.

5 Radley Balko, "eBayInvites Internet Regulation, Backs Online Gambling Ban," June 7,2006, http://www.foxnews.com/story/0,2933,198610,00.html.

6 Ibid.

7 There has been someprecedent for the Dispute Settlement Body of the WTO authorizingsuch cross-retaliation. Ecuador secured the right to suspendobligations to the European Union under the GATT, the GATS, and theAgreement on Trade- Related Aspects of Intellectual Property Rights(TRIPS) in its long-running dispute over banana tariffs. Ecuadorhas, however, so far declined to exercise that right.

8 Paul Blustein, "AgainstAll Odds: Antigua Besting U.S. in Internet Gambling Case at WTO,"Washington Post, August 4, 2006.

9 Office of the UnitedStates Trade Representative, "Sixth Report to Congress on theOperation of the Caribbean Basin Economic Recovery Act," December31, 2005, p. 16, http://www.ustr.gov/assets/Trade_Development/Preference_Programs/CBI/asset_upload_file670_8672.pdf.