Telecommunications and Trade in Services Peter Cowhey Dean Graduate School of International Relations and Pacific Studies University of California, San Diego And Jonathan Aronson Professor Annenberg School and School of International Relations U.S.C. May 2004

Changing mix in the market: 1994 vs 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

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: 2 nd generation dominated by GSM and CDMA. 3 rd 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