2004-05-13
The World Trade Organization and Online Gaming

David vs. Goliath: The U.S. Protects Its Own

By Rick Smith, Executive Director, Interactive Gaming Council
And Keith Furlong, Deputy Director, Interactive Gaming Council

David is whipping Goliath in an unusual battle at the World Trade Organization (WTO). Antigua and Barbuda, a tiny Caribbean nation, challenged the United States on issues related to a commercial services accord, specifically the General Agreement on Trade and Services (GATS).

In the U.S., home to at least half of the worldwide online gaming market, supporters of online gaming have been cheered by the result: A surprise ruling from the WTO in favor of the complaint filed by Antigua and Barbuda. The country argued that U.S. efforts to ban online gaming had seriously damaged its online gaming industry, in violation of international trade rules, causing a direct economic hardship for its people and its government. Antigua and Barbuda used to host more Internet gaming sites than any country in the world.

The island country encouraged online gaming to supplement its tourist industry, providing vital jobs and government revenue. Christiansen Capital Advisors, analysts well known for their coverage of the gaming industry and the online segment in particular, estimates that online gamblers will spend upwards of $7.5 billion this year, a significant increase from last year’s estimate of $5.7 billion.

Sir Ronald Sanders, the country’s ambassador to the WTO, told Bloomberg News that Antigua has lost more than $90 million in income and 4,000 jobs because of U.S. actions against Internet gaming. He told the New York Times: “The U.S. says it wants open competition. But it only wants free trade when it suits the U.S.”

However, Pat O’Brien, an attorney with the U.S. firm Greenberg Traurig, in an article published by Interactive Gaming News (www.igamingnews.com), suggested that Antigua lost its business not because of U.S. laws, but because it imposed a 3 percent tax on gaming revenue, leading many of the operators to leave the country for tax friendly Costa Rica.

While the decision has not been publicly released, it is known that the WTO issued an interim ruling in favor of Antigua, with details of the formal ruling expected in May. Sanders said this is the first time that such a small country, one with fewer than 100,000 people, had brought a dispute before the WTO. U.S. officials denounced the ruling, arguing that gaming is not included among the “services” in the trade agreement.

News of the interim ruling made headlines in U.S. papers and Web sites. Not surprisingly, anti-gaming politicians released statements bashing the WTO and its disregard for American values.

Robert Zoellick, the U.S. Trade Representative, told Congress that the U.S. would appeal the WTO ruling. He called it “absolutely outrageous.” Prior to joining the Bush administration, Zoellick was a paid consultant to Enron. Jacob Sullum, in an article -- “Is talking about online gambling illegal?” (www.townhall.com) -- echoed the sentiments of many when he said: “As if to confirm the double standard, U.S. Rep. Bob Goodlatte, R-Va., called the WTO ruling ‘appalling,’ saying, ‘It cannot be allowed to stand that another nation can impose its values on the U.S.’ What does Goodlatte think the U.S. is doing when it treats gambling operations that other countries consider legitimate businesses as criminal enterprises?”

Some online gaming operators enthusiastically hailed the WTO ruling as a major victory. Most experts, however, doubt that the decision will alter the current hostility of the U.S. toward online gaming. Practically speaking, the ruling is not expected to have a major impact. For one thing, the U.S. appeal will drag the case out.

Ultimately, Antigua would have the right to impose retaliatory trade sanctions against the U.S. But that’s not a threat that is likely to worry U.S. policy makers, unless larger countries, for example, the United Kingdom, joined Antigua’s fight. By coincidence, one of the three panel members was from the U.K. The WTO arbitration panel comprised B.K. Zutshi (India) as chair, and members Virachai Plasai (Thailand) and Richard Plender QC (United Kingdom). Canada, the European Communities, Japan, Mexico and Chinese Taipei reserved their rights to participate in the panel proceedings as a third party.

All in all, it is a stretch to hope that the U.S. would be compelled to change its ways based on possible retaliatory trade sanctions with Antigua. The threat of trade sanctions could intensify, however, in the unlikely scenario that other, first-world, countries decide to join Antigua against the U.S. Frank Fahrenkopf, the head of the land-based gaming industry’s powerful lobby, the American Gaming Association, recently told the Las Vegas Sun, “Even if Antigua were to win two years down the road, the impact of that means that Antigua and Barbuda can put sanctions on products Americans sell to Antigua. I doubt that’s going to shake up anyone.”

U.S. Hypocrisy
Is there more at stake, however, than U.S. policies toward online gaming? Will the U.S. move to blatantly disregard decisions with regard to international trade when the decisions do not suit Washington?

Sanders stated in published news reports that the WTO decision clearly calls for the U.S. to dissolve its stance against online gaming or risk losing face with regard to its stance on free trade issues.

On 26 November 2002, the U.S. proposed a "Tariff-Free World" calling on WTO members to eliminate all tariffs on consumer and industrial goods by 2015. The proposal also called for a separate program to identify and eliminate non-tariff barriers (http://www.ustr.gov/releases/2002/11/02-112.htm).

Gaming is nearly omnipresent in the U.S. -- from local convenience stores that sell lottery tickets, to racetracks and bingo halls, to video lottery terminals, to riverboat casinos, to Native American casinos and the mega-resorts of Las Vegas and Atlantic City. In fact, only two of the 50 U.S. states have no gaming whatsoever. The problem for the U.S. is perception. Casino gaming is legal, and successfully regulated and taxed, in many states. State governments also make millions from their own gambling businesses, the lotteries. Yet, when this otherwise accepted form of entertainment moves to the Internet, gaming opponents attack it as anti-social.

Intelligent debate about licensing, with regulation, of online gaming has been thwarted by misguided, futile efforts to block citizens from using the Internet for this activity. The Interactive Gaming Council, igcouncil.org, a trade association that continues to advocate for licensing and regulation of online gaming, believes that concerns about online gaming that are expressed by legislators can be better addressed through strict regulation of the industry, including provision of the player protections that are available in other forms of gaming.

What’s Next?
The WTO dispute is unique beyond its David vs. Goliath aspect. Most WTO rulings involve disputes over tangible products, such as lumber, steel and auto parts, rather than services. This is the first WTO decision involving the Internet, and also the first to involve gambling.

The U.S. government has about two months to officially provide notice of an appeal, and then another limited time frame in which to submit its arguments. The process will take months, perhaps years. And, even if the U.S. loses its appeal, most industry experts agree that the WTO ruling, while a public relations triumph for the online gaming industry, will have little impact on policy makers and legislators.

Fahrenkopf even warned in news reports that the WTO ruling could have a negative effect by creating additional momentum for online gaming prohibition legislation that awaits consideration in the U.S. Senate. While the U.S. Department of Justice believes that online casino gaming is already illegal under the 1961 Wire Act, a federal court disagrees. On November 20, 2002, the Fifth Circuit Court of Appeals issued a ruling in the case of Re: MasterCard International Inc. Internet Gambling Litigation, that upheld a lower court decision that the Wire Act's prohibition on the use of a communication facility for the placement of a wager on "a sporting event or contest" does not extend to casino-style gambling, consistent with the plain language of the statute. Bills to specifically outlaw online gaming have never passed both houses of Congress in the same session.

One of online gaming’s biggest enemies, Republican Representative Michael Oxley, went so far as to say that “The WTO’s action has significantly reduced its status and credibility as a reliable arbiter of international trade disputes.”

Such statements by powerful politicians may undermine the position of the U.S. in other trade disputes, when it tries to pressure countries like China to abide by their trade commitments and open up their markets to U.S. services such as banking.