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United States withdraws its commitment

Aftermath of the WTO ruling.  The WTO Appellate Body ruling in the US-Antigua Gambling case created a major headache for the U.S. government. Antigua, as the winner in this case, had several options for retaliating against the United States, if it choose to do so.  The United States wanted to make progress in the WTO Doha Round of services negotiations, and couldn't be seen as flouting an Appellate Body ruling.  The adverse ruling did not automatically “overturn” federal law, but it did say that at least one federal law--the Interstate Horse Racing act--had to be amended.

Antigua urged the United States to come into compliance with the ruling by providing Antigua with market access to U.S. on-line gamblers.  Instead, Congress headed a different direction.  Bills introduced into the U.S. House on "Internet Gambling Enforcement" sought to clamp down further on offshore operators and stiffen penalties domestically. 

In a 16 February 2006 letter to USTR Rob Portman, Antigua's Ambassador and Permanent Representative to the WTO sent a letter indicating his government's displeasure with the proposed bills:

Each of the Bills [introduced in Congress] is directly contrary to the rulings and recommendations of the Dispute Settlement Body (DSB) of the World Trade Organization....both of the Bills exclude from their coverage transactions made in accordance with the Interstate Horseracing Act of 1978.... [they] specifically exclude from their coverage..."intrastate transactions," effectively allowing remote gambling that occurs wholly within the borders of an American state....the Bills exclude from their coverage remote gambling conducted by Native American tribes....Neither of the Bills provide Antiguan gambling and betting service operators with any access to consumers in the United States or are in any way responsive to the recommendations of the DSB.

Antigua concluded by citing the 3 April 2006 compliance deadline, and said it looked forward to the United States' "full and prompt compliance...with the rulings in...US-Gambling."

States call for withdrawal of gambling commitment.  
State leaders communicated with USTR and their Congressional delegation about this case.  Some states, like Utah, sought
to preserve their outright ban on gambling.  The National Conference of State Legislatures passed an "action calendar resolution" calling for the United States to withdraw its commitment.

But other states like New Jersey and Mississippi were concerned that allowing Antigua on-line market access would undercut support for 'bricks and mortar' gambling, and cut into the state's reliance on casino taxes and other forms of gaming revenue.  Five states obtain more than 10% of their total revenue from various forms of gambling (casinos, video poker terminals, lotteries, etc.), and another five states are close to that double-digit figure. Those states most dependent on gambling revenues had been soonest to pass laws banning internet gambling.  

Nationwide, approximately 30% of total lottery spending ends up in state coffers, and lottery revenues now account for more than 2% of total state revenues. A 2005 New York Times article noted that “gambling revenues, once a mere trickle, have become a critical stream of income in a number of states, in some cases surpassing traditional sources like the corporate income tax and helping states lower personal income or property taxes.”

Article XXI of the GATS--withdrawal of a commitment
Article XXI allows WTO member countries to “modify or withdraw any commitment in its Schedule.”  But according to Article XXI, any WTO member affected by the proposed modification or withdrawal would be able to engage the United States and seek a “compensatory adjustment….[so as] to maintain a general level of mutually advantageous commitments not less favorable to trade than that provided for in Schedules of specific commitments prior to such negotiations.”

Meaning that, if the US were to withdraw the gambling commitment, it would have to offer new or amended commitments elsewhere in the US GATS schedule that are “not less favorable to trade” with WTO members.

Note: it’s not just Antigua that can ask for such negotiations.  The 'Most Favored Nation' principle of the WTO extends to the Dispute Resolution Body as well, so that any country or negotiating bloc affected by the withdrawal of a commitment could also seek componsation.  Antigua's victory meant that, if the U.S. chose to withdraw its commitment, the U.S. would need to negotiate compensation with Europe, as well as with Costa Rica--another big player in the global gambling market.

Rather than ban internet gambling, the European Union has opted to regulate and tax on-line casinos. European trade negotiators were eager to seek a “compensatory adjustment” through the opening up of another GATS sector if the US moved to withdraw the gambling commitment. The EU has long-standing GATS “requests” of the United States in areas ranging from banking to legal services to water. 

As noted above, gambling interests in the European Union view the US-Antigua case as a “solid precedent” for filing a WTO case against the United States along similar lines to that pursued by Antigua in its filing. The dispute panel in the US-Antigua case confined its analysis to the US federal laws at issue, and did not address the complaints Antigua made against various state laws.  

So the complaining party in any future WTO dispute filing--particularly one like the EU, with substantial legal resources--is more like to detail, comprehensively, the ways in which existing US state laws are not in keeping with the US commitment under “other recreational services.

Another major concern at the time was the size of "compensatory adjustment” would be based on the size of the market-access offer being withdrawn. Internet gambling was a $7.5 billion business at the time of the WTO Appellate Body ruling.  Would the adjustment be based on past losses, and annual rate, or one which reflected the annual growth rates in the industry in excess of 20%?  

Lack of action on compliance...
Antigua noted that the U.S. hadn't made the changes in any of the three federal 'measures' to bring the U.S. into compliance, and it went back to the United States to establish that fact.  Early in 2007, a WTO Compliance Panel formed to hear Antigua's complaint agreed that the U.S. was dragging its feet:

There has been no change to any of these three measures since the original proceeding.  there has een no change in their application, or even their interpretation...There is no evidence of any changes in the factual or legal background bearing on these measures....

The WTO compliance panel did note there were two ways that the U.S. could come into compliance.  First, it could provide Antigua with market access for remote gambling services.  Secondly, it could crack down on US-based remote gambling operators. 

...is trumped by action in Congress 
While all this was going on at the WTO, the U.S. Congress moved. On the last day before the 2006 election-period recess, Congress passed the Unlawful Internet Gambling Enforcement Act.  The provisions in this legislation--passed as Title VIII of an otherwise unrelated bill called the Safe Port Act (HR 4954)--flew in the face of the Antigua decision.  In fact, it very closely resembled one of the bills cited by Antigua in its 2006 letter as non-compliant with the WTO dispute ruling on gambling. 

The new law could have been one way for the U.S. to comply--if  domestic law enforcement would begin cracking down on remote operators--but instead the law upheld the status quo, exempting the horse racing industry, intrastate gambling, and Native American tribal gaming operations from most restrictions. 

Antigua had won at each step of the way.  The WTO Compliance Panel ruled that the United States couldn't just pursue the status quo.  It had to change laws or withdraw the commitment.  Antigua mulled over its options for retaliating--by removing copyright protections on films and DVDs, for example, or by stripping patent protections from certain medicines.  Both such 'cross-sectoral' retaliatory actions are permissible under the WTO.

This was a time of reckoning for USTR.

United States moves to withdraw its Commitment.
On 4 May 2007, Deputy US Trade Representative John Veroneau announced that the United States would "clarify" its WTO commitments with respect to Internet gambling services.  A carefully-worded USTR news release never mentioned the withdrawal of a commitment--only its "clarification"--nor did it mention that, as a result of this action, the United States would now have to negotiate with a range of countries that are home to internet casinos and other on-line gambling businesses.  This case was about to enter a new phase.

Equally important was the precedent that this set.  No country had invoked the GATS Article XXI process for withdrawing a GATS commitment before.  This was uncharted waters for the WTO.  What would European and Caribbean countries seek in compensation if they acquiesced to the U.S.' withdrawal of its gambling commitment?  What would Antigua get as a result?

Read next:  Bargaining over schedule adjustments to the GATS

POSTCRIPT:  The WTO-GATS Article XIV clause on “public morals” enabled the United States to dodge a bullet in the Antigua case. But NAFTA and CAFTA Investment Chapters do not contain this “public morals” exception."

Potential Investment Challenges to State Gambling Laws. 
The United States is party to numerous investment agreements such as Chapter 11 of NAFTA, and Chapter 10 of the CAFTA, and several CAFTA and NAFTA signatory countries are home to large numbers of on-line casinos.  The United States may be more vulnerable to a challenge under investment rules, because  U.S. investment agreements do not contain a “public morals” exception.  Gambling concerns from those countries might use the Investment Chapters of these regional agreements to bring a challenge against U.S. state and federal gaming regulations.

This risk has been noted by law firms that represent on-line casino operators. A January 2008 investment law briefing by Herbert Smith noted that "the US endeavour to deny gaming operators access to its markets by withdrawing its GATS comitments is unlikely to succeed given the extensive rights conferred to foreign investors under...IIAs."  The briefing notes that the investment treaties entered into by the United States contain so-called pre-establishment rights, "guaranteeing to investors the right to establish investments in the US.... Consequently, the US would be obliged to extend national treatment and MFN-treatment...to investors even at the pre-entry phase."  They conclude that these rights are "likely to be invaluable in the event that the US does succeed in withdrawing its commitments concerning 'gambling and betting services'."

WTO Members with a Stake in Internet gambling

U.S. negotiators appeared to recognize this risk with respect to investors based in Central American nations that are party to CAFTA.  USTR exchanged letters with Costa Rica in an attempt to avoid such a claim under the proposed CAFTA.

The U.S. has not yet negotiated a definitive carve-out of gambling regulation from investment rules in Annex II of CAFTA, or other recent agreements such as with Panama, a country also home to internet casino businesses.

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