The Internet and International Trade Policy
John du Pre GAUNTT <email@example.com>
The successful conclusion of the World Trade Organization (WTO) talks on basic telecommunications in February 1997 was presented as the template for liberalization of basic telecomms and information services on a global basis.
While not directly addressed in the February WTO Agreement, the Internet promises to radically shift certain assumptions underpinning future telecomms trade liberalization talks. More specifically, two areas of Internet functionality -- voice over the Internet and Internet broadcasting -- promise to force themselves to the top of the agenda of the next General Agreement on Trade in Services (GATS) negotiations, scheduled to commence in the year 2000.
Voice over the Internet was considered to be a value-added service (VAS) in the 1993 Uruguay Round and hence not subject to market restrictions associated with basic telecommunications. Yet, there continues to be a significant debate as to whether technical advances are evolving Internet voice into a viable substitute for basic telecomms. If a national regulator decides that IP voice services qualify as a substitute -- and are theoretically subject to access charges and universal service contributions -- such a decision will have to be made in light of already agreed-upon schedules included in the 1997 WTO Agreement.
However, far more contentious for international trade policy are Internet audio and video services. Depending upon how negotiators perceive Internet bit-streaming applications (i.e., is it a broadcast or is it a piece of audio or video data), there is the danger that WTO members could opt for Most Favored Nation (MFN) exemptions with regard to Internet broadcasting or attempt to create regional preferences. Aside from the technical difficulties of policing those types of restrictions, such exemptions or regional arrangements could weaken some of the more basic commitments for telecomms liberalization.
The problem at issue could be phrased as follows: at what point does Music Net become the same as Music Television from an international trade services viewpoint, and how should an Internet-based music channel (not to be confused with a radio station) that allows for audience interactivity be understood in the context of telecommunications?
The preceding suggests that there will be a point of crisis where trade negotiators must decide the context and nomenclature under which real-time packet-switched services -- broadcasting or not -- are to be treated under GATS.
The aim of this paper will be to delineate the basic trade issues and principles that distinguish negotiations that cover telecommunications and broadcasting; highlight how the Internet networking model impacts each; speculate on some of the likely concerns and negotiating positions of major Internet service exporting nations and their likely markets; and hopefully sketch a rough guide to the intellectual issues that must be addressed for a successful general services round in the year 2000.
The successful conclusion of the World Trade Organization (WTO) negotiations on basic telecommunications is considered fundamental for the future viability of the Global Information Infrastructure (GII).
The 15 February 1997 Agreement brought basic telecomms into the framework of the General Agreement on Trade in Services (GATS). A total of 69 countries representing 93% of global telecomms revenue signed the Agreement which commits signatory governments to apply various GATS disciplines such as market access, regulatory transparency, national treatment and most favored nation (MFN) status to basic telecomms.1
While not specifically addressed in the February WTO Agreement, the Internet hovered prominently in the background. The February WTO Agreement comes at a point when the Internet is challenging fundamental concepts of what constitutes telecomms -- and by extension, the context in which global telecomms liberalization is to be negotiated. More specifically, two areas of Internet functionality -- Internet telephony, and IP broadcast/multicast -- promise to force themselves to the top of the agenda facing negotiators preparing for the next general round of the GATS.
Granted that Internet applications were originally designated as value-added-services (VAS) in the Uruguay Round of the General Agreement on Trade and Tariffs (GATT), by the year 2000, the start of the next round of GATS, the question of whether these services are equivalent to traditional telephony and broadcasting from a technical point-of-view will be largely a moot point.
Of the two service domains, Internet telephony stands a reasonable chance of being addressed in a multilateral setting to the satisfaction of WTO members. Given that the WTO Agreement allows for the self-termination of telephony on the most important international routes, the case for invoking arbitrage as the primary attraction of Internet telephony becomes less compelling. Moreover, it is wrong to assume that incumbent operators will not embrace IP telephony protocols if and when the market for packet-switched voice as a stand-alone service or as part of an integrated package reaches maturity.
Internet broadcast and multicast applications, on the other hand, are a far more contentious area. While there are many nations that do not object to seeing audio-visual products and services traded like ordinary goods, there are many more that do.
This paper will focus on the WTO and the Agreement on basic telecomms and give a brief overview of Internet telephony and IP broadcast/multicast. It will then highlight some of the policy positions taken in national and regional settings coming to grips with these applications. From there it will conclude with some thoughts about possible negotiating positions taken by the main WTO actors, as well as comment on reconciling the national interest in the global context of the Internet.
Established in 1995, the WTO is responsible for administering multilateral trade agreements negotiated by its members; in particular the General Agreement on Trade and Tariffs (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Intellectual Property Rights (TRIPS).2 The basic underlying philosophy of the WTO is that open markets, non-discrimination and global competition in international trade are conducive to the national welfare of all countries.3
The origin of the WTO was the GATT, a treaty signed in 1947 that was the start of the present multilateral trading system. The GATT trade model was simple. Countries undertook to apply protection only through a price-based mechanism -- a tariff transparently applied to imported goods at the border. The maximum level of the tariff could not exceed an agreed- or bound-rate, and would be negotiated downward in periodic multilateral negotiations.4
This model worked well until services became a larger force in the world economy. It is often the case that a service supplier needs a local presence to have effective market access, which implies that trade disciplines need to cover investment as well as cross-border delivery. Given the essentially intangible nature of services, liberalization could not be negotiated on the basis of price mechanisms applied at the border.5
The GATS negotiators arrived at a model that was based on GATT, but in ways that reflect in part the intangible and non-storable nature of services. In the GATS, the only major obligation that a country assumes with respect to trade in all services is Most Favored Nation treatment (MFN). Other commitments to foreign services or service suppliers such as national treatment and market access, apply only to sectors and modes of supply in which countries have made specific commitments. Commitments are further divided into different modes of supply. These include:
Commitments under GATS in any particular sector can be limited to any or all modes of supply, depending largely on the outcome of the negotiations.6
Although GATS was negotiated and implemented during the Uruguay Round of the GATT, the 1993 talks on services ended with four outstanding issues: telecomms, natural movement of people, maritime and financial services. Telecomms talks in particular were assigned the Negotiations Group on Basic Telecommunications (NGBT), which started in May 1994 with an April 1996 deadline. Some 48 governments representing over 90 percent of global telecomms revenue joined the negotiations.7
The talks were designed to be comprehensive, with no basic telecommunications service excluded a priori. The negotiating process began by sending out questionnaires to the various WTO members to ask them about their telecomms systems and regulatory structures. The main questions from a trade point of view were to ask where countries had limitations on foreign ownership or operation of telecomms networks.8
However, the most critical aspect for reaching an agreement revolved around MFN for telecomms. MFN was a cornerstone of GATT and underpins the WTO. It means that as a general rule, if a country decides to allow outsiders to take part in competition, it cannot discriminate between one WTO member and another.
However admirable this concept is in theory, in practice precious few market opening measures come without strings attached. Within GATS, there is such as thing as an MFN exemption. Article 2 of the GATS states that a country can list products or services which will not fall under multilateral trade disciplines even if a sector is declared to be open. It is here where the relative market power of individual WTO members comes into play.
Around 85% of the world telecomms market is accounted for by the United States, Canada, the EU and Japan. If any of these exempted a service or severely limited it, their decision could neuter the cause of liberalization. Known collectively as the Quad, the four negotiating groups are the linchpin of legitimacy for any multilateral treaty covering telecomms.
Thus, it is no surprise that Internet telephony and IP broadcasting/multicast technology have been buzzwords during the past year in Quad countries. The technology has reached commercial grade quality since the summer of 1997 while corporate strategies and regulatory regimes have only begun to address the implications.
The move toward exploiting Internet telephony service on a commercial basis has already begun. USA Global Link -- a US call-back operator -- launched in March 1997 the first international phone-to-phone Internet service.9 Called Global Internetwork, the service transforms analog calls into digital packets which are transmitted across the Internet to another terminal. Once the call reaches the destination country, a phone gateway transforms the data back into an analog signal and forwards it to the recipient via the local phone system.10
Concurrent with the Internet telephony world consolidating technical platforms and direct investment is the trend being seen in Internet broadcasting and multicast. Internet broadcasting and its newer permutation -- Internet multicast -- also attracted capital and talent in droves during 1997.
Unicasting, which is the normal way that the Internet is used, involves one source -- perhaps a single server-sending packets to one destination host. This is the basic facility provided by the Internet protocol (IP) and is a point-to-point, non-real-time, best-effort delivery service of IP.
Sending a copy of a message from a central source to all nodes on a network is broadcasting in the classic sense. Push technology occupies a middle ground where a single source sends a message at regular intervals to multiple points, but only to those points ready to receive the message.
Multicasting involves multiple sources sending packets to multiple selected destinations. Multicast is a receiver-based instead of a sender-based concept: receivers join a particular multicast session group and traffic is delivered to all members of that group by the network infrastructure.11 Under a native multicast environment, a network router accepts data from a server only if an end-device served by that router has requested the data. The router then uses that single copy to fulfil all requests within its service domain. Thus, rather than duplicating data ad infinitum, multicasting sends the same information just once to multiple users -- with theoretically substantial savings in bandwidth.12
One of the earliest examples of multicast applications is RealNetwork, a service shared by U.S. long distance carrier MCI and Progressive Networks of Seattle, Washington.13 RealNetwork embeds Progressive Networks Real Audio and Real Video streaming technology throughout MCI's Internet backbone. By broadcasting from multiple points on the network rather than from one central server, RealNetwork expects to scale to as many as 50,000 simultaneous users, hoping to reach a total of 10m on a daily basis.14 ABC News, Atlantic Records, ESPN, JAMtv and the Seattle Mariners baseball team are among the first content providers to deploy the service.15
The upshot of the trends in 1997 is that Internet telephony and IP casting in its various forms are moving beyond the technologist's or the hobbyist's domain. Like electronic mail, which was an academic tool or a curiosity just a decade ago, but is now a standard business application, it can be expected that the preceding Internet service domains will be integrated an equally short time.
But whereas electronic mail did not change the overall industry structure of the telecomms and broadcast industries -- and thus, the negotiating positions taken in multilateral forums -- the same cannot be said for IP telephony and broadcast/multicast. Even before WTO negotiators start placing these services within the realm of GATS, the industries themselves have little idea how the technology will affect their business and by extension, how they should lobby their trade representatives.
It is instructive, therefore, to explore some of the positions put forth in the last year on Internet telephony from the business and policy communities. IP broadcast and multicast, on the other hand, do not have the luxury of such an extensive history from which to speculate.
In the beginning, most Internet telephony software required both users to have their computers connected to the Internet at the time of the call. The quality, reliability and proprietary nature of the software packages conspired to represent no real threat to the traditional telecomms business.
However, once emphasis in Internet telephony changed from PC-to-PC and began concentrating on PC-to-phone and especially phone-to-phone, certain telecomms operators began to become nervous. If it were possible for resellers to exploit Internet backbones -- even as competition further lowers the price of leased lines -- in order to connect POTS telephones, many of the principles upon which the traditional telecomms business case rest would be severely undermined -- at least in theory.
In North America, there has already been an attempt to force a decision regarding Internet telephony from the Federal Communications Commission (FCC). In March 1996, the American Carriers Telecommunications Association (ACTA) -- a trade association primarily composed of small and medium sized long distance carriers -- filed a petition with the FCC to regulate Internet telephony.16
ACTA basically argued that providers of software that enable real-time voice communications over the Internet should be treated as telecommunications carriers and be subject to FCC regulation. It based its conclusions on the contention that the use of the Internet to provide telecomms services had an impact on the "traditional means, methods, systems, providers and users of telecommunications services, an impact which could -- if left unchecked -- eventually create serious economic hardship on all existing participants in the long distance marketplace and the public that is served by those participants." 17
Nor was debate over Internet telephony confined to North America. In July 1997, the European Commission published a draft document regarding voice over the Internet. The basic EC position was that in the current context of use, "voice on the Internet cannot be considered Voice Telephony and therefore falls within the liberalized area. . . . a priori authorization may therefore not be imposed on Internet Access/Service Providers".18
In a response to the EC draft, the European Public Telecommunications Network Operators Association (ETNO) -- a trade association of Europe's largest PTTs -- noted that two different applications of Internet telephony could be identified.19 The first case is the typical scenario involving personal computers, modems and software. The second case entailed end users who did not need any specific equipment or software. In this case, a service provider offers conversion from the PSTN to packet based transmission/switching servers. In this case, the Internet is being used as a transmission medium and the terminals are irrelevant.
Yet ETNO was quick to note that this does not mean automatically that ISPs or Internet applications vendors should be required to pay access fees or universal service contributions as if they were regular telecomms operators. Instead, the question is whether there should be more regulation on things that are just now coming into existence or should authorities withdraw certain types of regulation on existing services?20
Whereas the reaction to ACTA's proposal was both swift and negative while the ETNO reflection document used somewhat circular reasoning, both positions raise some fundamental questions regarding telecomms regulation in the context of the Internet. Should a service provided over the Internet that appears functionally similar to a traditional, in other words, regulated telecomms service be subject to existing regulatory requirements? Or -- turning the question around -- if an unregulated environment such as the Internet can offer a service that is functionally similar to a traditional telecomms application, is there scope for relaxing certain obligations on existing telecomms operators?
The key aspect is how one determines the context for something being functionally similar to regulated telecommunications. If one bases the argument on technology, it appears that the counter arguments are stronger. For example, there are many cases where cellular telephony is not considered to be the same quality as a land-line connection, yet there is no separate classification for mobile service.21
Additionally, even if service providers begin providing telephone gateways to receive Internet calls destined for a POTS terminal, the gateway providers must have the necessary hardware to route voice traffic from the Internet to the local telecomms network. This means that they must pay local network providers to terminate Internet calls just as a traditional long distance operator would pay for the termination of circuit-switched calls.22
Thus, it is widely considered that the final judgement of whether or not Internet telephony will be considered basic telecomms -- and hence a trade issue -- lies with how it affects market structure, and not how it is delivered from a technical point-of-view. Paradoxically, it is here where one can argue that the February WTO Agreement has already dealt with Internet telephony in an indirect sense.
In principle, about 80% of world trade in telecomms will be covered by a regime that allows an operator to self-terminate international traffic (e.g., the operator does not have to hand traffic over to a correspondent but interconnects with a local operator). Or if that is not possible or feasible, the same operator will be able to negotiate interconnection based on the opportunity cost of providing self-termination.
In terms of the effect of Internet telephony on international trade negotiations, most negotiators believe that it is better to concentrate on the mainstream trend which is that voice is moving into data instead of a particular application area. This implies that the mainstream data services market -- which is epitomized by frame relay/ATM protocols running on SDH/SONET infrastructure -- and the Internet will shortly become so closely merged that one won't be able to notice the difference.
The same cannot be said about Internet broadcast and multicast. If, as is widely considered, traditional broadcast issues nearly brought down the Uruguay Round, broadcasting and multicasting over the Internet can only compound the problem.
Even in the more simple world that existed before the convergence of communications, computing and content, the common customs nomenclature (CCN) -- a compilation of codes that identify everything from bananas to nuclear reactors for trade purposes -- was often employed according to the political exigencies facing negotiators. For example, during the Uruguay Round the United States opted for an MFN exemption to preserve a bilateral agreement on direct broadcast via satellite with Mexico and Canada through NAFTA, even though at the time it was arguing precisely for multilateral solutions.
There were strong protests over this position with the EU stating that the United States had made multilateral commitments on audio-visual (AV) during the Uruguay Round that appeared to cover all AV services and hence was subject to MFN. The EU reasoned that surely direct broadcast via satellite qualified as an AV service. The United States said no because it classified direct broadcast via satellite as a telecomms service that did not need a broadcast license. Moreover, the United States made clear that it did not accept the CCN classification of broadcast via satellite in the first place and, therefore, had the right to define DBS as it saw fit -- in this case, as telecomms instead of broadcast.
Such theological debate suggests that definitions of what are telecomms, what is broadcast, what are VAS in the context of the Internet cannot help but become more intractable. In the words of a negotiator, "Ultimately, I hope and think that by the year 2000 or in the course of the next round of GATS, the technology will get so advanced that people will say, good God this is ridiculous and move onto a different way of classifying and negotiating real-time services".
If this sentiment is anything to go by, it will be extremely difficult for broadcast/multicast services to be negotiated under GATS disciplines unless they are linked to other equally important trade areas.
Linking issues potentially plays two roles.23 First, linkage can be used to achieve reciprocity which -- loosely defined -- is the practice of making an action conditional upon the action of a counterpart.
A second reason for linking issues is to increase the potential gains from trade. The need for linkage depends on whether there are sufficient mutual gains within a given issue area, and whether these gains are distributed more or less symmetrically.24 If the gains are too small or the distribution is too asymmetric, cross-issue linkage becomes necessary. Thus, the question of what to link is equivalent to the question of what to trade.25
However, even if a trade nomenclature for Internet broadcast and multicast exists and an agenda links enough issues for vested interests to meet, this does very little to head off what will be the primary battle over IP broadcast and multicast: culture. It is impossible to separate broadcasting and multicasting from content. And it is impossible to separate content from culture.
One can argue that it is the cultural aspect that delineates broadcasting from telecomms negotiations. Anything with content has a potent effect on the people who experience it. Aside from the caricatures of cultural imperialism reverberating in think tanks and op-ed pieces, it is a foregone conclusion that local customs or national broadcasting laws will be affected.
In the meantime, corporate restructuring is completing the convergence trend launched by technology. For example, in January 1997, France Telecom announced that it had bought for an undisclosed sum Keystone Communications, a United States-based satellite transmission and television company.26 France Telecom had previously purchased United Kingdom-based broadcast service provider Maxisat, as well as regional satellite network Telecom 2, along with having stakes in the Eutelsat and Intelsat organizations.27
Across Europe, major television broadcasters such as Spain's Retevision are being tapped as second national operators for telecomms, while outright telecomms ownership of CATV networks (the Netherlands) or their local loops (France) further confuses the issue.28 Events in the United Kingdom with interactive services and digital TV are even more complex. There, British Telecommunications (BT) reached an agreement in 1997 with Rupert Murdoch's satellite company BSkyB, Japan's Matsushita and bankers HSBC to create British Interactive Broadcasting (BIB), which aims to deliver interactive multimedia services, especially over the coming digital TV networks and the Internet.29
The upshot of this mixing of interests is that the next round of GATS will commence after the much ballyhooed idea of convergence is established as a day-to-day reality. Regulating -- and hence trading -- communications based on a 20th century model that revolves around the nature of a network access device -- TV, radio, PC etc. -- will be useless not only due to technical advance but by some immense concentrations of global corporate power.
Corporate power, more than anything else, is the cultural context within which negotiators must interpret what is in the national interest. As such, there are identifiable forces that will influence Quad negotiators during the next round of GATS.
The United States and Canada are significant net exporters of content whether as film, television, music, software or other permutations. Their telecomms and broadcasting companies are among the world's most powerful, while their technology companies exert significant influence over many of the technical standards bodies that deal with the Internet.
One can expect the North Americans to advocate a fairly narrow agenda that pushes for deeper commitment on intellectual property rights (IPR) as well as market access commitments for professional services such as finance, insurance and accounting that are rapidly reorganizing around the Internet as a delivery vehicle. The nature of this type of trade bestows significant first-mover advantages, a fact not lost on either the North Americans or their international trading partners. However, this opens the danger that the vital cross-issue linkages may not be available.
The EU occupies an uneasy middle ground, with substantial technical and content-based industries, but without the linguistic or regulatory homogeneity enjoyed by its North American counterparts. However, the EU does have ample experience in integrating the interests and constraints of multiple cultures and political systems. As a result, Europe often draws support -- deserved or not -- from the rest of the world that both admires and is nervous about North America.
Most likely, the EU will push for a broader agenda not only to counter North American power but also to provide enough linkages within its fifteen Member States so that it can present a united position. But if the agenda is too broad, it may bog down the process even as technology and commercial tie-ups outstrip the ability for negotiators to keep up.
Japan is in a bit of a muddle. It knows that its culture and language do not export while its economy is founded upon manufacture. Although its largest electronics companies have ample say in world standards bodies, the innovative start-up companies who change the rules of the game are few and far between. That said, the Japanese have the advantage of a huge industrial and capital base, a highly educated citizenry, the world's largest telecomms carrier and close relations with one of the most dynamic -- notwithstanding the recent financial crisis -- economic areas on earth.
In the end, the much fabled term critical mass will be invoked by all sides. And critical mass has a public and private definition. Publicly, it refers to the quantitative number of countries that have made market opening commitments, while in reality it represents what a negotiating team can sell to its national Parliament or Congress.
The question then becomes how Internet telephony or IP broadcast and multicast fit into the national interest. For certain WTO members the new export potential is seen as the primary, positive goal. Likewise, the way in which existing industries can reorganize around these services for competitive advantage seems persuasive as well.
On the other hand, there are decision makers who fear that these services threaten their ability to form or execute telecomms and broadcasting policy. Thus, negotiators can count on hearing a multitude of conflicting truths about how the Internet impacts both policy areas.
Among the truths this chapter has tried to express is that Internet telephony basically represents a new way to deliver a familiar service because the larger trend is voice moving into data -- not a specific technical model. As such, the way in which negotiators can place a value -- and hence what they are willing to sacrifice to achieve consensus -- is fairly well understood.
On the other hand, IP broadcast/multicast services represent a break with the past. Thus, it is highly suspect that traditional economic arguments or utopian future-gazing are enough to persuade many countries to open their markets to unrestricted broadcast and multicast services. And if these digital services in fact represent an engine of global economic growth, it will be instructive to observe whether the main Internet trade protagonists will be willing to alter hitherto sacred cows such as agricultural subsidies in order for trade in Internet services to be governed by a multilateral agreement.
In this sense, the next round of the GATS will be salutary for the Internet in an international context. GATS negotiators from both advanced and developing countries will be forced to choose just how the Internet fits into the national interest because they will have to sacrifice something in the belief of getting something greater in return.
Granted it will be horribly difficult. However, human beings are remarkably adept at handling multiple -- and conflicting -- epistemologies. We would not survive otherwise. The sub-atomic physicist who denies the existence of solid matter avoids the approaching car nonetheless. Let us hope that nation-states exhibit similar versatility.