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Karunaratne, Neil Dias

Article — Digitized Version The reality and the rhetoric of free in services: The case of telecommunications

Intereconomics

Suggested Citation: Karunaratne, Neil Dias (1993) : The reality and the rhetoric of in services: The case of telecommunications, Intereconomics, ISSN 0020-5346, Nomos Verlagsgesellschaft, Baden-Baden, Vol. 28, Iss. 2, pp. 95-102, http://dx.doi.org/10.1007/BF02928110

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Nell Dias Karunaratne* The Reality and the Rhetoric of Free Trade in Services

The Case of Telecommunications

The rapid globalisation of the information has unleashed new pressures for increasing the tradabilty of information services. There exists a large gap, however, between the rhetoric of the advocates of free trade in services and their protectionist practices.

ost leading of the world are now Union (ITU), that monopolised international linkage and M information economies, where information-related operation, had to cope with increased competition. The activities or the information sector generate the lion's ITU, which had regarded telecommunications services as share of national income and employment. The growing a nontradable, eventually abandoned its stance and in services is an indicator ofthe rapidity complemented the General Agreement on Tariffs and of the globalisation of the information economy. Trade (GATT) efforts to liberalisetrade in services such as Developing economies are also rapidly restructuring, on telecommunications. The globalisation of the information occasion telescoping or leapfrogging the stage-wise economy arguably is one of the important factors that graduation process to become information economies. 1 made trade in services a central issue at the stalled multilateral trade negotiations (MTN) of the Uruguay At the epicentre of the globalisation of the information Round (1986). The advanced information economies, economy and the informatisation of national economies lie motivated by self-interest, established a parallel forum the revolutionary changes in information technologies. A known as the Group of Negotiations on Services (GNS) to clusterof microelectronic and optoelectronic technologies examine the feasibility of replicating a GATT type of have profoundly changed the production servicing and regime to regulate free trade in services such as tele- transmission processes that govern modern economic communications. activity. The speed of electronically transmitted services has increased whilst the transactions costs have dropped Trade in services occurs when a resident or factor of one dramatically. These developments have made services country receives a payment from a foreign counterpart. tradable that were hitherto nontradable. The The term covers both factor and nonfactor exchanges of transnationalisation of production by multinational services. However, GATT since its inception had steered corporations has stimulated the growth and diversification clear of issues related to investment and factor of trade in telecommunications services. The growth movements. Under the aegis of the advanced information in intra-industry trade or trade in similar rather than economies the GNS wanted to focus its attention on different types of products is one indicator of nonfactor services such as advertising, banking, finance, the transnationalisation process This in turn has insurance and telecommunications. However, developing contributed to the deregulation of domestic and countries that had a in labour- international telecommunication organisations. Domestic intensive services such as construction wanted these on telecommunication monopolies had to abandon their the GNS agenda. Curious anomalies surfaced when it status as natural monopolies based on the provision of came to the classification of services. For example, the universal basic telecommunications, whilst international movement of personnel from advanced to developing cartels such as the International Telecommunications

M. Jussawalla, D. M. Lamberton, N. D. Karuna- rathe : The Cost of Thinking: Information Economies of Ten Pacific University of Queensland, Brisbane, Australia. Countries, Ablex Publishing Corporation, Norwood, N. J. 1988

INTERECONOMICS, March/April 1993 95 REPORT countries is classified as services whilst the reverse trade in goods and services would be unnecessarily process is defined as immigration. 2 The GNS agenda buying into a maze of definitional problems. eventually included several new issues such as trade Based on the Ricardian notion that factor mobility is a related investment measures (TRIMs) and trade related prerequisite for rendering services, recent taxonomies7 intellectual property rights (TRIPs). Many developing identify at least four broad types of services: economies contended that the inclusion of new issues would distract GATE from making headway in the [] both the producer and the consumer are immobile unfinished area of the reduction of non- barriers. when the service is transmitted (e.g. architects' drawings However, proponents of GNS from advanced information to an engineer abroad); economies eventually prevailed. It was argued that if GATI [] only the producer is mobile and has to render services did not address these new issues it would be forgotten in at a location where the consumer is immobile (e.g. Korean the dust of history2 In the GNS negotiations the construction firm moving to build in Saudi Arabia); telecommunications sector became a prime target of [] only the consumer is mobile and has to go to the scrutiny and it was the first sector to be tested. The producers' location to consume the service (Japanese inordinate attention bestowed on the telecommunications sector by the G NS was undoubtedly due to the fact that it is tourist visiting Hawaii to enjoy the pleasures of a tropical one of the leading sectors of the emergent information island); economy. In fact, telecommunications is regarded as the [] both the producer and the consumer are footloose and electronic highway of the modern information economy? can trade in services in any nominated location.

The principle of comparative advantage is deemed to Theoretical Rationale be tenable for the various types except perhaps for the Goods and services have different attributes. However, third, where exporting factors can shrink the production that by itself does not provide a justification for possibility curve of the exporting country and shift it out in establishing a separate framework to regul ate free trade in the importing country undermining comparative services. We shall therefore first examine the advantage. This happens because the autarkic price of the characteristics of services and whether neo-classical factor for the exporting country exceeds that of the trade theory and the principle of comparative advantage importing country2 However, even when the principle of are tenable for trade in services, just as they are for goods. comparative advantage is violated, trading is a positive The attributes of services which differ from those of goods sum game that enhances the welfare of the participants? have been defined as intangibility, nonstorability or The whole gamut of neo-classical factor endowments nonstockability, inappropriability and nontransparency.5 theory or the Heckscher-Ohlin model appears to be Furthermore, the consumer and the producer must applicable with equal vigour to trade in services as it is for interact for the rendering of a service. The distinction trade in goods. '~ The fundamental theorems such as the between goods and services, however, remains fuzzy Samuelson factor price equalisationtheorem also seem to under the impact of modern technology. For example, the be tenable in the case of services.~l Trade theory does not services of a tenor such as Pavarotti are converted into a provide a persuasive rationale to treat trade in the good when recorded on a compact disc or cassette. B intangible services any differently from the tangible trade Furthermore, services through telecommunications can in goods despite their obvious differences. be recorded and retrieved. Non-marketed intra-firm The classification of services has also been made on services with specialisation become marketed. the basis of the cost of interaction between the consumer Therefore, given that goods and services change character and can be splintered or disembodied from one another, any regulatory system that attempts to separate 7 R. M. Stern, B. M. Hokeman: Conceptuallssues Relating to Services in the InternationalEconomy, Chapter 1, in: C. H. Lee, S. N aya (eds.): Pacificand World Studies,Westview Press, Boulder, 2 D. Nayyar: Thepoliticaleconomyofinternationaltradeinservices, Colorado1988; G. R Sampson, R. N. Snape: Identifyingthe in: CambridgeJournal of Economics,Vol. 12 (1988), p. 40. Issues in Tradein Services,in: The World Economy,Vol. 8 (1985). 3 R. M c C u I I o c h : Servicesand the UruguayRound, in: The World 8 A. V. Deardoff : ComparativeAdvantage and lnternationalTrade Economy, 1990,pp. 329-348,here p. 334. and Investmentin Services, in: R. M. Stern (ed.): Trade and Investment in Services: CanadaJU.S. Perspectives, University of 4 p. Robinson, K. Sauvant, Govitrikar (eds.): Electronic TorontoPress (for OntarioEconomic Council), 1985,pp. 53-68. Highwaysto World Trade,Westview Press, Boulder,Colorado 1989. 9 R. W. Jones: Comments,in: A. V. Deardoff, ibid. 5 T. R H ill : On Goodsand Services,in: The Reviewof Incomeand Wealth, Series23, 1977, pp. 315-318. to B. H i n dl ey, A. S m it h : ComparativeAdvantage and Trade in Services, in: The World Economy,Vol. 7 (1984), No. 4, pp. 369-390. 6 j. N. Bhagwati: Why are ServicesCheap in PoorCountries, in: EconomicJournal, Vol. 94 (1984), No. 374, pp. 279-286. ~ Cf. J. N. Bhagwati, op. cit.

96 INTERECONOMICS,March/April 1993 REPORT and the producer of a service, defined as the simultaneity charter on goods. Basically, GATT principles are factor? 2 The simultaneity factor assumes values near the committed to free trade in a competitive market upper limit of unityfor services that require high interaction environment and therefore aim at the removal of trade costs between the consumer and the producer, whilst for barriers that distort gains from trade. 14 A review of the traded goods the simultaneityfactor may be near the lower principles agreed for free trade in the telecommunications limit zero as the required interaction is negligible. The sector shows that they are the same old GAFF principles revolution of information technology has reduced the with a new GNS label and they are: transactions costs and generated increased interaction [] non-discrimination, or the most-favoured-nation between service producers and consumers (MFN) principle, whereby all trading partners are accorded internationally. In other words, it has increased the the same treatment; tradability of services. [] transparency, or making the customs duties and non- The revolution in information technology has increased tariff barriers to trade clear to prospective competitors; the tradability of services through telecommunications. [] equal treatment, whereby foreign and domestic firms Rent-seeking developing economies are poised to milk are treated equally by host governments; some of these rents by instituting mercantilist polices. The [] developing countries were also afforded progressive advanced information economies and their multinational liberalisation or market access commensurate with their corporations do not wish to witness the undermining of level of development, thereby affording them non- free trade in services. Although there is no persuasive reciprocity; theoretical basis for establishing a separate GATE-like regulatory framework for services the advanced countries [] the right of establishment, or enabling foreign firms to have flexed their muscle and put the issue of service perform their business operations through local branch negotiations firmly on the GATE agenda. However, without offices in the host country. making the GAI-I- regime on goods function true to its free However, when the first principle relating to non- trade charter, the introduction of another flawed institution discrimination or MFN provisions was put into practice to cover free trade in services appears to be questionable. the most vocal advocates of liberalisation of telecommunications sought to undermine it. The USA and Free Trade in Rhetoric Only its national lobbies such as AT&T successfully sought to exempt basic telecommunications from free trade The neo-classical free trade paradigm provides a clear coverage on the grounds that it would enable foreign message that free international trade based on perfectly competitors to free ride without offering any reciprocal competitive markets maxi mises the national income of the benefits. However, when it comes to non-basic or value- participants and thereby global welfare. Free trade is the added services, the USA and its giant telecommunications first best optimum and its spirit is enshrined in the GATT multinationals have enthusiastically supported principles and upheld by all its members at least in their liberalisation. Ironically, these multinationals enjoy a public pronouncements, although not in their polices. This decisive technological lead and are poised to free ride in may be due to the fact that although the powerful normative the telecommunication sectors of other countries and superiority of free trade may win the argument on make massive profits. The double standards applied to international trade it may not win the votes at home. 13 The liberalising non-basic services whilst protecting basic lengthy deliberations on telecommunications in GNS is a telecommunications services exemplifies once again the case in point on the schizophrenic behaviour of both truth in the allegation that "free trade when you are strong advanced and developing economies. They are overtly and when you are weak" has been the free trade in their rhetoric in international fora but are hallmark of GATE negotiations on telecommunications covertly protectionist when their self-interest or rent services. Despite the free trade rhetoric on services earnings are threatened. similar mercantilist behaviour was evident in relation to The lengthy GNS deliberations on telecommunications other sectors. For example, the USA was reluctant to did not advance beyond the acceptance of the same liberalise trade in aviation and shipping, caving in to principles of free trade as are enshrined in the GATE pressure from domestic lobbies. The developing economies have also sought to ~2 S. Hi r s c h : Servicesand ServiceIntensity in InternationalTrade, undermine the demands for free network access or market in: WeltwirtschaftlichesArchiv, Vol. 125 (1989), pp. 44-60. ~3 L. B. Yeager, D. G. Tuerck: ForeignTradaandU.S.Policy: The Case for Free InternationalTrade, Praeger Publishers,New York 14 G, Feketekuty: International Trade in Services, Ballinger, 1976. Cambridge, Mass. 1988. INTERECONOMICS,March/April 1993 97 REPORT

access to domestic telecommunications markets by trade sanctions and other retaliatory measures by the unbundling the mode of delivery from the network access advanced countries. issue. They hope thereby to secure a bargaining chip in A major stumbling block in the progress of GNS at the subsequent rounds of GNS negotiations. Furthermore, beginning was the stubborn stance taken bythe ITU, which developing countries, based on promptings of the regarded telecommunications to be a nontradable International Telecommunications Union (ITU), would like service. Partly, this was a legacy of the ITU as the to trade off market access for infrastructure development supranational cartel that regulated the international trade in the vital telecommunications sector. The in telecommunications during the moribund industrial era apprehensions of developing countries with regard to the by its monopoly over technical standard setting, open door policy to telecommunications trade are not tariffication and accounting. The ITU cartel operation without some justification. First, developing economies ensured the reaping of monopoly profits from the provision fear that a free market in telecommunications services of vital services that enabled the international and equipment will toll the death knell of their nascent interconnectivity and interoperability of domestic domestic telecommunications sectors. Second, they telecommunications monopolies. However, multinational contend that technological and cultural imperialism and corporations in their push for the internationalisation of further marginalisation of their telecommunications production demanded independent network access for sectors would result because of predatory competition by enhanced services. Telecommunications was crucial to foreign multinationals. Third, they fear the loss of multinational firms' efficient performance in the economic control over vital strategic sectors such as competitive international trade arena. The ITU was telecommunications, banking and finance, shipping and exposed as a rent-seeking cartel which manipulated tariffs aviation. They consider that such an erosion of control over and accounting. It was also alleged that it failed to deliver key service sectors would pose a threat to their national as the official custodian of infrastructure development in security and sovereignty. However, developing developing countries. Under pressure and virtual economies, despite their defiant and protectionist blackmail the ITU has softened its uncompromising stance posturing, have often toed the line when threatened with to become a partner with GATT. It now acts to complement

Peter Behrens (Ed.) EEC Competition Rules in National Courts Les r gles de concurrence de la CEE devant les tribunaux nationaux Part One: United Kingdom and Italy / Premi6re Partie: Royaume Uni et rltalie

The competition roles of the EEC are directly applicable in the Member States. Therefore, the natio- nal courts play an important role in the implementation of European . The editor of this volume has initiated a research project which will analyse the national case law. This volume contains the national reports from the United Kingdom and Italy. Further national reports will follow. The project is designed to make the national case law accessible to lawyers practicing in the field of European competition law. The Community organs get an overview over the implementation of Community law in Member States. Those interested in research find the materials for further com- parative studies. The authors are competition law experts from the different Member States. The editor ist Professor of Law at the University of Hamburg and Member of the Board of Directors of the Institut fur Integra- tionsforschung of the Stiftung EUROPA-KOLLEG Hamburg. 1992, 315 S., brosch., 88,- DM, ISBN 3-7890-2709-X (Schriften des Europa Kollegs Hamburg zur Integrationsforschung, Bd. 1) Nomos Verlagsgesellschaft Baden-Baden [']

98 INTERECONOMICS, March/April 1993 REPORT and support the GATT negotiations to establish a free justify protection for high-tech sectors such as trade regime for services. 's telecommunications.'a

The progress of multilateral trade negotiations in the It is possible to use game theoretic pay-oft matrices to Uruguay Round (1986) has been thwarted mainly by the demonstrate that governments can shift rents and make intransigence of the advanced countries with regard to the the domestic telecommunications sector gain at the reduction of agricultural subsidies. With respect to GNS expense of potential foreign rivals. TM However, in practice there is disarray and "the developed rather than the such interventionist policies open up a Pandora's box of developing economies -which always espouse trade uncertainties. First, the various game theoretic outcomes liberalisation but are sometimes driven more by from the behaviour of rival interactions are very difficult to mercantilist and protectionist impulses!"16 are quantify. Therefore, policy formulation to implement responsible for it. This is because their free trade rhetoric strategic trade theory becomes a formidable task and a does not translate into policy actions. risky business. 2~ Second, even when strategic trade policies are implemented they could attract foreign Strategic Trade Sector telecommunications firms to the domestic market. Then the government would unwittingly be subsidising the The protectionist arguments for government foreign competitor rather than the local firm, thus intervention in high-tech sectors such as tradable undermining the whole rationale of rent shifting. 21 Thirdly, telecommunications services have recently received the general equilibrium arguments militate against the some academic respectability from the so-called new strategic promotion of the telecommunications sector as trade theories. The new trade theories incorporate market this would shift resources away from other domestic imperfections, such as economies of scale, product sectors. Cost rises would make other competitive sectors differentiation, game theory, and organisational in the economy uncompetitive. The losses from adverse strategies. These new theories purport to explain why effects on other sectors may far outweigh the benefits from strategic sectors can maximise national welfare if the promoted domestic sector thereby resulting in a large promoted by government intervention by granting tariff and overall macroeconomic loss of welfare. Fourthly, the non-tarift protection. The new theories have explained the introduction of domestic distortions to generate national empirical puzzle of why much of the world's trade amongst welfare benefits at the expense of world welfare is a advanced countries is increasingly intra-industry, or in beggar-thy-neighbour type policy that can lead to similar goods and services, rather than in dissimilar ones retaliatory actions. These deficiencies make strategic as explained by the neo-classical theory of comparative trade polices lose some of their appeal. advantage. Returns to scale internal to the firm and product differentiation become crucial in explaining Some analysts contend that there is nothing new about the genesis of intra-industry trade. Here, the type of strategic trade arguments. They are allegedly the old wine firm is invariably a multinational corporation and tele- of the infant industry argument in a new bottle. The infant communications play a vital role in both the internal and industry argument has an economic basis if, according to the international management of the firms' production and the MilI-Bastable theorem, the net discounted value of an trading operations. Many governments therefore identify interventionist action turns out to be positive. However, the high-tech production and service sectors such as finely researched findings of the political economy of telecommunications as winners on strategic grounds for protection militate against the giving of protection even on special protectionist treatment. It is generally argued that a temporary basis as it has a tendency to outlive its they generate positive externalities and R&D on them will usefulness. The political economy of protection highlights not occur at the required level because of inappropriability the inefficiencies associated with rent-seeking problems. '7 These are grounds that new theories invoke to behaviouF2 and directly unproductive activities of

~s International Telecommunications Union: The Challenge of Change, ~9 j. A. Brander, B. J. Spencer: International R&DRivalry Document 145-E, 26 April 1991. and Industrial Strategy, in: Review of Economic Studies, Vol. 50 (1983), pp. 7O7-722. 16 B. R. Woodrow: Tiltingtowardsatraderegime, The lTU and The Uruguay Round services negotiations, in: Telecommunications Policy, 2o G. M. Grossman, J. D. Richardson: Strategic US Trade Vol. 4, 15 August 1991, pp. 323-342, here p. 341 ; by the same author: Policies: A Survey of Issues and Early Analyses, Special Paper 5, Technology in Environmental Management, in: Futures, Vol. 23, No. 5, International Finance Section, Princeton University Press, Princeton pp. 451-468. 1985. ~7 B. Hindley, A. Smith, op. cit. 21 A. D i x it : International Trade Policies for Oligopolistic Industries, in: Economic Journal, Vol. 94 (1984), Supplement; I. Horstmann, ~e G. M. Grossman, C. Shapiro: Normative lssues Raised by J. R. Markusen : UptheAverageCostCurve:lnefficientEntryand InternatLonal Trade in Technology Services, in: R. M. St e r n (ed.), the New , in: Journal of , Vol. 20 op. cit. (1986), pp. 225-248.

INTERECONOMICS, March/April 1993 99 REPORT protectionist lobbies. 23 In retrospect even the architects of union theory enunciated by Viner 28 and refined by Lipsey strategic trade theory acknowledge the allocative and Lancaster ~9 clarifies that the formation of regional inefficiencies, administrative costs, and the danger of trading or telecommunications blocs is a special case of retaliation by rivals and recant their support for strategic the theory of the second best. This implies that regional intervention. 24 Therefore, after careful analysis of the blocs, whilst they liberalise trade between partners in the inefficiencies inherent in strategic trade theory we concur bloc, may be welfare enhancing only if the trade creation that free trade is not pass6 after all. 2s It remains the effects exceed the effects. Vinerian theory dominant paradigm for distilling policy guidelines for defines trade creation as the increase in welfare due to international trade in telecommunications and other extra consumption arising from cheaper from a services. bloc partner. Whilst trade diversion is the welfare loss due to higher cost imports from a partner, the fact that regional Telecommunications Blocs blocs can be welfare reducing makes them second best, The violation of the basic tenets of the free trade as a move towards freer trade is not necessarily Pareto principles enshrined in the GAI-F non-discrimination optimal. There is no reason why the logic of Vinerian articles or the MFN clause, and tariff only restrictions, are integration theory is not applicable to trade in evident in the USA Super 301 laws, the voluntary telecommunications services. In fact, the formation of restraints (VER) on textile, car and other imports. One of NAFTA and the Single European Market are expected to the most flagrant violations of GATT principles is the result in massive welfare increases because trade in French non-tariff barrier on Japanese video cassette services is anticipated to increase within the regional recorders (VCRs) known as the Poitier syndrome. The trading blocs, a~Much of the increase in intra-regional trade French reduced Japanese VCR imports to a trickle by is anticipated to be generated from the expansion of value- subjecting them to delaying customs checks in a remote added network services or VANS. However, the welfare border post called Poitier. The rising tide of improvements in regional trading and telecommuni- neoprotectionism has led to the emergence of a trilateral cations blocs are achieved at the expense of the rest of the trading world centred around North America, Europe and world as they have beggar-thy-neighbour effects. Some by default the Asia-Pacific Region. The close symbiotic features of the North American and European regional relation that exists between trade and telecommunications telecommunications blocs are reviewed below. has been analysed empirically. 26 It is manifest in the The NAFTA has witnessed a significant liberalisation of configuration of telecommunications to three separate telecommunications trade between the USA and Canada. blocs corresponding to the three trade blocs: the North The achievements of NAFTA on regional telecommuni- American Free Trade Area (NAFTA), the European cations provide a way out of the tardy global liberalisation Community (EC) and the residual Asia-Pacific Trading efforts of telecommunications under GNS. However, the Area (APTA). The leading information economies in the theory of the warns that regional telecommunications blocs are engaged in fierce liberalisation in telecommunications trade could be competition to become switching nodes for leased lines or second best. Also, from a global perspective it is welfare regional hubs. The U.K. is the current hub for Europe and reducing because it is at the expense of the other Hong Kong is the hub for the Asia-Pacific Region. But telecommunications blocs. Nevertheless, significant Ireland in Europe, and Singapore and Australia in the Asia- breakthroughs on transborder US-Canada telecommu- Pacific Region are increasingly competing to become nications trade have been achieved under NAFTA: regional hubs. 27 [] the right of establishment to compete in the areaof non- The theory of or the customs basic value added network services;

22 A. O. Krueger: The political economy of the rent-seeking [] the reduction of tariffs; the relaxing of non-tariff barriers society, in: American Economic Review, VoI. 64 (1974), pp. 291-303. or requirements on technical standards; 23 j. N. Bhagwati: Directly unproductive profit-seeking (DUP) activities, in: Journal of Political Economy, Vol. 90 (1982), pp. 988-1002. 24 p. R. Krugman: Is Free Tade Passe?, in: The Journal of Economic Perspectives, Vol. 1 (1987), No. 2, pp. 91-107. 28 j. Viner: The Customs Union Issue, Carnegie Endowment for International Peace, New York 1950. 2s j. N. Bhagwati: Is Free Trade Pass6 after All?, in: Weltwirtschaftliches Archiv, Vol. 125 (1989), pp. 17-44. 29 R. G. Lipsey, K. Lancaster: The General Theory of the Second Best, in: Review of Economic Studies, October 1956. 26 N. D. Karunaratne: Symbiotics of Telecommunications, , in: Economica Internazionale, Vol. 51 (1988), 30 S. Globerman, I~ Booth: The Canada-US Free Trade Nos. 1-2, pp. 1-20. Agreement and the telecommunications industry, in: Telecommuni- cations Policy, December 1989, pp. 319-329; O. Stehmann: 27 j. V. L a n g d al e : International telecommunications and trade in Liberalizing the intra-EC long-distance market, in: Telecommunications services, in: Telecommunications Policy, 1989, pp. 203-221. Policy, VoI. 15 (1991), No. 2, pp. 129-136.

100 INTERECONOMICS, March/April 1993 REPORT

[] improved transparency in the of Nations (PINs) and the other regional blocs and investing telecommunications trade; in a manner that will deter rivals, as foreshadowed in strategic trade theory. Also several new satellites are [] streamlined bilateral dispute settlement mechanisms; anticipated to compete with INTELSAT. The net result is [] the elimination of restrictions on direct investment and anticipated to be massive excess capacity and a fall in the lifting of impediments to the movement of business prices particularly in the Asia-Pacific Region. However, personnel. even in the Asia-Pacific Region the major beneficiaries from the telecommunications development bonanza are The NAFTA agreement dodged the thorny likely to be the richer countries that include the four transportation and culturally sensitive trade issues. dragons (Singapore, Taiwan, South Korea and Hong The Single European Market will integrate Kong). Australia and NewZealand have already embarked telecommunications networks and aid free transborder on a closer economic relationship agreement (CER) and flows of telecommunications in the EC. Its architects there are larger benefits possible from integration into a realise that telecommunications are not merely a service single market22 but a vital resource that can be harnessed for economic However, the PINs scattered over the 29 million square integration by facilitating macroeconomic coordination kilometres of the Pacific Ocean could miss out from the and microeconomic harmonisation. Telecommunications benefits of competition in telecommunications in the services play a critical role similar to asingle currency unit Asia-Pacific Region. Their dispersed nature makes them and free factor mobility in integrating and making the suitable for footprinting by satellites. However, the PINs a reality. Therefore, the Commission of the are on the thin route telecommunication locus and do not European Communities has invoked the competitive offer multinationals the prospect of cream skimming. The provisions of the Treaty of Rome, Article 90, to end or vary economic disparities that exist between PINs are reflected domestic monopolies on terminal equipment, government in the teledensity disparities (telephones per 100 procurement and technical specifications on services. population) which is 1.5 for Papua New Guinea compared The net trade creation effects emanating from an to 67 for New Zealand. The rural/urban disparities within integrated telecommunications market among members PINs are also large23 The double dualism that prevails in of a community closely bound by economic and cultural developing PINs has been censured on humanitarian and ties are anticipated to be spectacular in the near future. common interest grounds2' The radical perspective The contemporary environment in Europe remains contends that the infusion of high-tech such as fractured by competition and regulation 3' but there are telecommunications can further marginalise PINs inexorable political forces that will hasten the integration of economically and culturally. On the positive side, the European telecommunications markets in the long theoretical analyses show that the integration of PINs into run. a regional bloc would improve their welfare due to the The Asia Pacific Region presence of multinationals and their job creation effects2 s

The increasing competition amongst partners in each Welfare Scenarios regional telecommunications bloc is manifest in the area of fibre optic and satellite facilities construction. In the The emergence of trilateral regional trading and Asia-Pacific Region the submarine coaxial networks are telecommunications blocs is certainly second best as they being duplicated by new fibre optic cables linking up the do not maximise world welfare and, moreover, one region's other regional blocs. Furthermore, Cable and Wireless, in gain is achieved at the expense of that of another bloc. implementing their strategy of establishing a global digital However, in the area of trade in services all the trading and network, is linking up the ASEAN countries, Pacific Island telecommunications blocs are poised to grow in a symbiotic fashion with the rapid globalisation of the

3, R. Mansell, P. Holmes, K. Morgan: Europeanlntegration information economy. Below, we make use of estimates and Telecommunications: Restructuring Markets and Institutions, in: from general equilibrium model calculations by the Centre Prometheus, Vol. 6 (1990), No. 1, pp. 50-66, here p. 64. for International Economics 36 to map out the welfare 32 p. L I oy d : The FutureofCER.ASingle MarketforAustralia and New Zealand, Committee for Economic Development of Australia, Monograph No. 96, The Institute of Policy Studies, Victoria University 3s H. Beladi, S. K. Samanta: Foreign Technology and Press, 1991. Customs Unions: Trade Creation and Trade Diversion, in: Journal of 33 M. Jussawalla, M. R. Ogden: The Pacificlslands. Policy Economic Studies, Vol. 17 (1990), No. 6, pp. 27-35. options for Telecommunications investment, in: Telecommunications Policy, 1989, pp. 40-50. 38 Centre for International Economics (CIE): Western Trading Blocs: Game, Set or Match for Asia-Pacific and the World Economy ?, Canberra 3, Sir Donald Maitland et al.:TheMissionLink, ITU, Geneva1984. 1990.

INTERECONOMICS, March/April 1993 101 REPORT scenarios resulting from the pursuit of different strategies increase significantly, as shown bythe increase in GDP of by the major regional blocs. The estimates are only ball $US 119 billion (Cell IV, Table 1). Europe would be the park figures for services based on the heroic assumption largest beneficiary from the best case scenario, that trade in services comprise 30% of the value of total accounting for nearly four times the welfare gains of the merchandise trade, as reported in GATI" statistics. The Asia-Pacific Region. The difference in welfare gains from welfare implication per se for telecommunications pursuing the worst case or protectionist and the best case services cannot be estimated, as published data on or free trade strategies for services by the major regional electronic trade in information services is not available. blocs is about $US 180 billion (i.e. Cell IV minus Cell I). Other calculations also indicate that if Asia-Pacific The pay-off matrix for welfare effects of trade in services decides to unilaterally liberalise its trade in services it (Table 1) is estimated on the basis of the pursuit of both could gain $US 67 billion, with Japan being the major protectionist and free trade strategies in the North beneficiary? 7 American and the European trading blocs. The resulting changes in the other regions are quantified in terms of Concluding Remarks GDP in the pay-off matrix. The worse case scenario The international trade paradigm and the associated quantifies that the world GDP losses due to the principles of comparative advantage appear to be equally simultaneous pursuit of protectionist strategies by the applicable to both goods and services such as North American and European trading blocs would be telecommunications, although they share different nearly $US 61 billion, with Europe accounting for a major characteristics. Therefore, there are no theoretical portion or over 61% of the loss and the Asia- Pacific Region grounds for asserting that policy-making or institution- accounting for about 8% of the loss in world GDP (Cell I, building for regulating free trade in services should be Table 1). If Europe opts for afree trade strategy while North different from free trade in goods. In this context, it is quite America keeps the trade shutters down on services, world pertinent to question all the fuss about negotiating for a welfare will increase by $US 40 billion and Asia-Pacific free trade regime for services?8 GDP will increase by 28% and the GDP of the other trading The fact that the principal architects of GATT have blocs increase much more (Cell II, Table 1). flagrantly violated the cardinal free trade principles If Europe opts for the "fortress Europe" strategy while enshrined in Article 1 by non-tariff barriers needs to be the North American trading bloc opts for free trade in rectified before a similarly flawed system is duplicated for services, the world welfare increase as measured in terms services. The replication of a malfunctioning system does of GDP increase would be only $US 15 billion. The Asia- not augur well for free trade in services. It may only distract Pacific Region would gain as much in percentage terms GAFF from the fundamental task of counteracting the non- compared to North America with both regions increasing tariff barriers that are gnawing at its very existence as the their GDP by 13% each (Cell III, Table 1). The best welfare free trade custodian of the world. Non-tariff barriers on scenario eventuates when both North America and goods are so adverse in their welfare impact and opaque Europe go for free trade in services. World welfare would and intractable when practised by nations. The insidious welfare effects and the nontransparency problems are Table 1 likely to be more complex in the case of services. Unless Pay-off Matrix for Trade in Services, the practitioners of neoprotectionism eschew them and Protectionist vs. Free Trade Scenarios promote a genuine free trade regime in goods according to Percentage ($USbillion) the GATr free trade principles, having a separate GAFF- North America Protectionist Free Trade like regime for services is unlikely to ensure free trade in Europe services. Therefore, the fundamental problem that Cell l Cell II appears to threaten the world trade system is the spread of non-tariff barriers in goods and services or neo- Europe -61% (-37) 32% (13) Protectionist Asia Pacific - 8% (-5) 28% (11) protectionism. This has to be tackled head-on by North America -31% (-19) 40% (16) World -100% (-61) 100% (40) spokespersons for both advanced information economies and developing economies by matching their public Cell III Cell IV rhetoric on free trade with concrete policy actions at home. Europe 74% (11) 53% (63) Free Trade Asia Pacific 13% (7) 16% (19) North America 13% (7) 31% (37) World($USbn.) 100% (15) 100% (119) 37 G. Banks, A. Stoeckel: Western Trade Blocs& the New Protectionism,in: Policy,Vol. 6 (1990), No. 3, pp. 2-5. Source: Centre for International Economics: General Equilibrium 38 S. Veigt: TradedServices in the GATT- What's all the Fuss Model Calculations,Canberra 1990. About?, in: INTERECONOMICS,Vol. 26 (1991), No. 4, pp. 177-186. 102 INTERECONOMICS,March/Aori11993