BRIEFING PAPER trade and investment series

Volume 5 Number 2 • July 2004 Telmex Panel Strips WTO of Another Fig Leaf by Ellen Gould

In April 2004, a WTO dispute panel ruled in There are provisions in the Telecommunications favour of the US in almost all aspects of a case Reference Paper as well as in the GATS it brought against Mexico. The US successfully Telecommunications Annex that seem to allow an claimed that Mexico was violating the General out for governments if their goal is to encourage Agreement on Trade in Services and subsidiary GATS universal access to services and infrastructure agreements in how it regulated the country’s major development. The lesson from the Telmex case, telecommunications supplier, Telmex. The panel however, is that these provisions are in practice dismissed Mexico’s arguments that in order to be worth little. granted access to the Mexican market, American The US submissions to the panel included firms should have to contribute to the development particularly ominous statements on the topic of the country’s telecommunications infrastructure. of universal service obligations and directly The panel’s interpretation of the GATS provides a contradict the expansive interpretation suggested cautionary tale for governments who believe they by other WTO members. A section of the can preserve their policy space while taking on more Telecommunications Reference Paper appears WTO obligations. to allow governments the leeway to maintain The GATS Telecommunications Reference Paper universal service obligations. This section of the provided most of the grounds for the US win. If a Reference Paper is often cited as evidence that country commits to the Reference Paper, as Mexico governments can liberalize under the GATS and has, telecommunications companies cannot “cross- yet still protect their most vulnerable citizens from subsidize”. This means companies are not allowed being marginalized by market forces. The British to cover the less lucrative aspects of their business government has even claimed that WTO dispute - such as the provision of pay telephones that serve panels will read into all aspects of the GATS - not poor neighbourhoods - through revenues from only those covered by the universal service section their more profitable operations. The Reference of the Telecommunications Reference Paper - Paper also insists that companies be allowed to pay recognition of the legitimacy of universal service for only those aspects of a network that they want obligations: access to (rates charged have to be “unbundled”) “We have already specifically made clear rather than being required to contribute to the in the GATS that we reserve the right network as a whole. – as do all WTO Members – to define Both of these provisions militate against our own universal service obligation in governments regulating to ensure access to the context of basic telecommunications services by the poor. Developing countries are also services. It follows that that right also particularly disadvantaged because they cannot exists in relation to other sectors, and to regulate to encourage the expansion of their issues such as safety, affordability, quality domestic infrastructure. Mexico pointed out in of service, security of supply and other the Telmex case that developing countries have public interest objectives...”(December different policy objectives than industrialized nations 2003 UK Government’s Reply to the because of the relatively poor state of their basic GATS Consultation, http://www.dti.gov. infrastructure. uk/ewt/gats2000.doc)

national office • bureau national • 410 – 75 rue Albert Street • Ottawa, ON K1P 5E7 tel: 613-563-1341 • fax: 613-233-1458 • [email protected] • www.policyalternatives.ca However, the US argued in the Telmex case that The panel’s decision is particularly negative the Telecommunications Reference Paper “is best from the perspective of developing countries. understood as providing limited exceptions” for Mexico drew on a clause in the Annex that universal service. The US detailed how limited these says developing countries are allowed to “place exceptions are due to numerous Reference Paper reasonable conditions on access to and use of restrictions on their use, particularly the requirement public telecommunications transport networks that universal service regulations must be “no more and services necessary to strengthen its domestic burdensome than necessary”. Since other countries telecommunications infrastructure and service follow policies different from Mexico’s, that means capacity and to increase its participation in in the US view Mexico’s policies are not “necessary.” international trade in telecommunications services.” Furthermore, the US said that rather than adopting The panel stated that in order to be able to benefit the Reference Paper as it was drafted, governments from this provision, developing countries would should have added their own wording to protect have had to refer to it or to have named their universal service - as the US has done. According to development objectives when they made their the US, therefore, the universal service regulations telecommunications commitments. Since virtually of many WTO members can be challenged since no developing country has done this, the panel almost all who adopted the Reference Paper did so rendered the provision effectively useless. without altering its wording. A particular irony of the Telmex case is that Mexico did not try to use the universal service around the same time the WTO ruled in favour exceptions in the Reference Paper and the panel of the US against Mexico, the US administration neither commented on them nor investigated declined to implement the GATS “pro-competitive” whether Telmex was in fact meeting universal service model domestically. Firms attempting to challenge obligations. The panel, however, unequivocally entrenched telecommunications companies in the rejected Mexico’s other arguments related to US are now abandoning these efforts because the universal service. The Reference Paper allows rates to US has refused to enforce policies guaranteeing be set “having regard to economic feasibility”, and affordable rates for access to networks. Mexico stated that this meant developing countries “have wide latitude to allow rates that would permit Key Quotes from the Telmex Panel the continued development of needed infrastructure and the achievement of universal service.” The panel Para. 7.183: “The qualification of ‘cost-oriented rates’ did not accept this argument. by the word ‘reasonable’ would not therefore permit Mexico also tried to claim that the “reasonable”, costs to be included in the rate that were not incurred “cost-oriented” rates required by the Reference in the supply of the interconnection service. Thus, Paper allowed recovery of the costs of meeting contrary to Mexico’s position, the general state of the universal service obligations. According to the telecommunications industry, the coverage and quality US: “Cost-oriented pricing, as that term is used of the network, and whether rates are established in Section 2 of the Reference Paper, does not under an accounting rate regime, are not relevant to permit Mexico so-called ‘flexibility’ to implement determining a proper cost-oriented rate.” the national goals that Mexico identified in its submission.” The panel agreed with the US, with Para. 7.214: “More generally, Mexico argues that the result that foreign companies connecting to commitments made by developing country Members Mexican telecommunications infrastructure are have to be interpreted in the light of paragraph 5 of freed from having to contribute to meeting Mexico’s the preamble to the GATS, and GATS Article IV which social policy objectives. recognize that these Members need to ‘strengthen As Mexico pointed out, the GATS their domestic services capacity and efficiency and Telecommunications Annex says countries are competitiveness’. However, we note that these allowed to impose conditions on access to provisions describe the types of commitments that networks in order to “safeguard the public service Members should make with respect to developing responsibilities of suppliers ... to make their networks country Members; they do not provide an or services available to the public generally.” The interpretation of commitments already made by those panel said that this clause did not apply because developing country Members.” interconnection rates do not qualify as “conditions” of access, and even if they did, rates charged Para. 7.244: “International commitments made under still have to be “reasonable” according to WTO the GATS ‘for the purpose of preventing suppliers standards.

2 ... from engaging in or continuing anti-competitive departure from specific commitments which Mexico has practices’ are...designed to limit the regulatory powers voluntarily and explicitly scheduled.” of WTO Members.” Mexico - Measures Affecting Telecommunications Para. 7.388: “Section 5(g) recognizes the right of Services - Report of the Panel developing countries to inscribe limitations in their WT/DS204/R schedules for the objectives recognized in Section http://docsonline.wto.org 5(g). The Panel notes that Mexico’s Schedule of Specific Commitments does not include any limitations Ellen Gould is a Vancouver-based independent referring to Section 5(g) or to the development consultant on international trade agreements, advising objectives mentioned therein. Without such limitations the Harrison Institute - Georgetown University, in Mexico’s Schedule, Section 5(g) does not permit a municipal authorities, and consumer groups on the impact of these agreements.

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