Author Archives: jdingel

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?

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?

Cheap “fixes” for migrant problems

Problem:

Thousands of migrants try to enter Europe illegally each year and hundreds die on often perilous sea journeys.

Solution:

A $6bn development package for West Africa has been revealed which it is hoped will help halt the emigration of young people from the region.

Solution that might actually work:

Sadly, there is no quick-fix way to keep Africans from attempting the deadly journey to the Canary Islands and Lampedusa in unseaworthy craft, as there is no quick-fix way to keep Mexicans and Central Americans from attempting the risky crossing of America’s southwest desert. But among the highly imperfect solutions, Harvard’s Lant Pritchett has the best: give many of them a humane and dignified path to a substantial degree of economic opportunity through expanded guest worker arrangements.

Cheap "fixes" for migrant problems

Problem:

Thousands of migrants try to enter Europe illegally each year and hundreds die on often perilous sea journeys.

Solution:

A $6bn development package for West Africa has been revealed which it is hoped will help halt the emigration of young people from the region.

Solution that might actually work:

Sadly, there is no quick-fix way to keep Africans from attempting the deadly journey to the Canary Islands and Lampedusa in unseaworthy craft, as there is no quick-fix way to keep Mexicans and Central Americans from attempting the risky crossing of America’s southwest desert. But among the highly imperfect solutions, Harvard’s Lant Pritchett has the best: give many of them a humane and dignified path to a substantial degree of economic opportunity through expanded guest worker arrangements.

What’s the US advantage in FDI returns?

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich

What's the US advantage in FDI returns?

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich

What's the US advantage in FDI returns?

“U.S. investors earn a significantly higher rate of return on their foreign investments than foreigners earn in the United States… about one-third of the excess return earned by U.S. corporations abroad can be explained by firms reporting “extra” income in low tax jurisdictions of their affiliates.” – Barry Bosworth, Susan M. Collins & Gabriel Chodorow-Reich

This paper takes free trade seriously

A 2003 paper (pdf) from Dean Baker:

“Free trade” has generally been used to refer to the removal of trade barriers that protect less-skilled workers… The term has rarely been used in the context of efforts to extend protectionist barriers that benefit powerful industries… A consistent proponent of “free trade” would be opposed to all these barriers to the free exchange of goods and services…

While both Democratic and Republican administrations have actively sought to lower some types of trade barriers, most notably on manufactured goods, U.S. trade negotiators have done little or nothing to lower other barriers… highly paid professionals continue to work in a well-protected labor market. This protection is one reason that wage growth for these professionals has consistently outpaced the rate of wage growth of most other workers in the United States over the last two decades…

Skilled labor is in fact a produced input… In the same way that developing countries can often produce steel or apparel at a lower cost than in the United States,developing countries will often be able to educate doctors, dentists, lawyers, or accountants — to U.S. standards – at a far lower cost than in the United States…

U.S. trade policy toward highly paid professional services has largely gone in the opposite direction in recent years, increasing barriers to foreign professionals… a new test – which only applied to foreign trained doctors — was put in place as part of the licensing requirements for foreign physicians. As a result of these restrictions, the inflow of foreign residents was cut almost in half…

[S]ince 1976, the Federal government has had a policy of refusing to hire foreign citizens, unless no qualified citizen can be found for a position. The analogous policy for goods would be a federal buying policy that required the government to purchase only U.S. made products, unless there were no domestic producers of a specific item. Such a policy would be a blatant violation of NAFTA, the WTO, and numerous other trade pacts….

The potential economic impact of freer trade in professional services is at least an order of magnitude higher than most of the items that currently dominate the trade agenda… [R]emoving barriers for four categories of highly paid professionals –doctors, dentists, lawyers, and accountants… [would produce] annual gains to consumers [that] could be between $160 billion and $270 billion, or between $2,200 and $3,700 a year for an average family of four.

In defense of anti-dumping

Ever the contrarian, Dani Rodrik mounts a defense of anti-dumping rules (pdf):

There are also some provisions of the GATT/WTO regime that are highly open to protectionist abuse, but these have had only limited impact on trade. The anti-dumping (AD) provisions of trade law are particularly notable in this respect, as they provide easy access to protection in circumstances where the economic case for protection is weak or non-existent. While countries do make use of AD, it is hard to argue that the world economy has greatly suffered as a result. In retrospect, what is striking is not that AD is used, but that it is used so infrequently in light of the flexibility of the rules, and that it has caused so little damage. Indeed, we could argue that AD has made the trade regime more resilient by providing a safety valve for protectionist pressures. These pressures might have had more damaging consequences otherwise, if they had to make their way outside international rules rather than within them.

Border effects & prices

Yuriy Gorodnichenko and Linda Tesar (2006), “Border Effect or Country Effect?“:

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model it is impossible to separate the “border” effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the US and Canada.

Via DeLong.