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WTO Panel Ruling – That U.S. Has Failed to Comply With Order About Internet Gambling Policies – Clears Way for Imposition of Trade Sanctions or Other Compensation

March 30, 2007

WTO Panel Ruling – That U.S. Has Failed to Comply With Order About Internet Gambling Policies – Clears Way for Imposition of Trade Sanctions or Other Compensation

Ruling Illustrates How Fast-Tracked Trade Agreements Undermine Complex Areas of Domestic Policy

WASHINGTON, D.C. – The World Trade Organization (WTO) enforcement panel ruling that the United States government failed to comply with a 2005 final WTO order to change certain laws related to the U.S. ban on Internet gambling proves the perils of the Fast Track system, Public Citizen said today.

Beyond the narrow issues under contention, the WTO Internet gambling ruling implicates large swaths of state and federal gambling law unrelated to online gaming as potential trade barriers, and a follow-on WTO challenge already has been threatened by the European Union.

“This ruling is just the latest example of how Fast Track roulette – where Congress gambles on providing a president blank-check authority to sign us on to outrageous trade deals – is always a losing game for the United States,” said Lori Wallach, director of Public Citizen’s Global Trade Watch division.

The ruling clears the way for Antigua, which challenged the ban, to demand compensation from the United States, and if an agreeable deal cannot be struck, to impose trade sanctions. To exact compliance, Antigua could suspend benefits it extends to the United States under other WTO agreements. Antigua could, for instance, suspend its observance of copyright and patent protections required by WTO to a degree deemed equivalent to Antingua’s commercial losses from its Internet gambling operations being excluded from the U.S. market.

“And it’s not just ‘an eye for an eye’ when it comes to WTO trade sanctions,” Wallach said. “Antigua could set up its own version of iTunes without paying the U.S. artists, suspend U.S. pharmaceutical company patent rights or follow the advice of its lawyers and ignore intellectual property rules to start selling Windows Office, given Microsoft is a U.S. company.” 

This case shows the perils of ‘trade’ agreements over-extending their scope into domestic regulatory issues and the mismatch between negotiating processes that exclude the participation and oversight of a broader set of interested parties. For instance, a key basis for this case was the colossal mistake made by U.S. trade negotiators in 1995 when the Office of the U.S. Trade Representative (USTR) signed up a category called “recreational services,” which included a “gambling and betting services” subcategory, to comply with the WTO’s service-sector agreement called the General Agreement on Trade in Services (GATS). The error was not avoided because state attorneys general were not meaningfully consulted and Congress failed to review the pact in detail due to Fast Track trade procedures, which bypass normal congressional procedure and limit debate.

As a result of the USTR’s blunder, three long-standing, federal anti-racketeering statutes that in effect banned Internet gambling were challenged as cross-border “barriers to trade” in the WTO by Antigua, whose Internet gambling firms wanted access to U.S. customers. In 2005, the WTO ruled that the United States had to change at least one federal law involving Internet gambling (the Interstate Horseracing Act) or allow all Internet gambling. In addition, a European Union official has already threatened a follow-on trade suit against the more recent Unlawful Internet Gambling Enforcement Act passed in 2006, which had a devastating impact on publicly traded European gambling firms. (For more information about this case, click here.)

One of the most significant consequences of the WTO’s 2005 ruling is that 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 placed in jeopardy of future challenges.

In 2005, 29 state attorneys general wrote the Bush administration seeking withdrawal of the gambling sector from WTO jurisdiction. The WTO GATS agreement allows nations to “take back” service sectors from WTO jurisdiction, but only after compensating trading partners for lost business opportunities. The Bush Administration has resfued to do so.

“We knew about the outrageous over-reach of the WTO into non-trade matters. What we didn’t know is that the USTR could make mistakes of this magnitude – signing up extremely sensitive areas of domestic law to WTO jurisdiction – and then refuse to correct the enormous error when it was pointed out,” said Wallach. “These agreements need to be vetted more closely by states and by Congress. That scrutiny cannot occur under the current failed Fast Track procedure.”

Rather than pausing to reexamine the WTO GATS agreement in light of this ruling, the federal government is currently engaged in negotiations to dramatically expand the scope of the WTO service sector agreement, called GATS. 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.

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