U.S.A. SEEKS TO REMOVE THE GOALPOSTS IN W.T.O. DISPUTE

11 May 2007

Discriminatory online gambling legislation is here to stay

A spokesman for the United States Trade Representative argued Friday that it was not required to comply with a WTO ruling to open its borders to the Internet gambling industry because of an "oversight" in a decade-old trade agreement.

The major news wire services carried a report this week in which the United States said it will maintain a ban on Internet gambling services despite an adverse World Trade Organisation ruling.

Reuters opines that the move opens the door for other WTO members - ranging from tiny Antigua and Barbuda to the 27-nation European Union - to seek potential damages at the WTO.

However, Deputy U.S. Trade Representative John Veroneau told reporters the United States did not believe there was any basis for other countries to receive compensation.

Veroneau argued that a case brought by Antigua and Barbuda several years ago took advantage of a "drafting error" made by the United States as part of its commitments in the early 1990s to open its recreational services market.

Even though U.S. law has banned interstate gambling for years, the United States had failed to make clear that its commitments "did not extend to gambling," Veroneau said.

"Neither the United States nor other WTO members noticed this oversight in the drafting of U.S. commitments until Antigua and Barbuda initiated a WTO case ten years later," Veroneau said. He added that it would be "....nonsensical for the U.S. to make a commitment to open up interstate gambling for foreign providers."

The United States believes there is little, if any, basis for other countries to seek compensation because countries did not bargain for access to the U.S. gambling market as part of world trade talks in the early 1990s, Veroneau asserted.

The spokesman said that, having exhausted all its other options to fight the case, the United States will now seek to exercise a rarely used right under WTO rules to modify its services commitments and explicitly, albeit retrospectively exclude gambling from the agreement.

Explaining the WTO process (the USTR has submitted a WTO GATS Article XXI (Modification of Schedules) request) which the USA will now seek to deploy, Veroneau said it allows the U.S. to "clarify" its restrictions to "recreational services" offered internationally. A clarification undercuts WTO member claims for compensation in lost revenue as a result of the ban, he added.

Other countries will have 45 days to file a claim for compensation if they believe they are damaged economically by the U.S. move.

That would lead to a 3-month period for the WTO to decide on compensation, in the form of reduced U.S. market access in some services sector of the WTO member seeking damages, USTR officials said.

The Caribbean islands, which have built up a $130 million online gambling industry to make up for declining tourism revenues, argued that the U.S. measures hurt them while leaving some U.S. domestic operators free to use the Internet for gambling related activities.

Despite losing the case before the WTO disputes panel, the United States has argued at every step of the case that it never intended to open its gambling market. Last year, the U.S. Congress passed additional and selective legislation to ban online gambling financial transactions with online gambling companies.

In March this year, the WTO finally ruled that the United States had failed to comply with an April 2005 ruling against a portion of its ban having to do with online gambling exemptions for domestic horse racing.

The Unlawful Internet Gambling Enforcement Act signed into law by President Bush late last year has exacerbated the WTO problem for the United States, say observers. Many companies say they were caught off-guard by the law, which stops U.S. banks and credit card companies from processing payments to online gambling businesses outside the country.

The ban prompted major listed companies, such as Sportingbet PLC, Party Gaming plc, Playtech plc and Leisure & Gaming plc, to sell their U.S. operations or ban US players who constituted half the market, incurring substantial losses for investors in the $12 billion global online gambling industry.

The WTO panel ruling in March opened the door to commercial sanctions against the U.S., ruling that the new law unfairly targets offshore casinos. The twin island nation of Antigua and Barbuda in the Caribbean, for example, argues that online gambling had been providing income for hundreds of its citizens.

Antigua and Barbuda wasted no time in reacting to the most recent US statement, urging America to reconsider its stance and indicating that it would pursue "full compensation for our citizens."

Sallie James, a trade policy analyst with the Washington-based Cato Institute think tank, said the U.S. "...is in the wrong and it knows it, but it doesn't want to open up markets on gambling and betting services so it wants to change the law it has to abide by."

Another Internet gaming specialist put it more succinctly: "Basically they are saying, '...we admit defeat and we are taking our ball and going home.' Antigua kicked their ass so bad they are waiving their last appeal. This has huge international trade implications. [The US] knew very well what they were doing when they made their commitments. At the time they were the world's largest exporter of gaming services. At the time 100 of the 150 countries opted out of it, but not them.

"Finally, know that despite what they imply, this will not be easy for them to just opt out. It could cost them billions, not just to Antigua, but any other country who wants to put in a claim."

Public Citizen (www.citizen.org:80/pressroom/release.cfm?ID=2429) commented: "The Bush administration’s unprecedented decision that it will withdraw the U.S. gambling service sector from World Trade Organization (WTO) jurisdiction is good news for U.S. sovereignty. But the fact that this action will trigger major demands by other countries for compensation under WTO rules also highlights how the fast track negotiating system has enabled a series of trade pacts that undermine the public interest."

What "Modification of Schedules" entails, and the practical impact of WTO rulings:

Despite having one of the largest and most sophisticated negotiating teams, the United States could not avoid having WTO’s expansive rules limit U.S. domestic regulatory authority, says "Public Citizen".

In 2005, 29 state attorneys general wrote the USTR seeking withdrawal of the gambling sector from WTO jurisdiction. Because of the WTO ruling against the United States, the USTR had three options: change domestic federal laws and pre-empt corresponding state laws; do nothing and face both trade sanctions and future challenges; or withdraw its commitments, negotiate compensation and avoid future cases that would expose state law to WTO challenge.

The WTO GATS agreement allows nations to “take back” service sectors from WTO jurisdiction, but only after compensating trading partners for lost business opportunities.

“What American industries will USTR be willing to trade to compensate for the withdrawal of the gambling industry from the WTO?” says Saerom Park, state and local program coordinator of Public Citizen’s Global Trade Watch division. “The USTR’s announcement unfortunately explained none of this.”

"The USTR’s decision, conveniently announced on a Friday afternoon to avoid press and public scrutiny, claims that it ‘intends to clarify its WTO commitments’ and ‘correct its WTO schedule’ with respect to Internet gambling services, rather than fessing up to how dramatic this move is and how costly it is to get out of WTO’s clutches,” said Park.

The USTR can not merely “clarify” or “correct” U.S. service sector commitments at the WTO – it can only withdraw them. Additionally, the USTR can not withdraw U.S. commitments without first compensating countries that feel they have lost out on their access to a substantial portion of a $12 billion online gambling market, making this potentially a very costly situation.

The United States finds itself in the position of either facing trade sanctions for failing to implement a WTO ruling ordering it to change its ban on Internet gambling or face costly demands for compensation from other WTO countries after requesting to remove the gambling sector from WTO jurisdiction.

Either way, the United States may be required to pay for the right to regulate gambling activities within the USA.

But, Public Citizen argues, the current choice of action is necessary to shut down future threatened additional WTO challenges by simply removing the sector from the sphere of authority of the WTO.

Beyond the narrow issues related to Internet gambling, the WTO Internet gambling ruling implicated large swathes of state and federal gambling law unrelated to online gaming as potential trade barriers.

The European Union has already threatened to bring an additional case. An array of common state gambling regulations such as gambling bans, state lotteries, sector carve-outs or exclusive Indian gaming rights, which have the effect of keeping out private European lotteries and casinos, were implicated as trade violations and jeopardised by the possibility of future challenges through the Internet gambling ruling.

The WTO ruled that the United States had to bring federal statutes into conformity with WTO rulings. In addition, a European Union official has already threatened a similar trade suit against the more recent Unlawful Internet Gambling Enforcement Act passed in 2006, which has been labeled as "protectionist".

As at going to press, there was no WTO reaction to the US announcement.

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