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?

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?

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?

Dani Rodrik, surrounded by anarcho-sympathizing libertarians at Cato Unbound, thoughtfully discusses the limits of self-enforcing agreements. In response to Peter Leeson’s claim that we don’t see “shriveling international commerce in the absence of supranational commercial law,” Rodrik writes:

It may be objected that the operation of the global economy is proof in itself that a high level of economic activity can be maintained without political institutions… But Leeson is overlooking several things. First, there is in fact a significant global institutional architecture that supports the international economy: globalization would not have reached this far in the absence of the WTO, IMF, World Bank and a host of regional supranational institutions. The global public sector is not non-existent.

Now the World Bank and IMF cannot claim credit for inducing developed countries to liberalize their trade policies, nor do they get much credit for Indian or Chinese policy shifts, so it seems that the bulk of responsibility for the relatively open global trading system would fall upon the WTO. But even those (Subramanian & Wei) claiming that the WTO promotes trade concede that it doesn’t force countries to liberalize, which is why developing countries remain relatively closed and sensitive sectors “did not witness liberalization.” The WTO is not an effective supranational institution if that term means enforcing policies contrary to participants’ wishes.

In fact, a leading theoretical explanation for the WTO is that it is a successful self-enforcing agreement! Bagwell & Staiger:

[T]he optimal unilateral tariff for a national-income maximizing government of a large country is positive. If both governments behave this way and set positive import tariffs, a Prisoners’ Dilemma situation is created. In the Nash equilibrium, tariffs are too high and trade volumes are too low; hence, a trade agreement that facilitates a reciprocal reduction in tariffs could be mutually beneficial…

The terms-of-trade theory is easily generalized to include political considerations, and it may be directly interpreted in the context of the market-access language that trade-policy negotiators use. This theoretical perspective offers a means by which to interpret the rules of GATT/WTO. For instance, it suggests that a government may hesitate to liberalize unilaterally, since it does not want to face the terms-of-trade loss that such behavior would imply…

Likewise, a government would hesitate to liberalize as part of a reciprocal negotiation, if it were concerned that its negotiating partner might later “cheat” and raise its tariff. We argue that the GATT/WTO enforcement provisions can be interpreted in this light…

As there are no GATT/WTO police, agreements between governments achieved through GATT/WTO negotiations must be self-enforcing. Indeed, the rules of GATT/WTO may be interpreted as a codification of supergame strategies.

Rodrik may be right about the limits of self-enforcing agreements in most circumstances, but the liberalization of international trade seems to be a counterexample to his generalization.

[Of course, Rodrik is also writing about the protection of property rights and enforcement of contracts across national borders, which may indeed depend upon states making legal arrangements, but that’s not the role of the IMF, WB, nor WTO.]

A neat idea I first read about in Fair Trade For All apparently has both a longer history and a richer theoretical exposition than I realized.

In 2002, Mexico proposed that the WTO make retaliatory tariff rights tradable, so that countries that would only hurt themsleves by imposing sanctions might still pose a punitive threat to the subject of complaints at the trade body’s dispute settlement mechanism. This sounds like a great idea to me.

Bagwell, Mavroidis & Staiger have an academic paper on the subject: The Case for Auctioning Countermeasures in the WTO. Their result is a bit surprising:

We then consider an extended auction, in which the home country is also allowed to bid to retire the right of retaliation. The extended auction is again characterized by positive externalities between foreign countries. But the extended auction also features negative externalities, since the home country experiences a negative externality whenever a foreign country wins. In the extended auction, we find that auction failure does not occur; in fact, the home country always wins and the retaliation right is therefore always retired.

It’s an odd outcome, but instituting the auction does result in the violator paying compensation, so it sounds better than the status quo. But Bagwell is cautious (pdf) in making a policy recommendation:

[Bagwell, Mavroidis & Staiger] do not claim to answer this question, though, since a system with tradable retaliation rights would generate additional costs and benefits that are not included in their formal analysis. One un-modeled benefit is that the prospect of auction revenue might enable a small and developing country to attract private legal support for WTO legal actions that it would not otherwise be able to afford. Under the heading of un-modeled costs, it is important to
list the possibility that the revenue generated by auctions could result in nuisance cases and excessive use of the WTO dispute settlement system. Another potential cost is that a system of tradable retaliation rights might cause bilateral trade tensions to grow into multilateral tensions. Acrimony across governments could grow, and future negotiations could be undermined…

The costs of a system with tradable retaliation rights could well exceed the benefits. At this stage, I therefore caution against any explicit change in the DSU to accommodate tradable retaliation rights.

True, there are many costs and benefits not examined by a formal auction model, but how does one research the likelihood of nuisance cases or acrimony? I don’t we’re likely to see significant academic progress on whether auctioning countermeasures would be net beneficial, so policymakers ought to start discussing it seriously.

[The general merits of making tort claims transferrable will be familiar to those who have read David Friedman’s Law’s Order.]

I have no idea if these rumors are credible:

The head of the World Trade Organization, WTO, confirmed Wednesday that the group was looking for bigger headquarters but refused to comment on rumours that this could be outside Geneva or even Switzerland…

‘Above all we need to be under the same roof,’ added Lamy who refused to be drawn on claims that the WTO had been approached by Hong Kong and Singapore with a view to moving the operation there. He said he would not fall into a trap of negotiating in public.

AP story.

FT:

Stuart Eizenstat, a former undersecretary of commerce in the Clinton administration, said… whether the current Doha trade round yielded an agreement or not, it should be the last of its kind. “The world is moving too fast for this kind of consensus-driven, five, six, seven, eight-year rounds.”

What aspects of the world now move so quickly that multilateral negotiations are obsolete? The argument is not obvious to me.

More from the same article:

The Atlantic Council… said the struggle to complete the Doha round showed that it was no longer possible to make meaningful progress in a global negotiating system that operated through consensus. It said economies willing to offer large tariff and subsidy cuts need to be able to deal with the “free rider” problem by not extending the same terms to everyone regardless of whether they made equally big concessions – the so-called MFN principle.

Perhaps that’s a coherent story in regards to tariffs, but since it’s not possible to preferentially rescind subsidies (pdf), that’s not a very helpful suggestion in regards to the Doha round’s primary issue!

The Commerce Department has yielded to the WTO’s ruling on zeroing in the calculation of anti-dumping duties. Though the United States has shown a tendency to initially resist WTO rulings against it, it usually concedes, albeit after waiting a number of months or losing an additional ruling. This strikes me as (somehwat) promising for building up the WTO’s institutional credibility

Doug Irwin celebrates the GATT’s 60th birthday (ungated version):

Sixty years ago this week (April 10, 1947) at the Palais des Nations in Geneva, Switzerland, representatives from 23 nations opened a conference that attracted little attention at the time, but had far-reaching consequences for the world economy. The conferees met to negotiate tariff reductions and finalize the text of a General Agreement on Tariffs and Trade (GATT)…

The origins of the GATT can be found in the economic disaster of the interwar period… Although the world economy recovered slowly from the depression, the spread of high tariffs, import quotas, discriminatory practices and foreign exchange restrictions meant that world trade remained stagnant and compartmentalized throughout the 1930s.

The tragic economic and political consequences of that “low dishonest decade” spurred some officials to think about a new economic framework. Marked by the bitter experience after World War I, Cordell Hull — FDR’s Secretary of State — came to believe that “unhampered trade dovetail[s] with peace; high tariffs, trade barriers and unfair economic competition, with war.”…

[In the 1947 GATT meetings, the] U.S. insisted that the most-favored nation (MFN) clause — ensuring nondiscrimination in trade — be the Article I cornerstone of the GATT because it wanted to prevent the spread of Imperial preferences that discriminated against its exports. Fearful of its postwar financial situation, Britain demanded large American tariff cuts in exchange for a reduction in preferences and wanted the freedom to impose quantitative restrictions on imports in case of balance of payments difficulties, something that became Article XII of the GATT…

Over its 60-year history, the GATT has had many shortcomings. Agricultural trade has largely eluded liberalization. The current spread of preferential trade arrangements… have reintroduced discriminatory trade practices…

Despite these shortcomings and difficulties, the GATT framework has survived as a durable code of conduct for commercial policy and dispute resolution…

The prosperity of the world economy over the past half century owes a great deal to the growth of world trade which, in turn, is partly the result of farsighted officials who created the GATT. They established a set of procedures giving stability to the trade-policy environment and thereby facilitating the rapid growth of world trade. With the long run in view, the original GATT conferees helped put the world economy on a sound foundation and thereby improved the livelihood of hundreds of millions of people around the world.

The task for statesmen today is to look beyond short-term political considerations, arising from the complaints of special interests that fear market competition and the parsing of subsidies, and bring the ongoing Doha Round to a successful conclusion. If immediate steps cannot be taken to liberalize trade, then the phasing in of reforms and the phasing out of subsidies over many years is perfectly consistent with the long-term objectives of the GATT. We should remind ourselves how much poorer the world would be today without the politically courageous decisions made by visionary diplomats meeting in Geneva 60 years ago this month.

This is the appropriate occasion to call for good trade policymaking, but I won’t hold my breath.

Daniel Altman explains global economic governance by grouping together the IMF-WB-WTO trio and extending the “chairs and shares” IMF story to apply to the WTO in an IHT article. The result is nonsense:

The World Bank, the International Monetary Fund, the World Trade Organization – the United States manages to dominate all three groups and more, thanks to its economic might, or at least the economic might it had when those organizations were conceived. But how much of that power will it have to cede to China when that country outweighs U.S. productive capacity?…

In September, China was granted a quarter more votes in the IMF as an acknowledgment of its growing economic importance…

The World Trade Organization is an even tougher nut to crack, since it works on a consensus system; each member has a veto. Still, the United States has found other ways to dominate its operation, for example by initiating more trade disputes (and being the respondent in more trade disputes) than any other member. And only the United States and the European Union participated in the backroom negotiations at both the Uruguay round of trade talks in the 1990s and the Doha round that is currently under way.

Being the respondent in WTO dispute cases is a sign of dominance?!? Hats off to the US for ruling the globe by losing cases to Antigua and Brazil. I suppose China ought to welcome a flurry of cases against it.

Similarly, Altman’s characterization of trade negotiations is misleading. First, the green room meetings of the 1990s often included 25-30 participants, not merely the US and EU. Second, the US failure to enter into productive dialogue with important trading nations is a sign of its incompetence and inability to complete the Doha round, not dominance. Third, the EU and US have sought to increase Chinese participation in the Doha round of negotiations, but China has been satisfied to rest on the laurels of its 2001 accession.

Altman is a solid journalist and very smart guy, but I think he has mischaracterized the American and Chinese roles in the WTO.