Insights - Implications of the WTO Ruling

6 April 2004

A dispute panel handling the WTO case of Antigua and Barbuda vs. the United States last month delivered a preliminary decision in favor of the tiny islands. Though the decision has not yet been made public, it is understood that the panel found that the United States is violating its General Agreement on Trade and Services (GATS) by implementing policies that prohibit financial transactions for online gaming services.

Antigua and Barbuda, as well as many throughout the industry, immediately heralded the victory as the first step in loosening up strict U.S. policy and opening the world's largest gambling market. The reality of the situation, however, is that the decision, even if it survives a U.S. appeal, is not a mandate that can force a change in U.S. policy.

In fact, judging from the reaction of several U.S. officials, it seems that WTO decision might even serve as the catalyst U.S. authorities have been seeking to pass prohibitive legislation. According to I-gaming's biggest foe in the U.S., Senatory Jon Kyl, "This could demonstrate the need for the United States to act and demonstrate its resolve."

So we called on the experts to sort through the confusion and explain what the ruling really means. We asked:

How, if at all, is U.S. policy likely to change now that the WTO dispute panel has ruled that the U.S. is in violation of the GATS? How soon can we expect to see any changes?

Dan Walsh: "WTO decisions don't change U.S. law; only Congress can do that, and no one on Capitol Hill is considering legislation to accommodate the WTO on this."

Dan Walsh: In answering this question, it's best to start with what won't happen: The U.S. is not going to immediately declare Internet wagering legal in response to the WTO. WTO decisions don't change U.S. law; only Congress can do that, and no one on Capitol Hill is considering legislation to accommodate the WTO on this.

Under the WTO process as I understand it, the decision is now subject to appeal, which will take (I think) two months, and then, if it is upheld, there will be a period during which the WTO will seek to mediate between the parties to come up with an amicable solution. If this cannot be accomplished, then the WTO will authorize Antigua to impose retaliatory sanctions against the U.S. However, it is hard to imagine sanctions by Antigua that would have sufficient leverage to sway Congress on this issue. I have heard in some quarters that there might be a process by which the United Kingdom could "piggyback" on Antigua's case; in that scenario, the sanctions could have more substantial impact, but even then, it is hard to imagine Congress passing legislation to affirmatively legalize Internet gambling.

What the decision has done, however, is raise the profile of our industry, something that is never helpful from a lobbying standpoint. The Kyl legislation has been a back-burner issue for months now; it remains to be seen whether the WTO ruling will push it back to the front. In fact, it is possible that the ruling could cause a backlash with some in Congress pushing to pass the Kyl bill simply to show disdain for the WTO's decision.

I expect some in the anti-trade coalition may seize upon this issue to try to undermine public support for free trade. It's not hard to envision one of the labor unions saying, "Not only do international trade agreements send your job overseas -- they now require that your children be allowed to gamble from your living room!" (Hyperbole is a staple of both the opposition to international trade and to Internet gambling.)

I suppose a nightmare scenario would be for the Kerry campaign to seize on this WTO decision as a "wedge" issue--to show that international trade agreements (and by extension, the Bush Administration, which supports them) have gotten out of control. I would then be concerned that the Administration would feel compelled to crack down even harder on our industry, either by law enforcement or by endorsing the Kyl bill, just to insulate themselves from such accusations.

In short, it is difficult to predict what consequences might arise from this decision, if any. From the standpoint of the industry in looking at the U.S. market, any real celebration of the decision is premature.

Dan Walsh is a Director of Governmental Affairs in Greenberg Traurig's Washington, DC office. Prior to his private sector career, Walsh served nine years on Capitol Hill, including seven as legislative director to Rep. Wayne T. Gilchrest (R-MD). In 1997 he represented the moderate Republican Tuesday Group in House Republican leadership. Walsh has extensive experience representing clients before Congress and was involved in public policy positioning, coalition-building, industry outreach, and media strategy.

Patrick O'Brien: "Costa Rica, and even England when it legalizes Internet gambling, could file similar complaints against the United States."

Patrick O'Brien:The decision reported in the press is preliminary and will be reviewed by the WTO before being issued, and then appealed by the United States. The United States can be expected to fight the ruling vigorously, not only because it never intended to commit to cross-border trade in gambling services, but, more importantly, because the WTO's decision as to how that commitment was inadvertently made would carry over to a long list of broad range of other areas where the U.S. never intended to make commitments. That is why Canada, Japan and the EU sided with Antigua in the matter, not because they favor cross border gambling, but because they want the WTO to rule that the U.S. made that long list of commitments to cross-border trade.

Assuming the Appellate Body upholds the lower court decision as most appellate courts do, the United States will then have to reach a settlement with Antigua through arbitration or else face sanctions imposed by the WTO. In past situations where the United States has been found in violation, such as the tax preferences granted to foreign sales corporations or the anti-dumping duties assessed on steel imports, the United States has enacted legislation to bring it into compliance. However, in those cases, the threatened sanctions were monetarily significant. In this case, the monetary loss claimed by Antigua is miniscule from the U.S. perspective. So rather than enacting laws to bring the country into compliance with its WTO commitment, the United States can be expected to accept sanctions.

Moreover, these sanctions will almost certainly be only a small portion of Antigua's claim. Antigua argues that the country lost jobs because anti-competitive U.S. gaming laws drove out the industry, but the fact is 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. In fact, the only reason Antigua has a viable Internet gaming industry is because it is illegal in the United States. If the United States were to legalize Internet gaming, the operators would not be located in Antigua, but in Las Vegas, and Antigua would have no gaming industry at all. So, what we can expect as an end result is for the United States to be compelled to make some relatively minor trade concessions to Antigua to offset some portion of the purported damages.

However, that does not mean the WTO decision is meaningless. I think it still can have four potential benefits. First, the WTO decision can be used by opponents of the Kyl bill as an argument that any Congressional effort to prohibit or interfere with Internet gaming is contrary to international law. Second, it can be used by proponents of the Conyers' bill as an argument supporting the need to establish a Congressional committee to study Internet gaming with an eye to regulating it. Third, it can be used against the Department of Justice as evidence that the advertising of Internet gaming on the worldwide Internet is the advertising of a legal activity in much of the world and therefore protected free speech. Finally, Costa Rica, and even England when it legalizes Internet gambling, could file similar complaints against the United States, for significant damages, forcing the country to either change its laws or grant offsetting trade concessions. Of course, about the last thing any of these countries would want is legalization and competition from the United States.

Patrick O'Brien spent 25 years as a Special Agent with the U.S. Customs Service before joining the law firm Greenberg Traurig. In those years, he occupied numerous important positions, including Special Agent in Charge of South Florida and the Caribbean, and Assistant Regional Commissioner New York, where his primary responsibilities involved combating money laundering, drug smuggling and illegal exports of arms and technology. In addition, as the Director of Internal Security for Customs he was responsible for all Customs corruption prevention programs and corruption investigations worldwide. He practices widely in customs law and in other areas of international trade law.

In December, as we anticipated a decision from the dispute panel we asked Bruce Zagaris, "What is the likely outcome of the WTO dispute between the United States and Antigua and how will the United States respond if the organization decides in favor of the islands?" Zagaris provided a thorough answer to first question, maintaining that "the Antiguan chances are quite good." To the second part of the question Zagaris replied:

It is difficult to predict the likely U.S. action without seeing the WTO decision. However, in the event Antigua and Barbuda wins, the United States is likely to revise its legislation in a way that tries to change some of potentially offending laws so that it complies with the WTO ruling, but does not dismantle the effect of its regulatory measures. This potential reaction would also provide more time, but it may not comply with the WTO ruling. The U.S. response to the WTO ruling that the Foreign Sales Corporation (FSC) incentive legislation violated the WTO resulted in the enactment of the Extraterritorial Income Exclusion Act of 2000 (ETI Act), which in turn the WTO found violated the initial ruling that the FSC violated the WTO. A wild card is that, similar to the constituency in the United States for the FSC, the U.S. gaming industry and the political environment is still quite divided on regulating the Internet gaming generally and different components of it. The division of gaming regulatory policy is complicated by the lack of a true federal regulator and the diverse state and local government policies.

(View the entire Zagaris "Insights" article.)

Bruce Zagaris is a partner at Berliner Corcoran & Rowe in Washington, D.C. He has written a number of articles and advised clients on international regulation of Internet gaming and trade in services. The firm is registered as an agent under the Foreign Agent Registration Act. However, the firm has not participated in the WTO litigation and this article is not prepared on behalf of the client (Antigua and Barbuda) or seen by the client and in no way reflects the client’s thinking.