EXECUTIVE SUMMARY


INTRODUCTION

This Briefing Report was written in preparation for the Regulatory Colloquium held at ITU Headquarters in December 1995, the fifth in a series begun in 1993. The report deals with the implications for national telecommunications policy and regulation arising from the "Uruguay Round" of global negotiations that took place between 1986 and 1994 within the framework of the General Agreement on Tariffs and Trade (GATT). The Uruguay Round was concluded by the "Marrakesh Agreement" [1] signed in April 1994. This Agreement established the General Agreement on Trade in Services (GATS), which applies to trade in services including telecommunication services. It also established the World Trade Organisation (WTO), the institutional framework within which the GATS operates. Active negotiations have been taking place since May 1994 within the GATS framework, aimed at further multilateral liberalization of trade in telecommunication services.

These developments have added a new and potentially powerful influence to the forces shaping national telecommunications policy [2] . How significant their effects on the telecommunications industry will be, what form these effects will take, and how soon they will be felt, remains highly uncertain. Nevertheless, it is not too soon to tackle these questions. On the contrary, it is important that decision-makers in the telecommunications field should understand what is involved before the outstanding issues have been settled. Such understanding is probably a precondition for success in the current negotiations, because success is likely to depend not only on achieving widespread agreement to extensive changes in the telecommunications policies of many countries, but also on gaining similar acceptance of major changes in the way that many national telecommunications regulators carry out their work.

The report therefore:

As with the Briefing Reports prepared for the four previous Colloquia, this report ("Briefing Report No. 5") represents the results of an independent study carried out to provide input for the discussions at the Regulatory Colloquium. It reflects the authors' views and not necessarily ITU policies or the conclusions of the Colloquium itself, which are to be found in the Chairman's report, a separate document. Nor does it necessarily reflect the views of the WTO or of individual national delegations to the WTO, the GATS, and the NGBT.

The authors would like to emphasise that they are not, and do not claim to be, specialists on the subject of international trade institutions, negotiations and agreements. They are telecommunications specialists, seeking to explain and interpret for the telecommunications community, in language intelligible to that community, the significance of the agreements already reached within the GATT framework, and the continuing negotiations taking place under WTO auspices.

The preparation of the Briefing Report, and the associated research, were funded by the Friedrich Ebert Stiftung, whose support is gratefully acknowledged.

OBJECTIVES OF THE REPORT

The aim of the Briefing Report is to explain and assess the WTO trade-negotiation process and its implications for telecommunications from the point of view of readers who are engaged in policy-making and/or management in the telecommunications industry (and most especially those concerned with regulatory affairs), but who are not familiar with the WTO process.

STRUCTURE OF THE REPORT

The Briefing Report, like this Executive Summary, is divided into four parts:


PART I - BACKGROUND: THE URUGUAY ROUND, THE MARRAKESH AGREEMENT, THE WTO, AND THEIR SIGNIFICANCE FOR TELECOMMUNICATIONS

Expanding the scope of international trade negotiations to include services in general, and telecommunication services in particular, is a relatively new idea. In retrospect, however, its adoption now seems inevitable. The economies of advanced industrial countries have become more and more strongly oriented towards the production, distribution and export of information, and many of them have become large net importers of manufactured goods. It was therefore natural that the governments of these countries sought to link any further opening of their own markets for goods to some degree of progress in opening up markets for services on a worldwide basis. In practice, moreover, internationally-traded services are almost all concerned with information-handling: they either are telecommunications services, or, as in the case of banking or publishing, are very heavy users of telecommunications.

The Marrakesh Agreement that resulted from the Uruguay Round included four key elements dealing with telecommunications:

It would be a mistake to assume that the GATS Telecommunications Annex and its Schedules are unimportant, just because they have not instantly produced a major acceleration of movement towards more open telecommunications markets. In the nature of most international agreements, especially those dealing (as this one does) with economic and social matters of far-reaching importance, their full effect is felt only over an extended period of time. In the case of the GATS and the Telecommunications Annex, there are at least three and possibly four mechanisms through which major movement towards open markets could occur in the mid-to-long term (possibly as early as 1997):


PART II - THE WTO REGIME FOR TRADE IN TELECOMMUNICATIONS SERVICES

By the "WTO regime", as it affects telecommunications, we mean the set of rules and institutional arrangements that a country which has ratified the Marrakesh Agreement thereby accepts concerning:

These obligations and institutional arrangements are complex in detail. However, the most essential points can be stated fairly concisely. We do so under two headings:

"General Obligations and Disciplines"

The key obligations undertaken by WTO members in relation to telecommunications include:

These obligations are discussed below. In addition, other important (though very general) obligations require governments to ensure that their regulatory policies and practices do not "constitute unnecessary barriers to trade", and that the telecommunication monopolies under their jurisdiction (if any) do not "act in a manner inconsistent with that Member's obligations and specific commitments".

Some of the general obligations and disciplines apply unconditionally; others apply only to those combinations of members and services where specific commitments have been made. (This is explained in detail in the full Briefing Report.)

Most-Favoured Nation (MFN) Treatment

The GATS (Article II) specifies[8] that the government of each WTO member must accord to service suppliers based in another member treatment (in terms of effective access to compete in the national market) "no less favourable" than the treatment it accords to "any other country". This provision, long-established in international agreements concerning trade in goods, would have far-reaching implications if applied to telecommunications. However, its application in the case of telecommunications in a WTO context is suspended until the work of the NGBT reaches a successful conclusion or the NGBT reports that it has failed to succeed[9].

Today, in the virtual absence of MFN in telecommunications, governments or telecommunications regulators, even in most of the countries where a pro-competitive telecommunication policy is in force and multiple competitors participate in the market, allow companies from other countries to participate only on a restricted basis[10]. Whether or not companies from other countries are allowed to participate in the market in such country (Country A) typically depends on the policy being followed by the government and/or by telecommunications regulators in their home country (Country B). For example, the national government or regulator in Country A may be concerned with whether monopoly market power in Country B is being abused, or international accounting rates[11] are being kept at an excessive level. It may also be concerned with whether companies from Country A are afforded opportunities to participate in Country B's market to a degree comparable to the rights of companies from Country B to participate in Country A. As these examples illustrate, international trade-policy relationships in telecommunications today are usually bilateral, and predominantly managed on a basis of reciprocity.

The GATS obligation on members to accord MFN treatment to all other members will (to the extent that it is carried into practice) replace the current system of predominantly reciprocal bilateral arrangements with a system of multilateral agreements embodying the MFN principle. It is inherent in the MFN principle that such agreements will sometimes require Country A to extend to carriers from Country B rights which are not yet made available reciprocally in Country B to carriers from Country A. MFN will thus tend to enhance and accelerate the process of opening up national markets to freer trade in telecommunication services than would likely be achieved through a patchwork [12] of bilateral reciprocal agreements.

However, just how far MFN will apply in practice depends on two important limitations on the application of MFN to telecommunications:

Transparency

The GATS requires each member to publish all of its laws and rules that affect trade in services. The Telecommunications Annex specifies that transparency, as defined, requires publication of further information about ,among other things:

Transparency is obviously a vital requirement for effective opening of markets. At the least, publication of all the laws, rules, regulations, and other conditions affecting entry into a market lightens the burden that potential entrants must carry when considering entry. At the worst, absence of transparency can enable a country's policy-makers, regulators, and others wilfully to delay entry of foreign services or service suppliers or to permit entry only on discriminatory terms that put foreign services or service suppliers at a competitive disadvantage vis a vis domestic services and service suppliers.

It seems likely that the general transparency obligation of the GATS will have considerable effect on the practices of telecommunications regulators in WTO member countries, and thus in spreading information about members' laws, rules, regulations and the like. Regulators in countries where regulatory rules are already published need not drastically alter their behaviour in order to conform to Article III of the GATS. By contrast, very few countries ordinarily publish, or require their PTO to publish, such matters as "tariff and other terms and conditions" for use of the PSTN; and consequently, conforming to the transparency obligation of the Annex will require significant or even radical modification of their existing regulatory regimes. It remains to be seen whether and how soon members will be willing and able to make such modifications.

"Specific Commitments"

The GATS provides for members to make, via national Schedules to the Marrakesh Agreement, commitments on specific services, as described at the beginning of this summary. The Schedules can subsequently be amended in such a way as to further reduce obstacles to international competition for the services already included, and/or to include additional services. Agreement to do this is now being pursued through the NGBT negotiations.

A key specific commitment concerns "national treatment".

National Treatment

National treatment requires each WTO member to treat services and service suppliers of other members no less favourably than its "own", but only in market segments that a member has "inscribed in its schedule, and subject to any conditions and qualifications set out therein" [Art. XVII, § 1]. It only applies where a member has specifically agreed, in its Schedule, to apply it to a particular service. Unlike MFN, which is in principle an obligation necessarily undertaken by every member of the GATS (subject to exemptions referred to above), the national treatment obligation does not apply comprehensively.

Although the national treatment obligation can thus be avoided by not "scheduling" it, the work of the NGBT clearly aims to induce as many participants as possible to agree in practice to unqualified acceptance of the obligation. Otherwise international trade and international competition in telecommunication services would be severely hampered. Accordingly, if the NGBT's efforts arrive at a successful culmination, the participants in the resulting agreement will probably have moved considerably toward accepting the widespread application of the principle of national treatment.

Moreover, whatever the outcome of the NGBT process, movement toward widespread application of the principle of national treatment will eventually take place if the GATS procedure for "progressive liberalisation" (discussed in Chapter 3 of the Report) operates as expected. However, as progressive liberalisation rounds need not begin until the year 2000, widespread achievement of national treatment may be considerably delayed, and with it the fuller opening of members' markets for telecommunication services.

Institutional Arrangements

The key elements of WTO institutional arrangement (other than the Secretariat), so far as they affect trade in telecommunication services, are:

Of these three elements of the WTO machinery, the NGBT is, at least for the moment, the most important in terms of its likelihood of making a major difference to telecommunications policy in the Participants of the NGBT during the next five years.


PART III - THEMES AND ISSUES BEING NEGOTIATED IN THE NGBT

The NGBT's working methods are described in detail in Chapter 7 of the report. The centrepiece of the NGBT process is the negotiation, by "full participants", of "offers" of market-opening measures, which will eventually become commitments if the NGBT negotiation is successful. Offers are put forward by governments of NGBT Participants or, in the case of the 15 countries of the European Union, by the European Commission. All offers follow, with minor variations, a standard format, shown in Exhibits ES1 (which represents the blank format) and ES2 (which reproduces the NGBT's "Model Schedule", and explains the kinds of content appropriate to the various parts of the blank format). The three columns in the table deal with:

As of late November 1995, 28 of the 31 full participants in the NGBT (including the European Commission, representing 15 countries) have made offers, covering a total of 42 countries, almost all of which are major markets for telecommunications services. A further 28 countries are participating as observers. Observer countries are being encouraged, by the most active participants and by the WTO Secretariat, to become full participants; and full participants who have not yet made offers are being encouraged to do so.

Exhibit ES.1

STANDARD FORMAT USED IN THE SCHEDULES FOR NATIONAL COMMITMENTS

COUNTRY X

Modes of Supply: 1) Cross-border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons

Sector or sub-sector Limitations on market access Limitations on National
Treatment
Additional commitments
1.C Telecommunications
services
.
a) Voice telephone
services* (CPC 7521)

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

.
b) Packet-switched data
transmission services*
(CPC 7523)

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

.
c) Voice-Mail*
(CPC 7523)

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

    1) xxxx
    2) xxxx
    3) xxxx
    4) xxxx

.

* PHB note: Illustrative examples from the full list of categories used.

Exhibit ES. 2

NGBT DRAFT MODEL SCHEDULE OF COMMITMENTS ON BASIC TELECOMMUNICATIONS

COUNTRY X

Modes of Supply: 1) Cross-border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons

Limitations on Market access

Limitations on NationalTreatment

Additional Commitments

2.C Telecommunication
Services (UNCPC)
(a) through (g) and (o)
Types of measures to be listed:

1) e.g. Quantitative limitations/ needs tests applied to the number of service suppliers (incl. monopolies, duopolies, etc.), total value of transactions, total number of operations or quantity of output.

Types of measures to be listed:

1) e.g., Preferences given to domestic suppliers or restrictions imposed on foreign suppliers in the allotment of frequencies.
Types of measures relevant to possible undertakings:

(Commitments on measures not subject to scheduling under Articles XVI and XVII, including but not limited to those regarding qualifications, standards, or licensing requirements or licensing procedures and other domestic regulations that are otherwise consistent with Article VI and the Annex on Telecommunications.)

e.g., Separation of regulatory and operational functions.

Safeguards against anti-competitive practices (i.e., of monopolies and dominant providers).

Procedures or requirements related to:

  • licensing
  • allotment of radio frequencies
  • numbering and identification codes
  • type approval
  • interconnection.

Pricing related measures, e.g. cost-oriented pricing.

Participation in the standards-setting process, including review and comment prior to adoption of new standards.

Rights of way for the construction of infrastructure.

2) Example not given. 2) Example not given.
3) e.g., Quantitative limitations/ needs tests applied to the number of service suppliers (incl. monopolies, duopolies, etc.), total value of transactions, total number of operations or quantity of output.

Quantitative limitation on the number of available frequencies to be allotted to foreign service suppliers.

Restrictions or requirements regarding the type of legal entity permitted to supply the services (also, a requirement of certain forms of commercial presence could rule out cross-border supply).

Limits on foreign equity participation.

3) e.g., Preferences given to domestic suppliers or restrictions imposed on foreign suppliers in the allotment of frequencies.

Limitations on the nationality or residency of directors or board members.

Restrictions on foreign ownership of land, or foreign ownership of facilities.

4) e.g., Limitations/needs test applied to the total number of natural persons that may be employed. 4) Example not given.

As participants in the NGBT negotiate about the contents of the "offers" that will become "schedules" of binding commitments if and when the NGBT reaches agreement, the most important substantive issues they are haggling over are:

Members that already have fairly "transparent" regulatory decision-making processes [18] (Australia, Canada and the US, for example) may or may not be willing to accept a far-reaching agreement for the opening of national markets without significant changes in the national regulatory policies and/or processes of other countries. The indications so far are that they will insist on such changes: both Canada and the US have submitted documents spelling out the kinds of changes they are seeking.

Exhibit ES.3 characterises the kinds of issues addressed in national offers submitted during the NGBT process. It is intentionally a "common sense" classification chosen because the authors believe its categories will be meaningful to readers in the telecommunications community; its categories do not correspond exactly to those of the "Model Schedule".

Exhibit ES. 3

CLASSIFICATION OF SUBSTANTIVE ISSUES ADDRESSED BY OFFERS MADE THROUGH THE NGBT PROCESS

Market-opening offer by Country X

Commitments concerning "market access"
and "national treatment"

"Additional Commitments" on the regulatory environment

Commitments
about licensing
Commitments about foreign-
ownership
restrictions
Commitments
about use
of frequencies
Commitments
concerning
qualifications
standards or
licensing
requirements
Regulatory
structures
and
processes
Licensing
procedures
Safeguards
against anti-competitive
practices
Interconnection rights and
principles
Rights to standard
setting

e.g.
commitments
to allow market
participation by
carriers from other
member countries

e.g.
commitments to
repeal or reduce
foreign
ownership
restriction

e.g.
commitments
about policies
on frequencies

e.g.
modification of
financial
qualifications
for companies
to be licensed

e.g.
separation of
operational and
regulatory functions

e.g.
publication of
criteria for
awarding
licenses

e.g.
laws or regulations
concerning
predatory
pricing

e.g.
published and
uniform interconnection
rates

e.g.
right to
participate in
standards-
setting
process

Each national offer carries a qualifying statement similar to the following:

This offer is conditional. Country A reserves the right to modify, extend or reduce this offer at any time prior to the conclusion of the negotiations on basic telecommunications, depending, inter alia, on the number of offers by other parties; on the degree to which these offers are equivalent and mutually acceptable; and on the extent and significance of any exemptions from the MFN obligation sought by other parties.

The process of negotiation is a subtle one, including not only interaction between Participants in the NGBT but also between each Participant's delegation and the various arms of government that determine telecommunications policy in its home country. As Exhibit ES4 illustrates, the periodic deadlines for presentations of versions of the national "offers" alternate with formal meetings of the NGBT, informal NGBT meetings at the level of senior officials, and periods set aside for bilateral negotiations about the contents of the offers. As this process goes on, offers are slowly and incrementally "improved". Broadly, the process works like this:

So far, the NGBT negotiations are at the stage where delegations are being urged to improve their offers. Some delegations have in fact indicated that they will consider doing so: the European Commission, for example, has indicated that it might be possible to negotiate away all or some of its remaining restrictions on foreign ownership.

Exhibit ES.4
Work Schedule of the negotiating group on basic telecommunications (NGBT)

1994

1995

1996

.

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

Major
WTO
Events
. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .
Quest-
ionnaire
Process
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
NGBT
Meet-
ings
. . . .


6
May

.


11
July

. .


24-
26
Oct

.
12-
13
Dec
.
27-
28
Feb
.
26
Apr

. .
12-
13
Jul
.
20
Sep


6
Oct



17
Nov


15
Dec

. . . . . . . .
Periods set
aside
for
bilater-
al
nego-
tiations
. . . . . . . . . . . . . . . . . . . .
18-
22
Sep
.
13-
17
Nov


11-
15
Dec

. . . . . . . . . . . .
Offer
process/
final-
isation
of
schedules
. . . . . .

.

Jan-
Apr
Original
deadline
for
draft offers

. . . . . . . . . . . . . .

Dec-
Jan
Dead-
ine
for
revised
offers

Feb-
Mar
Dead-
line
for
draft
schedules

Mar
Dead-
line
for
final
schedules

. . . . . . . . .
NGBT goals . . . . . . . . . . . . . . . . . . . . . . .

Dec
Comp-
lete
work
of
outstand-
ing
regu-
latory
issues

. . .

Apr-
May
Target
date
for NGBT
Agree-
ment
and
report
to
Council
for
Trade
in
Services

. . . . . . .
Key:

Formal NGBT Meetings......... Informal meetings of senior ...........Periods set aside for bilateral talks
.............................................officials for NGBT.....................in connection with NGBT meetings

......Past or scheduled...........................................................
(date)......meetings........................(date)

......Anticipated meetings
........not yet scheduled

A critical question concerns whether major developing countries will make offers that open their markets to a significant degree. If an NGBT agreement has the effect of opening major growth markets in these countries to competition, this may be viewed very favourably by the developed industrial countries. If it does not do so, an NGBT agreement would still have some attractions for the advanced countries, but it is questionable whether they will be willing to let its requirements for MFN and national treatment prevent them from using rights to participate in the national markets (as they do today) as a bargaining counter in bilateral negotiations over issues such as reducing excessively high accounting rates or obtaining reciprocal market access.

From the point of view of the developing countries themselves, the critical question is whether there is enough benefit to them from joining the group of countries that have made substantial offers to open their markets to competition. One point of view argues that the resulting flow of investment, technology and management skills into their national telecommunications markets is highly desirable, and may even represent a critical precondition for their other industries to achieve or retain international competitiveness. Another view emphasises the "infant industry" argument: that national carriers in developing countries need time to adapt to "best practice" before being exposed to the full blast of international competition. Still other commentators argue that competitive entry is incompatible with maintaining the universal service obligations of the established ("incumbent") PTO, or at least that developing countries need an extended transition period in order to put effective arrangements in place to safeguard universal service provisions [19].

One possibility for a compromise might perhaps be found along the following lines. If governments of some developing countries feel that their national carriers are not ready for international competition, they have the option of making a market-opening offer in NGBT that retains, for a fixed number of years, a limitation on the maximum allowable degree of foreign ownership but otherwise allows entry of new carriers that are partly foreign-owned. This would stimulate a flow of capital and know-how into the country concerned while, through joint ventures, strengthening the locally-based carrier or carriers rather than challenging them head-on. Concerns about universal service can be met by imposing on all carriers either obligations to provide service to rural or disadvantaged areas, or to contribute to the costs of doing so.


PART IV - CONSEQUENCES AND OPPORTUNITIES OF THE WTO REGIME FOR TELECOMMUNICATIONS POLICY AND REGULATION

There is little to indicate that telecommunications policy in any country has yet changed in any major way since the Marrakesh Agreement was signed in April 1994. Nevertheless, it is likely that such changes will take place:

or

We consider both of these aspects in turn.

Implications of existing GATS provisions

It would appear that the GATS and the Telecommunications Annex do already have significant, though limited, implications for three types of interested parties, specifically:

The general nature of the language of the GATS and the Telecommunications Annex makes it difficult to be certain exactly what the practical implications of their obligations will be in the day-to-day decision-making of national telecommunications regulators and ultimately the operations of telecommunications operators. To some extent, this will depend on what interpretations of these provisions are generally accepted: the questions involved are discussed in detail in Chapters 3 and 4. It is also possible that the "General Obligations" will be clarified by the settlement of disputes, rather as case law clarifies the meaning of national legislation drafted in broad and even ambiguous terms. For example, it is possible that at some stage a government, acting on behalf of a potential telecommunication competitor frustrated in attempting to enter the telecommunications market in another member country, may initiate a complaint under the Dispute Settlement Understanding, and that the outcome may set a clarifying precedent.

Implications of the possible outcomes of negotiations in the NGBT

The outcome of the NGBT negotiations still lies in the future (April 1996 at the earliest). It is still possible that the NGBT will produce no agreement, or an agreement that represents no large advance relative to today. In the authors' view, however, there is a reasonably high probability that such a stalemate will not occur.

If the NGBT produces agreement including a substantial degree of opening of markets in at least a major sub-category of member states (i.e. all or most of the "full participants" in the NGBT), it is likely to have some or all of the following implications for national governments and telecommunications regulators, and for telecommunications carriers, in these member states.

Possible implications for national governments and telecommunications regulators

The government and regulator of a given NGBT Participant (Country A say) may, depending on the NGBT outcome, become committed to:

Possible implications for telecommunications service suppliers

If all or some of the provisions listed above do emerge in an eventual NGBT agreement, the implications for telecommunications operators would include all or some of the following in all or some of the NGBT full-participant countries, depending on the content of their Schedules of commitments:

Of course, all this is speculative. It may not happen. Nevertheless, the possibilities listed above all have a substantial foundation in offers already made in the course of the NGBT negotiation, although these offers may still be withdrawn or scaled down if the Participants making the offers consider that substantial progress towards open markets has not emerged.