Should the WTO have "property rights" over domestic policies?

The best definition of property rights is the one developed by Grossman, Hart, and Moore, which says that ownership of an asset implies residual control rights--the right to do with the asset as you please subject to restrictions you may have already accepted via a prior contract. Similarly, we can define property rights over domestic policies as the right to formulate them in any way the nation pleases, without violating rights already granted to other nations through pre-existing international agreements.

Now suppose you enter into a contract with the WTO to open up one of your markets. Suppose further that due to changes over time in technology or other conditions which no-one could have foreseen at the time of the initial contract, the substantive implications of the agreement changes. That is, the agreement generates new market access benefits to other countries, and begins to impinge on rights you had not thought (or wished) to have granted away. Who then has residual control rights over these additional benefit flows generated by the exogenous and unforeseen change in circumstances? The WTO or the domestic polity?

This in essence is the question increasingly raised by the "new" trade issues in the WTO. When countries first signed into GATT/WTO, GMOs, currency manipulation, child labor, environmental concerns and a range of other issues did not loom large, either because trade and outsourcing remained small or because the technology was not yet on the horizon. If we now insist on folding these new areas under a literal reading of pre-existing agreements, we risk giving undue property rights to the WTO over domestic policies. 

The case of online gambling, described here, provides an interesting illustration of this process at work. The tiny Caribbean nation of Antigua has taken the U.S. to court in the WTO over the U.S. prohibition of gambling on internet casinos hosted in Antigua. And Antigua has won its case! The WTO ruled that U.S. policies were discriminatory since the country does permit other forms of gambling online, such as "the purchase of lottery tickets, participation in Web-based pro sports fantasy leagues and off-track wagering on horse racing." Now the U.S. either has to rewrite its rules in a way that would de-legalize these forms of gambling as well, or offer compensation to Antigua.

Now, what is interesting here is that according to the New York Times, the WTO agrees that the U.S. did not originally intend to include online gambling when it opened its market to similar services: 

The W.T.O. allowed that Washington probably had not intended to include online gambling when it agreed to the inclusion of “recreational services” and other similar language in agreements reached during the early 1990s, when the W.T.O. was first established. But the organization says it has no choice but to enforce the plain language of the pacts.

So the question is precisely who gets allocated the residual rights 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.

My solution would be to redress the balance by restoring the residual rights to the domestic polity, but to do so under multilaterally designed and monitored institutional safeguards (to minimize risks of protectionist capture). See this paper for the details.  

UPDATE: Jim Leitzel over at Vice Squad offers a useful and complementary perspective on the WTO decision, looking at the issue from the perspective of domestic regulatory policy. He writes (in an e-mail to me) "I believe that as a matter of policy, the US should have won this case, even on the horseracing. As a matter of WTO law, I doubt that the US should have won.... I find fault with the US's legal tactics, it is true, but I support their position." Jim explains why in his book Regulating Vice: Misguided Prohibitions and Realistic Controls, forthcoming from Cambridge University Press:

...the pre-existing discriminatory approach is defensible. Allowing (perhaps a handful) of in-state producers to operate under liberalized vice rules is a form of licensing – and restricting the number of licenses in an effort to reduce vice consumption is consistent with a robust policy approach. Perhaps it is best if the licensing restriction is simply numeric, where in-state and out-of-state producers can bid on an even footing for the limited number of licenses. But allowing
free trade commitments to overturn an existing implicit, geographically-based licensing regime presents the possibility that in the short run, there will be no effective constraint on the granting of licenses. Any resulting increase in vice-related problems could provoke a vice prohibition, or a step back from free trade, as opposed to paving the way for the implementation of a theoretically pure, evenhanded-but-numerically-restricted, licensing system.

In a lot of policy areas, governments face similar trade-offs. A purely non-discriminatory approach, even if ideal, may run into practical and administrative difficulties. And when there exists some ambiguity as to whether prior commitments to the WTO have explicitly ruled out non-discrimination in that specific area, letting trade rules trump domestic practices seems to me to be a bad idea.   

Comments

[Per Kurowski]

Well if we open up the can of the not-originally-intended-inclusions then I guess we also would need to open that of the not-originally-intended-outcomes and that could really wipe away the whole WTO structure.

But of course something has to be done. For instance when you say redress the balance by restoring the residual rights to the domestic polity”, what is domestic? The US wanting to have the right to enforce prohibition against legal gambling on the web or Antigua who might have sacrificed everything else just in order to carve itself out a market niche in online gambling.

Also when you refer to “under multilaterally designed and monitored institutional safeguards (to minimize risks of protectionist capture)” do you mean a bureaucratic negotiation process or are you more thinking of a bidding? … where anyone could have the right to bid for Antigua’s “rights” to spread online gambling in the US but where after the round of biddings the US would retain the first option right…if it of course pays up to Antigua the winning bid. Should Antigua then be able to retire on this?... and then suffer the WTO curse?

Perhaps what we need is a twelve man jury that after a publicly televised process decides, in the name of the principle of keeping free trade free, whether the US is right in its claims and by how much it should compensate Antigua. Whatever… don’t solve it in small, dark and smoky rooms.

[Jonathan Dingel]

According to I. Nelson Rose, other countries specifically excluded gambling from the recreational services portion of GATS at the Uruguay Round, so I think that this is then better characterised as an error by the USTR than an intrusion into domestic policy space by the WTO.

See http://tinyurl.com/2zcth8

Moreover, the source of American outrage is not the WTO's ruling, but Antigua's requested remedy: open season on American IP.

See my post at http://tinyurl.com/2c9ckv

[Per Kurowski]

Thanks to Jonathan Dingel reminding (or in my case informing) us with his links on the “except sporting” bit of it all.

I mean now with David Beckham going to LA Galaxy but neither Manchester United or Real Madrid being allowed to operate in the US soccer market, it could be a propitious moment to break some deadlocks in WTO on some service and mode 4 issues.

[Mr. Impressive]

I think that this is then better characterised as an error by the USTR than an intrusion into domestic policy space by the WTO.

Is the error made by the USTR not making a gambling exception, or agreeing to the broad language in the GATT/WTO agreements at all?

I ask, to illustrate a simple point. Blaming the USTR does not really solve the problem, now does it?

Further, do you have any evidence that suggests that other countries that including gambling exceptions did so because of a concern about online gambling in particular?

[Jonathan Dingel]

Mr. Impressive and I have a lengthier exchange over at my blog - http://tinyurl.com/2c9ckv

In short, that USTR error rather than WTO mission creep is responsible for this ruling does not diminish the public policy importance nor increase the likelihood of successfully resolving the dispute. But it alters the context of the discussion about residual rights.

Online gambling is a type of gambling, and the first online casino opened in 1995 (http://kyroslaw.com/articles/online_gambling_law.html), so it's reasonable to believe that this issue may have been anticipated by those writing gambling exceptions. But I have not seen any literature describing this aspect of the Uruguay Round, besides the link to Prof. Rose's work above.

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