Home Africa and the Middle EastAfrica and the Middle East 1999 Telecommunications and IT Services in the Multilateral Trade System

Telecommunications and IT Services in the Multilateral Trade System

by david.nunes
Lee Tuthill Issue: Africa and the Middle East 1999
Article no.: 7
Topic: Telecommunications and IT Services in the Multilateral Trade System
Author: Lee Tuthill
Title: World Trade Organisation Secretariat
Organisation: Trade in Services Division
PDF size: 36KB

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Article abstract

Over the past year, the Council for Trade in Services, that oversees the General Agreement on Trade in Services (GATS) for the World Trade Organization (WTO), held an “information exchange”. In this exercise, WTO Members reviewed recent developments in various service sectors and considered the possible implications for the next Round of Multilateral Trade Negotiations. The new Round is due to be launched by a Ministerial Meeting to be held at year end. This article draws from the background notes on telecommunications and computer services prepared for the information exchange by the WTO Secretariat, highlighting many of their main points and observations.

Full Article

The IT industry has grown out of a convergence of telecommunications, computer technology and software as well as more content-oriented industries such as broadcasting and publishing. Although there is no uniform definition of the IT, by any measure the linkages between the equipment, software, communications and computer services components of the IT market are recognized recognised as important. The blend can yield hybrid IT services difficult to categorise into any particular sector. For instance, there may be a fine line, if any, between certain on-line computer services and value-added telecommunications services. The fast-growing and lucrative IT market has wrought brought about head-on competition between the computer and telecommunications services industries, offering consumers not only a wider variety of technologies and products but also attractive prices. Moreover, the IT industry includes companies that design, build and supply the means for global electronic commerce. However, the very different histories of these converging sectors gives rise to concern that the traditionally unregulated computer services industry could begin to face the constraints that governments apply to the telecommunications and broadcast sectors. The latter, despite much of the deregulation under way, remain much more subject to intervention. The fact that the computer industry developed in an open competitive environment is often credited with having driven its rapid growth. Market Access Commitments: Telecom and Computer Services As of November 1998, 89 WTO Members have included telecommunications services in their GATS schedules of commitments. The number is likely to rise as additional governments complete the process of accession to the WTO in the coming months. In all, basic telecommunications are included in the commitments of 83 Members. On value-added telecoms, over 70 Members have made commitments. Also, many Members have committed in their schedules to observe a set of telecom regulatory principles. In computer and related services, 73 GATS Member governments have made commitments at present. These include consultancy related to the installation of hardware, software implementation, data processing, data base services and an “other” category. For these services, the proportion of commitments with no limitations whatsoever listed against market access is comparatively high, ranging from 68-77% for commercial presence and from 60-63% for cross border supply. While the GATS directly addresses the liberalization of IT-related service sectors, it should also be borne in mind that the WTO agreement to eliminate tariffs on information and communication technology products areis also important. The GATT Information Technology Agreement and the Mutual Recognition Agreements on conformity assessment are expected to help reduce the cost of equipment essential to trade in IT services. Telecom Sector Developments The role of telecommunications as essential to the facilitation of international trade, economic development, and the enrichment of citizen’s lives has become widely accepted. Modern means of telecommunications, enhanced by competition, will enable all countries to participate more fully in international trade and in the WTO. Many emerging economy governments which joined in making GATS commitments on basic telecommunications had come to view inadequate telecommunications networks and services as an impediment to achieving their full economic potential. As of February 1998, with the entry into force of the WTOs telecom agreement , 82% of the world telecom revenue was subject to competitive markets. This has dramatic implications for how the telecom industry will be structured and the way services will be provided in the future. Telecommunications is undergoing a process of rapid technological and structural change accompanied by dramatic economic growth. The national monopolies which have dominated the industry in almost all countries until very recently are now facing competition in many countries. This process was both reflected in and stimulated by the commitments made in the GATS negotiations. The most recent edition of Telegeography confirms that as of July 1998, over 1,000 facilities-based international carriers were operational world-wide, compared with less than 500 just two years earlier. The competition now in effect in more than forty countries is already showing benefits not only for customers and new international telecom carriers, who have gained over 11% of the world market, but also for a few incumbent operators who, by slashing prices to face competition, have registered impressive growth. The worlds leading telecom companies continue, for the most part, to be incumbent operators, from industrializedindustrialised countries. Nevertheless, a number of emerging economy operators and a few new entrants are making important inroads. In 1997, the top 20 telecom operators in terms of revenue accounted for nearly US$ 477 billion or 74% of total 1997 world revenues and for nearly 2.4 million employees. Telebras of Brazil and DGT of China ranked among these. The top 20 operators ranked by number of main lines, accounted for nearly 67% of all main lines in 1997. Several emerging economy operators figured among these, including those of China, Korea, Brazil, India, and Taiwan. Similar patterns are evident in markets for international and cellular services. In terms of international revenue, the top 20 operators earned an estimated US$ 115.3 billion in 1997. Operators from China, India, Singapore and Mexico were among these. Revenue of the top 20 suppliers of cellular service (in number of subscribers) in 1997 reached US$ 73 billion: Chinas operator ranked second; Koreas SK Telecom, seventh; and Brazils operator assumed twelfth place. The clear prospect of competition has also accelerated the pace of innovation, leading to technologies that were difficult to foresee even very recently. Mobile services are growing at such rates that their economic importance may soon rival fixed-networks. As prices fall, some citizens of emerging economies will experience their first telecom access through mobile rather than fixed telephones. Internet-based services are undergoing similarly dramatic strides as new and traditional operators integrate internet-style backbones into their networks. And with new satellite services such as GMPCS, which has just recently become now coming on line, the so-called Third Generation technologies are already expected to be operational shortly. Satellite transport capacity may become as important as wire-based capacity within the next decade. One way telecom providers try to cope with this upheaval is through mergers and acquisitions. According to an article in Telecommunications magazine, in the first half of 1998 the value of telecom transactions world – wide increased seven-fold, meaning about 10% of the value of the global telecoms market changed hands in only six months. This does not, suggests the article, represent the advent of mega-companies set to dominate telecommunications, but while “a relatively small number of colossal deals are inflating overall deal value, there is a much larger number of smaller, discrete transactions whose significance goes well beyond their apparent scale.” The 1997 Communications Outlook of the OECD reports that among the corporate aims inspiring the high merger and acquisition levels is a desire offer global one-stop shopping for integrated services and a wider range of services. With this in mind, operators are acquiring Internet service providers and other data communications or computer service/software firms. Telecom companies are thus preparing to compete in the multi-dimensional IT markets of the future. IT Industry Developments According to the OECD Information Technology Outlook 1997, the global IT market in 1995 was worth nearly US$528 billion. Its growth rate, averaging nearly twice that of global GDP growth from 1987-94, was particularly high in some Asian and South American countries. Although the world IT market mainly concentrates in G7 countries, by 1995 countries such as the Republic of Korea, Brazil and China had markets comparable to or larger than some European markets. In non-OECD countries, PCs and workstations as a share of IT spending grew at more than double the rate in OECD — which may reveal a bypassing of mainframe technologies. For IT services, the markets of Singapore, India, Brazil, Chile and South Africa are notably strong. The OECD Report also notes that the world IT market experienced a series of structural changes from 1985-95. First, there was a downward trend in the relative importance of hardware and a corresponding rise in software/services. Second, PCs and workstations became increasingly important, supplanting larger-scale computer systems and mini-computers. Finally, the most significant recent development in networked computing — the Internet — is a dramatic example of convergence between the computer and telecom sectors. Moreover, competition in computing services is increasing, as global hardware companies improve their skills at facilities management and systems integration and as new networking and multimedia opportunities prompt telecom and media companies to enter the market. In computer services, proximity to the customer has been essential because the best way to clearly identify market opportunities is through familiarity with cultural, administrative and regulatory issues. As a result, most companies concentrate on regional and national markets. This means that the commercial presence mode of supply covered by GATS commitments takes on importance. Electronic commerce is increasingly used by software companies as a complement to off-the-shelf and mail-order sales. According to the Software Business Practices Survey, 30% of responding U.S. companies used electronic distribution as one way to deliver their products in 1995 and 48% planned to do the following year. While 17% of responding firms companies used internet for sales in 1995, the largest companies (revenue over US$50m) showed greater enthusiasm, with 21% conducting internet sales already and 41% hoping to do so the following year. GATS commitments on cross border supply of computer services can help pave the way for such developments. The IT sector is a substantial generator of new employment not only in industrializedindustrialised markets but in emerging markets as well. In the US shortages of labour with the necessary computing skills has emerged, with the software industry alone producinged 135,000 new jobs in 1996 but U.S. universities graduating only 36,000 computer science students. In Western Europe, where software and services companies and independent service providers employ over 500,000 persons, skills shortages are exacerbated by introduction of the Euro and the need to cope with the millennium bug. Given these labour-demand characteristics, GATS commitments on the movement of natural persons to supply such services takes on a great deal of significance. The Regulatory Environment Telecom Services For telecommunications, the ability of new entrants to arrive on the scene is only part of the picture. It has proved, and continues to be, exceedingly difficult for new entrants to gain a significant market share. In the face what may be continuing dominance over essential infrastructure and the local loop for a considerable period of time, effective regulatory safeguards, especially in relation to competition and interconnection, will be indispensable. Other important functions of telecom regulation remain important but will need to be recast to complement a competitive environment. Finding new mechanisms to meet universal service objectives, whose impact on competitors is even-handed, will require creativity. Also, many licensing practices and procedures that are a holdover from the past may need to be streamlined or even recast. Finally, regulators and operators everywhere are struggling with costing methodologies appropriate to the new environment. Improved data collection and new methods of cost calculation are necessary for regulators to safeguard competition and for operators to make sound business decisions. A transparent and fair regulatory framework will be vital to the investment decisions of new providers of services of all kinds, but particularly for satellite and other wireless services. Given the dramatic growth of these services, how best can spectrums be managed, licensed and priced to meet the many competing new demands? IT Services The fact that computer and IT services face little or no sector-specific regulation, does not mean that government policies and practices lack significance for the sector. On the contrary, a variety of government measures have an effect on the growth and development of these services. Relevant areas include labour policies (work permits/visas, education and training), research and development support, protection of intellectual property rights to address software piracy, technical standards, tariffs on computer equipment, and government procurement of information services. In addition, recent government initiatives related to the Global Information Infrastructure (GII) or Global Information Society (GIS) serve to stimulate demand for these services. Moreover, as on-line supply of computer services becomes increasingly commonplace, issues of legal contract/software license enforcement and many of the internet/e-commerce related concerns such as authentification; encryption, protection of individual privacy, and protection of the consumer assume ever greater importance for the computer industry. Conclusion As convergence leads telecom service providers to offer a wider range of multimedia services, regulatory considerations may become further complicated. For example, unbundled interconnection to essential infrastructure controlled by a dominant supplier is seen as necessary to achieve effective market access for basic telecom suppliers. But is it any less crucial for the supply of video over internet services, when access to the local loop, i.e. the final customer, can only be obtained from a dominant supplier? Convergence will also pose a significant challenge to governments to try to ensure that regulations applied across different segments of the multimedia industry are broadly consistent. The IT industry is concerned about the possibility of increased regulation both as a result of the maturity of the sector and from convergence. There are, however, factors which argue against increased regulation. Most importantly, the IT industry is highly competitive. Such competition can, in itself, obviate the need for much of the kind of oversight applied to telecommunications. Secondly, the telecommunications industry itself is now experiencing widespread deregulation. Thirdly, a need for public-interest regulation typical in broadcasting is much less evident in the IT industry as a whole. Nonetheless, the advent of multimedia services has led to regulatory concerns in some countries. Industry associations point out that the increased regulation of IT services could stifle the innovation that has, for example, served as a source of growth and modernisation for telecommunications.

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