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October-15-2007,
The Claims for Compensation in the Antigua WTO Case are Reasonable...By Hartley Henderson

When the United States decided to renege on its WTO obligations with regards to providing gambling services, it likely realized the decision would be a costly one. The U.S. chose to rewrite its commitments as is afforded under Article XXI of GATS, but the article is clearly written in a way to discourage countries from doing so. After all, "a deal is a deal" has been cited many times by American spokesmen in both trade negotiations and in contract law and in fact those exact words were uttered by U.S. Trade Representatives on numerous occasions when other countries such as Mexico and China tried to opt out of commitments. So naturally the WTO wanted to ensure that trade representatives in all countries thought long and hard before deciding to alter their schedules and undermine the organization and fair bargaining process. Hence the following was written in Article XXI paragraph 2 under the section of rewriting of schedules.

The modifying Member shall enter into negotiations with a view to reaching agreement on any necessary compensatory adjustment. In such negotiations and agreement, the Members concerned shall endeavour to maintain a general level of mutually advantageous commitments not less favourable to trade than that provided for in Schedules of specific commitments prior to such negotiations. (b) Compensatory adjustments shall be made on a most-favoured-nation basis.

The most favoured nation basis (MFN) is an interesting concept derived by the WTO to ensure that small nations such as Antigua can't be bullied by larger powerhouses such as the United States.

On the WTO website, the organization describes MFN as follows:

The most-favoured-nation (MFN) principle is a cornerstone of the multilateral trading system conceived after World War II. It seeks to replace the frictions and distortions of power-based (bilateral) policies with the guarantees of a rules-based framework where trading rights do not depend on the individual participants' economic or political clout. Rather, the best access conditions that have been conceded to one country must automatically be extended to all other participants in the system. This allows everybody to benefit, without additional negotiating effort, from concessions that may have been agreed between large trading partners with much negotiating leverage.

Unfortunately, since the day Antigua brought its grievance against America, the USTRs refused to take the Caribbean country seriously. They absolutely refused to meet with Antiguan representatives and attorneys to talk about Antigua's concerns and instead reverted to threats and stall tactics. And even when WTO judicial councils ruled in favor of the country of Antigua, the United States refused to take the decisions seriously. The final insult to the country occurred earlier this year when the USTRs scoffed at Antigua's claim for $3.4 billion per year in trade concessions and argued that a more realistic figure was $500,000 per year. This statement, of course, is inane since the court costs incurred by Antigua to bring the case were far more than the amount the U.S. offered. All the while the U.S. happily offered remote gambling services within its own country. Thus it seems evident that the United States doesn't believe in MFN.

But the question has to be asked, is the $3.4 billion per year being requested by Antigua and the much larger sums being bantered about by the EU, Canada, Australia, Macau, Costa Rica, Japan and India reasonable? By all accounts when all is said and done, the U.S. could be on the hook for $100 billion as a result of its choice to alter its commitments. First, let's consider Antigua. In 2001, prior to the vigorous efforts by the United States to block online gambling services to U.S. citizens, the Antiguan Directorate of Offshore Gaming had issued over 100 licenses which allowed companies to take bets worldwide for betting on sports and casino games. Licensees seemed to prefer the destination because it was close to the U.S. (which was the largest offshore gambling market in the world), plus Antigua seemed the most determined to do things right. The country took extensive measures to ensure the games were regulated and audited, that gambling by minors and problem gamblers were addressed and that anti-money laundering efforts were in place. In return the country made each licensee pay a fairly hefty fee to operate, as well as pay the government 3% of their profits. The casinos and sportsbooks were doing quite well catering to mostly U.S. bettors, the country's economy was improving as a result of the new revenue source and jobs were becoming available at decent wages (by Antiguan standards). Indeed the country seemed in a position to turn its economy around to the tune of billions of dollars. The $3.4 billion was not pulled out of thin air. According to Mark Mendel, Antigua's lawyer:

"We engaged some professional economists to perform our damage calculation. They acquired independent market data on global gaming, which included not only historical numbers for global gaming, broken down into type, country, etc., but projections as well."

When suggested that $3.4 billion still seems like a lot of money, Mark further added:

"The independent information we acquired shows that a massive amount of revenue-over US $2.0 billion at one point-was being earned by Antiguan operators. As incredible as it may seem, it is true, and can be borne out just by looking at some of the earnings of the public companies in the 2003-2006 time frame. It is typical for people to say 'that's too much,' but when you look at the facts, there they are."

Don't forget, just prior to the UIGEA being passed, online gambling was said to be a $12 billion industry and conservative projections pegged it to reach $30 billion by 2010. Looking at the exponential growth in online gambling revenues within the UK today where gambling is legal and regulated, it is not inconceivable that Antigua's revenues could have exceeded $3.4 billion per year had the status quo continued. After all, for a while even William Hill had an Antiguan license, but withdrew from the country when Kyl et al. started making waves.

As for the other countries, the claims could exceed $100 billion. The original speculation was that the European Union would seek $15.5 billion in compensation, but the figure for the 27 member state nation has since increased. That shouldn't be surprising. Many members of the EU are now offering online betting and the requirement that businesses in those countries not solicit Americans will hurt the bottom line greatly. In fact when the UIGEA was passed, $6 billion was wiped off of the AIM stock market in England and that represented only a small portion of the UK gambling companies. As well the EU would seek amounts that carry forward indefinitely, so even at the $15.5 billion per year figure, over 5 years that would equate to almost $80 billion. Companies such as Betfair, William Hill and Ladbrokes which had intended to target U.S. customers were forced to change their plans, and Party Gaming which had almost 75% of their poker customers from the U.S. were forced to close off that market, greatly hurting both the company and that sector of the British economy. As well many highly regarded companies from Austria were forced to abandon any plans to cater to the U.S. market. Consequently, it isn't hard to justify the figures being sought by the European Union.

Canada currently offers online gambling via servers in Kahnawake, Quebec. The Mohawks which run the servers take bets from all over the world excluding Canada. Seeing the success of Kahnawake, other first nations in Canada have indicated interest in setting up similar outlets in different regions of Canada, not to mention the fact that at some point the Canadian government may get in the game. With Canada sharing a border with the U.S., it is not inconceivable that American bettors would flock to Canadian gaming sites over other offshore sites. Thus the closing of the U.S. market to Canada could be an astronomical blow to the Canadian economy in the future if online gambling is opened up. Don't forget the countries don't have to prove actual losses to date as a result of the changing of the schedules, but simply need to show potential lost revenue.

Macau is a gambling Mecca in Asia catering to the lucrative Chinese market. The number of Chinese citizens that like to gamble combined with the fact that gambling in China proper is illegal gives Macau the ideal setup to flourish. Until 2002, Stanley Ho had a monopoly on gaming in the country, but in that year the monopoly was taken away and various casino operators from the United States set up shop. Included were Four Seasons, Sands, MGM and Hyatt and the economy of Macau has never been better. It is thus no surprise that Macau expects compensation from the United States. It is quite likely that Macau only revoked Ho's monopoly with the expectation that Ho and the government would be able to generate revenue via online gambling in the future. Indeed Stanley Ho had various ideas that would see Americans wagering virtually into Ho's casinos. In fact, in the 2000 census over 2 million Americans listed their prime language as Chinese and without question the number will skyrocket in 2010. To simply close off that potential market to Macau is worth several billion in compensation.

Australia and Costa Rica each had several online casinos that catered to the U.S. market at one time or another. Centrebet in Australia was actually owned by the Hilton Group and had a strategy focusing on the American market. They withdrew those plans when the U.S. threatened action. As well, American Gaming operated Mega$ports in Australia but were forced to shut down as a result of DOJ actions. World Wide Telesports was a publicly traded company on the Australian stock market under the name Betcorp, but the stock had to be delisted and the company sold when the UIGEA passed. Costa Rica was one of the largest offshore gambling destinations in the world, but is now a mere shadow of its former self as a result of the UIGEA and the United States' decision to block offshore gambling. Clearly each of those countries is entitled to a great amount of compensation.

India is the anomaly on the list. The country doesn't seem to have much of a gambling market currently, but that doesn't mean they are not entitled to receive compensation. For a country to be considered as being affected they only need to show that there was a possibility they could have benefited by the U.S. living up to its commitments. With a population of 1.1 billion people and a very diverse and sophisticated technological infrastructure it is not inconceivable that India at some point may have considered setting up a gambling economy with the U.S. as a prime target. Again, India only has to prove they could be affected, not that they were directly affected. India exports $112 billion in goods every year and no doubt would love to see sectors of the U.S. economy opened up that are currently closed or heavily taxed to them.

The remaining country is Japan. Markus Jelitto, a counsellor for the WTO in the Trade in Services Division, informed me that there was an unconfirmed press report in the WTO Reporter on September 28th which stated the U.S. and Japan settled their differences, although details of that settlement were not released.

So the U.S. is on the hook for at least $100 billion, but there seems to be some confusion as to what that means. I have read a few reports stating that the U.S. "would be cutting checks for that amount but that isn't the way it works. The affected countries must work with the U.S. to have sectors of the U.S. economy opened which are currently restricted or heavily taxed to them. If the U.S. can not come to an agreement, the decision will be left with a WTO arbiter who will determine what is fair compensation and what sectors the United States must open up. This in turn would greatly affect many U.S. sectors which are currently protected by high tariffs or are simply banned to outside countries. For example, the EU has long been pressuring the United States to open up the financial services sector to allow for foreign mutual funds and futures and the Agricultural industries within the U.S. are somewhat restricted. As well, the U.S. has various copyright and patent protections in place that other countries would like to see gone. If the U.S. is forced to open up $100 billion in those protected sectors it could greatly affect the U.S. economy.

The bottom line is that the U.S.'s decision to change its commitments is a costly one to the country. The reason the United States is so adamant about sticking to its decision to bar other countries from offering remote gambling services to U.S. citizens is unclear, especially given the large gambling economy that currently exists in America and considering the successful regulatory frameworks in other countries. Nevertheless, the U.S. stated "skepticism" about the amounts that have been suggested as compensation, but as can be seen those amounts are not unreasonable since the online gambling market could have been close to a $30 billion industry by 2010 had the U.S. not interfered. And remember, America did account for over 60% of online bettors prior to the passage of the UIGEA. Many have suggested that in the scheme of things this is really a minor inconvenience to the U.S. and is not getting much attention worldwide; but nothing could be further from the truth. In fact many countries are closely monitoring this case to see if the United States is really committed to the WTO and is willing to abide by its rules. In particular, countries like China and a few in Africa are very interested in the outcome of this case given the pressure being exerted on them by the USTR to open up more of its industries. If the USTRs show that they consider the WTO to be a one-way street in favor of themselves, then naturally those industries will stay closed to American interests. The following few months will speak volumes about how serious the U.S. is in the WTO process. MajorWager will keep readers informed of any breaking news.

10-15-2007
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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