Viewpoint The World Bank Group July 1997 Note No. 120 Liberalizing Telecommunications and the Cat-los A. Psiiio Role of the World Trade Organization Brcaga Powerful forces are February 15, 1997, wvill be remembered as a land- on the best way to proceed. Developing coun- recasting the business mark date in the history of the multilateral trade tries, for example, opposed the negotiations world in a fleeter, more competitive form, system. On that day, sixty-nine governments for- either because they believed that they did not These forces, largely malized commitments to liberalize their basic enjoy comparative advantage in the relevant grouped around telecommunications services under the General industries, or because they feared that these information infra- structure and new Agreement on Trade in Services (GATS). The negotiations would intrude into other areas, communications resulting Decision on Commitments in Basic such as foreign direct investment policies and technologies, have Telecommunications has both symbolic and national regulatory regimes. Needless to say, come to be knows collectively as the practical meaning. The final act of the Uruguay other topics-for example, agriculture and information revolution. Round in Marrakech in 1994, giving birth to the textiles-were much more prominent on the This Note is the third in World Trade Organization (WTO), was described negotiating agenda of developing countries. a series of five that looks at the information by many as the beginning of a new era in inter- revolution and the national trade rules. The agreement on basic For telecommunications, resistance to trade future of telecom- telecommunications can be characterized as the negotiations also came from major players in munications-and what they mean for the first major accomplishment of this new era. the industry. After all, state-owned enterprises regulatory role of Moreover, it will foster the liberalization of tele- were the suppliers of telecommunications ser- government. communications, bringing significant benefits for vices in all but a handful of countries, and inter- industrial and developing countries alike. national telephony was conducted like a cartel, with transactions closely regulated under rules This Note reviews the evolution of the services negotiated under the International Telecommu- and telecommunications negotiations, the scope nication Union (ITU). Against this background, of the new set of multilateral disciplines, and the idea of using trade negotiations to promote the implications of the agreement for WTO the liberalization of telecommunications was members, particularly developing countries. an alien concept to most of this community. It The basic message is that the agreement is a was also perceived as a threat to national regu- major accomplishment, but implementing the lators, and in some countries, it was even por- commitments it contains will pose a significant trayed as a threat to national sovereignty. challenge for many of the developing country WTO members. But the potential benefits of Despite the opposition, the sernices negotia- following through with these commitments are tions progressed more smoothly than most not trivial, and policymakers should nmaintain analysts had predicted at the beginning of the the focus on the liberalization agenda. build- Uruguay Round. The internationalization of ing on the commitments already made. services is at the very core of the process of economic globalization. Service industries (for A clash of worlds example, telecommunications, transport, finan- cial services) provide critical links among In the early 1980s, when the trade community. geographically dispersed markets. Efficient, under the leadership of the United States, began high-quality links are fundamental for trans- to discuss the inclusion of services in the multi- national corporations-the most dynamic actors lateral trade regime. there was no consensus in globalization-and this critical need explains 01 Industry and Energy Department * Finance. Private Sector, and Infrastructure Network 2 Liberalizing Telecommunications and the Role of the World Trade Organization their strong interest in the establishment of and make available to the public the laws and multilateral disciplines in services trade. Pushed regulations that affect trade in services. by these powerful interests and the growing recognition of the potential benefits of liberal- Market access and national treatment, in turn, izing services, the negotiating agenda evolved are specific obligations under the GATS. They gradually, and by 1993, the basic architecture apply only to the service industries and activi- of the GATS had been agreed on. ties specifically listed by a country in its schedule of commitments. These obligations The GATS in a nutshell' are specified at the level of each of the four modes of supply and subject to the limits made The GATS comprises the framework agreement explicit in the offer. The GATS adopts a "posi- (with its twenty-nine articles and eight annexes) tive list" approach with respect to sectoral cov- as well as the schedules of specific commit- erage of service industries-that is, only the ments and the lists of exemptions to most- industries and activities scheduled in the com- favored-nation (MFN) treatment submitted by mitments are subject to the GATS's specific member countries. It covers four modes of obligations. international delivery of services: cross-border supply (for example, international telephony), The treatment of telecommunications consumption abroad (tourism), commercial in the GATS presence (provision of services abroad through a branch, agency, or subsidiary), and the pres- Telecommunications services are defined in a ence of natural persons (entry and temporary comprehensive manner for GATS purposes, stay of foreign individuals in order to supply a encompassing both basic services-those that service). involve simply end-to-end transmission of voice or data-and value added services-those that it broadly follows the tradition of its counter- modify the form or content of the messages part for trade in goods-the General Agreement relayed through the networks.2 By the end of on Tariffs and Trade (GATT)-emphasizing the Uruguay Round, forty-eight schedules nondiscrimination and imposing limits on the (representing 59 of the 125 governments parti- use of quantitative restrictions on trade. But it cipating in the negotiations) contained com- introduces innovations, covering transactions mitments in the area of telecommunications. associated with commercial presence and intro- But almost all of these commitments covered ducing a concept of market access that goes only value added services, reflecting the resis- beyond border restrictions (for example, in tance still facing this novel approach to tele- principle, it proscribes restrictions on the type communications negotiations. In short, most of organization under which foreign providers of the relevant markets for communications can establish commercial presence). continued to operate outside multilateral disciplines. Unconditional MFN treatment is a basic obliga- tion of signatories that applies to all services, The Uruguay Round accomplished some im- an obligation that bars a WTO member from portant results for the telecommunications sec- treating other members less favorably than any tor, however. First, it raised awareness about other country. But GATS allows MFN exemp- the potential role of trade negotiations in foster- tions as long as the member country identifies ing the liberalization of telecommunications. them explicitly. The list of exemptions is sup- Second, it helped to diminish the gap in posed to be time-bound and, in principle, should understanding between the trade and telecom- not last more than ten years. Another basic obli- munications communities by promoting a dia- gation of members is a commitment to trans- logue on their distinct approaches to regulation. parency, which requires governments to publish Third, it established that access to telecommu- The World Bank Group 3 nications services was critical for trade in ser- telecommunications, unless a procompetitive vices and that users were entitled to fair terms regulatory framework was also put in place, of access (Annex on Telecommunications of the value of the market access commitments the GATS). would be greatly reduced. A draft reference paper describing regulatory disciplines support- But the limited progress in effective liberaliza- ive of market entry was negotiated, and most tion of basic telecommunications led WTO countries became signatories to this text (par- members to agree to continue the negotiations tially or in its entirety) in the context of addi- beyond the date of the Round's completion tional commitments made in their offers (April 15, 1994). Basic telecommunications (expanding on their market access and national joined maritime transport, financial services, treatment commitments). This can be charac- and the movement of natural persons as topics terized as the first multilateral effort to deal for sectoral negotiations. The Negotiating explicitly with substantive aspects of competi- Group on Basic Telecommunications (NGBT) tion policy. Even though limited to telecom- was created in May 1994. with a deadline of munications, it was a major achievement and April 30, 1996, for completing the talks. it paves the way for future multilateral disci- plines and international harmonization. From the NGBT to the GBT By April 1996, thirty-four offers (encompassing Participation in the NGBT was voluntary. Ini- forty-eight governments, with the European tially, fifty-three WTO members decided to par- Union's submission counting as one) were on ticipate in the negotiations, with twenty-four the table. Still, some countries-particularly the other governments attending the meetings as United States-were dissatisfied with the qual- observers. The attitude of most participating ity and coverage of the offers. Moreover, in the countries about the usefulness of engaging in final phase of the negotiations, the issue of sat- these negotiations had shifted significantly by ellite services-that is, to what extent explicit then. In part, this simply reflected a better under- provision for these services needed to be made standing of the potential benefits of liberalizing in the offers-added "noise" to the negotiations. telecommunications. More fundamentally, how- As a result, no deal was attained by the dead- ever, it reflected the growing recognition that line of April 30, 1996. Given the progress al- the industry is facing a paradigm shift. Techno- ready achieved, however, there was broad logical progress is rapidly eroding the sustain- support for continuing the negotiations. Seizing ability of old practices based on monopolistic this opportunity, Renato Ruggiero, Director- behavior, state control, and protected markets General of the WTO, suggested that countries for local providers. Call-back systems, virtual should be given a chance to improve on their private networks, the Internet, and the growing offers, and February 15, 1997, was established promise of modern satellite communications are as the new deadline for the negotiations. A new multiplying the opportunities for bypassing tele- body-the Group on Basic Telecommunications communications monopolies. At the same time, (GBT)-was created to carry on with the nego- the increasing information intensiveness of tiations, replacing the NGBT, and the rules of transnational corporations and the dramatic re- participation were changed to make all WTO ductions in the cost of communications create members full participants. additional incentives for customers to actively explore bypassing alternatives. The negotiations restarted in July 1996, and by the WTO Ministerial Conference in Singapore In the NGBT, the focus of the debate rapidly in December 1996, several countries had al- progressed from "why to liberalize" to "how to ready tabled improved offers, signaling support liberalize." Important conceptual progress was for a successful conclusion of the negotiations. achieved as participants recognized that for Still, some thorny issues continued to loom on 4 Liberalizing Telecommunications and the Role of the World Trade Organization FIGURE 1 COUNTRIES MAKING BASIC TELECOMMUNICATIONS COMMITMENTS Voice telephony ::0Local i n * e, IIIIIIEI Domestic longdistance !I I * International I II.EIIII'I*I 1 Resale . : :EII Data transmission . e Private leased circuit services Terrestre mobile t E I C1r Other terrestre mobile services 5 E Mobile sate~llite services 1IIIIII Fixed satellite services * Trunked radio Reference paper (additional commitments) I I l 0 10 20 30 40 50 60 70 XDeveloping countries High-incomecountries Source: World Trade Organization data. the horizon. In particular, lively discussions con- of the accounting rates system outside the W;'TO tinued on international services (for example, framework. This helped deflate opposition to countries with more liberal regimes were con- the agreement based on concerns that it could cerned that an MFN commitment to liberalize foster anticompetitive practices (for example, international services could give rise to anti- by one-way accounting rate bypass). Also help- competitive practices by foreign monopolistic ing to pave the way to the final agreement were carriers), on satellite services, and on what the adoption of a technologically neutral ap- constituted an adequate "critical mass" for a proach to scheduling (that is, unless otherwise deal. Other controversial issues included how noted, the commitments would cover all trans- to avoid discriminatory practices in the alloca- mission possibilities including satellite services) tion of spectrum and how to draw the line be- and the acceptance of the concepts that fre- tween telecommunications and audiovisual quency and spectrum management should not services given the growing technological con- be used to undermine market access commit- vergence in these areas. ments and that the use of MFN exemptions could temporarily address the differences in Gradually, however, technical and political treatment of audiovisual services. solutions began to emerge. With respect to international services, the United States unilat- In a parallel effort, governments, the WTO, and erally announced a new policy toward inter- several other multilateral organizations worked national settlement rates in December 1996, to raise awareness of the importance of the creating a mechanism for addressing the con- negotiations for developing countries and to cerns of its own carriers about the distortions help these countries prepare their own offers. The World Bank Group 5 FIGURE 2 DISTRIBUTION OF WORLD TELECOMMUNICATIONS REVENUES BETWEEN PARTICIPATING AND NONPARTICIPATING COUNTRIES United States (29.70) European Union (28.27) Japan (1559) Australia (1.89) Canada (1.78) Switzerland (1.48) Republic of Korea (1.45) Brazil (1.43) Mexico (1.08) Argentina (1.00) Other countries that made commitments (7.44) Countries not participating in the telecommunications agreement (8.56) a0 5 10 15 20 25 30 Percentage share Note:World revenues trom telecommunications services amounted to US$602 billion in 1995. Source: World Trade Organization data. The World Bank, for example, through its In- developing countries (figure 1). Moreover, most formation for Development (infoDev) program participants made commitments either to all or and in close cooperation with the WTO, spon- to parts of the reference paper, subscribing to sored a project to provide technical assistance procompetitive regulatory principles (for ex- to more than twenty developing countries in ample, the establishment of independent regu- the final stages of the negotiations.3 By early lators, the adoption of competitive safeguards, 1997, it became clear that a "critical mass" of measures to ensure interconnection, transpar- offers would be achieved. On February 15, ent and nondiscriminatory practices with respect 1997, the telecommunications talks were suc- to licensing, and universal service obligations). cessfully concluded. The exact implications of the agreement for a The scope of the agreement particular country can only be assessed by a careful analysis of its schedule of commitments, Sixty-nine WTO members tabled commitments including phasing considerations, list of quali- by February 15, 1997.4 These schedules will be- fications by activity and mode of delivery, and come formally binding by January 1, 1998. Not eventual recourse to MFN exemptions (nine only were several new offers added to the ones governments claimed such exemptions for cer- available in April 1996, but thirty-two of the tain activities). It is fair to say, however, that in thirty-four original offers were revised, typically contrast with the GATS's results in 1994, when leading to more substantive commitments. Com- most schedules were characterized by status mitments were made in all basic telecommuni- quo commitments (that is, governments basi- cations services by both high-income and cally bound themselves not to adopt more 6 Liberalizing Telecommunications and the Role of the World Trade Organization FIGURE 3 COUNTRIES WITH LOWEST TELEDENSITY WERE LESS ACTIVE IN WTO NEGOTIATIONS Teledensity in 1995 Main telephone lines per 100 inhabitants * >25 0 10-25 El 1-10 El<, WTO off rs (February, 1997) 4 * Countries making offers The boundaries, colors, denominations, and anyotheriformation shown on this map do not imply, on the par of the World Bank Group, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. Source: international Telecommunication Union and World Trade Organization data. restrictive policies), the outcome of the basic gotiations in fostering liberalization at the mul- telecommunications negotiations will foster sig- tilateral level. nificant additional liberalization.5 in this sense, the agreement proved wrong those analysts The markets affected by the agreement repre- wvho were skeptical of the role of sectoral ne- sent more than 90 percent of the world market The World Bank Group 7 for telecommunications (figure 2). Developing ing world came from internal sources (prof- countries account for less than 20 percent of its), with commercial funds (20 percent) and the global revenues from telecommunications official sources (15 percent) playing a more services, but they are the fastest-growing mar- limited role. By the end of this decade, it is kets for these services. Their participation in estimated that private capital flows will finance the WTO process is thus important not only a much greater share of the investments in the for developmental reasons, but also because sector (55 percent), with internal (40 percent) these markets are bound to increase their rela- and official sources (5 percent) reducing their tive importance in global terms. The areas with relative participation. the weakest telecommunications infrastructure (such as Sub-Saharan Africa) were those that But private investors will be willing to invest had participated less actively in the WTO ne- in modernizing the telecommunications infra- gotiations (figure 3). Assistance to help bring structure of developing countries only if they these countries into the system should be a can count on fair and stable rules of the game. priority for the donor community. Accordingly, developing countries able to sig- nal their commitment to liberalization and to The road ahead adopt a procompetitive regulatory environment will be in a better position to attract the capital Analyses of the importance of the basic tele- flows required for these investments. WTO communications agreement tend to cluster commitments can play an imnportant part in this. around two extreme positions. Most analysts have been extremely enthusiastic and present Benefits for developing countries are not lim- the agreement as delivering swift liberalization ited to attracting foreign direct investment. Lib- of participating markets. Others are more skep- eralization will also improve local firms' access tical, pointing out that the multilateral regime to efficient telecommunications service provid- and the regulatory authorities are being over- ers. This will increase their competitiveness- taken by the velocity of technological change and thus their ability to explore the dynamism in the industry. For the latter, the agreement of international trade in information-intensive, plays at best a secondary role in this process products and services. Last but not least, com- of change. petition will improve the price-quality mix of the telecommunications services available to Reality is somewhere in between. It is true that consumers. The critical remaining issue is the fast technological change has been the main quality of the implementation of the commit- driver of the paradigm shift described above, ments. Many developing countries are enter- and it explains to a large extent the changing ing uncharted territory, particularly with respect attitude in the industry on the desirability to procompetitive regulatory disciplines. Those (inevitability) of competition. But credible rules able to face these challenges successfully will relating to market access, constraints on dis- be much better positioned to benefit from the crimination, and a procompetitive regulatory 'information age." environment play an important part in shap- ing the outcome of this "revolution," particu- This section relies on Primo Braga (1996). For further details on larly In influencing the distribution of its the rationale for lihbenlizing services aunc on the architecture of benefits. the GATS, see UNCTAD and Ybrild Bank G1994) and Hoekman (199)6). 2Basic servtces cover voice telephony, telex, telegraph, facsimile, Private capital is expected to take the lead in data transmission, provate leased circuit services, fixed and mi- funding investments in telecommunications in bile satelltte svstems and services, cellular telephony, mobile data the developing world. In the early 1990s, 65 services, paging, and personal communication services. Value of the fundsusedtofinancebasic added rervices include email, voice matl. on-line data processing, percent of the funds used to finance basic on-line database storage and retrieval, and electronic data wireline telecommunications in the develop- interchange. 8 Liberalizing Telecommunications and the Role of the World Trade Organiization For further details on this project. which was executed b1 the International InstituLte of Communications, visit the infoDev website at http:/f/v-w.worldhank.orgihtml/infodev/infodev html. Antigua and Barbuda, Argentina, Australia, Bangladesh. Belize, Bolivia, Brazil, Brunei Darussalam, Bulgaria, Canada. Chile. Colombia. Cote d'lvoire, Czech RepuLblic, Dominica, Dominican Republic, Ecuador, El Salvador, European Communities and its Member States, Ghana, Grenada, Guatemala, Hong Kong, Hungary. Iceland, India, Indonesia, Israel, Jamaica, Japan, the Republic of Korea, MValavsia, Mauritius, Mexico, Morocco, New Zealand, Norway, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Romania, Senegal, Singapore, Sri Lanka, Switzerland, Slovak Republic, South Africa, Thailand, Trinidad and Tobago. Tunisia, Turkey, Cnited States, and Venezuela. For a discussion of the results of the GATS in promoting services liberalization, see Hoekman and Primo Braga (1996). References Hoekman, Bernard. 1996. "Assessing the General Agreement on Trade in Services." In Will Martn and L. Alan Winters. eds., The Ulrsguuat: Round and theDeveloping CctMntries. Cambridge: Cambridge Uni- versitv Press. Hoekman, Bernard, and C.A. Primo Braga. 1996. "Trade in Services, the GATS and Asia." Asia Pacific Economnic Rev'iew 2 rApril): 5-20. Primo Braga, C.A. 1996. "The Impact of the Intemationalization of Viewpoint is an open Services on Developing Countries." Finance and Developrnent forum intended to (March): 3-37. encosrage dissemina- UNCTAD and WVorld Hank. 1994. Liberalizing Interncttional Trans- tion of and debate on actions in Services: A Handbook. New York: United Nations. ideas, innovations, and best practices for expanding the private Carlos A. Primo Braga (cbraga@worldbank.org), sector The views Po incipalZEcoinomist, Telecommunications and the authors and should Informatics Division not be attributed to the World Bank or any of its affiliated organizations. Nor do any of the con- clusions represent official policy of the World Bank or of its Executive Directors or the countries they represent. To order additional copies please call 202- 458-1111 or contact Suzanne Smith, editor, Room F6P-188, The World Bank, 1818 H Street, NW, Washington, D.C. 20433, or Internet address ssmith7@worldbank.org. The series is also available on-line (www.worldbank.org/ html/fpd/notes/ note list. html). @) Printed on recycled paper.