INTERNATIONAL TELECOMMUNICATION UNION

Moscow, 5th February 1997

telecommunications AND TRADE

Paper presented by Dr Pekka Tarjanne, Secretary-General, International Telecommunication Union (ITU)
Forum ITA ‘97, “Telecommunications and World Development: Forecasts, technologies and services”
Moscow, 5th February 1997

Mr. Minister of Communications,
Your Excellencies,
Ladies and Gentlemen,

It gives me great pleasure to join you at this event to celebrate something old and something new. We are celebrating the 850th Anniversary of Moscow but also the inaugural event of the International Telecommunication Academy, of which I am proud to be a member. It is appropriate that the history of a city with the world renown of Moscow should be associated with the future of the communications industry. Moscow itself has long been a centre of communications—between East and West, between Europe and Asia, and, as the home of InterSputnik, even between Earth and Space. But long before Moscow became a centre for telecommunications, it was already a centre for trade. In another time and another place, it was said that all roads lead to Rome. But in this part of the world at least, all roads pass through Moscow!

Telecommunications and trade
Because the establishment of the International Telecommunication Academy is such an important event, I would very much like to say something important to you today, that will have meaning for the future of telecommunications.  For that reason, I originally proposed to our distinguished President, Professor Varakin, to talk about “The Role of the ITU in the Creation of the Global Information Society”.  But on further reflection, I decided to pick a topic that is even more timely.

Today, I want to take as my theme the linkage between telecommunications and trade. I have chosen this theme for a couple of reasons. The first as I said concerns timeliness.  In Geneva at the moment, talks are taking place which promise to herald a new era of market opening and freer trade. The second is more strategic. We will never have a global information society until we have a global information economy, and we will never have a global information economy without free trade in telecommunications and information services, for the simple reason that telecommunication services are essential to all forms of economic activity. I am convinced that this is the most important issue facing the international telecommunications community today, and all those who have an interest in the ultimate creation of a global information society.

When the participants in the Uruguay Round negotiations signed the Marrakech Treaty in April 1994, and created the World Trade Organisation (WTO), they left a number of areas of unfinished business, most significantly in the field of basic telecommunications. One reason that it proved difficult to reach an agreement in this area was because of the large sums of money involved: the public telecommunication sector in 1995 generated revenues of more than US$ 600 billion of which around US $ 53 billion came from international telephone charges (Figure 1). A second reason is the fact that many governments around the world still prefer to keep this money for themselves.

Figure 1: Revenue from international telecommunications services, 1990-95

Source: ITU World Telecommunication Development Report, 1996/97.

But in the three years since the Marrakech agreement a lot has changed:

•	In Europe, the 15 Member countries of the European Union, as well as several others such as Switzerland, have committed to open their telecommunication markets to competitors by the 1st January 1998. Some, such as Belgium, Denmark, Germany, Ireland, Greece, Netherlands and Portugal have introduced private sector participation into their main telecommunication operator in the last two years. Other countries did so earlier or plan to do so soon;
	
•	In the United States, a new Telecommunications Act was passed in February 1996 which promises to open previously closed markets in the field of local telecommunication services and video entertainment and to allow firms active in one market to cross over into others;
	
•	In Asia-Pacific, market reform has continued apace with developing countries such as India, the Philippines and Thailand opening up their markets to foreign investment;
	
•	In Latin America, the countries which first privatised their operators at the turn of the decade are now preparing for a second round of market-opening while new counties, notably Brazil, are preparing to privatise;
	
•	Even in Africa, which has long been the last bastion of telecommunication monopolies, countries such as Ghana, Guinea, Senegal and South Africa are leading the way by attracting strategic partners to invest in their telecommunication sectors.

The Group on Basic Telecommunications (GBT), which is due to complete its work on 15th February 1997 with implementation of a possible agreement planned for 1st January 1998, is thus working with a much wider constituency of countries which are already committed, in their own domestic legislation, to market opening.

What is trade in telecommunications, why does it matter and what are the benefits? 
Trade in telecommunications can be loosely defined as any sale of telecommunication equipment or services that crosses a national border. Exports and imports of telecommunication equipment fit quite well to the classical concept of trade as buying and selling. But trade in telecommunication services is more difficult to conceptualise. It includes transactions that cross national borders, such as telephone calls or electronic mail sent from one country to another. It also covers foreign investment, such as the purchase of telephone companies by foreign investors or joint ventures between local and foreign partners to establish new telecommunication service companies.

Trade in telecommunications matters for a number of reasons. First, because the telecommunication industry is a significant and growing sector in its own right. ITU estimates that the value of telecommunications trade (equipment and services combined), was worth around US$ 96 billion in 1995 (Figure 2) and probably exceeded US$ 100 billion during 1996. Second, because telecommunications plays an important role for other industries. Information, and the facilities for accessing, processing, and disseminating it in electronic form, have become a strategic resource as important as land, labour and capital. This dual role of telecommunications, as both a traded product and service and as a facilitator of trade in other products and services, is one of the key themes underlying the talks in Geneva.

Figure 2: Trade in telecommunications, 1990-95
In US$ billion

Note:	Telecom equipment exports cover product categories SITC 764.11, .13, .15, .17, 3, .49, .81 & .91. 
	Settlement payments shows estimated gross voice telephony settlement outpayments. 
	Privatisation covers foreign investment in privatisations of Public Telecommunications Operators. 
	Loans and aid represent foreign loans (including tied aid) made by the 22 major economies which are part of the OECD Development Aid Committee plus those made by the Multilateral Development Banks (1995 figures are projections). 
	Other is an estimate of other types of telecommunications trade achieved, for instance, by foreign direct investment other than privatisation, Build/Transfer arrangements, license awards, telecommunications consultancy, mobile roaming etc.
Source:	ITU World Telecommunication Development Report, 1996/97.

One particular area of growth is Electronic Commerce. It is estimated that some US$ 900 million worth of goods and services were traded over the Internet during 1996, a figure which is growing exponentially. It has been suggested in some quarters that the Internet should be regarded as exempt from taxes and duties imposed on other traded goods. This suggestion is partly a reflection of the fact that it is very difficult to apply existing tax regimes to the Internet, especially where information services are both ordered and delivered over the Internet. But it also reflects a desire to do things differently and to allow the Internet to achieve its full potential as a medium for promoting trade.

The third question—who benefits from freer trade—is the most difficult to answer because it is hard to quantify. One way of measuring the benefits of free trade is to compare the performance of those countries that permit competition and foreign investment with those that do not. For developed markets, there is now a large body of evidence which points to the benefits of allowing competition in telecommunications but the evidence for developing markets is more limited, for two reasons:

•	The experience of competition is much more recent in developing economies;
	
•	The demand for telecommunication services is so high in many developing economies, both competitive and non-competitive, that it tends to mask those differences which might result from changes in market structure.

Despite these methodological difficulties, it is now possible to point to some evidence that competitive developing economies are indeed faring better than their non-competitive neighbours. Research presented in the ITU’s World Telecommunication Development Report, 1996/97 shows that those emerging economies that have introduced some measure of competition at the national level are now reaping the benefits in terms of higher rates of growth in international traffic per subscriber line. Competitive markets are growing by 15 per cent per year since 1990 compared with just 3 per cent per year in non-competitive markets (Figure 3). 

In this respect, a comparison between the neighbouring continental-sized nations of the Russian Federation and the People’s Republic of China is instructive. Russia allows competition in the provision of international services but the provision of domestic services was, until recently, a monopoly. By contrast, China retains a monopoly over the provision of international services but has two competing carriers at the domestic level. Between 1990 and 1995, the level of international traffic per line in Russia grew by 22 per cent per year while in China it declined by 8 per cent per year (Figure 4).
Figure 3: Growth of international traffic per subscriber line, 1990-95
In competitive and non-competitive emerging markets

Note:  	The analysis is based on growth in minutes of international outgoing traffic and is based on 24 major emerging economies. The following markets were considered as permitting some degree of competition in international services: Chile, Korea (Rep.), Philippines, Russia.
Source:	ITU World Telecommunication Indicators Database.

Figure 4:  Growth in international traffic per subscriber line, 1990-95
In Russia and China

Figure 5:  Growth in telephone main lines, 1990-95
In Russia and China

Source:	ITU World Telecommunication Indicators Database.

On the other hand, the size of the domestic network in Russia grew by only 4 per cent per year while in China it grew by some 43 per cent per year (Figure 5). Of course, it would be simplistic to ascribe these differences of performance purely to the different market structures prevailing in the two countries, but nevertheless the correspondence between competitive market structures and improved performance is striking.

From a bilateral to a multilateral trade framework
So what is the significance of the telecommunications trade liberalisation talks in Geneva, due to conclude in mid-February 1997? At one level, the talks do not appear to be that significant. The spread of de facto competition in international telecommunication services—for instance from call-back, calling cards or other types of call-turnaround—has occurred much more rapidly than would have been expected a few years ago. Today, no market is truly “closed” any longer. Many entrepreneurs working in the telecommunications field are probably not even aware that the talks are taking place. Investment decisions will still go ahead and competition in telecommunications will grow even if the talks fail to reach an agreement.

But at another level, the talks do matter, and they matter very much. Telecommunications trade is now a multilateral not a bilateral affair. The rules of the game that have been in operation up to now have been based on bilateral, correspondent agreements between operators to establish prices, known as accounting rates, for the joint-provision of service. The industry is progressing towards a multilateral basis, whereby market opportunities are open to several foreign countries. A WTO agreement would give those market-opening moves binding force and would apply them to all members of the WTO under the terms of most-favoured nation status. The push towards multilateralism is coming for a variety of reasons:

•	The market of developed countries no longer represent the best market opportunity for companies to grow and to make profits. It is the emerging markets—of Asia, and to a lesser extent of Africa, the Arab States, Latin America and the Caribbean—which are now the most attractive. For the developed countries, access to these new markets is critical to their future economic growth and they are willing, if pushed, to offer to liberalise previously protected markets in agricultural and manufactured goods in order to gain that market access for trade in services;
	
•	The growing multilateralism is also a reflection of the fact that the costs, for service providers, of negotiating separate market access agreements in every territory in which they want to operate, are simply too high. The key ratio that businesses must consider is the cost of doing business in a territory (i.e., costs of establishments, legal fees, marketing, etc) relative to the cost of producing the service. The use of telecommunications promises to reduce that ratio—the trade friction cost—in a whole series of fields. Thus the significance of liberalising telecommunication trade goes well beyond the sector itself.
	
•	For their part, businesses want simple to interpret, predictable, transparent and stable regulations. Insofar as it is possible to establish such rules on a generic basis in a binding international treaty, then that should encourage investment and create the right environment for entrepreneurship. The accounting rate regime, in particular, is perceived as being discriminatory (the charges for call termination offered to one operator or one country are not necessarily the same as those offered to other countries), non cost-based (accounting rates represent the outcome of negotiations not a cost study), and non-transparent (only the United States publishes accounting rate information in full). On the other hand, accounting rates are predictable (they have declined by around 9 per cent per year since 1990; Figure 6) and the regime is stable. Hence many operators, particularly those that benefit financially from the existing regime, are unwilling to take the risk of moving to a new multilateral regime.

Figure 6: Trends in the price per minute of international call charges and settlement rates
1990-2000 (projected, in US Dollars

Note:	The tariff figures are based on the average price per minute of an international telephone call from 27 major economies to their leading call partners. The average settlement rate is based on a weighted US settlement rate with the same economies.
Source:	ITU/TeleGeography Inc. “Direction of Traffic, 1996: Trends in international telephone traffic”.
Despite these vested interests, it seems likely that the telecommunications environment will, over time, shift from a framework which is based on bilateral relations to one which is multilateral in character, and from closed to open markets. But there is considerable doubt over how long that transition will take. The major problem at present is that different countries are moving ahead with liberalisation at different speeds. Consequently, opportunities that are open in some markets (for instance, the creative use of leased lines to provide capacity resale or Internet telephony) are closed in other markets. Because no monopoly is leak-proof, one company’s market opportunity is another company’s regulatory loophole. 

The uneven pace of regulatory reform provokes cries of unfair competition and pleas for regulators to establish a level playing field. Can the talks in Geneva succeed in creating a level playing field? Probably not, unless they can rewrite the monopolistic history of the telecommunications industry. The incumbents or first-movers in a market will often have some sort of advantage over the late-comers. But the talks in Geneva can at least ensure that the transition to a multilateral and more open trading environment takes place in as orderly a manner as possible, by establishing a minimum set of rules and principles by which the players agree to abide.
The role of the ITU
The telecommunications sector is currently undergoing a transition from a global trading system for telecommunication services which has, hitherto, been based on bilateral arrangements to one which is multilateral in nature. As this process evolves, it should foster an environment in which investment and entrepreneurship can prosper, including the development of new forms of electronic commerce. 

The ITU is fully supportive of this process as it can provide great benefits in terms of infrastructure construction and the development of information processing industries.  We intend to do our part in supporting the creation of a multilateral framework for trade in telecommunication services, and open competitive markets.

There are several ways the ITU can help do this.  As the Telecommunications Annex to the GATS agreement recognises, global standards are essential to the efficient, non-discriminatory operation of global markets, and the ITU has a vital role to play in developing these standards.  The development of global markets will also be facilitated, particularly in the area of satellite services, if there are global allocations of spectrum to particular services.  The whole question of how countries manage spectrum and other scarce communications resources is a very important element of trade liberalization and the prevention of discrimination between domestic and foreign suppliers.  And developing countries—including those who are not taking part in the GBT—need to understand the benefits that trade in telecommunications can bring, and the measures necessary to protect their national interest.  The ITU Development Sector has a role to play in providing this information.

We will endeavour to respond positively to requests for assistance from countries in interpreting the significance of the future WTO agreement and in implementing the commitments that governments may have made as part of the agreement. In the areas in which ITU has competence, for instance accounting rates, we will continue to push for a framework which is non-discriminatory, cost-based, transparent and consistent with the principle of voluntary multilateralism that is emerging from the talks. 

We are conscious that many of the ITU’s 187 Member States, including the Russian Federation, are not members of the World Trade Organisation. Furthermore, none of the ITU’s 400 or so Sector Members—private network operators, equipment manufacturers and the like—are represented directly in the WTO. Consequently, the ITU can act as a bridge between events in the WTO and the wider telecommunications community.
Conclusion
At the start of this speech, I posed the question “What is trade in telecommunications, why does it matter and what are the benefits?”. In this presentation, I have tried to lay out the different components of telecommunications trade, in both equipment and services. I have tried to show the growing value of telecommunications trade, both in terms of financial value and value to customers. I have also demonstrated the benefits of freer trade and more open markets, in terms of lower prices for consumers, more choice, new market opportunities for suppliers and investors, and higher rates of economic growth. And I have outlined the important role the ITU can play in helping to create a multilateral framework which promotes trade in telecommunications, and through it the construction of a global information economy and society.  Ultimately, however, it is not governments that establish trade and certainly not inter-governmental organisations such as the ITU or the WTO. It is telecommunication users, and the companies that employ them that trade: when they make a telephone call, buy a piece of equipment or purchase a service. Governments can make trade easier to carry out, or they can make it harder. But only service providers, equipment manufacturers and their customers can make it happen.

References