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Unprecedented Bush Administration Decision to Withdraw U.S.Gambling Sector From WTO Jurisdiction Highlights Hazards of Fast-Track-Enabled Trade Agreements

May 4, 2007  

Unprecedented Bush Administration Decision to Withdraw U.S.Gambling Sector From WTO Jurisdiction Highlights Hazards of Fast-Track-Enabled Trade Agreements

Under WTO Rules, U.S. Is Required to Negotiate Terms of Compensation With Other WTO Signatory Countries Before It Is Allowed to Withdraw Sector

WASHINGTON, D.C. – 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, Public Citizen said today. 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.

“It’s good news that the Bush administration finally is listening to the state attorneys general and others who have asked for the U.S. Trade Representative (USTR) to remove gambling from WTO jurisdiction and thus eliminate further attacks on U.S. gambling regulation,” said Lori Wallach, director of Public Citizen’s Global Trade Watch division. “The WTO’s ruling against the U.S. Internet gambling ban was not some fluke, but rather a preview of coming attractions given how extensively the WTO’s service sector rules interfere with non-trade domestic policies regulating the conduct of services operating within our own country.”

Today’s announcement that the USTR has submitted a WTO GATS Article XXI  (Modification of Schedules) request follows an early March WTO enforcement panel ruling that authorized sanctions against the United States. The panel ruled that the U.S. had failed to comply with a 2005 final WTO order to change certain laws related to a successful challenge by Antigua of the U.S. ban on Internet gambling. 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?” said Saerom Park, state and local program coordinator of Public Citizen’s Global Trade Watch division. “The USTR’s announcement unfortunately explained none of this.”

In this case, 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 $15.5 billion online gambling market, making this potentially a very costly situation.

“Thanks to the WTO’s overreaching rules, the United States found 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 facing costly demands for compensation from other WTO countries after requesting to remove the gambling sector from WTO jurisdiction,” said Wallach. “Either way, the United States will be required to pay for the right to regulate gambling activities within our country. But today’s choice is designed to shut down future threatened additional WTO challenges by simply removing the sector from WTO coverage.”

Beyond the narrow issues related to Internet gambling, the WTO Internet gambling ruling implicated large swaths 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 or exclusive Indian gaming rights, which have the unintended effect of keeping out private European lotteries and casinos, were implicated as trade violations and jeopardized by the possibility of future challenges by the Internet gambling ruling.

The Antigua gambling case shows how “trade” agreements over-extend their scope into domestic regulatory issues that have nothing to do with trade. It demonstrates the dangers of trade negotiations that exclude the participation and oversight of a broader set of interested parties. It also shows the perils of fast track authority, which allows the president to negotiate the details of trade agreements without congressional input.

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. Thus, three long-standing, federal anti-racketeering statutes that in effect banned Internet gambling were subject to challenge as cross-border “barriers to trade” in the WTO by Antigua, whose Internet gambling firms wanted access to the U.S. market for online gambling – worth an estimated $15.5 billion.

In 2005, the WTO ruled that the United States had to bring federal anti-organized crime statutes into conformity with WTO dictates. 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 limited publicly traded European gambling firms’ potential U.S. sales opportunities. For more information about this case, click here.

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.

Even after this WTO gambling debacle, rather than pausing to reexamine the WTO GATS agreement, the federal government is currently engaged in negotiations to dramatically expand the scope of the GATS into additional sensitive service sectors. These negotiations are part of the “Doha Round” of trade talks that are once again under way in Geneva. Trading partners are demanding that the United States cover many more sectors under the terms of the agreement – including energy services, higher education services, medical services and more. Yet many of these matters are regulated by states, and state officials are not being meaningfully consulted about hidden dangers or these complex negotiations.

“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. “Worse, at the same time that the USTR is forced to withdraw the gambling sector, it is pushing to include new and additional aspects of the U.S. service sector under WTO jurisdiction. The Bush administration should use this gambling situation as a lesson and withdraw its Doha Round WTO offers to submit more of our sovereignty to WTO.”

For more information about this case and to see the 2005 attorneys general letter to the USTR, click here.