- Email: [email protected]
Liberalizing international trade in telecommunications services
Harry G. Broadman and Carol Balassa
Advances in telecommunications technology have created market opportunities that revolutionize the way firms do business. New technologies like fiber optics now permit competition between telecommunications firms where monopolies previously dominated, and companies compete for access to foreign markets and negotiate trade agreements that bring in profits using tools formerly reserved for trade politicians. What was once a regulatory area, telecommunications services are becoming a market access issue addressed under General Agreement on Trade in Services (GATS) and General Agreement on Tariffs and Trade (GA=).
A decade ago, international trade officials were relatively uninvolved in telecommunications services issues. Technological advancements, along with mutually reinforcing changes in both institutional regimes and market structures, however, have altered that situation. The development of fiber optics, for example, has dramatically reduced the cost of telecommunications transmission, thus broadening market boundaries. State-owned telecommunications enterprises are being privatized and deregulated. Also, heretofore protected monopolistic telecommunications firms are increasingly facing competitive entry by new rivals. All these changes have created new market opportunities and unleashed powerful economic forces that have profoundly altered the way in which telecommunications companies do business in a globalized economic environment. As a result, attaining access to foreign markets - the “bread and butter” of trade negotiators’ work - is now at the top of telecommunications companies’ agendas. Historical Perspective
Harry G. Broadman
is Assistant U.S. Trade
Representative for Services, Investment and Science & Technology in the Office of the U.S. Trade Representative, Executive Office of the President; and Professorial
Lecturer
in International
School of Advanced International Hopkins University (on leave).
Economics,
Studies, TheJohns
Carol Balassa is Director of Telecommunications Services Trade Policy in the Office of the U.S. Trade Representative,
Executive
Office of the President.
An earlier version of this article was presented as a speech by Dr. Broadman at the Center for Strategic and International Studies in Washington, D.C. The views expressed herein are the authors’ alone and should not be interpreted
Reprint:
to represent official U.S. government
28430
policy.
Since its inception in the last quarter of the nineteenth century, telephone service has been generally provided in most countries by state-owned (or state-controlled) monopolies. In most of Europe, Asia, Latin America and elsewhere, telecommunications services have been supplied by public enterprises, often as part of a national postal and telegraph monopoly (FM’). Perhaps the epitome of such restrictive systems was Japan’s; telephone service was initially available in Japan only for government use, with the introduction of public telephone service coming almost 20 years later. By contrast, in a few countries, such as the United States, telephone service traditionally has been provided by private companies granted monopoly franchises and subjected to government regulation. Provision of telecommunications services on a sanctioned monopoly basis has generally been justified on the grounds that basic telephone service, and the underlying network facilities infrastructure used to deliver such service, constitute a “natural monopoly.” In other words, within a given market only a single provider is capable of supplying the service at the lowest cost; permitting multiple providers would lead to a socially wasteful duplication of resources and higher costs. The monopoly provision of basic telephone service has also been rationalized as a way to fulfill the political ob-
31
jective
of ensuring
local level “universal
aging costs across all customer wishes local telecommunications relatively
low price.
service”;
by aver-
classes, everyone who service can obtain it at a
In fact, to keep local telephone
service
priced at an affordable level, cross-subsidization has been practiced, with artificially high rates charged for long-distance and international services. These arguments no longer hold the force they once
British Telecommunications (BT), the privatized former U.K. state monopoly, is now operating directly in many European intention
and Asian markets. Recently BT announced to invest in 20% of U.S.-owned MCI.
A similar
trend
exists
for U.S. telecommunications
its com-
panies, which have had a longer history operating in the commercial market. For example, AT&T has established an alliance
with carriers
in Canada,
Japan,
Australia,
did. Technological advances in computing over the last two decades, for example, have resulted in a dramatic re-
Korea and Singapore, provide international
and has requested authorization resale service within the United
to
duction
Kingdom. Sprint, meanwhile, belongs to a partnership volving carriers in Canada, the Netherlands, Sweden,
in-
in switching
costs,
while alternatives
litical and institutional regimes, States with the 1984 divestiture cently,
the adoption
Canada, Europe,
of analogous
to rigid po-
beginning in the United of AT&T and, more reliberalizing
measures
Japan, in
Japan, Australia, New Zealand and portions of have been introduced. These developments have
Australia,
and Hong
Kong,
and has applied
for au-
thorization to provide international service from the United Kingdom on a facilities basis. The Regional Bell
ushered in a new era where significant segments of telecommunications services are increasingly being provid-
Operating Companies (RBOCs) have also succeeded in diversifying internationally by investing in privatized foreign local telecommunications companies, e.g., South Western
ed competitively. It is fair to say that the changes that have occurred, and the many others that are only now
Bell in Mexico, Ameritech and Bell Atlantic in New Zealand, Bell South in Australia and NYNEX in Poland.
beginning
Nonetheless, the advent of new market opportunities abroad has also created problems for U.S. telecommunica-
to unfold,
are fundamental
in nature
and not
transitory.
tions companies. Trends and Pressures for Change In today’s
globalized
telecommunications
marketplace,
telephone and cable television companies are competing with each other, while IVANs (international value-added networks) providers Telecommunications
compete with both of them. firms are seeking to provide
service
in foreign markets on a resale basis as well as through facilities-based operations. Some telecommunications firms are offering cellular services countries, but in many developing
not only in developed nations, where, in fact,
cellular technology enjoys a comparative advantage. Parallel to, and in part inspired by, technological advances, the operations of the traditional state telecommunications enterprise are being transformed. Historically, these firms provided international service from within their own borders through a series of joint operating agreements entered into with other national telecommunications companies. Today, however, against the backdrop of privatization and deregulation, these entities are increasingly entering foreign markets directly, delivering end-to-end service. The result is a patchwork of “alternative” commercial arrangements that co-exist alongside traditional joint operating agreements. For example,
32
The United
States enjoys
both the eco-
nomic benefits of innovations and lower costs engendered by a deregulated domestic telecommunications environment. But despite their considerable petitive zeal, U.S. telecommunications
ingenuity and comfirms have been
largely blocked in most foreign markets, with the notable exception of the various specialized niches they have managed to create or penetrate. As a country that has benefitted from a very positive experience in telecommunications deregulation, it is perplexing (if not frustrating) that, despite slow movement toward liberalization in some major markets around the world, most countries continue to provide telephone service through state-owned monopolies. In short, in the province of international trade in telecommunications services, U.S. telecommunications companies have discovered that, while they may enter into creative equity and marketing arrangements abroad, as a general matter, few if any international rules for meaningful market access exist. The search for access to foreign telecommunications markets and, if entry is achieved, for rules to be able to compete on reasonable and nondiscriminatory terms, have led telecommunications companies to examine the possibiiities offered by applying trade policy tools to telecommunications services. The result is that what had previously
The Columbia
Journal
of World Business
been a regulatory area, reserved almost exclusively to telecommunications ministries at home and the International Telecommunications Union (KU) internationally, is increasingly becoming a market access issue addressed domestically by trade ministries and internationally by the negotiations for a General Agreement on Trade in Services (GATS) under the auspices of the General Agreement on Tariffs and Trade (GATT). Development of a Trade Negotiating Agenda for Telecommunications The GATT, in greatly oversimplified terms, is to trade negotiators what the ITU is to telecommunications officials an international body where rules are developed to foster the efficient functioning of the international trading system. It is significant to note, however, that an important difference between the two organizations is that, unlike the ITU, the GATT provides a formal dispute settlement mechanism and the possibility of sanctions. Prior to the present round of trade negotiations in the Uruguay Round, the GATT focused primarily on resolving problems related to trade in goods. The 1986 Declaration launching the Uruguay Round, however, expanded the scope of the GATT negotiations to address “new” and important areas of trade, including services, investment and intellectual property. It is in the context of the Uruguay Round services negotiations - formally known as the GATS - that the United States launched in 1989 what has become the first of two stages of a multilateral telecommunications services trade initiative. In 1989, the Office of the United States Trade Representative (USTR) proposed to negotiate terms relating to access and use of basic telecommunications services. Some two years later, in December 1991, USTR offered a proposal relating to negotiation of the provision of basic telecommunications services. That latter proposal is still (as we say in trade parlance) “on the table” in the GATS. In other words, multilateral negotiations to liberalize basic telecommunications services have not yet been formally launched. We describe that enterprise in more detail below. USTR’s entry into the basic telecommunications arena has its roots in concerns raised by United States services industries generally - banks and other financial institutions, transportation companies, accountants, architects, tourism companies and enhanced (or value-added)
Winter 1993
telecommunications services providers, among others that approached USTR in the early 1980s. Recognizing the importance of telecommunications in the international delivery of their products, these industries were concerned by their growing dependence on basic telecommunications services in foreign countries, which, as already noted, are in most cases provided by monopolies. These various industries came to USTR because, in their view, foreign restrictions on access and use of basic telecommunications were tantamount to trade barriers directly imposed on their own services, just as quotas and tariffs directly restrict market access for merchandise. They were seeking the development of legally binding and enforceable rules to ensure that their entry into foreign markets would not be hampered by restrictions on the use of basic telecommunications services. The result of these discussions was the development of a U.S. negotiating agenda to address the needs of the overall business community to have assured access and use of basic telecommunications services. This telecommunications agenda, partially an outgrowth of the non-binding services provisions of the U.S.-Israel Free Trade Area, was first formally negotiated in the U.S.-Canada Free Trade Agreement. The telecommunications agenda was subsequently adapted and expanded for the multilateral CATS negotiations in Geneva. After two years of negotiations, agreement was reached on a GATS Telecommunications Annex, which included important elements of the U.S. negotiating agenda. The CATS Telecommunications Annex The GATS Telecommunications Annex represents the first effort to develop multilaterally international trade rules for telecommunications services to meet the needs of the overall business community. The GATS Telecommunications Annex embodies the following elements. It: 1 stipulates that signatory countries are to provide reasonable and nondiscriminatory access and use of basic telecommunications services; 2 requires that regulations relating to use of a country’s telecommunications network be made publicly available; 3 calls for cost-oriented
pricing; and
33
4 specifies that users can attach equipment of their choice to the network, use proprietary protocols, and interconnect to the public-switched network or private networks of their choice.
The Annex also recognizes that a country’s regulators may, if necessary, impose measures to protect the universal service obligations and technical integrity of the country’s telecommunications network. The NAFTA Telecommunications
Chapter
The multilateral GATS Telecommunications Annex served as the basis for negotiation of a Telecommunications Chapter in the currently pending North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico. Because of the clearer common interests among the three NAFTA parties, the NAFTA Telecommunications Chapter was expanded, relative to the GATS Annex, to include specific provisions to ensure that technical product standards and equipment approval procedures not serve as disguised trade barriers. The NAFTA Telecommunications Chapter also includes a broader definition of “intracorporate communications.” In addition, the telecommunications negotiations in the NAFTA focused on liberalizing the provision of valueadded services. Importantly, the negotiations resulted in agreement to remove, upon entry into force of the NAFTA, most restrictions in Mexico on U.S. and Canadian foreign investment in value-added services, and by July 1995 the removal of all such restrictions.
Multilateral
Liberalization
Telecommunications
of Basic
Services
There have been a number of developments to establish multilateral trade rules in basic telecommunications services since the conclusion of the GATS Telecommunications Annex negotiations. As we noted above, the CATS Telecommunications Annex does not address the competitive provision of basic telecommunications services. This is largely because, at the time the negotiations on the “user” Annex were conducted, few countries appeared interested in opening up their basic telecommunications monopolies to competition, let alone foreign competition. Now, against the backdrop of the rapid technological changes and market forces mentioned earlier - especially the pressure from a wide array of businesses demanding more efficient telecommunications services - governments around the world have begun to explore different forms of deregulation. The liberalization efforts in Australia and New Zealand come to mind, for example. Still, in most countries, the timetable for meaningful deregulation seems to be in the distant future. Even the EC appears poised to delay until 1998, or later, its previously announced 1996 deadline for opening basic telecommunications services to competition. In December 1991, at the GATS negotiations, USTR formally announced the U.S. proposal to liberalize multilaterally the provision of basic long-distance telecommunications services. The U.S. offer to bind under international law its open telecommunications regime was made explicitly contingent on a significant number of trading partners with key telecommunications markets making meaningful liberalization commitments. Those “key” countries include the EC, Japan, Canada, Australia, Sweden, Finland, Norway, Switzerland, Korea, Singapore, Hong Kong and Mexico. The United States, in its proposal, stated that liberalization of basic telecommunications services should include the following commitments: l No limitations on the number of competitors to participate in a country’s basic long-distance market;
permitted services
l Permission for foreign entities to provide basic long-distance services both through facilities-based competition and through the resale of services of existing services networks;
34
The Columbia
Journal
of World Business
l Permission long-distance
for foreign investment services;
in basic
l Affording new telecommunications service providers transparent, nondiscriminatory and cost-based access to basic telecommunications services in order to be abie to operate economically; and
l Establishment, by each Party, of fair and transparent regulatory procedures administered by an institution with independent regulatory oversight.
Since the United States announced its willingness to negotiate liberalization of basic telecommunications services in the GATS, discussions with key trading partners have focused on the terms and parameters under which such a negotiation should be carried out. These discussions have also focused on the duration of such a negotiation, which while expected to extend beyond the envisioned conclusion of the Uruguay Round - and we note here the Round’s negotiations are scheduled to conclude by December 15 -the telecommunications negotiation would be for a finite period of time. Should the GATS basic telecommunications negotiations prove “successful” - that is, should key countries agree to open their telecommunications services markets to meaningful foreign competition - there would be an acceleration in the current trends of deregulation, privatization and globalization. For example, the GATS’ most-favored-nation (MFN) obligation (which stipulates that any GATS signatory must be treated no less favorably than the most favorable treatment accorded other GATS signatories) would ensure that a country’s liberalization commitment for basic telecommunications services is extended to all GATS members. And, while the GATS basic telecommunications negotiations are expected to take place primarily among key developed countries, the lower communications costs engendered by a successful negotiating outcome would send a powerful signal to developing countries (and their business communities) that they, too, stand to benefit tangibly from competition in basic telecommunications services. At the same time, the GATS’ transparency obligations, which require government rules and regulations affecting the provision of basic telecommunications services (in&ding standards) to be made public, would significantly facilitate business operations, productivity and major in-
Winter
1993
vestment decisions of not only telecommunications firms per se, but also of the many industries heavily dependent on a modern telecommunications network. Moreover, because the market access commitments of the GATS are legally bound, businesses would also enjoy the assurance that regulations governing telecommunications services cannot be made more restrictive than at present; indeed, the GATS provides for periodic negotiations to expand the liberalization commitments undertaken. Finally, businesses would enjoy greater security knowing that any disagreements over telecommunications market access commitments in the GATS would be subject to a “GATT-plus” consultative and dispute settlement mechanism that is likely to emerge from the broader Uruguay Round negotiations. What would be the impact of a GATS-engendered liberalized telecommunications environment on U.S. carriers? It is fair to surmise that U.S. carriers, which have been subject to the rigors of the commercial market for a decade, are relatively seasoned, agile competitors, and well positioned to take advantage of the improved market access opportunities that successful GATS negotiations would provide. At the same time, however, it must be assumed that successful GATS negotiations would result in greater penetration by foreign telecommunications firms in the U.S. market, thereby bringing the benefits of greater competition - lower prices, more rapid technological change, greater choice and higher quality of service offerings - to both U.S. telecommunications providers and users.
3s
Regulatory Reform and Trade Policy: The “Dominant Carrier” Issue
late telecommunications markets where there is little or no rationale for regulation.
Not surprisingly, the need for international rules in telecommunications services trade has brought to the fore the relationship between domestic regulation and trade negotiating objectives. A case in point was USTR’s response to the January 1992 announcement by the Federal Communications Commission (FCC) that the Commission was considering modifying its 1985 International Competitive Carrier policy on how foreign-owned U.S. common carriers are regulated in the provision of international service. In its 1985 decision, the FCC classified all U.S. carriers with more than 15% ownership by a foreign telecommunications entity as “dominant.” Carriers classified as “dominant” are subject to more burdensome procedures governing the filing of tariffs on phone rates and greater scrutiny in their overall operations than those classified as “nondominant.” Concerned by the strategic implications of the FCC’s proposed revision of this policy, in April 1992, USTR wrote to the FCC pointing to the importance for the Commission to take into account U.S. negotiating objectives in the Uruguay Round services talks. The April 1992 USTR letter noted that, as the United States attempted to bring trading partners to the table to negotiate liberalization of basic telecommunications services, action should not be taken on the dominant carrier decision by the FCC that could be construed as giving away U.S. negotiating leverage. In a follow-up letter, in September 1992, USTR suggested to the FCC a particular proposal in its final dominant carrier rule-making: USTR proposed that the Commission extend “nondominant” carrier regulatory status to a foreign carrier only if it were established that the carrier neither controls a bottleneck telecommunications facility, nor otherwise has the ability to exercise market power on a U.S. international route. In cases where it is difficult to establish ex ante the possibility for exercising market power, USTR suggested that the FCC conduct an investigation to determine the extent to which the carrier enjoys such an ability. The final FCC rule on dominant carrier status issued in November 1992 reflects a balance between the need to maintain negotiating leverage for the Uruguay Round basic telecommunications initiative and the desire to deregu-
The balance is reflected in a three-part tem set out by the FCC:
36
classification
sys-
l U.S. foreign-owned firms with no affiliated carrier in the destination country will presumptively be classified as “nondominant” for that route;
l U.S. foreign-owned firms affiliated with a monopoly carrier in the destination country will presumptively be classified as “dominant” for that route; and
l U.S. foreign-owned firms affiliated with a carrier - but a carrier that is not a monopoly in the destination country will receive closer scrutiny by the FCC for that route in order to determine what type of regulatory regime is called for.
NTIA’s Notice of Inquiry on Regulation of International Telecommunications Services The timeliness of the issues USTR raised in its reply to the FCC on the dominant carrier issue is reflected in the National Telecommunications and Information Administration’s (NTIA) January 1993 Notice of Inquiry on “U.S. Regulation of International Telecommunications Services.” The NO1 raises numerous questions on the process for developing telecommunications policy as the U.S. Government charters new areas of trade policy in the telecommunications arena. In its written reply to NTIA’s NOI, USTR explicitly stated that international negotiations to liberalize market access for basic telecommunications services may affect important areas of U.S. regulatory policy, thus creating a direct link between regulatory decisions and trade negotiating objectives. Indeed, USTR argued that, in order to ensure that regulatory and trade policies are mutually reinforcing, consultation and coordination will be required so that the FCC is fully informed of the trade implications of its regulatory decisions. USTR strongly believes that through careful coordination, FCC regulatory policy can complement, and indeed enhance, USTR’s ability to achieve U.S. telecommunications trade objectives, such as the GATS aim to multilaterally open foreign markets to providers of basic telecommunications services. The Columbia]ournal
of World Business
Trade policy tools have the potential to provide leverage not otherwise available through “traditional” regulatory channels to achieve more open international markets in telecommunications services. Nonetheless, despite the progress already achieved using these tools, many governments’ attitudes around the world lag substantially behind the advances occurring in telecommunications technology and the natural influence of market forces. From the perspective of the U.S. government, we must take advantage of U.S. telecommunications firms’ enormous competitive strengths in international markets, and continue to push for liberalization through all appropriate channels. It cannot be emphasized enough that the benefits of such liberalization, however, are neither unidirectional nor restricted to the telecommunications sector. Attaining the objective of international liberalization will benefit not only U.S. telecommunications firms and U.S. businesses that rely on telecommunications services to carry out their global operations, but will bring the advantages of innovation, lower costs and better and more varied service offerings to foreign telecommunications companies and oth-
Winter 1993
er businesses as well. This is as true among developing nations as it is among developed countries. Indeed, if there is a principal lesson to be gleaned from our analysis, it is that as telecommunications technology continues its rapid advance, and the cost of transmission continues to drop, telecommunications services will become globalized. As a result, telecommunications networks will no longer be organized on a territorial basis. This will mean nothing short of a revolution in the way multinational enterprises, who themselves are increasingly globalized, will locate and carry out their operations particularly multinationals in telecommunications-reliant, technology-intensive industries where an educated labor force is critical. Developing nations, where wages are relatively low and job opportunities for educated workers insufficient, have much to gain from this process; they may perhaps even enjoy a comparative advantage relative to developed countries. But in order to harvest the fruit of this coming revolution, governments must stand ready to liberalize their traditional telecommunications regimes and embrace the free flow of trade in telecommunications services. Those who do not will surely be left behind.
37
Advances in telecommunications technology have created market opportunities that revolutionize the way firms do business. New technologies like fiber optics now permit competition between telecommunications firms where monopolies previously dominated, and companies compete for access to foreign markets and negotiate trade agreements that bring in profits using tools formerly reserved for trade politicians. What was once a regulatory area, telecommunications services are becoming a market access issue addressed under General Agreement on Trade in Services (GATS) and General Agreement on Tariffs and Trade (GA=).
A decade ago, international trade officials were relatively uninvolved in telecommunications services issues. Technological advancements, along with mutually reinforcing changes in both institutional regimes and market structures, however, have altered that situation. The development of fiber optics, for example, has dramatically reduced the cost of telecommunications transmission, thus broadening market boundaries. State-owned telecommunications enterprises are being privatized and deregulated. Also, heretofore protected monopolistic telecommunications firms are increasingly facing competitive entry by new rivals. All these changes have created new market opportunities and unleashed powerful economic forces that have profoundly altered the way in which telecommunications companies do business in a globalized economic environment. As a result, attaining access to foreign markets - the “bread and butter” of trade negotiators’ work - is now at the top of telecommunications companies’ agendas. Historical Perspective
Harry G. Broadman
is Assistant U.S. Trade
Representative for Services, Investment and Science & Technology in the Office of the U.S. Trade Representative, Executive Office of the President; and Professorial
Lecturer
in International
School of Advanced International Hopkins University (on leave).
Economics,
Studies, TheJohns
Carol Balassa is Director of Telecommunications Services Trade Policy in the Office of the U.S. Trade Representative,
Executive
Office of the President.
An earlier version of this article was presented as a speech by Dr. Broadman at the Center for Strategic and International Studies in Washington, D.C. The views expressed herein are the authors’ alone and should not be interpreted
Reprint:
to represent official U.S. government
28430
policy.
Since its inception in the last quarter of the nineteenth century, telephone service has been generally provided in most countries by state-owned (or state-controlled) monopolies. In most of Europe, Asia, Latin America and elsewhere, telecommunications services have been supplied by public enterprises, often as part of a national postal and telegraph monopoly (FM’). Perhaps the epitome of such restrictive systems was Japan’s; telephone service was initially available in Japan only for government use, with the introduction of public telephone service coming almost 20 years later. By contrast, in a few countries, such as the United States, telephone service traditionally has been provided by private companies granted monopoly franchises and subjected to government regulation. Provision of telecommunications services on a sanctioned monopoly basis has generally been justified on the grounds that basic telephone service, and the underlying network facilities infrastructure used to deliver such service, constitute a “natural monopoly.” In other words, within a given market only a single provider is capable of supplying the service at the lowest cost; permitting multiple providers would lead to a socially wasteful duplication of resources and higher costs. The monopoly provision of basic telephone service has also been rationalized as a way to fulfill the political ob-
31
jective
of ensuring
local level “universal
aging costs across all customer wishes local telecommunications relatively
low price.
service”;
by aver-
classes, everyone who service can obtain it at a
In fact, to keep local telephone
service
priced at an affordable level, cross-subsidization has been practiced, with artificially high rates charged for long-distance and international services. These arguments no longer hold the force they once
British Telecommunications (BT), the privatized former U.K. state monopoly, is now operating directly in many European intention
and Asian markets. Recently BT announced to invest in 20% of U.S.-owned MCI.
A similar
trend
exists
for U.S. telecommunications
its com-
panies, which have had a longer history operating in the commercial market. For example, AT&T has established an alliance
with carriers
in Canada,
Japan,
Australia,
did. Technological advances in computing over the last two decades, for example, have resulted in a dramatic re-
Korea and Singapore, provide international
and has requested authorization resale service within the United
to
duction
Kingdom. Sprint, meanwhile, belongs to a partnership volving carriers in Canada, the Netherlands, Sweden,
in-
in switching
costs,
while alternatives
litical and institutional regimes, States with the 1984 divestiture cently,
the adoption
Canada, Europe,
of analogous
to rigid po-
beginning in the United of AT&T and, more reliberalizing
measures
Japan, in
Japan, Australia, New Zealand and portions of have been introduced. These developments have
Australia,
and Hong
Kong,
and has applied
for au-
thorization to provide international service from the United Kingdom on a facilities basis. The Regional Bell
ushered in a new era where significant segments of telecommunications services are increasingly being provid-
Operating Companies (RBOCs) have also succeeded in diversifying internationally by investing in privatized foreign local telecommunications companies, e.g., South Western
ed competitively. It is fair to say that the changes that have occurred, and the many others that are only now
Bell in Mexico, Ameritech and Bell Atlantic in New Zealand, Bell South in Australia and NYNEX in Poland.
beginning
Nonetheless, the advent of new market opportunities abroad has also created problems for U.S. telecommunica-
to unfold,
are fundamental
in nature
and not
transitory.
tions companies. Trends and Pressures for Change In today’s
globalized
telecommunications
marketplace,
telephone and cable television companies are competing with each other, while IVANs (international value-added networks) providers Telecommunications
compete with both of them. firms are seeking to provide
service
in foreign markets on a resale basis as well as through facilities-based operations. Some telecommunications firms are offering cellular services countries, but in many developing
not only in developed nations, where, in fact,
cellular technology enjoys a comparative advantage. Parallel to, and in part inspired by, technological advances, the operations of the traditional state telecommunications enterprise are being transformed. Historically, these firms provided international service from within their own borders through a series of joint operating agreements entered into with other national telecommunications companies. Today, however, against the backdrop of privatization and deregulation, these entities are increasingly entering foreign markets directly, delivering end-to-end service. The result is a patchwork of “alternative” commercial arrangements that co-exist alongside traditional joint operating agreements. For example,
32
The United
States enjoys
both the eco-
nomic benefits of innovations and lower costs engendered by a deregulated domestic telecommunications environment. But despite their considerable petitive zeal, U.S. telecommunications
ingenuity and comfirms have been
largely blocked in most foreign markets, with the notable exception of the various specialized niches they have managed to create or penetrate. As a country that has benefitted from a very positive experience in telecommunications deregulation, it is perplexing (if not frustrating) that, despite slow movement toward liberalization in some major markets around the world, most countries continue to provide telephone service through state-owned monopolies. In short, in the province of international trade in telecommunications services, U.S. telecommunications companies have discovered that, while they may enter into creative equity and marketing arrangements abroad, as a general matter, few if any international rules for meaningful market access exist. The search for access to foreign telecommunications markets and, if entry is achieved, for rules to be able to compete on reasonable and nondiscriminatory terms, have led telecommunications companies to examine the possibiiities offered by applying trade policy tools to telecommunications services. The result is that what had previously
The Columbia
Journal
of World Business
been a regulatory area, reserved almost exclusively to telecommunications ministries at home and the International Telecommunications Union (KU) internationally, is increasingly becoming a market access issue addressed domestically by trade ministries and internationally by the negotiations for a General Agreement on Trade in Services (GATS) under the auspices of the General Agreement on Tariffs and Trade (GATT). Development of a Trade Negotiating Agenda for Telecommunications The GATT, in greatly oversimplified terms, is to trade negotiators what the ITU is to telecommunications officials an international body where rules are developed to foster the efficient functioning of the international trading system. It is significant to note, however, that an important difference between the two organizations is that, unlike the ITU, the GATT provides a formal dispute settlement mechanism and the possibility of sanctions. Prior to the present round of trade negotiations in the Uruguay Round, the GATT focused primarily on resolving problems related to trade in goods. The 1986 Declaration launching the Uruguay Round, however, expanded the scope of the GATT negotiations to address “new” and important areas of trade, including services, investment and intellectual property. It is in the context of the Uruguay Round services negotiations - formally known as the GATS - that the United States launched in 1989 what has become the first of two stages of a multilateral telecommunications services trade initiative. In 1989, the Office of the United States Trade Representative (USTR) proposed to negotiate terms relating to access and use of basic telecommunications services. Some two years later, in December 1991, USTR offered a proposal relating to negotiation of the provision of basic telecommunications services. That latter proposal is still (as we say in trade parlance) “on the table” in the GATS. In other words, multilateral negotiations to liberalize basic telecommunications services have not yet been formally launched. We describe that enterprise in more detail below. USTR’s entry into the basic telecommunications arena has its roots in concerns raised by United States services industries generally - banks and other financial institutions, transportation companies, accountants, architects, tourism companies and enhanced (or value-added)
Winter 1993
telecommunications services providers, among others that approached USTR in the early 1980s. Recognizing the importance of telecommunications in the international delivery of their products, these industries were concerned by their growing dependence on basic telecommunications services in foreign countries, which, as already noted, are in most cases provided by monopolies. These various industries came to USTR because, in their view, foreign restrictions on access and use of basic telecommunications were tantamount to trade barriers directly imposed on their own services, just as quotas and tariffs directly restrict market access for merchandise. They were seeking the development of legally binding and enforceable rules to ensure that their entry into foreign markets would not be hampered by restrictions on the use of basic telecommunications services. The result of these discussions was the development of a U.S. negotiating agenda to address the needs of the overall business community to have assured access and use of basic telecommunications services. This telecommunications agenda, partially an outgrowth of the non-binding services provisions of the U.S.-Israel Free Trade Area, was first formally negotiated in the U.S.-Canada Free Trade Agreement. The telecommunications agenda was subsequently adapted and expanded for the multilateral CATS negotiations in Geneva. After two years of negotiations, agreement was reached on a GATS Telecommunications Annex, which included important elements of the U.S. negotiating agenda. The CATS Telecommunications Annex The GATS Telecommunications Annex represents the first effort to develop multilaterally international trade rules for telecommunications services to meet the needs of the overall business community. The GATS Telecommunications Annex embodies the following elements. It: 1 stipulates that signatory countries are to provide reasonable and nondiscriminatory access and use of basic telecommunications services; 2 requires that regulations relating to use of a country’s telecommunications network be made publicly available; 3 calls for cost-oriented
pricing; and
33
4 specifies that users can attach equipment of their choice to the network, use proprietary protocols, and interconnect to the public-switched network or private networks of their choice.
The Annex also recognizes that a country’s regulators may, if necessary, impose measures to protect the universal service obligations and technical integrity of the country’s telecommunications network. The NAFTA Telecommunications
Chapter
The multilateral GATS Telecommunications Annex served as the basis for negotiation of a Telecommunications Chapter in the currently pending North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico. Because of the clearer common interests among the three NAFTA parties, the NAFTA Telecommunications Chapter was expanded, relative to the GATS Annex, to include specific provisions to ensure that technical product standards and equipment approval procedures not serve as disguised trade barriers. The NAFTA Telecommunications Chapter also includes a broader definition of “intracorporate communications.” In addition, the telecommunications negotiations in the NAFTA focused on liberalizing the provision of valueadded services. Importantly, the negotiations resulted in agreement to remove, upon entry into force of the NAFTA, most restrictions in Mexico on U.S. and Canadian foreign investment in value-added services, and by July 1995 the removal of all such restrictions.
Multilateral
Liberalization
Telecommunications
of Basic
Services
There have been a number of developments to establish multilateral trade rules in basic telecommunications services since the conclusion of the GATS Telecommunications Annex negotiations. As we noted above, the CATS Telecommunications Annex does not address the competitive provision of basic telecommunications services. This is largely because, at the time the negotiations on the “user” Annex were conducted, few countries appeared interested in opening up their basic telecommunications monopolies to competition, let alone foreign competition. Now, against the backdrop of the rapid technological changes and market forces mentioned earlier - especially the pressure from a wide array of businesses demanding more efficient telecommunications services - governments around the world have begun to explore different forms of deregulation. The liberalization efforts in Australia and New Zealand come to mind, for example. Still, in most countries, the timetable for meaningful deregulation seems to be in the distant future. Even the EC appears poised to delay until 1998, or later, its previously announced 1996 deadline for opening basic telecommunications services to competition. In December 1991, at the GATS negotiations, USTR formally announced the U.S. proposal to liberalize multilaterally the provision of basic long-distance telecommunications services. The U.S. offer to bind under international law its open telecommunications regime was made explicitly contingent on a significant number of trading partners with key telecommunications markets making meaningful liberalization commitments. Those “key” countries include the EC, Japan, Canada, Australia, Sweden, Finland, Norway, Switzerland, Korea, Singapore, Hong Kong and Mexico. The United States, in its proposal, stated that liberalization of basic telecommunications services should include the following commitments: l No limitations on the number of competitors to participate in a country’s basic long-distance market;
permitted services
l Permission for foreign entities to provide basic long-distance services both through facilities-based competition and through the resale of services of existing services networks;
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The Columbia
Journal
of World Business
l Permission long-distance
for foreign investment services;
in basic
l Affording new telecommunications service providers transparent, nondiscriminatory and cost-based access to basic telecommunications services in order to be abie to operate economically; and
l Establishment, by each Party, of fair and transparent regulatory procedures administered by an institution with independent regulatory oversight.
Since the United States announced its willingness to negotiate liberalization of basic telecommunications services in the GATS, discussions with key trading partners have focused on the terms and parameters under which such a negotiation should be carried out. These discussions have also focused on the duration of such a negotiation, which while expected to extend beyond the envisioned conclusion of the Uruguay Round - and we note here the Round’s negotiations are scheduled to conclude by December 15 -the telecommunications negotiation would be for a finite period of time. Should the GATS basic telecommunications negotiations prove “successful” - that is, should key countries agree to open their telecommunications services markets to meaningful foreign competition - there would be an acceleration in the current trends of deregulation, privatization and globalization. For example, the GATS’ most-favored-nation (MFN) obligation (which stipulates that any GATS signatory must be treated no less favorably than the most favorable treatment accorded other GATS signatories) would ensure that a country’s liberalization commitment for basic telecommunications services is extended to all GATS members. And, while the GATS basic telecommunications negotiations are expected to take place primarily among key developed countries, the lower communications costs engendered by a successful negotiating outcome would send a powerful signal to developing countries (and their business communities) that they, too, stand to benefit tangibly from competition in basic telecommunications services. At the same time, the GATS’ transparency obligations, which require government rules and regulations affecting the provision of basic telecommunications services (in&ding standards) to be made public, would significantly facilitate business operations, productivity and major in-
Winter
1993
vestment decisions of not only telecommunications firms per se, but also of the many industries heavily dependent on a modern telecommunications network. Moreover, because the market access commitments of the GATS are legally bound, businesses would also enjoy the assurance that regulations governing telecommunications services cannot be made more restrictive than at present; indeed, the GATS provides for periodic negotiations to expand the liberalization commitments undertaken. Finally, businesses would enjoy greater security knowing that any disagreements over telecommunications market access commitments in the GATS would be subject to a “GATT-plus” consultative and dispute settlement mechanism that is likely to emerge from the broader Uruguay Round negotiations. What would be the impact of a GATS-engendered liberalized telecommunications environment on U.S. carriers? It is fair to surmise that U.S. carriers, which have been subject to the rigors of the commercial market for a decade, are relatively seasoned, agile competitors, and well positioned to take advantage of the improved market access opportunities that successful GATS negotiations would provide. At the same time, however, it must be assumed that successful GATS negotiations would result in greater penetration by foreign telecommunications firms in the U.S. market, thereby bringing the benefits of greater competition - lower prices, more rapid technological change, greater choice and higher quality of service offerings - to both U.S. telecommunications providers and users.
3s
Regulatory Reform and Trade Policy: The “Dominant Carrier” Issue
late telecommunications markets where there is little or no rationale for regulation.
Not surprisingly, the need for international rules in telecommunications services trade has brought to the fore the relationship between domestic regulation and trade negotiating objectives. A case in point was USTR’s response to the January 1992 announcement by the Federal Communications Commission (FCC) that the Commission was considering modifying its 1985 International Competitive Carrier policy on how foreign-owned U.S. common carriers are regulated in the provision of international service. In its 1985 decision, the FCC classified all U.S. carriers with more than 15% ownership by a foreign telecommunications entity as “dominant.” Carriers classified as “dominant” are subject to more burdensome procedures governing the filing of tariffs on phone rates and greater scrutiny in their overall operations than those classified as “nondominant.” Concerned by the strategic implications of the FCC’s proposed revision of this policy, in April 1992, USTR wrote to the FCC pointing to the importance for the Commission to take into account U.S. negotiating objectives in the Uruguay Round services talks. The April 1992 USTR letter noted that, as the United States attempted to bring trading partners to the table to negotiate liberalization of basic telecommunications services, action should not be taken on the dominant carrier decision by the FCC that could be construed as giving away U.S. negotiating leverage. In a follow-up letter, in September 1992, USTR suggested to the FCC a particular proposal in its final dominant carrier rule-making: USTR proposed that the Commission extend “nondominant” carrier regulatory status to a foreign carrier only if it were established that the carrier neither controls a bottleneck telecommunications facility, nor otherwise has the ability to exercise market power on a U.S. international route. In cases where it is difficult to establish ex ante the possibility for exercising market power, USTR suggested that the FCC conduct an investigation to determine the extent to which the carrier enjoys such an ability. The final FCC rule on dominant carrier status issued in November 1992 reflects a balance between the need to maintain negotiating leverage for the Uruguay Round basic telecommunications initiative and the desire to deregu-
The balance is reflected in a three-part tem set out by the FCC:
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classification
sys-
l U.S. foreign-owned firms with no affiliated carrier in the destination country will presumptively be classified as “nondominant” for that route;
l U.S. foreign-owned firms affiliated with a monopoly carrier in the destination country will presumptively be classified as “dominant” for that route; and
l U.S. foreign-owned firms affiliated with a carrier - but a carrier that is not a monopoly in the destination country will receive closer scrutiny by the FCC for that route in order to determine what type of regulatory regime is called for.
NTIA’s Notice of Inquiry on Regulation of International Telecommunications Services The timeliness of the issues USTR raised in its reply to the FCC on the dominant carrier issue is reflected in the National Telecommunications and Information Administration’s (NTIA) January 1993 Notice of Inquiry on “U.S. Regulation of International Telecommunications Services.” The NO1 raises numerous questions on the process for developing telecommunications policy as the U.S. Government charters new areas of trade policy in the telecommunications arena. In its written reply to NTIA’s NOI, USTR explicitly stated that international negotiations to liberalize market access for basic telecommunications services may affect important areas of U.S. regulatory policy, thus creating a direct link between regulatory decisions and trade negotiating objectives. Indeed, USTR argued that, in order to ensure that regulatory and trade policies are mutually reinforcing, consultation and coordination will be required so that the FCC is fully informed of the trade implications of its regulatory decisions. USTR strongly believes that through careful coordination, FCC regulatory policy can complement, and indeed enhance, USTR’s ability to achieve U.S. telecommunications trade objectives, such as the GATS aim to multilaterally open foreign markets to providers of basic telecommunications services. The Columbia]ournal
of World Business
Trade policy tools have the potential to provide leverage not otherwise available through “traditional” regulatory channels to achieve more open international markets in telecommunications services. Nonetheless, despite the progress already achieved using these tools, many governments’ attitudes around the world lag substantially behind the advances occurring in telecommunications technology and the natural influence of market forces. From the perspective of the U.S. government, we must take advantage of U.S. telecommunications firms’ enormous competitive strengths in international markets, and continue to push for liberalization through all appropriate channels. It cannot be emphasized enough that the benefits of such liberalization, however, are neither unidirectional nor restricted to the telecommunications sector. Attaining the objective of international liberalization will benefit not only U.S. telecommunications firms and U.S. businesses that rely on telecommunications services to carry out their global operations, but will bring the advantages of innovation, lower costs and better and more varied service offerings to foreign telecommunications companies and oth-
Winter 1993
er businesses as well. This is as true among developing nations as it is among developed countries. Indeed, if there is a principal lesson to be gleaned from our analysis, it is that as telecommunications technology continues its rapid advance, and the cost of transmission continues to drop, telecommunications services will become globalized. As a result, telecommunications networks will no longer be organized on a territorial basis. This will mean nothing short of a revolution in the way multinational enterprises, who themselves are increasingly globalized, will locate and carry out their operations particularly multinationals in telecommunications-reliant, technology-intensive industries where an educated labor force is critical. Developing nations, where wages are relatively low and job opportunities for educated workers insufficient, have much to gain from this process; they may perhaps even enjoy a comparative advantage relative to developed countries. But in order to harvest the fruit of this coming revolution, governments must stand ready to liberalize their traditional telecommunications regimes and embrace the free flow of trade in telecommunications services. Those who do not will surely be left behind.
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