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Trade in Telecommunications

This article is the first of two features discussing the implications of the WTO agreement on trade in basic telecommunications, which came into effect on 5 February this year. In this first piece, we examine the issues likely to be discussed at the International Telecommunication Union’s forthcoming World Telecommunication Policy Forum on Trade in Telecommunications, to be held in Geneva on March 16-18.

On March 16, around 700 of the leading players in the world of telecommunications will convene at the Geneva International Conference Centre for the ITU’s second World Telecommunication Policy Forum. This year, instead of discussing new developments in satellite technology (the focus of 1996’s Forum), delegates will be looking at the new kinds of structures that will emerge in the light of the recent World Trade Organization (WTO) agreement on trade in telecommunication services.

As things stand today, the shape of the new telecommunications environment post-1998 is still uncertain. The forces now changing the world’s telecommunications markets, along with more fundamental shifts in economic paradigms brought about by globalization of the world’s economy, are complex and unpredictable. About the only thing that is certain is that this year’s Forum delegates will have their work cut out for them trying to plan for a future in which no-one is yet sure of the rules, let alone who will be playing the game.

Markets in Transition

The formal liberalization of telecommunications markets through the WTO agreement, as well as through regional agreements such as the one covering the European Union, reinforces a trend which has been making its presence felt in the telecoms industry for several years. The break-up of monopoly-dominated markets for fixed-line telephony has already occurred in some countries, such as the US, the UK, Sweden, Finland, Japan, Australia, New Zealand and Chile. In many other countries, competition has been introduced into specific market segments, most commonly the provision of cellular mobile services.

The forces of liberalization now sweeping through the telecoms community are a result of broad changes in the global economy brought about by a large number of factors – new digital technologies, a more mobile population, a growing reliance on data and voice networks, the growth of electronic information processing and dissemination, especially over the Internet, falling costs of long distance and international communications, and the growth of pan-regional and global business operations, just to name a few.

As the cost of raw transmission continues to drop, global markets are opening up and telecommunications is becoming a commodity like any other. And as more and more intelligence is placed in equipment peripheral to telecommunication networks, more power is being placed in the hands of users to employ diverse terminal equipment, build their own networks, and experiment with new ways of doing things. In such an arena, companies, departments and individuals are now demanding the ability to define, meet, and control their own information and communication requirements – and to choose the products they want from many alternative sources.

At the same time, many operators are finding that it’s no longer feasible, nor desirable, to retain the old state-owned monopoly system which has dominated the telecoms industry for many years. The recent trend towards privatization of carriers, both as a means of generating income for government as well as improving the efficiency of telecoms provision, is leading to a growing pool of private sector operators keen to exploit perceived market niches and increase their profits. These carriers, no longer constrained by restrictive operating rules, are broadening their horizons and looking to grow their market share by proving end-to-end services to their customers on a regional and global scale.

Such operators generally favour greater liberalization in the provision of telecoms services, since it gives them the chance to exploit new markets and new market sectors. While a freer marketplace means they lose their hold over once-captive telecommunications users, these organizations believe – with some justification – that the likely growth in revenues would offset the risks. Offshore operations, alliances with other carriers, development of new market segments and innovative ways of setting and bundling telecoms charges are all attractive options for the new breed of telecoms carrier keen to take advantage of the wealth of opportunities opening up in the world of telecommunications.

The New Landscape

It was against this backdrop that the WTO agreement on basic telecoms took shape. A product of the General Agreement on Trade in Services (GATS) which was signed in Marrakech in April 1994, the agreement commits participating countries to progressively open up their national markets to foreign participation over the coming years. Although a great many countries have not yet signalled their willingness to join the agreement, the 72 countries already having made specific commitments alone account for some 93% of all revenues generated by global telecommunication services.

Under the new agreement, countries have basically made two types of commitment. The first relates to market access and national treatment, and indicates which sectors of a country’s market are to be open to competition. The second relates to regulatory and trade disciplines, as well as the country’s legal obligations. The general requirements which will apply under the new framework include adherence to the WTO principle of Most-Favoured Nation (MFN), which ensures non-discriminatory treatment of countries in international trading arrangements; provisions for transparency of licensing and regulatory procedures; the establishment of domestic regulators to ensure fair treatment of competing carriers; and consistent national treatment of foreign and domestic providers.

It is expected that the introduction of the agreement will lead to a significant reduction in telecommunications tariffs, particularly the cost of international calls. Until recently, these have been routinely charged at rates between three and ten times higher than domestic long distance calls, even though, due to the widespread installation of high capacity fibre optic cables, the actual cost of carrying the call may not now be very different.

Special Concerns

Despite the expected benefits for consumers in terms of cheaper telephone calls, many nations and carriers still have serious reservations about the WTO deal. In particular, many developing nations fear the implications of the new arrangements for their national telecommunications networks. This is not without some justification – developing countries often pay much more for equipment, network maintenance and technical support than richer countries, due to combination of geographical difficulties (climate, distance), inefficient purchasing procedures, and the lack of a local manufacturing base which obliges them to rely on expensive imports of core telecoms equipment. Furthermore, many of these countries are hampered in their ability to recoup the high costs of network maintenance because the vast majority of their population is not able to afford a telephone. This means that they are highly reliant on income from the business sector, in the form of settlement payments from international calls. Many administrations fear that the breakdown of the old system will have serious negative effects on their plans for network growth and development.

These kinds of issues will be at the heart of the ITU’s three-day Policy Forum in March. There, delegates will discuss how the WTO agreement will affect national sovereignty over telecommunications, and look at new regulatory approaches for determining interconnect agreements. The meeting will also consider new pricing systems that might develop alongside the accounting rate system, and examine different ways of facilitating the transition to cost-based accounting rates, especially for those countries which would most seriously affected by loss of income from settlement payments.

The Need for Change

Of these complex problems, accounting rate reform is likely to be the stickiest issue. In the context of the work of ITU Study Group 3, an outline of seven principles which should guide the reform process have already been developed: continuity/viability of international telecommunication service; transparency; non-discrimination; cost-oriented tariffing; market competition; the passing on of reductions to consumers; and ease of transition for developing countries.

Between March 16 and 18, delegates from around the world will need to work to forge consensus on transitional arrangements which could enable advancement towards a new system which is equitable for all. With some nations, such as the US, threatening unilateral action on the issue of accounting rates, the working out the ‘how’ and ‘when’ of accounting rate reform has become urgent. If countries continue to sit back from the negotiating table, the only certainty now seems to be that the system will be reformed without their input. And unilateral action aside, the WTO agreement provides for action on accounting rate reform, should there be no substantial progress by the year 2000 – now, just some18 months away.

The Forum, then, is an attempt to bring all sides together, with the aim of finding the best way forwards for all – not just with regard to tariff reform, but in the context of the new regulatory environment in general. In effect, the delegates at this year’s Forum will be working to shape and build the communications landscape of the future. The ITU, will, as always, be there to ensure that it is a fair one, and one that will improve access to vital communications services for people everywhere.