Choosing between liberalization and regulatory autonomy under GATS: implications of U.S.-Gambling for trade in cross border e-services.

• Author: King, Nancy J.

ABSTRACT

In 2005, the World Trade Organization (WTO) Appellate Body presided over United States--Measures affecting the cross-border supply of gambling and betting services (U.S.-Gambling), in which Antigua argued that U.S. criminal laws banning the provision of cross-border online gambling services violate U.S. commitments under the General Agreement on Trade in Services (GATS). For the first time, the WTO's dispute settlement process directly addressed the application of GATS to domestic regulatory barriers restricting cross-border trade in services. This Article examines GATS rules on domestic regulation as well as the WTO Appellate Body and Panel decisions in the case and asks if the WTO has improperly restricted members' ability to regulate domestic concerns. What will be the broader impact of the WTO's rulings for cross-border trade in e-services? Highlighting the difficulties that members face in trying to resolve the conflict between liberalization and regulatory autonomy in the context of cross-border e-services, this Article argues that the scope of GATS rules on domestic regulation needs to be refined if GATS is to remain an instrumental force in liberalizing trade in e-services. The Article concludes with proposals to guide the negotiations on domestic regulation to ensure that such regulations are not unnecessarily burdensome to trade in e-services. Identifying certain unresolved issues of U.S.-Gambling that characterize the tension between market access and domestic regulatory autonomy, it also argues that these issues must be addressed in the negotiations on domestic regulation if a desirable balance between regulatory autonomy and progressive liberalization of global e-services markets is to be achieved.

TABLE OF CONTENTS I. INTRODUCTION II. GATS, TRADE LIBERALIZATION, AND DOMESTIC REGULATION A. Making Commitments to Liberalize Trade in Services B. Most Favored Nation, Transparency, and Other General Obligations of Members C. Limitations on Domestic Regulation that Restricts Trade: Balancing Liberalization with Regulatory Autonomy 1. The Article VI Mandate to Develop Disciplines on Qualitative Domestic Regulation 2. Article XIV Exceptions Permitting Regulations Necessary to Protect Fundamental Domestic Policy Interests 3. Articles XVI and XVII: Restrictions on Quantitative and Discriminatory Forms of Domestic Regulation i. Market Access Obligations Restrict Domestic Regulations that Place Quantitative Limits on Access to Services Markets ii. National Treatment Obligations Restrict Discriminatory Domestic Regulation III. THE U.S.-GAMBLING LITIGATION A. The Panel's Decision B. The Appellate Body's Decision IV. THE TENSION BETWEEN LIBERALIZATION AND REGULATORY AUTONOMY: INSIGHTS FROM U.S.-GAMBLING A. U.S.-Gambling: An Erosion of Domestic Regulatory Autonomy? B. The Role of Disciplines under Article VI: 4 and the Accountancy Disciplines C. Article XIV Shields Domestic Regulation that Restricts Liberalization 1. The First Tier of the Article XIV Analysis 2. The Second Tier of the Article XIV Analysis V. ENHANCING THE REGULATORY ROLE OF GATS FOR CROSS-BORDER TRADE IN E-SERVICES A. GATS and Developments in the WTO Work Program on E-Commerce B. The Need for a Strengthened Discipline on Domestic Regulation C. Going Forward Pragmatically--A Modest Proposal for Drafting Disciplines to Support E-Services VI. LIBERALIZING E-SERVICES: THE CONTINUING DEBATE OVER THE BOUNDARIES OF DOMESIC REGULATORY AUTONOMY AFTER U.S.-GAMBLING A. Determining the Boundaries of the Market Access Obligation B. The Ambiguities of Classifying Regulations as Qualitative or Quantitative C. Whether Legitimate Policy Objectives Support Greater Regulatory Autonomy for Qualitative as Opposed to Quantitative Measures VII. CONCLUSION I. INTRODUCTION

Has the recent decision in United States--Measures affecting the cross-border supply of gambling and betting services (U.S.-Gambling) (1) significantly deprived World Trade Organization (WTO) (2) members of their domestic regulatory autonomy (3) under the General Agreement of Trade in Services (GATS)? (4) What are the implications of this decision for liberalization (5) of cross-border trade in electronic services (e-services) and the growth of electronic commerce (e-commerce)? (6)

In U.S.-Gambling, the WTO Appellate Body (and Panel) challenged conventional understanding of the market access obligation under GATS. (7) It did this by equating a U.S. ban (8) on the cross-border supply of gambling and betting services to a quota, prohibited under the market access obligation of GATS. (9) Critics were quick to condemn the ruling for its expansion of what they termed a "per se" prohibition of an exhaustively defined list of quantitative restrictions under the market access obligation in GATS. (10) Many said the ruling erroneously expanded a GATS prohibition on market access restrictions to include substantive qualitative restrictions based only on their quantitative effects, (11) which contradicted previous views that GATS distinguishes between quantitative restrictions prohibited under the terms of the market access rule and qualitative regulations permitted under the general rules on domestic regulation. (12) The WTO dispute settlement panels were accused of authorizing "WTO intrusion into the regulatory freedom of WTO Members far beyond what was originally agreed to in the WTO Treaty," (13) and threatening "with the stroke of a pen, the validity of scores of domestic services regulations, including those that are non-discriminatory." (14) Responding to the initial Panel Report, the United States Trade Representative (USTR) called the Panel decision "deeply flawed," stating that "the Panel inappropriately found that our regulations on gambling services were a prohibited quota based on a faulty new legal theory that places unwarranted restrictions on the ability of all WTO Members to regulate their service sector." (15) Attorney Generals of twenty-nine U.S. states called the ruling "quite troubling." (16) In April 2006, the Governor of the state of Oregon asked the U.S. Trade Representative to exclude Oregon from the proposed expansion of U.S. commitments under GATS, including those that would cover gambling services. (17)

Although it may be argued that U.S.-Gambling undermines regulatory autonomy, it is less obvious that U.S.-Gambling deprives members of any legitimate rights to regulate services covered by members' commitments under GATS. Concluding its report on the U.S.-Gambling dispute, the Panel categorically states:

We also wish to emphasize what we have not decided in this case. We have not decided that WTO Members do not have a right to regulate, including a right to prohibit, gambling and betting activities. In this case, we came to the conclusion that the US measures at issue prohibit the crossborder supply of gambling and betting services in the United States in a manner inconsistent with the GATS. We so decided, not because the GATS denies Members such a right but, rather, because we found, inter alia, that, in the particular circumstances of this case, the measures at issue were inconsistent with the United States' scheduled commitments and the relevant provisions of the GATS. (18) The U.S.-Gambling reports confirm that both the Panel and the Appellate Body are unequivocal in their rejection of a general "effects" doctrine from being incorporated into the interpretation of the market access obligation. (19) Critics condemned the Panel as having "already made up its mind that the U.S. laws are prohibited market access restrictions simply because they have the effect of a prohibition on certain cross-border supplies of gambling services." (20) However, it is not obvious that the decisions of the WTO dispute settlement panels extend the prohibition on market access restrictions beyond the quantitative restrictions already prohibited by GATS to include all domestic regulation that is quantitative in effect. (21) Moreover, as acknowledged by the Panel in U.S.-Gambling, (22) the architecture of GATS explicitly recognizes the sovereign right to regulate services, and provides flexibility for members to regulate in order to pursue public policy objectives such as consumer protection (for example, regulations that ensure the quality of services and the capacity of service suppliers to supply services). (23) Although U.S.-Gambling blurs the conventional boundaries of the market access obligation, it is not clear that it converts these types of consumer protection regulations into prohibited market access restrictions based purely on their quantitative effects. (24) Nevertheless, ambiguities in the U.S.-Gambling decision have prompted some to recommend a precautionary approach for members in terms of scheduling further liberalization commitments under GATS. (25) As one legal commentator views it:

It would probably be prudent and cautious to assume that the coverage of Article XVI:2 [the GATS provision prohibiting a list of quantitative and quantitative type restrictions on market access] extends to measures having the same effect as those explicitly mentioned. Negotiators may therefore find it useful to schedule more conditions and limitations to a market access commitment than they deem necessary. Negotiators should generally be especially careful about scheduling commitments in sectors which remain strictly regulated. Indeed, it may be more appropriate not to schedule any commitments at all in such a sector. (26) The outcome of the U.S.-Gambling litigation has significant implications for cross-border trade in e-services, which is a major component of e-commerce. (27) Indisputably, it broadens our understanding of the sphere of the market access obligation under GATS in a manner that significantly advances liberal trade in e-services. (28) This interpretation of U.S.-Gambling is based on a finding in the case that the United States' commitment to liberalize cross-border trade...