Telecommunications and Trade in Services

Peter CowheyDean

Graduate School of International Relations and Pacific Studies

University of California, San Diegopcowhey@ucsd.edu

And Jonathan Aronson

ProfessorAnnenberg School and School of International Relations

U.S.C.aronson@usc.edu

May 2004

Changing mix in the market: 1994 vs. 2001

• Total size grew from $517 billion to $968 billion• In 1994 data and mobile were 16% and 10% of

revenues. In 2003 they were 18.5% and 33%. – Measured by traffic volume data about equals voice

but it is priced much more cheaply even after major declines in price of long distance voice!

• International telecom stays around 8%

Trade Policy should be the Tip of the Iceberg

• Telecom/IT are vital drivers of economic growth

• Competition and market reform are best option

• Trade policy can leverage benefits of market reform– Capital markets– Credibility vs. flexibility

Trade Policy

Market restructuring and Policy

Role of Telecom & IT in Economy

$847,917

$300,625

$232,604

$134,583

$40,625

$29,250

$22,750

$11,083

$4,433

$USD per Mile

Roadway

Waterway

Electricity

Gas

Optical Fiber

Coaxial Cable

Copper Cable

Wireless Towers

Aerial Wireless*

Cost per Mile of Connectivity Infrastructure

Some economic principles

• Large economies of scale and scope do not justify monopoly– Privatization is less effective without competition– Phasing in competition slowly has very mixed record

• It is possible to share network capabilities efficiently among several operators but this requires regulatory intervention

• Significant network externalities justify efficient policies to promote universal service

When do economies of scale arise? (Finley)

• Fixed costs – costs that are independent of usage

– Costs of maintaining local telecom loop

– Costs of running airline reservation system

– Costs of maintaining electricity transmission lines

• Network economies

→Total costs per unit lowest when only one firm incurs the fixed costs

---Easier to optimise operating costs (relative to usage) in a larger network than a small one

• Policy dilemma

– Introducing competition in one service (long distance calls) may lead to technical inefficiency

– Having no competition → allocative inefficiency

Evolution of the Network

• Stage One: Rise of Corporate Networks leads to competition in basic services– Importance of “private leased circuit” and value-added

service markets. Role of large user– Backbone long distance vs. local transmission (“last

mile”) network– Network elements shared with

newcomers=Interconnection regulation– Trade implications:

• Large users push for value-added and private network rights• Scrutiny of interconnection regulation• Competition in services vs. competition in network

infrastructure

Evolution of the Network

• Stage Two: Rise of the Internet– Computer architecture is “flatter” and more

efficient than old phone networks. Innovation is faster.

– Puts enormous pressure on traditional price structures—Voice over the Internet Protocol

– New trade scheduling challenges: Packet network and voice service liberalization may imply VoIP commitment (Case of China)

Network Evolution

• Stage Three: The rise of wireless networking• From satellite to fixed wireless

– Allocation vs. Assignment– Licensed vs. Unlicensed

• Mobile wireless now leading in developing countries: 2nd generation dominated by GSM and CDMA. 3rd generation is different varieties of CDMA.– Pricing freedom and competition drive rapid build out

• High speed (up to 2.5 megabits/second) is coming—could change markets for wired broadband by introducing new rival

WTO BTA in 1997 Was a Timely Agreement!

• Facilitates efficient global networking just as US and EU agree to change their domestic markets

• 77 countries with over 85% of revenues

• Liberalize voice, data, and international services

• Common approach to regulation

• Foreign investment rights were critical issue

The Political Economy of BTA

• EU, US and Japan establish opening of OECD market, including FDI

• International services were a big challenge“

• NICs” want FDI and spur to economic innovation

• Bilateral trade pacts clarify obligations and expand incrementally

• NICs now expanding their cross-national networks (e.g., Telmex)

GATS Framework Matters

• Most Favored Nation and National Treatment are core principles: Non-discrimination

• Dispute resolution system applies to BTA• Scheduling of service commitments:

– Mode One (cross-border) and three (commercial presence) include supplying services across borders and using a local subsidiary. Right of investment crucial.

– Mode Two: Right of consumption abroad important for large users (e.g. private networks)

– Mode Four: Movement of natural persons– Commitments are “technology neutral”– Reservations and “additional commitments”. Examples:

• Phase in periods and limits on number of network suppliers• Reference Paper

The Reference Paper on Regulatory Principles

• Behind the borders’ barriers• Separate regulator with transparent decision-

making in a timely manner– Adequate staffing and enforcement powers

• Obligation to take measures to deal with market power of “major suppliers” (essential facilities)– Prevent anti-competitive practices, such as anti-

competitive cross-subsidies or withhold vital information from competitors

Regulatory Principles (2)

• Interconnection obligation– Any technically feasible point in network– Cost-oriented and non-discriminatory terms– Timely unbundled elements of network

• Transparent, competitive neutral measures to achieve universal service are OK—can cover new services

• Procedures to allocate scarce resources (e.g. spectrum and rights of way)are transparent, timely and non-discriminatory

Interconnection and Market Power

• These are transitional measures—e.g., broadband

• Interconnection consensus—reference offer and international benchmarking

• Enforcement powers

• Wireless termination and resale

Rate Rebalancing: The Key to Many Dynamics

• Traditional pricing under-priced local services and over-priced long distance– More efficient supply of universal service

subsidies

• Take-off of mobile services due to ability to do premium service pricing

• International services and settlement rates– Market power on monopoly termination– FCC “Benchmarks”

New International Issues

• Challenges to traditional settlement rates: US-Mexico dispute shows interconnection may applly to international services

• “International Charges for Access to International Services” (ICAIS)—market power exercised by U.S. carriers

Mobile Networks: Emerging Issues

• Decline of mandatory standards and rise of more flexible spectrum use– Is spectrum plan transparent?– Is licensing technology and service neutral?

• Can licenses be resold on a commercial basis?

• Is there unlicensed spectrum?• What are the costs of terminating

international calls on mobile networks?

Exercises

• Domestic analysis– Network patterns – use and revenue– Using new technology– Benchmarking your nation– Priorities for reform

• Trade negotiations– Mock bilateral fact-finding– Play the role of an EU or US negotiator– Do fact-finding and negotiation with a foreign investor