David Versus Goliath And The WTO Versus Eliot Spitzer And The DOJ

Friday, October 1, 2004 - 01:00

Antigua challenges U.S. restrictions on Internet gambling in the World Trade
Organization. In June 2003 the Caribbean twin-island state Antigua and Barbuda
started a WTO dispute settlement case against the U.S. in relation to its
prohibition of foreign Internet gambling. At the time many observers viewed this
as a hopeless, if not ludicrous, case. At the time of writing, however, the U.S.
and Antigua have jointly asked for the procedure to be suspended while they
negotiate "a mutually agreed solution." So perhaps the case is not so ludicrous
after all.

Gambling is one of the Internet's commercial success stories. Antigua's claim
was a case waiting to be brought. The Internet is a very suitable medium to
supply gaming services, so suitable that gaming is one of the main commercial
success stories of the Internet. Countries such as Antigua, but also the UK,
have embraced this high tech development of one of the world's oldest
businesses. In the U.S., however, the regulation and taxation of gambling is a
matter for the states and each state has developed its own gaming policy. These
policies are very much geared towards keeping the economic benefits of gaming
within the states' respective territories, which is squarely at odds with the
a-territorial nature of the Internet. Hence the U.S.' tendency to prohibit
Internet gambling: it simply does not fit in with the way in which gambling has
traditionally been regulated.

The prohibition on foreign operators comes inter alia in the form of
settlements between New York Attorney General Eliot Spitzer and financial
intermediaries such as PayPal and Citibank. The latter were forced to halt the
processing of gaming transactions to avoid criminal prosecution. Further, the
Department of Justice has sent letters to U.S. media companies, urging them not
to carry advertisements for foreign gambling sites.

The WTO and the Internet are complementary factors of globalised trade in
services. The "territorial" approach of the states to gambling regulation is
also squarely at odds with the concept of free trade which underlies the WTO. In
this respect the WTO and the Internet are complementary factors of globalised
trade: the WTO lays down the basic rules for international trade and the
Internet provides the technical means through which that trade can easily take
place across borders. In fact, the U.S. itself has encouraged developing
countries to make use of the opportunities of the Internet. In a 1998 submission
to the WTO the U.S. noted that one of the benefits of electronic commerce is
that it allows businesses from developing countries to "'leap frog' into the
information age and reap the benefits early rather than late." That is precisely
what Antigua has done, albeit probably more rapidly than the U.S. anticipated
and in a sector where the U.S. did not expect it. But of course, that is what
competition is all about.

Developing countries seize the opportunity. Antigua's claim is one of the
very first that is based on the General Agreement on Trade in Services (GATS)
which came into force on 1 January 1995 with the other WTO Agreements at the end
of the so-called "Uruguay Round Negotiations." The GATT (the WTO's predecessor)
only dealt with trade in goods and had no disciplines on trade in services.
Ironically, it was the U.S. which, following lobbying by U.S. services
industries, insisted that the WTO had to include rules on services. Developing
countries opposed WTO disciplines on trade in services but the U.S. threatened
not to participate in the WTO at all, if it did not have rules on services. The
developing countries gave in. At the time the perception was that free trade in
services would only benefit enterprises in the developed world and that, for
instance, the financial services industries in developing countries would be
completely unable to compete with highly sophisticated competitors from,
inter alia, the U.S.

Some ten years later the debate about delocalisation of call centers and
other IT jobs demonstrates that this perception is now very different. In that
respect Antigua's claim can be seen as part of a much broader evolution.
Developing countries try to improve their economic situation by taking up trade
in services and they use the WTO and the Internet as a means to achieve that
objective. Many people in the Western world seem to perceive this as a threat
but these countries are doing precisely as they were told to do by the World
Bank, the WTO and indeed the U.S. itself.

The U.S. is a major beneficiary of the WTO dispute settlement system. It
would be entirely wrong to take the view that the U.S. does not gain from the
WTO because it seems to be the target of an ever increasing number of WTO
complaints. The U.S. is one of the main beneficiaries of the WTO and its dispute
settlement system in particular. This is because most countries around the world
will comply with U.S. demands long before a matter reaches the stage of an
official WTO dispute settlement procedure. Most countries do not find the
prospect of being sued by the U.S. appealing, if only because they have far less
legal resources. In the case of Antigua, for instance, the U.S. complained that
Antigua's refusal to give AT&T a licence for mobile telephony violated the
GATS. Rightly or wrongly, Antigua gave AT&T its licence and the matter never
appeared in the WTO's dispute settlement statistics.

The same applies to the instances in which U.S. companies raise WTO arguments
in discussions with foreign Governments. U.S. companies have the right to
complain to the U.S. Government about violations of WTO law. Such complaints can
trigger the U.S. Government into action and can ultimately result in a WTO
action by the U.S. against the country concerned. In that context even a threat
by a U.S. company will often be enough to make a foreign country comply with its
WTO obligations. Again, these instances do not appear in the official WTO
dispute settlement statistics.

What matters is not the size of David but the size of the stone he hurls. The
enormous difference in size and economic weight between the U.S. and Antigua
begs the question as to what Antigua can do if it wins a WTO case but the U.S.
then refuses to comply. However, this is not just a problem for Antigua. It is a
problem for almost all WTO members because, with the exception of the EU, they
are all smaller and/or less developed than the U.S. The WTO provides the remedy
of trade sanctions: if a country that lost a dispute refuses to comply, the
country that won the dispute can be authorised to impose trade sanctions up to a
level that is thought to be equivalent to the harm caused by the breach (for
instance, by restricting imports from the losing country). It is well known that
this system works to the advantage of the larger and economically most powerful
WTO members, i.e. the EU and the U.S. Because the economy of all other WTO
members is much smaller than that of the U.S. or EU, it is almost impossible for
these other countries to retaliate effectively against these two giants of world
trade. Most smaller economies need exports to and imports from the U.S. and the
EU much more than the EU or the U.S. needs them as an export market. WTO members
can try to be creative and seek to retaliate by suspending the protection of
U.S. or EU owned intellectual property rights or by withdrawing licences in
sectors such as financial services or telecommunications. However, that may not
always be practicable and a developing country will be reluctant to shut down
foreign financial services or telecommunications companies which form part of
its commercial infrastructure.

But as one commentator noted with regard to Antigua's case, what matters is
not the size of David but the size of the stone he hurls. And the stone that a
country such as Antigua can hurl is the WTO dispute settlement system itself. At
the moment overall compliance with WTO dispute settlement rulings is good. There
has been and remains some foot dragging by the EU and the U.S. in the most
politically sensitive disputes but apart from that the compliance record is
remarkable. If it were to become clear, however, that the EU and the U.S. would
simply ignore the unfavourable dispute settlement rulings they lose that would
take away the main incentive for other WTO members to comply with dispute
settlement cases that the EU or the U.S. win. Compared to the U.S. and the EU,
most WTO members are small and/or less developed. The occasions on which most of
these countries will consider the use of the WTO dispute settlement system will
be rare. If, however, the EU or the U.S. ignores the result in those few cases
that such countries do bring and win, why then would these countries respect
their own WTO obligations? Since the EU and the U.S. appear to be the main
beneficiaries of the WTO and its dispute settlement it is therefore very much in
their long term interest to avoid the emergence of a "culture of

Is the WTO unduly interfering with U.S. internal affairs? Some will no
doubt argue that the regulation of gambling in the U.S. is an internal affair
and that this is not a matter for the WTO. Admittedly, the WTO is probably not
one of the things that Mr. Spitzer and the DOJ thought about before they tackled
the Internet gambling industry. But the scope of WTO law is not defined by what
the U.S. (or any other WTO member) regards as an external trade matter or an
internal matter. The scope of WTO law is defined by the text of the WTO Treaties
and these can capture domestic regulation on gambling, or any other matter, as
long as it also affects foreign traders (which is very often the case in today's
ever more international business environment).

Furthermore the U.S. itself has brought cases on issues that the responding
party viewed as matters of domestic regulation. For instance, the WTO cases
against the EU's bans on hormone treated beef or GMO foods (both of which apply
to all products, irrespective of their origin). The simple fact is that the
political views on whether or not a WTO complaint is justified will very much
depend on the domestic, political perspective. But that, of course, can play no
role in determining whether the rules of international law apply or not.

A practical lesson. One practical lesson this case teaches us is that the WTO
can impact on all sectors, including in sectors where businesses least expect
it. And of course, it is not only businesses from developing countries that can
benefit from improved market access to major Western markets. U.S. companies can
and should also make use of WTO law, for instance to overcome trade obstacles in
the EU.

Craig Pouncey and Lode Van Den Hende
work in Herbert Smith's trade and WTO practice in Brussels and act for Antigua
in its WTO complaint against the U.S. Herbert Smith, one of the world's leading
firms for international litigation, has over 1,000 lawyers in its headquarters
in London and other offices in Europe and Asia. In the trade and WTO area
Herbert Smith has acted for U.S. interests in high profile disputes with the EU,
including the disputes on bananas and hormone treated