Averting a Telecommunications Trade War

ONCE, telephone traffic belonged to every nation's flag carrier: the Post Telegraph and Telephone operator or a private company with a similarly exclusive national franchise.

But no longer. In much of the world, technology and market liberalization have opened the vast national pools of telecommunications traffic, once a country's patrimony, to as fierce international bidding as forests or mineral deposits.

In theory, such competition should give consumers more choice. And it should save them money, especially for international calls, which despite rapidly falling transmission costs may still be priced at $1.00 a minute or more for calls originating in the US. The charge for overseas calls in a foreign country may be two or three times that.

Users have the right to route their calls via the lowest priced carrier, regardless of national pedigree, don't they? After all, whose traffic is it?

Yet, even in the United States, the answer still seems to depend on whom you ask, carriers or customers. In Europe and much of Asia, the sovereignty of the national carriers, rather than of consumers, is even more firmly entrenched. Hence, as regulatory and trade officials in the Clinton administration begin to address this issue with their foreign counterparts, they would do well to keep consumer interests front and center.

A case in point is the new contest between British Telecom (BT), Britain's largest telecoms carrier, and AT&T. BT wants to provide trans-Atlantic telephone service from the US by leasing underseas cable facilities from US carriers. AT&T wants to lease British circuits to provide similar end-to-end services from Britain.

However, AT&T has asked the Federal Communications Commission (FCC) to reject the service application of BT's US subsidiary. AT&T claims that British regulations would not permit it to interconnect its international circuits with BT's domestic network on terms equivalent to those offered by BT in the US, as FCC rules require. BT denies this.

BT and AT&T each seems to want the best of both worlds: unlimited access abroad and a managed oligopoly at home.

The US accounts for approximately 26 percent of international telephone traffic; Britain for approximately 8 percent. These are critical markets for each company as it seeks to become a global supercarrier.

Both companies have some "big guns" in the wings. AT&T recently appointed Carla Hills, the Bush administration's US trade representative, to its board of directors. BT has already enlisted the British Embassy in Washington and appears to have the ear of Sir Leon Brittan, the European Community's top trade official.

Striking a balance between the producer and consumer interests involved in market access disputes is not easy. And the telecommunications sector is hardly unique; such issues are at the heart of the Uruguay Round of multilateral trade talks.

But, so far as the AT&T-BT contest is concerned, on both sides of the Atlantic there appears to be more interest in brokering a deal between the protagonists than in helping the consumers or the smaller entrepreneurial carriers that have championed competition thus far.

Yet the potential benefits to consumers are considerable. For example, one result of BT's FCC application has been an AT&T proposal to reduce by at least 60 percent the wholesale rate, or settlement, it now collects from British carriers for landing their traffic in the US.

AT&T says it is willing to connect calls from Britain for about 10 cents a minute provided BT will accept the same rate for landing US traffic.

LOWER international settlement rates generally lead to lower retail rates for international telephone users. Lower retail rates also reduce the margins available for AT&T's would-be competitors, such as BT, which seek to enter the US market by leasing AT&T's international circuits in bulk and then reoffering the capacity to the public for telephone services.

This year, the US and Britain will exchange roughly 1.5 billion minutes of switched telephone traffic. If AT&T were required to pass through to telephone users even half of the proposed cut in settlements - a very conservative assumption given US-Britain toll charges are still at least 50 cents to 60 cents a minute - the savings would amount to approximately $115 million.

And that is just the US-Britain route; if more competition led to similar rate reductions on other routes, the savings could be well over $1 billion annually.

Given the magnitude of the sums, it is not surprising that, free-market rhetoric aside, most national carriers would prefer to have regulators manage the growth of competition on their behalf rather than let the market do it.

One way to do that is to transform the debate into a trade dispute between "us" and "them," to borrow from a 1990 Harvard Business Review essay of Labor Secretary Robert Reich. But, as Mr. Reich properly asks, in an age of networked production and supernational companies, "Who is `Us"' and "Who is `Them'?"

Global managers of supernational corporations, such as AT&T and BT, have their own priorities - winning market share, increasing stockholder value, and securing the bottom line.

Similarly, every nation wants to improve its economic performance and provide the jobs and services its people want. National security is also a legitimate concern.

That is why all countries have basic telecommunications regulations for doing business. "They" must abide by "Our" rules and we by theirs. But so long as they do, how much does it matter today where a company is chartered?

For most telephone users, the answer is "not much." Thus the Clinton administration might do well to use the new contest between BT and AT&T as a unique opportunity to bring down transatlantic telephone rates rather than to engage in yet another trade war with Europe.