TWN Info Service on WTO and Trade Issues (May 07/09)

28 May 2007

US move for GATS schedule modification (after losing gambling case) is an 'uncharted area'

The move of the United States to re-negotiate and modify, in terms of Article XXI of the GATS, its schedule of services market access commitments, and under it the Uruguay Round commitment on 'gambling services' sub-sector is an uncharted area of the WTO, its General Agreement on Trade in Services and the Dispute Settlement system.

The outcome will have some far-reaching effects on the WTO, GATS, and the current Doha negotiations for further liberalisation of 'trade in services'.

The US move came after it lost in a dispute settlement case at the WTO which had been initiated by Antigua and Barbuda.

Below is an analysis of the US move by Chakravarthi Raghavan, Editor Emeritus of theSouth North Development Monitor.  It was published in the SUNS on 9 May.

With best wishes
Martin Khor

US move for GATS schedule modification is an 'uncharted area'

Published in South-North Development Monitor on 9 May 2007

By Chakravarthi Raghavan, Geneva, 7 May 2007

The move of the United States to re-negotiate and modify, in terms of Article XXI of the GATS, its schedule of services market access commitments, and under it the Uruguay Round commitment on 'gambling services' sub-sector (within the category of 'recreational services'), and involved the issue of compensation to 'affected parties', is an uncharted area of the WTO, its General Agreement on Trade in Services and the Dispute Settlement system.

The outcome will have some far-reaching effects on the WTO, GATS, and the current Doha negotiations for further liberalisation of 'trade in services'.

An announcement in Washington last week by the Deputy USTR, Mr. John Veroneau, of the move to modify, has again claimed that the original schedule filed in 1993 was a 'drafting error', and the US was only modifying and correcting this error - as the only way to comply with a panel and Appellate Body (AB) ruling, and now a compliance panel ruling. These rulings found that the US measures restricting internet gambling access was discriminatory in the face of the US federal law, the Interstate Horseracing Act, which has provisions enabling remote gambling.

The ruling against the US (panel ruling in 2004, and the AB ruling in 2005, followed by adoption of the ruling by the DSB) came in a dispute raised by Antigua and Barbuda.

In making the announcement about seeking modification to clarify its WTO commitment, Deputy USTR Veroneau said in Washington that in the early 1990s when the US was drafting its commitments to open its market in recreational services, it was not made clear that these did not extend to gambling - an area where for decades there were laws banning inter-state gambling. Also, claimed Veroneau, that back in 1993, no WTO Members could have "reasonably thought that the US was agreeing to commitments in direct conflict with its own laws."

He went on to argue that neither the US, nor any other WTO members had noticed this oversight in drafting until Antigua and Barbuda "initiated a WTO case ten years later (in 2003)" , and has gone to claim that the WTO panel had acknowledged that the US did not intend to adopt a commitment inconsistent with its own laws.

However, that panel found that the US federal law, the Interstate Horseracing Act, permitted interstate wagers to be accepted by an off-track betting system via telephone or other modes of electronic communication (which includes internet) and thus discriminated between foreign and domestic gambling service suppliers.

In challenging the US explanation that it was a drafting error that led to the initial commitment in 1993, a US lawyer, Mark Mendel (one of Antigua's lawyers in the dispute) in a comment to Simon Lester, posted on the International Economic Law and Policy blog, has said that it is really an incredible allegation that it was simply a US drafting error or mistake. "Over 100 WTO members," he said, "managed to exclude gambling commitments from their schedules, over a dozen of them by explicit reference. It is simply impossible for the US to have made a mistake in this regard."

Other trade observers note that the Uruguay Round GATS negotiations, as is the case now too, had involved members making 'initial offers', these offers being circulated plurilaterally among those members who made offers, then such participating members making 'requests' for improvement to individual members making offers and improvements (or new offers) made and ultimately all these being plurilaterally scrutinised and accepted for scheduling - when they were multilateralised on an MFN principle among all members.

The Marrakesh treaty (with the requirement, unlike in the old GATT, of signatories agreeing to bring their domestic laws into compliance with the Marrakesh Treaty and its annexes), as well as the DSU (and its rulings automatically accepted by negative consensus), and all signatories having to sign on to all agreements, came almost at the end (in Nov-Dec 1993).

In the processes and procedures for the modification of the US schedule, there are no precedents to follow, and hence it is an uncharted territory - and the outcome could have consequences that are likely to affect existing GATS rights and obligations, as also the course of the current negotiations in GATS under the Doha Round, some trade experts suggest.

It would add one more uncertainty to the GATS negotiations of 'negotiating' without any data (see Chakravarthi Raghavan 2002, 'Developing Countries and Services Trade: Chasing a black cat in a dark room, blindfolded', TWN Penang). Twenty-one years after the launch of the Uruguay Round (and the promises that a data collection process will be set in motion), and 12 years after the Marrakesh Treaty came into force, despite the United Nations having agreed on a manual for collection of Services data in national accounts, these national accounts, even when collected and collated, will not provide any data or comparable data on national or international data on trade in services in all four modes. At an UNCTAD consultation in 2002-2003, in which this writer participated, the experts who had designed and got the manual okayed could not explain how the data would show national trade in services at sufficiently dis-aggregated levels, nor how directions of such trade could be deduced. Later, one of the experts privately explained that in drafting the manual they did not know the kind of data that trade negotiators would need!

A former UNCTAD economist and a Research Fellow at the Financial Market Centre is engaged in a project to assess the use of national banking data to assess the value of banking services and trade in banking services. If successful, perhaps it could provide a secondary source of national and international data on trade banking services, and maybe a secondary source of data could be evolved for some internationally traded insurance services also.

There are others who however question this, and any event wonder whether it would be useful in such disputes and adjudication by arbitrators.

But beyond that, the entire services trade is still without any reliable and comparable data.

As for modification of GATS schedules, after the Marrakesh Treaty came into force, there is only one instance of modification of GATS schedules - that by the European Community to adjust the schedule, as a consequence of the expansion of the Community with several new members.

The GATS provisions (in Art. XXI) for modification of schedules is slightly different from analogous provisions of the General Agreement on Tariffs and Trade. There is no concept in GATS of initial and substantial negotiating rights, obliging the GATT member seeking modifications to enter into consultations and negotiations with identified affected members and compensating them for loss of trading opportunities by such withdrawal. In terms of GATT, where there is plentiful data of trade, and directions of trade, the loss of trading opportunities and compensation is a quantifiable exercise.

As the former Ambassador to GATT, Mr. B. K. Zutchi, who personally played an important role as negotiator in the drafting of the GATS articles, explains it in a communication:

"During the negotiations of Art. XXI of the GATS, it became clear that the concept of negotiating rights could not be instituted in the services agreement, at least in the beginning, because there was no reliable and comparable information on trade flows, which is the very basis of this concept in the GATT. Several alternatives were discussed with a view to seeing whether affected parties could be identified or even guidelines laid down for their identification. The negotiating process was not able to throw up an acceptable basis for identifying affected parties."

It is in this background, says Zutchi, that the Uruguay Round participants negotiated a balance between the rights and obligations of the withdrawing (modifying) member and the affected members, by allowing the latter to lodge their claims for loss of trade and consequent compensation, and obliging the withdrawing member to enter into negotiations with all the members who may choose to lodge claims, but leaving it to the withdrawing party to accept or reject a particular claim. At the same time, a process of arbitration was provided against arbitrary behaviour on the part of the withdrawing party.

The GATS Art. XXI. 3 (a) provides that if no agreement is reached, the affected Member may refer the matter to arbitration, and any affected Member that wishes to enforce a right that it may have for compensation must participate in the arbitration.

In the event of a claim and arbitration, according to Art. XXI 4.(a), the modifying member may not modify or withdraw its commitment until it has made compensatory adjustments in conformity with the findings of the arbitration. Sub-para (b) then goes on to provide for the usual WTO remedy of retaliation by withdrawal of equivalent concessions, in the event of the modifying Member implementing its proposed modification or withdrawal without complying with the terms of the arbitration finding.

While Antigua and Barbuda is the complainant in the dispute, trade sources note that there are some EU members with extensive interest in gambling services. Britain, for example, has several enterprises providing gambling services and internet gambling; some of the executives of these firms have been 'arrested' by US authorities, while they were 'transiting' the United States, and are being proceeded against by the US for violation of its gambling statutes. There are also a few other EU members who have an interest.

Some trade observers and experts suggest that if the US claim of error in scheduling gambling services as among the US market access commitments in GATS was genuine, they could and should have raised this right at the beginning when Antigua and Barbuda sought consultations - preliminary to raising a dispute. They could have argued at that time that in the context of their domestic political economy, they would not be able to honour such a commitment.

According to Antigua officials and their online gambling association, there are about 30 casinos licensed to operate, employing some 1000 people, and bringing in an annual estimated revenue of $130 million.

The US inter-state (and internet) gambling market is said to be of the value of about $15 billion.

Some US media reports (WTO Reporter of 7 May) have cited unnamed US officials as saying that there was little chance of the US offering compensation to Antigua and Barbuda.

Other trade experts note that there are very competing stake-holder interests involved in the US - both those who want to prohibit foreign supplier competition in the lucrative domestic gambling industry, including inter-state on line gambling, and others who are trying to use the WTO system to pry open such a market. Both are busy lobbying the Congress and the administration.

But in the context of the Bush administration popularity, and the 2008 Presidential and Congressional elections in sight (where the Republicans may lose heavily), the administration clearly is in no position to tackle this issue.

In an editorial on 5 May, the Los Angeles Times, the prestigious west coast paper, in an Editorial, accused the US administration of 'gaming a system', and said that while the US move to modify its schedule might solve its problem with Antigua, it won't fix the flaws in the US policy. "As the off-track-betting issue illustrates, Congress loses interest in protecting people from the lure of online gambling when thoroughbreds and trotters (in horse racing) are involved. Similarly, interstate restrictions on games of chance evaporate for state lotteries - a form of gambling that the government enthusiastically promotes. Meanwhile, restrictions on other forms of wagering have led to perverse results... A saner approach would be to allow online betting through licensed and regulated operators (as has now been proposed by the Democratic chair of the House Financial Services Committee".

In terms of the WTO, and GATS scheme, while the arbitrator can fix the value of compensatory adjustments to be made, in the final analysis, the much proclaimed rules-based system provides only for an affected party to 'retaliate' by withdrawing equivalent concessions.

In any event, until the US move, and claims are adjudicated and terms of compensation announced, the US may not modify its schedule. And what happens to the ruling obtained by Antigua in terms of the existing obligation, and the US failure to comply with the ruling appears to be opening up another area for lawyers and their fees.

And, if it was true that the US became aware of its error only when Antigua raised its dispute (and held the consultations with the US as required by the DSU), the US could have claimed at that stage that it had committed an error, that it would be unable in terms of its political economy to honour such a commitment for internet gambling, and had sought negotiations to amend its schedule, and started the Art. XXI process.

The US did not, and probably thought that it would be able to "bully" the system - the dispute panel and the Appellate Body processes (to get a finding in its favour). But this failed.

Their current move for renegotiation under Article XXI is viewed by some trade specialists as a minor triumph for the working of the DSU process. But it can also be seen as an exception proving the rule (of ultimate futility of a lengthy, costly DSU process) more so when considering the large number of cases (principally involving anti-dumping, zeroing, hidden subsidies in agriculture or other GATT obligations) where the US is required to change its law to comply but has not done so.

(* Chakravarthi Raghavan, the Editor Emeritus of the South-North Development Monitor, contributed this commentary.)