Thursday, August 23, 2007

Antigua 1, US Nil

Typically, international politics is an arena dominated by power. In conditions of anarchy, those who can do, and that rule is frequently followed by the US, which uses its hegemonic status to ignore rules that the US finds inimical to its interests.

International institutions are the primary ways in which anarchy is mitigated in international politics, as strong institutions can create norms and rules that states must follow or risk falling afoul of the enforcement mechanism of the institution. The WTO is one of the most significant of these institutions, as it possesses a relatively credible and powerful enforcement mechanism (described here) and has succeeded in forcing states to change their policies and domestic laws.

However, the WTO now faces a difficult situation by virtue of its very strength. The WTO has found that US laws barring American citizens from gambling on-line with off-shore casinos are a violation of free trade and of the US's obligations under the WTO. The ruling, initially made in 2004 and upheld in two appeals, supported Antigua's claim that the US law has unfairly impacted Antigua's trade in Internet gambling (Antigua's second-largest business behind tourism), and the case is now in damage assessment, with Antigua claiming $3.4 billion in damages and asking for the right for reciprocal violations of US intellectual property. If the US wishes to avoid allowing Antigua to violate US IP protections (to the amount determined by the damage assessment hearing), the US will either have to allow Americans to gamble with off-shore casinos on the Internet or ban all forms of domestic on-line gambling, such as the on-line purchase of state lottery tickets, off-track betting on horse-racing, and even fantasy sports leagues in which prize money is awarded.

The problem is, as the New York Times notes, that:
For the W.T.O. itself, the decision is equally fraught with peril. It cannot back down because that would undermine its credibility with the rest of the world. But if it actually carries out the penalties, it risks a political backlash in the United States, the most powerful force for free-flowing global trade and the W.T.O.’s biggest backer.

“Think of this from the W.T.O.’s point of view,” said Charles R. Nesson, a professor at Harvard Law School. “They’re this fledgling organization dominated by a huge monster in the United States. People there must be scared out of their wits at the prospects of enforcing a ruling that would instantly galvanize public opinion in the United States against the W.T.O.”
Over at his blog, Dani Rodrik sees this as a serious problem for the WTO, writing that "this is another example of how existing WTO practices are leading to the narrowing of policy space to the detriment of legitimacy (and economic logic). When the system serves to enforce new restrictions on domestic policy autonomy that would be wildly unpopular at home, it is time to rethink the system."

But I don't see why this example is any different than any other trade dispute for which the WTO has jurisdiction. The point of the WTO is to allow states to tie their own hands. That is, states know that free trade is an overall good, but that they have powerful short-term domestic reasons to opt for protection. Committing to the WTO allows states to avoid the collective actions problems that are so endemic in trade and stick to a free trade policy. There are exceptions, under which states are allowed to impose protectionism, such as protection of domestic morals, national security, public safety, and so on. But states often try to disguise protectionist policies with legitimate rationales, like France's attempt to ban GMOs.

Indeed, the US invoked such language, claiming that the US has the right to ban Americans from on-line gambling "on moral grounds, just as any Muslim country would be within its rights under international trade agreements to ban the import of alcoholic beverages." However, given that the US allows many types of gambling, including on-line wagering, the claim rang hollow, and was rejected by the WTO.

Despite Rodrik's claim, this is exactly the kind of issue that the WTO should be dealing with. The US has no legitimate reasons to ban on-line gambling, given that gambling is obviously legal and quite prevalent in this country. There are entire cities devoted to gambling, states run massive gambling operations, and every local paper prints sports odds on a daily basis. Gambling has long been subject to massive protectionism in this country for no good reason, but the advent of on-line gambling has changed the venue and scope of the country's ability to maintain that protection. As other countries, like Antigua, developed gambling industries, the US's double standards looked more and more like unfair and illegal protectionism.

It is very important that the US comply with the WTO's decision. The WTO is one of the cornerstones of the international order, and is vital for insuring the continued prosperity of this country, and nearly every other country in the world. Furthermore, the US has been trying to get smaller, developing countries to accept American intellectual property rights laws under the WTO. Why would they do so if the US refuses to play by the rules (of course, the American, European, Japanese, and Korean refusals to ease or cease agricultural subsidies are already driving this line of thought, but at least ag policy is not currently covered by the WTO)? Refusing to comply will fundamentally damage US credibility and interests to a degree that not even the invasion of Iraq was able to do. It is vital to the US that other countries commit themselves to the WTO and comply with its obligations; it is equally vital that the US do the same.


Matt Eckel said...

Could not agree more. We've championed the WTO as a largely successful engine of US international economic policy for decades now. Occaisionally that will mean accepting decisions that run contrary to our own preferences (and, if I may, we aren't talking about losing a half trillion dollars and part of our industrial base, we're talking about foolish and inconsistent restrictions on online poker). Excellent and well argued post.

Anonymous said...

i agree with the legislation which aims to ban credit cards as a payment method for online gambling of any sort... i mean its a no brainer when you consider you are placing somebody else’s money on an uncertain event happening with the aim to recoup more than you invested. Chance and credit do not mix well in my opinion, and continuing to allow it would only contribute further to negatively affecting the high levels of personal debt many citizens today find themselves in. I agree however, in a sense that it won't work - i mean whats the point in banning credit card payments for online poker, for example, but not online sports betting? slightly hipocritical no? I mean how can you allow someone to participate in online horse racing betting, but not have a gamble on a hand of cards? both activities involve a large degree of chance, and neither are guaranteed to yield financial return.
It also infuriates me that the minority of irresponsible gamblers [those paying with someone elses money!] have now ruined the fun of online betting for everyone else - those like me who pay with money they actually have in their bank!! boooo

Anonymous said...

Antigua has finally won the battle over online gambling with the U.S., but I wonder what the next step will be.