Economic Geneva

The New York Times has details of this interesting story. The World Trade Organization (WTO) ruled the US violated Antigua's rights by prohibiting Americans from gambling over Internet sites based in Antigua. Now the lawyer for Antigua is asking the WTO to compensate the island nation by allowing it to set aside US intellectual property laws and to distribute copies of American music, movie and software products, among others with impunity.

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For the W.T.O. itself, the decision is equally fraught with peril. It cannot back down because that would undermine its credibility with the rest of the world. But if it actually carries out the penalties, it risks a political backlash in the United States, the most powerful force for free-flowing global trade and the W.T.O.’s biggest backer.

“Think of this from the W.T.O.’s point of view,” said Charles R. Nesson, a professor at Harvard Law School. “They’re this fledgling organization dominated by a huge monster in the United States. People there 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.” ...

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. “Geneva is certainly buzzing about this case,” said Lode Van Den Hende, an international trade lawyer with the firm of Herbert Smith in Brussels. ...

“Compensation is not a check in the mail,” Professor Jackson of Georgetown said. “It’s the right to raise trade barriers against the country in violation.” Whatever trade barriers Antigua imposed, he said, “would feel like a pin prick.”

To get around that limitation, Antigua is seeking the right under international law to violate American intellectual property laws.

Dani Rodrik thinks the WTO Antigua decision goes to heart of who gets to regulate property rights within a national space. Rodrik argues that because trade evolves, "unforseen" contingencies arise over which international bodies like the WTO, not the national states, acquire jurisdiction. In other words, as the scope of trade regulation grows organically, it grows in favor of the WTO.

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.

Trade Diversion doesn't buy Rodrik's argument. It says that once America agreed to the provisions, it should not renege. If matters changed in ways unforeseen, then too bad. They should have been foreseen. And since Antigua was "clever" enough to find a way to extract it's pound of flesh, there is no recourse but to pay it. Because those are the rules America agreed to and America plays by the rules.

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. ...

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 Antigua story underscores how asymmetries operate in international trade and political relations. A regulatory regime is created, but that fact does not guarantee "fairness". The huge disparity in the size between Antigua and the United States makes the island's trade retaliatory power weak. And in a straight trade dispute the odds would weigh overwhelmingly in favor of the US. But lawyers are clever and the loophole cited by the New York Times makes it possible for Antigua to demand the right to pirate US intellectually property -- under the rules -- and "morally" too because a mechanism which allowed the US to use is preponderant economic power would be "unfair". Where have we seen this before? Pretty much everywhere. While not exactly the same, the Antigua decision has structural similarities to the way some international lawyers think about the Geneva Convention and human rights legislation. The US is "bound" by the letter of the law, and if a terrorist mass murderer can find a legal loophole to escape then he is "entitled" to use it. But the Convention is not obeyed by weaker parties because it is impractical to enforce it. Just as pirated DVDs can be found being openly sold in many street corners in Asia without being similarly available in places like Australia, countries with well-functioning legal systems find themselves at a disadvantage compared to countries with no enforcement. In the area of human rights, for example, America has courts before which lawyers can appear. Al-Qaeda has a cave in Pakistan where accommodations are notoriously poor. The US will obey a legal judgment. Legal judgments against al-Qaeda are an exercise in futility. Who will lawyers sue? Under these conditions the full weight of international law will always come down hardest on the most law-abiding. It's ironic that WTO may be reluctant to enforce its own judgment because it has such an appearance of unfairness that it may create a backlash against itself. But give them time and they will become as stone faced as the human-rights advocates.

The condition is so pervasive it almost seems natural. For example, illegal immigrants are allowed to use every US statute on the books to plead their case, as they should be. But others parties technically bound by the same obligation are under no de facto compulsion to behave similarly. "A Mexican Senate committee passed a measure Wednesday urging President Felipe Calderon to send a diplomatic note to the United States protesting the deportation of an illegal migrant who took refuge in a Chicago church for a year," even though Mexico itself summarily deports thousands of Central Americans who cross into it. The power disparity between countries like the United States and other countries is offset by the disparity in expectations of compliance. It would be considered natural for Khalid Sheik Mohammed to ask for his "rights" under international law, but an American soldier captured by al-Qaeda can hardly make the same request -- unless he wants to kill his captors with laughter -- which might be a violation of the Geneva Conventions itself. The application of "international law" to heterogeneous world often results in a split-level regulatory environment in practice. And that, sad to say, is probably how it is intended.

What's the alternative? An abolition of treaties? A return to the law of the jungle? Agreements between states are often advantageous. Some form of international law benefits everyone. But the worst excesses should be curbed. Maybe some of the logic behind tort reform can be applied to international law regime in order to improve it. Some way must be found to dampen the economic incentives which direct lawsuits not at those most liable for an offense but against those most able to pay for one. Some means must be discovered to enforce agreements in countries where they are least likely to be obeyed rather than to concentrate on ever-stricter enforcement in the only places willing to abide by the letter of the regulation. Otherwise the whole system will resemble that of the proverbial drunk who sought his lost keys under a lamppost, though he didn't misplace them there simply because that was only place where there was light to search by.