WTO Condemnation of U.S. Ban on Internet Gambling Pits Free Trade against Moral Values
By Joost Pauwelyn
On November 10, a dispute-settlement panel of the World Trade Organization (WTO) condemned the United States for banning online gambling.
It did so at the request of one of the smallest countries in the world, Antigua and Barbuda.The case was triggered when in 2000 a U.S. court sentenced Jay Cohen, a U.S. national and founder of the World Sports Exchange, to 21 months in jail for selling gambling services to U.S. citizens from the island of Antigua, in violation of the 1961 Wire Communications Act.
How did internet gambling reach the WTO?World trade rules not only liberalize trade in goods (say, beef or computers), but they also touch on trade in services (for example, cross-border telecom services or the establishment of a U.S. bank abroad).Through this lens, the U.S. ban on internet gambling amounts to a trade restriction on imports (of gambling services) from Antigua.
Antigua’s argument rested on whether the U.S. made any international commitments with respect to gambling services.In its schedule to the General Agreement on Trade in Services (GATS), the U.S. agreed not to impose a number of restrictions on the importation of “recreational services.”For Antigua, and now the WTO, this includes the free flow of cross-border “gambling services.”The U.S., in contrast, has always maintained that it never intended to bind itself in this sensitive sector.First, its GATS schedule explicitly excludes “sporting” services, which on the U.S. reading includes gambling.Second, internet gambling is prohibited within the U.S. so why, the U.S. argued, would it permit foreigners to supply those services?
Pursuing a very textual interpretation, the WTO panel sided with Antigua.It equated the U.S. ban with a prohibited import restriction and found a violation under Article XVI of GATS.
This is where moral values enter the scene.The WTO offers an escape clause for trade restrictions necessary to protect “public morals” or “public order” (GATS Article XIV(a)).Citing concerns of money laundering, organized crime and unrestricted access for minors to internet gambling, the U.S. explained that it is exactly for those reasons that it bans online wagering both domestically and from overseas.
On this point, the Panel sided with the U.S.The Panel relied on, among other things, statements made before Congress by the then U.S. Attorney General, Robert F. Kennedy.Nevertheless, the Panel stopped short of excusing the U.S. ban, for two reasons.First, although the ban is related to public morals, the U.S. should have negotiated with Antigua to see whether less trade restrictive alternatives (other than an outright ban) are available.On that ground, the Panel did not find that the ban was truly “necessary” to protect public morals as required under the escape clause.Second, the panel found that U.S. enforcement efforts are skewed in favor of U.S.-based suppliers of gambling services.Because the U.S. seemed to prosecute foreigners more frequently than U.S.-based suppliers, the panel was not convinced that the ban was applied in a non-discriminatory manner.
In sum, for the WTO panel, the U.S. ban on internet gambling is a trade restriction and cannot be excused on grounds of public order or morality.On that basis, it is about protectionism, not moral values.
The U.S. is certain to appeal this panel ruling.In the meantime, it is worth pointing out some striking features of this latest WTO case and to highlight some of the weak points in yet another controversial WTO ruling.
This case is important for at least two reasons.First, it is the first time that the WTO (or, for that matter, its predecessor, the GATT) ruled on the thorny issue of public morals and whether they can excuse a trade restriction.In rather summary fashion, the panel judged whether internet gambling raises issues of public order or morality and ruled on whether the U.S. had dealt with them in an appropriate manner.This illustrates once more how deeply WTO commitments may penetrate the regulatory powers of its member countries.One week after a U.S. presidential election in which “moral values” voters appear to have played a key role, the ruling is likely to stir up further criticism in the United States of un-elected judges overturning core U.S. values from Geneva.The WTO dispute settlement process is one of the few international dispute mechanisms embraced by the United States (in contrast, most notably, to the International Criminal Court).The WTO risks losing the U.S. as one of its staunchest supporters if it appears to be insensitive to U.S. demands, including those related to “moral values.”
Second, the gambling dispute is a true David against Goliath story.It shows that even the smallest player, Antigua, can win against the biggest trading nation, the United States.At the same time, the dispute also unearths another trend: the growing privatization of WTO dispute settlement.On paper the mechanism is strictly a process between states.Yet, in an increasing number of cases, a single company stands behind the scenes of the state-sponsored complaint (in this case, Mr. Cohen and World Sports Exchange).Moreover, businesses engage in what one could call “state shopping.”In the gambling case, for example, Mr. Cohen, a U.S. national and investor, lost his battle within the U.S. itself, and then obtained the support of a foreign government, here Antigua, to sue the United States.The WTO case thus could be seen as pitting a U.S. investor against the U.S. government.
The weak spots in the panel ruling are at least three-fold.First, although the panel implicitly agreed that the U.S. never really intended to commit itself in the area of gambling services, following a very literal interpretation of the text it eventually came to the opposite conclusion.In particular the explicit exclusion of “sporting” in the U.S. schedule, as it is defined in American English, can with some imagination be said to include gambling, at the very least sports-related gambling.In some of its definitions of “sporting” the panel itself included the activities of gambling, even prostitution.
Second, the panel ruling essentially forces the U.S. to favor foreign suppliers of internet gambling services over domestic ones.This is the reverse of what the WTO normally demands under the so-called national treatment clause, ensuring that foreigners are not disadvantaged against nationals.As noted, the U.S. bans internet gambling both at home and from overseas.For the panel, the fact that it thus treats foreigners the same way as domestic suppliers did not excuse the ban.Under trade in goods rules (GATT), a clear distinction is made between border measures and domestic regulation.Border measures other than tariffs are in principle prohibited (GATT Article XI).In contrast, domestic regulations that apply equally to national products and imports without discrimination are excused (GATT Article III).Under GATS, however, no such clear dividing line is drawn, for one thing because the intangible nature of services makes border control extremely difficult, if not impossible.At the same time, if the ban on internet gambling is indeed non-discriminatory, it could arguably be justified under the GATS national treatment provision (GATS Article XVII).The panel, exercising judicial economy, refused to rule on this provision.The U.S. could, however, invoke it as a defense against the violation of its market access obligation (under GATS Article XVI).Much as under GATT, a domestic services regulation, like the U.S. ban on internet gambling, could then be excused from GATS border or market access obligations if, but only if, it is non-discriminatory.Although this may be difficult to achieve under current GATS rules, the dividing line between domestic regulation (GATS Articles XVII and VI) and market access (GATS Article XVI) needs clarification.
The third point relates to the panel’s treatment of the public morals exception.Because the United States did not engage in consultations with Antigua on alternatives to a complete ban, the panel found that the ban is not truly “necessary.”Yet, if the U.S. can point to a sufficient nexus between its ban and public morals, and if Antigua cannot come up with an alternative that is less trade restrictive and equally meets U.S. needs, it is hard to see why the ban is not necessary and why further consultations were required.The indication that the U.S. may have acted tougher on foreigners than on domestic suppliers, though apparently true, does not necessarily demonstrate a clear pattern or practice of bias.More generally, the case shows that allocating the burden of proof to the defendant, here the U.S., for all elements under a WTO exception is problematic.The notion of burden of proof normally applies to factual issues, not to legal rules or exceptions.In this case, once the U.S. has offered a prima facie case of “necessity”, the burden could reasonably be placed on Antigua to come up with a valid alternative to the ban or to prove a consistent practice of its biased enforcement.
At the same time, this latest WTO ruling need not be seen as a serious encroachment by the WTO on U.S. sovereignty.Even if the panel ruling were upheld on appeal, the U.S. can easily bring its ban on internet gambling in line with WTO rules.All it needs to do is to sit down with Antigua and in good faith try to see whether there is any alternative (such as strict regulation) to a complete ban.Given its tough stance at home (once again, the U.S. bans internet gambling also within the U.S.), it is unlikely that any such alternative is available.The other thing the U.S. would need to do is to go more forcefully after U.S.-based infringements.If it does these two things, the U.S. ban will be excused.Hence, even on the panel’s reading, it would be relatively easy for the U.S. to convert this WTO ruling from one finding protectionism to one recognizing the importance of moral values.
Finally, if necessary, the United States can always re-negotiate its GATS commitments and withdraw the one on internet gambling (GATS Article XXI).All it needs to do is offer equivalent compensation or accept reciprocal trade retaliation by Antigua.
About the Author
Joost Pauwelyn is Associate Professor of Law at the Duke University School of Law.From 1996 to 2002 he worked as a legal officer with the WTO Secretariat.Joost is the author of Conflict of Norms in Public International Law:How WTO Law Relates to Other Rules of International Law (Cambridge University Press, 2003).
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