Rodrik is wrong about the WTO’s gambling decision

The WTO has ruled in favor of Antigua and Barbados again and again at the WTO, declaring that if the United States allows some forms of online gambling within its borders, then it must allow its citizens to gamble online across borders. This makes Dani Rodrik uncomfortable, but I don’t understand why.

Rodrik argues that the WTO is infringing upon US domestic policy space by interpreting “recreational services” to include online gambling, when “U.S. did not originally intend to include online gambling when it opened its market to similar services.” If that wasn’t the intention, then the WTO ruling is a power grab by the international body:

So the question is precisely who gets allocated the residual rights [to policy-making] in this instance: the international trading regime, or the domestic polity?

This leaves the WTO in a bind. For taking these rules at face value results in decisions such as these that are deeply counterintuitive. As the Harvard law professor Charles Nesson puts it, “people [at the WTO] 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.”

To me, 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.

I disagree with Professor Rodrik on three issues: (1) the factual claim that gambling wasn’t originally part of the Uruguay Round deal (2) the theoretical claim that the ruling is contrary to economic logic, and (3) the impact claim that Americans will be enraged by this infringement upon their “policy space.”

First, the factual claim. The US should have seen this coming. Other countries did, and specifically excluded gambling from the recreational services provision. Professor I. Nelson Rose of the Whittier Law School writes:

The United States had indeed (accidentally) agreed to let in all forms of gambling when, in 1994, it signed the General Agreement on Trade in Services (GATS). It did this by agreeing to let in all “Recreational, Cultural & Sporting Services” . . . “except sporting.” Other countries put “gambling” on their lists of excluded services; the United States did not.

Perhaps it was an accidental inclusion, but then this is the fault of the USTR for being asleep at the wheel, not the WTO for enforcing its agreement. Other countries were apparently more competent.

Second, the economic logic. What is “deeply counterintuitive” about the decision that a country may not discriminate against economic activities along national borders? Perhaps the WTO could have ruled more narrowly, so that Antigua would merely have the right to sell “lottery tickets, participation in Web-based pro sports fantasy leagues and off-track wagering on horse racing,” rather than all forms of online gambling, but that’s arguing about the proper scope of the discrimination in question, not the principle itself. I think it’s logical to believe that, as Sallie James puts it, “if the United States finds online gambling offensive, it must be consistent in its restrictions and apply them equally to domestic and foreign providers.”

Third, the American anger at the decision. Rodrik’s post makes it appear that Americans are so fond of sovereign “policy space” that they will be quite upset by the WTO’s infringement upon it, but Professor Nesson was explaining that the WTO must be reluctant to enforce its decision because Antigua, aware that, absent transferrable retaliatory rights, a few tariffs upon US exports would provide it negligible leverage, requested an awesome penalty:

Mr. Mendel, who is claiming $3.4 billion in damages on behalf of Antigua, has asked the trade organization to grant a rare form of compensation if the American government refuses to accept the ruling: permission for Antiguans to violate intellectual property laws by allowing them to distribute copies of American music, movie and software products, among others.

Dean Baker rightfully highlighted this clever tactic, but Rodrik omitted it. Whether it is pragmatically wise for Antigua and the WTO to entangle themselves in such a high-stakes showdown is a completely valid question, but I don’t think the ruling lacks economic or legal merits. So why is Dani Rodrik so skeptical of the decision?

4 thoughts on “Rodrik is wrong about the WTO’s gambling decision

  1. Mr. Impressive

    Your objections to Rodrik are unpersuasive.

    (1) First, Rodrik did not make a “factual claim” that gambling was not part of the WTO. (To be nitpicky, if such a claim was made, it wouldn’t be a factual claim at all, but rather a legal claim.) Rather, he said that the importance of “online gambling” was not an issue that “loomed large.”

    There is a difference between “gambling” in general and “online gambling.”

    You have given no reason to think that other countries that carved an exception for gambling were thinking of “online gambling” in particular as opposed to “gambling.”

    Do not accuse others of making “factual errors” when you do not understand their point. This is about online gambling in particular, not gambling in general.

    One last point. You seem to think that if you can “blame” the USTR, that would justify shrinking the domestic policy space in the United States. But creating such grave consequences for the errors of one individual would make entering into agreements like the GATT/WTO too risky. If we are to lose our domestic policy autonomy if the USTR turns out to be less than perfect, then that is a grave problem going to the very legitimacy of the WTO system.

    (2) Your asides about discrimination are totally irrelevant. This case is not really about discrimination. We do not discriminate against foreign countries that want to open casinos in Las Vegas. If an Antiguan company wants to open a casino is Las Vegas, they should feel free to do so. It rather was about the type of regulation that is permitted.

    Here is a bit of economic logic for you. Say that gambling is seen as a vice which has negative externalities. (i.e. When the breadwinner blows all the family’s finances gambling, that affects more than that individual. It also affects his family. And it affects society too.) On the other hand, gambling also has its benefits. (i.e. It brings pleasure to people who play.) Economic logic might dictate that an optimal approach is to limit gambling geographically (i.e. gambling addicts living outside of Las Vegas will have fewer opportunities to feed their addiction and those living inside of Las Vegas will have the option to move to a city where gambling is not as readily available — but it is impossible to move away from the Internet) or to limit it to games that tend to not be as addictive for most people (i.e. lottery tickets).

    Thus, there is an argument that prohibiting online gambling operations (whether run by foreigners or US citizens) while restricting it geographically (again, whether the Casinos that are so restricted are owned by foreigners or US citizens being irrelevant) would be optimal in terms of economic logic.

    Your arguments about discrimination are more rhetorical than substantive. They are very much off the mark.

    (3) Your point about retaliation in the area of IP is an interesting one. But, also irrelevant to any critique of Rodrik’s argument.

    Here is Rodrik’s critique, in a nutshell, as I understand it.

    1 – In terms of interpretation, the WTO should consider the intent and circumstances surrounding adoption of the agreement, not take the very broad language that was used as a license to invade domestic policy space in ways never intended.

    2 – Certain restrictions may have their own economic logic. Decreasing the number of policy options available domestically may lead to the adoption of policies that are economically less efficient.

  2. Jonathan Dingel

    Mr. Impressive,

    Thanks for reading and sharing your thoughts.

    (1) The factual claim in dispute is whether the US could have reasonably foreseen gambling as being included in the “recreational services” definition. Rodrik wrote that, according to the NYT, “did not originally intend to include online gambling.” Since other countries anticipated that gambling, of which online gambling is a subset, would be included, it seems reasonable to say that, while the US may have erred, this is not a surprise jurisdictional expansion of the GATS. The factual claim was about reasonable anticipation, not the correct legal interpretation, and I apologize for being unclear in the original post.

    In regards to “blaming” the USTR, I did not say that this was a desirable policy outcome nor that the USTR deserves to suffer the full consequences of its error. I’m merely defending the WTO dispute ruling as institutionally appropriate. The pragmatic and policy questions are beyond the scope of what I wrote.

    (2) Rodrik’s original post contained little discussion specific to gambling and no articulation of its special status as a vice with negative externalities, so I don’t think I was remiss in omitting this realm of discussion from my post. I agree that the WTO may have erred in ruling that the US must now permit all forms of online gambling.

    As I originally wrote, it would likely have been better off with a narrow ruling that “Antigua would merely have the right to sell “lottery tickets, participation in Web-based pro sports fantasy leagues and off-track wagering on horse racing.” But if you want to argue about the proper scope of non-discrimination, then you’ve conceded that vice legislation should not discriminate between domestic and foreign sources of vice. Your complaint is about properly defining the scope of some 8 digit HTS codes. I happen to think that you’re right that the more narrow ruling would be correct. That doesn’t mean that the WTO ought to have ruled for the US.

    (3) I think the omission is relevant because Rodrik argued that “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.” This restriction is not wildly unpopular. The backlash will be from IP owners, not public citizens concerned about infringements upon domestic policy space. Does that mean it’s not time to rethink? Probably not, but you need another motive now.

    Here’s my objection to the nutshell version –

    1- It’s difficult to say the invasion was never intended if other countries anticipated its application and chose to exclude it.
    2 – Where possible, logical (and illogical) economic restrictions ought to be applied without discrimination. Since it is feasible to allow foreign service providers to provide the same types of online gambling (lottery, sports, horses) as domestic service providers, it ought to be allowed.

    I doubt that Mr Impressive and I disagree nearly as much as he implies in his comments.

  3. Mr. Impressive

    There is a risk to any argument. Disagreements tends to be emphasized and highlighted, where in contrast areas where agreement exists tend to be demphasized. So, I agree, we probably agree on much more than my discussion indicated. I think it is useful that you pointed out.

    I agree with the principle of non-discrimination. At least as between private domestic companies and private foreign companies. But, I do not believe that a foreign company should have the right to run a lottery when domestic companies do not have that right in states where the lottery is a government monopoly and when profits from those lotteries go to government functions such as public education.

    On the other hand, if US companies were allowed to run Internet gambling operations, I think equal access should be given to Antiguan operators and all other eligible WTO members who meet the same requirements that US companies meet. But, it should be noted that “off-track wagering on horse racing” is not necessarily equivalent to Internet-based wagering on horse racing. Likewise, a government monopoly selling lottery tickets where the funding goes to public education and other government services is very different from lotteries run on the Internet where the profit goes to private companies. The web-based fantasy leagues should be allowed on an equal basis to all, of course.

    It is highly likely that Mr. Rodrik takes a similar position, although I am no mind reader. You really have no basis for thinking that Mr. Rodrik takes issue with the basic principle of non-discrimination enscounced in the WTO and hence your argument in point number 2 is likely irrelevant. It is somewhat of a mystery exactly what sort of economic logic Mr. Rodrik was referring. But, I do not think it is plausible to think that he was taking issue with the principle of non-discrimination in general. (Although it is clear that he does take issue with a “purely non-discriminatory approach” when “practical and administrative difficulties” are excessive.)

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