VZCZCXRO8231
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHC #5472/01 3442341
ZNR UUUUU ZZH

P 102320Z DEC 07
FM SECSTATE WASHDC
TO EU MEMBER STATES COLLECTIVE PRIORITY
INFO RUEHGV/USMISSION GENEVA PRIORITY 9589
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS SECTION 01 OF 04 STATE 165472 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD WTRO
SUBJECT: DEMARCHE ON GAMBLING - WTO ARTICLE XXI PROCEDURE 
 
REF: STATE 60296 
 
SENSITIVE BUT UNCLASSIFIED ENTIRE TEXT. PLEASE PROTECT 
ACCORDINGLY. 
 
¶1.  This is an urgent action request.  See paragraphs 14 and 
¶15. 
 
SUMMARY 
------- 
 
¶2.  In May 2007, the United States began a process to clarify 
that its WTO obligations do not extend to gambling and 
betting services, in response to a WTO dispute settlement 
finding that the U.S. inadvertently included this subsector 
in its commitments.  The EU has identified itself as a WTO 
Member whose interests would be affected by this 
clarification; accordingly, the U.S. has entered into 
negotiations for a "compensatory adjustment" to include 
additional services activities in the U.S. WTO services 
commitments.  Although the U.S. has made a compensation offer 
which exceeds the value of the U.S. market for gambling and 
betting services, the European Commission, citing pressure 
from EU Member States, has not yet accepted the offer.  As 
discussed below, Posts are asked to contact appropriate host 
government trade officials to inform them of this action and 
to encourage them to contact the Commission to urge the EC to 
accept the U.S. offer and avoid arbitration.  The deadline 
for negotiations is December 14, after which the EU will have 
45 days to consider whether to seek arbitration. Posts are 
requested to deliver this demarche no later than Wednesday, 
December 12.  Please slug responses to EEB/TPP/MTA Carol 
Henninger and USTR Thomas Fine. 
 
THE GAMBLING PROCEEDING 
----------------------- 
 
¶3.  Pursuant to a WTO dispute settlement procedure initiated 
by Antigua and Barbuda in 2003, the WTO Dispute Settlement 
Body (DSB) has adopted an Appellate Body report that 
concludes that the commitment scheduled by the United States 
during the Uruguay Round under the General Agreement on Trade 
in Services (GATS) to provide market access to foreign 
service suppliers of "other recreational services" must be 
construed to include gambling services, such as Internet 
gambling services provided by companies located in Antigua. 
 
¶4.  Although the United States had argued during the case 
proceeding that it had not intended to give up its 
longstanding federal prohibition and criminal penalties with 
regard to interstate (i.e. cross-border) gambling, the Panel 
found that the United States, albeit unintentionally, had 
committed to allowing market access for Internet gambling. 
The Panel further found that the United States had failed to 
rebut Antigua's argument that U.S. criminal laws governing 
gambling on horse racing discriminated against foreign 
operators.  The WTO Appellate Body upheld these findings. 
 
¶5.  Since May 2007, the Gambling dispute has been progressing 
on two tracks.  First, because the WTO has ruled that the 
United States has not brought its anti-gambling laws into 
compliance with the WTO panel ruling, Antigua requested 
permission to impose 3.4 billion USD, per annum, in 
retaliation in the form of suspended TRIPs and 
telecommunications obligations.  This request has been 
referred to arbitration under WTO dispute settlement 
procedures.  A decision of the arbitrator is currently 
scheduled to be issued on December 14. 
 
¶6.  Second, in light of the WTO dispute settlement findings 
and concern about other WTO Members bringing similar 
challenges to U.S. federal and state gambling laws, in May 
2007 the United States invoked Article XXI of the GATS, which 
establishes a process for WTO Members to modify or withdraw 
their schedule of services market access commitments.  (See 
REFTEL)  The modification would correct the U.S. GATS 
schedule in order to reflect our original intent to exclude 
gambling from U.S. commitment on recreational services.  By 
using this procedure, the U.S. is attempting to resolve not 
only the complaint and possible retaliation by Antigua, but 
also to forestall potential future disputes on this issue. 
 
¶7.  GATS Article XXI provides that when other WTO Members 
allege to be affected by a proposed modification, the Member 
invoking Article XXI and those other Members should 
negotiate a "compensatory adjustment" (i.e., new services 
 
STATE 00165472  002 OF 004 
 
 
market access) to other areas of the GATS schedule.  Seven 
WTO Members notified the United States that they consider 
that their interests would be affected by the proposed 
change:  Antigua and Barbuda, Canada, Costa Rica, the EU, 
India, Japan and Macau (NOTE:  Australia initially filed such 
a notice, but subsequently withdrew.  END NOTE).  The period 
of time to negotiate the compensatory adjustment has been 
extended twice by mutual agreement, and will expire on 
December 14. 
 
¶8.  During the summer 2007, USTR met with the claimants on 
several occasions.  USTR made clear during these 
consultations that the United States did not believe that its 
action to clarify its GATS schedule with regard to gambling 
and betting services should warrant compensation since it 
never intended to make such a commitment and no WTO member 
had bargained for it during the Uruguay Round. The U.S. also 
noted that the subsector affected by this modification (i.e., 
gambling) involves issues of public morality, law enforcement 
and protection of minors.  However, the United States 
indicated that it shared the systemic concerns expressed by 
the EU and a number of other claimants about setting any 
precedent that might encourage misuse of Article XXI by WTO 
Members.  The United States therefore agreed that in order to 
address the overall systemic concerns, it would make an offer 
for compensatory adjustment. 
 
¶9.  In September, the United States offered to provide new 
market access commitments in the sectors of storage and 
warehousing services, and technical testing and analysis 
services.  Although Canada and Japan accepted this 
compensatory adjustment offer, other claimants, including the 
EU said that in their view it was not commensurate with their 
claims.  USTR continued to meet with the claimants to discuss 
the matter.  In December, USTR increased its offer by 
proposing to bind research and development services, a sector 
which alone is significantly larger than the entire U.S. 
gambling industry, and is an EU priority sector in the 
ongoing DDA GATS negotiations. 
 
¶10.  Although the EU itself has not taken a commitment for 
gambling under the GATS, and gambling is restricted to 
various degrees in most EU Member States, the European 
Commission has taken a very aggressive stance in these 
negotiations.  That stance perhaps reflects lobbying by the 
European Internet gambling industry, largely based in the UK, 
but with a significant presence in Malta and Gibraltar as 
well.  That industry has been pushing very visibly for a 
change to U.S. laws prohibiting Internet gambling.  This 
issue continues to be very divisive in the U.S. Congress. 
Consequently, no changes in federal laws affecting Internet 
gambling are anticipated in this Congress. 
 
¶11.  The European Commission position in this case may also 
reflect concerns about national restrictions within the EU on 
Internet gambling which may discriminate against providers of 
gambling services from other EU Member States.  Since 2006, 
the Commission has inquired about or formally requested a 
change to gambling legislation in: Austria, Denmark, Finland, 
France, Germany, Greece, Hungary, Italy, the Netherlands, and 
Sweden. 
 
¶12.  In a recent meeting with European Commission Director 
General for Trade David O'Sullivan, Deputy U.S. Trade 
Representative Veroneau explained that the sectors we are 
offering to bind represent a very generous economic offer 
which would not be further increased.  Mr. O'Sullivan was 
also reminded that the U.S. obligation with respect to 
gambling results from a drafting error, and thus these 
negotiations are a windfall to the EU.  Nevertheless, Mr. 
O'Sullivan suggested the offer was insufficient, citing, as 
he has in the past, views of EU Member States. 
 
¶13.  If the United States does not reach an agreement with 
the EU by December 14, the Commission will have 45 days in 
which it may request arbitration.  In order to do so, it will 
need to seek authorization from the EU Member States through 
the 133 Committee. 
 
 
Action Request 
-------------- 
 
¶14.  No later than Wednesday, December 12, Posts are 
requested to convey the points in paragraph 16 to appropriate 
host government trade officials responsible for providing 133 
Committee instructions:  1) to inform them that the United 
States has made a very substantial and generous economic 
offer in services sectors of special interest to the EU, 2) 
to remind them that this case arose because of a drafting 
 
STATE 00165472  003 OF 004 
 
 
error, not because of withdrawal of a negotiated commitment, 
and 3) to explain that the United States would view a 
decision to seek arbitration in this matter as gratuitous and 
inappropriate.  Member States should be urged to contact 
European Commission trade officials as soon as possible to 
encourage the EC to accept the U.S. offer and avoid 
arbitration. 
 
¶15.  Post should further note that many WTO member countries, 
including some EU Member States, prohibit gambling and 
betting activities whether through the Internet or other 
means.  We believe these countries should appreciate the 
importance of maintaining WTO members' flexibility to 
regulate in this sensitive area of public morality. The 
decision of whether to open gambling markets should be done 
through careful policymaking, rather than through litigation. 
 
¶16.  Background Points 
 
--  On May 4, 2007, the United States notified the WTO that 
it is invoking Article XXI of the General Agreement on Trade 
in Services (GATS) to correct mistakes in the drafting of the 
U.S. GATS schedule to clarify that the GATS market access 
commitments do not cover gambling and betting services, 
including Internet gambling; 
 
--  The U.S. took this unusual action due to the fact that in 
the course of dispute settlement proceedings, the U.S. 
schedule was deemed to include a commitment on gambling, even 
though this had not been the intent of the United States.  In 
fact, no WTO Member had requested such a commitment; 
cross-border gambling had been and continues to be prohibited 
under long-standing U.S. criminal laws; and the U.S. schedule 
never even mentions the terms "gambling" or "betting." 
 
--  Gambling is an area which raises highly sensitive issues 
of law enforcement, public morality, and the protection of 
minors and other vulnerable groups.  Abolishing longstanding 
U.S. anti-gambling laws was not an option, and the United 
States accordingly has chosen the GATS Article XXI procedure 
as the means to clarify its schedule and thus resolve the 
dispute. 
 
--  The U.S. shares the systemic concerns WTO Members have 
expressed about the potential for misuse of Article XXI, and 
have offered to make a substantial compensatory adjustment by 
making new services commitments in other sectors.   The WTO 
system cannot function if there is no means to correct 
errors. 
 
--  The United States made an initial offer in September, 
which was rejected by the European Commission.  After further 
discussions, in December we offered new commitments in 
storage and warehousing services, technical testing and 
analysis services, and research and development services. 
 
--  These sectors represent far greater economic potential 
(over 200 billion USD) than the most exaggerated estimates of 
the entire U.S. gambling market.  Further, the offered 
sectors have all been specifically requested by the EU in the 
Doha WTO negotiations, and they are sectors in which European 
industry is well-positioned. 
 
--  Nevertheless, the European Commission has stated that the 
U.S. offer is insufficient, expressing concern that EU Member 
States would not accept it.  We have made a very generous and 
substantial offer, which we believe more than compensates for 
the clarification of the U.S. GATS schedule.  These 
negotiations are scheduled to conclude on December 14, after 
which any claimant that has not accepted our offer will have 
45 days to request arbitration. 
 
--  The United States would very much prefer to avoid 
arbitration in this matter.  We understand that there is an 
industry in the EU that is impatient to offer Internet 
gambling in the United States.  However, we urge EU 
governments to bear in mind that no WTO Member asked the 
United States to make a commitment for gambling and betting 
services during the Uruguay Round, and as the dispute 
settlement panel recognized, the United States never intended 
to offer a market access commitment for gambling. 
Furthermore, as the WTO Appellate Body recognized, gambling 
raises serious social issues of law enforcement, public 
morals, and the protection of minors and other vulnerable 
groups, and its regulation is permissible under WTO rules. 
Arbitration will not change that, and will not benefit the 
European gambling industry. 
 
--  We note that a number of EU Member States confront 
similar concerns and maintain restrictions on Internet 
 
STATE 00165472  004 OF 004 
 
 
gambling. It is important to allow flexibility to regulate in 
this sensitive area of social policy.  The decision of 
whether to open gambling markets should be done through 
careful policymaking, rather than through litigation. 
 
--  In light of the size of our offer, the fact that it 
addresses specific EU requests, and the fact that the entire 
issue arises from a drafting error, seeking arbitration will 
be perceived in a very negative light as a gratuitous attempt 
to gain a windfall from this difficult issue. 
 
--  Should the EU reject our offer, we are confident that an 
arbitrator will find that our offer meets the WTO requirement 
to rebalance our services obligations. Our goal, however, is 
to avoid unnecessary WTO arbitration.  At a minimum, we are 
urging the EU to refrain from joining any arbitration which 
Antigua and Barbuda may request. 
 
--  We urge your government to convey to the European 
Commission support for accepting the U.S. compensation 
proposal before December 14. 
 
 
If asked about proposals in Congress to change U.S. law with 
respect to gambling: 
 
--  There are some in Congress who believe U.S. gambling laws 
should be relaxed, and others who oppose such changes. 
This difference of views reflects the disagreement in 
American society about this sensitive issue.  We cannot 
predict where this debate will come out.  We do note, 
however, that just last year Congress strengthened U.S. 
anti-gambling laws. 
 
End background points. 
RICE