Telecommunication Services in GATS
We have a fundamentally new world market for telecommunications at the close of the century. This development marks the closing of a policy circle in which the market has moved full circle from initially competitive circumstances (Mueller 1983). Only later did monopolies emerge, and with them came a form of collective amnesia. It seemed as if monopolies had always existed.
It was only in 1984 that the United States forced the divestiture of AT&T and thereby created competition in the market for long distance services. The divestiture also liberalized the market for competition in telecommunications equipment. Only the United Kingdom and Japan followed the American lead on services initially and also introduced the possibility of competition in local phone services. However, both countries restricted the number of new entrants. Most other countries simply rejected the notion of competition in telephone services, until Australia, New Zealand, and Canada gradually embraced competition in this area.
In October 1986 the WTO (then the General Agreement on Tariffs and Trade, or
GATT) launched the Uruguay Round. For the first time (and somewhat ambitiously) the Uruguay Round included trade in services on its multilateral agenda (Whalley and Hamilton 1996). It quickly became evident that trade in telecommunications services would be defined only as trade in value-added services such as data networking.
During the Round (which was completed in December 1993) three developments changed the telecommunications industry. First, the digital technology revolution began to change the market fundamentally. Digital technology forced a major reexamination of the opportunity costs of protecting traditional telecommunications equipment and service suppliers
(Cowhey 1990, 1999). An inefficient market for telecommunications threatened competitiveness in the computer, software, and information industry markets. For example, after experimenting with limited competition in data and mobile communications through the early 1990s, the members of the European Union (EU) concluded that monopoly control of the public telephone network would always discourage realistic pricing and provision of the infrastructure for information services and equipment.
Second, after dislocations created by global stagflation through the early 1980s, reforms in the economic policies of developing countries stimulated interest in privatization of state enterprises as a tool of economic reform. State telephone companies were particularly promising targets for privatization. Once privatization became a serious option, these countries also began exploring other options for allowing selective competition. Third, even as competition began in the major industrial countries, their phone companies looked to foreign markets to create new business opportunities. Yet all phone companies faced major limits on foreign market access, and once in a foreign market they confronted serious regulatory uncertainties about how they would be treated. This situation was not simply a case of industrial countries pressing developing countries. Suspicion among industrial countries ran equally deep. Thus, just as the Uruguay Round closed in 1993, Europe and the United States warily approached the idea of expanding trade agreements to cover basic telecommunications services. Suddenly, dismantling traditional monopolies for telephone services (or “basic services” in the language of trade talks) had become a high-profile test for the world trade system.
It is fair to say that most countries were skeptical about or indifferent to the reopening of trade negotiations on telecom services as an extension of the Uruguay Round in 1994. But the success of neoliberal economic reforms in Asia and South America had put even the most politically untouchable forms of monopoly up for reexamination in the mid-1990s. And the soaring U.S. economy, symbolized by its resurgent information industry, led all major countries to believe that a profound globalization of the information industry was both inevitable and a driving force for national economic growth.
The major industrial countries were impatient to secure their mutual rights to market access in telecommunications services, and the WTO was a convenient forum for achieving this goal. However, the multilateral features of the WTO (particularly the Most-Favored-Nation [MFN] and National Treatment obligations) meant that mutual opening among countries of the Organization for Economic Cooperation and Development (OECD) automatically conferred benefits on developing countries. The industrial countries realized that the issue of securing competition and open markets in basic telecommunications services in developing countries had to be faced immediately. Otherwise, these countries would lose a trade deal among themselves.
Thus, the fate of the WTO telecom talks became joined to the spread of competition in basic telecommunications services to developing countries (Cowhey and Richards forthcoming).
The trade talks could not have forced the developing countries to adopt unacceptable reforms. But the political effort generated by the negotiations induced leaders among the newly industrializing countries to make deeper and faster market changes that binding trade commitments would make irrevocable. The timing was right, because national governments in trade-oriented economies were putting regulatory reforms and the introduction of competition in the telecommunications sector high on their policy agendas. Increased volumes of trade and factor mobility at both regional and global levels had intensified reliance of business users and households on telecommunications services. Households were demanding even more sophisticated services at lower prices. Commercial enterprises were becoming increasingly concerned about the competitive effects of poor quality. Moreover, the pricing and flexibility of telecommunications services were becoming a larger factor in production. But traditional stateowned monopoly suppliers had largely failed to provide low-cost, efficient, or even widely available services in many countries.
A number of empirical studies have found that investment in telecommunications infrastructure is a strong predictor of economic growth (Madden and Savage 1998). This finding suggests that in order to accelerate economic development, countries need to create policy environments conducive to a high level of investment in the telecommunications sector.
Therefore countries in dire need of investment want assurances that operating surpluses from profitable segments of the telecommunications industry will be used for network upgrades and expansions. Fortunately, competition tends to modify the trend (followed by traditional monopolies) of spending the surplus on vested interests without significant modernization. The number of local exchange lines in the Philippines doubled, for example, within three years after competitive entry was allowed.
WTO negotiations on basic telecommunications offered an instrument for consolidating and promoting the liberalization of competition and trade in telecom services by making legally binding commitments on future liberalization plans. As far as regulatory reform in telecommunications was concerned, the negotiations definitely enhanced the ability of national regulators to convince markets that reforms in their countries were unlikely to be reversed.
Some governments used the WTO Agreement on Basic Telecommunications to accelerate policy reforms and make binding international commitments to the future liberalization of basic telecommunications. Other governments bound only the existing policy regimes or even made commitments making market access less liberal than it already was. However, even if a government could not, for political reasons, sustain the existing levels of liberalization, the commitments were still valuable. For example, commitments binding at less than the current limit on equity to any foreign investor will be “ratcheted up” after they enter into force because of the MFN principle. Using the MFN clause, any new entrant from one country can demand the same level of equity participation granted to a supplier from another country (Low and Mattoo 1997). The three Central and Eastern European countries and four Latin American countries reviewed in this paper made commitments binding the governments to the status quo or promising future liberalization in certain areas promises that had not been planned prior to negotiations.
The change in the international telecommunications regime has three major implications:
First, for countries that are not yet members of the WTO, the WTO telecommunications agreement will influence the terms of their accession; their minimum commitments on telecommunications will have to be significant. Second, the agreement has changed the expectations of all economic agents, including governments. Countries with less regulatory transparency and little competition will be considered riskier, because markets do not believe that traditional telecommunications practices are sustainable. Moreover, any dominant set of regulatory arrangements creates its own set of supportive political coalitions. We can expect the WTO agreement to create interest coalitions in many important countries in order to promote further market opening in economies where open competition in telecommunications has not yet taken root. These coalitions will use trade negotiations, transnational political lobbying, and market activities to expand the realm of competition.8 Third, the WTO agreement has accelerated the growth of new global carriers for communications services and new forms of cross-border information services using innovative technology. This last point requires special consideration, as it shows how a new international regime changes options for domestic markets. The WTO agreement’s strong coverage of both industrial and industrializing countries makes it easier to conceive and execute new ways of providing services on a global basis. The result is a surge of new entrants with innovative business models and new technological approaches.
These new ways of providing global telecommunication services are reshaping the economics of the market for services within and among countries. The old international telecom regime favored the “joint supply” of international phone services using accounting rates.
Under this system each carrier theoretically contributes half the international phone or fax service for example, taking the international call from a hypothetical midpoint in the ocean and terminating the call to a local household in its country. Presumably the supply of an international call depends on each national carrier providing half of the facilities for the call. For contributing this capability the national carrier is entitled to a fee usually equivalent to half of the accounting rate the “settlement rate.”
The settlement rate is not the end price to consumers. National carriers can and do mark up the price still further for originating an international call. But the costs created by settlement rates influence the minimum price for the service. The key cost is the net settlement payment. For example, the United States sends 10 minutes of calls to Mongolia at a settlement rate of $1 per minute. Mongolia sends the United States a total of five minutes of calls at this rate. The net settlement payment from the United States to Mongolia in this period is $5. The U.S. carrier must recover this payment from its own customers, a significant cost element in its pricing decision.
Jointly provided services allow one party to block production. Given the problems with pricing in most developing countries, pressure to cover shortfalls on local services by inflating rates for international services has been enormous. And it has been particularly attractive to extract rents from carriers in industrial countries by inflating settlement rates. Moreover, in the era of monopoly, companies relied primarily on national public financing to build the network.
Profits from settlement rates were thus an important source of the convertible currency needed to finance purchases of foreign telecommunications equipment.
Even this array of options only begins to capture the import of the digital packet network organized around Internet Protocols (IP networking). While all forecasts are suspect, most experts would agree that the following predictions capture the contours of the changes being accelerated by IP networking. McKinsey and Company (1995) estimated that global fax, voice telephone, and virtual private networking services over IP networks in 1997 amounted to about US$2.2 billion and that total global real time multisite video-conferencing services amounted to about $3.6 billion. The International Data Corporation (IDC) projects that those sums will rise to about $50.6 billion and $19.7 billion, respectively, in 2001. Virtual private networks on IP networks will be worth about $25 billion of those totals, and much of the increase in real-time video conferencing will be on IP networks. In comparison, the global telecom market in 1997 was about $600 billion (Eugster and others 1998).
Another way of understanding the transformation is to look at the growth rates for voice and data in key markets. In the bellwether U.S. market, the latest estimates suggest that the transmission capacity dedicated to llong distance data will exceed that for voice somewhere around 2001. Revolutions in both fiber-optic transmission capacity and the price-performance measures for packet switches and routers are further speeding the changes. One expert believes that router-based switches for IP networks will double their price-performance ratios every 20 months? Almost double the rate of progress for asynchronous transfer mode (ATM) switches, which were significantly better than traditional central office switches (Staple 1998). Every estimate shows that surging increases in the volume of packet-switched traffic will also lead to far higher volumes of data than traditional voice and fax traffic on most international routes. The growth of electronic commerce over the Internet is causing transoceanic transmission of data to grow at rates of over 90 percent per year. Moreover, such businesses as “video chat rooms” on the Internet defy traditional distinctions in telecommunications and broadcast regulation. And worldwide use of the Web for commerce will explode. IDC research suggests that the number of buyers on the Web will grow from 18 million in 1997 to over 320 million by 2002. The volume of purchases will rise to over $400 billion by 2002, a compound annual growth rate of 103 percent annually from 1997.13
Further propelling this change is the revolution in cross-border production networks that cover everything from agriculture to textiles to advanced computing equipment. A fundamental change in international production has occurred because powerful, cost-efficient networks for computing and communications have allowed whole new ways of coordinating work across national borders (Bar and Borrus 1992). Just-in-time production and delivery, including realtime changes in engineering, are possible on a coordinated basis across several countries. Rapid changes in pricing and inventory decisions are equally feasible. And just as importantly, these changes are spreading. Even less powerful networks can, for example, tremendously assist
African farmers in getting more timely and accurate information from urban markets.