International Trade in Telecommunications Services

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International Trade in Telecommunications Services

Transcript Of International Trade in Telecommunications Services

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research
Volume Title: Issues in US-EC Trade Relations Volume Author/Editor: Robert E. Baldwin, Carl B. Hamilton and Andre Sapir, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-03608-1 Volume URL: http://www.nber.org/books/bald88-1 Publication Date: 1988
Chapter Title: International Trade in Telecommunications Services Chapter Author: Andre Sapir Chapter URL: http://www.nber.org/chapters/c5962 Chapter pages in book: (p. 231 - 246)

V Trade in Services

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International Trade in Telecommunications Services
Andre Sapir
9.1 Introduction In recent years, there has been growing American sentiment toward
promoting U.S. service industries and enhancing their international competitiveness. At the 1982ministerial meeting of the General Agreement on Tariffs and Trade (GATT), the United States trade representative (USTR) proposed for the first time that service transactions be added to the agenda for the next round of multilateral trade negotiations. However, the developing countries, led by Brazil and India, rejected this proposal. These countries have been reluctant to enter international negotiations on services for two reasons. First, U.S. negotiators unintentionally conveyed the message that the liberalization of trade in services would be a zero-sum game. Their eagerness to dismantle barriers to trade in services is perceived by many as simply serving the self-interest of large U.S. service corporations. Second, many GATT signatories are not enthusiastic about trade liberalization in this area. They fear that an international system of rules for trade in services will interfere with their national policy objectives.
Although the European Community (EC) shared many of these apprehensions, it was instrumental in finding the compromise adopted at the 1982meeting: contracting parties with an interest in services would undertake national studies of problems in services trade. Most industrialized nations submitted reports for the November 1984 GATT session, and a working group was establishedto improve information about services.
Andre Sapir is professor of economics at the Free University of Brussels. I am grateful for detailed comments and suggestions from Robert Baldwin. 1 have also benefited from comments by several participants at the conference.
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During the following two years, the EC again played a crucial role in reconciling the strong American stand on including services in the new round with the insistence of the developing countries that services remain outside the scope of GATT. Under the compromise reached at the September 1986 ministerial meeting which launched the Uruguay Round, the multilateral trade negotiations are to proceed along two parallel tracks: one for goods and one for services. The services negotiations are aimed at establishing an international set of rules that might eventually be incorporated into the GATT system.
One sector of special concern to U.S. officials that illustrates the problems of negotiating in the services area is telecommunications services. U.S. interest in this field goes considerably beyond the perception that American firms have a competitive advantage in supplying telecommunications services. Telecommunications play a central role for almost all forms of services by providing an infrastructure for international trade in services.
The United States has devoted particular attention in recent years to issues of telecommunications trade with the EC. The European telecommunications market-the world’s second largest-tends to be much less open than the American market. This is a result of the difference in institutional arrangements on the two sides of the Atlantic. In European countries (as in most of the world), telecommunications services are provided largely by government monopolies known as PTTs (Posts, Telegraph, and Telephones). In contrast, telecommunications services in the United States are supplied by private firms which operate in an increasingly competitive environment since deregulation was launched over a decade ago.
U.S. interest in telecommunications services also stems from the changes in this sector caused by an ongoing technological revolution. New information technologies are much faster, and it now costs less to process, store, retrieve, manipulate, and transmit data. Information technology now also encompassesa wide array of convergent and linked information-goods and information-services activities. The information-goods industry includes computers, data recognition equipment, telecommunications equipment, and other related hardware, while the information-services industry consists of computer services, information storage and retrieval, and telecommunications services.
Information technology has led to the merger of data-processing and telecommunications activities into telematics, which involves both information-goods and information-services industries. As a result, the traditional dividing line between goods and services has become blurred. The extension of telematics internationally has given rise to transborder data flows that are similar to trade in information services and can be defined as the electronic international movement of computer-readable

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data across telecommunications networks. This paper analyzes the trade policy issues of transborder data flows, with particular emphasis on US-EC trade relations.
Although there is a general trend toward information intensity throughout the economy, it varies by industry. Thus, the impact of transborder data flows on international transactions will vary across industries. In particular, the possibilities for international trade in services have been greatly enhanced by transborder data flows because of their “high information-technology content in both product and process” (Porter and Millar 1985, 154). However, the exact nature of the impact of transborder data flows will depend on the nature of services. I will argue in this paper that information flows enhance intrafirm trade in some service industries and interfirm trade in others.
Both intrafirm and arm’s-length information flows depend upon the efficient operation of telecommunications networks. How open should telecommunicationsservices be to competitive forces? The United States and the European PTTs have two opposite views on this matter, with Europe favoring as wide a monopoly as is possible. This paper examines the implications of alternative regulatory environments on telecommunications trade.
The plan of the paper is as follows: section 9.2 analyzes the impact of information flows on the structure of international trade in services, while section 9.3 examines the policy issues involved in the organization of international telecommunications. The last section offers some perspectives on the potential for future trade negotiations in the telecommunications field.
9.2 The Impact of Information Flows on Service Trade
Information technology, by increasing the speed and efficiency of transmitting information around the world, is rapidly changing the previous landscape of international service transactions. It has created new services with substantial scope for international trade flows, namely information services. In addition, information technology has greatly enhanced the tradability of traditional services.
Information services have as a primary function the collection, processing, and/or transmission of information in an electronic form. They include data-processing and data-base services. These services are essentially long-distance, linking a computer facility to a remote user via a communications system. Therefore, they are highly tradable. In their case, transborder data flows tend to be arm’s-length transactions between the provider of the service and an unrelated user.
Complementary innovations in data processing and telecommunications are opening up the way toward a greater international division

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of labor in services in the same way that the industrial revolution affected agricultural and manufactured goods. “[A] key factor in the growth of world trade [was] a sequence of transportation innovations that opened up continental hinterlands, reduced the cost of transoceanic shipping, and made possible the preservation of perishable food products during extensive voyages over land and sea. These innovations included the rapid growth of the railroads after 1830, the expanding role of the iron steamship after 1850, and the introduction of refrigeration on both freight cars and steamships beginning in the 1870s.
. . . With these complementary innovations, there began to emerge,
by the end of the nineteenth century, a truly worldwide agricultural division of labor” (Rosenberg 1982, 58 and 251).
The increased tradability of services is conceptually equivalent to a reduction in transport costs and has two consequences for the pattern of trade. On the one hand, reduced transportation costs make it feasible for service industries to reallocate certain activities to least-cost locations and to export their products to other locations. On the other hand, reductions in transport costs make possible the greater exploitation of economies of scale. In a world of low transport costs, the size of domestic markets plays less of a role in shaping trade patterns, and production can be concentrated in fewer locations.
Several trade economists have recently drawn on the work by Hill (1977), who emphasizes the nonstorable nature of services: production and consumption must generally occur in the same location and at the same time. This characteristic provides the basis for the fact that services are generally not traded in the papers by Bhagwati (1985), Deardorff (1984), and Sampson and Snape (1985).
Bhagwati (1985) and Sampson and Snape (1985) divide services into two categories: those that require the physical proximity of the producer and the consumer and those that do not; the latter are referred to as “separated” services by Sampson and Snape. Within the group of services for which physical proximity is essential, a further distinction is drawn between those that necessitate the movement of the producer, the consumer, or both. The distinction carries major policy implications. For “separated” services, trade liberalization is similar to trade liberalization in goods. But for the majority of services, freedom of international transactions would require freedom of movement of either producers or consumers. It is precisely the latter issue which has clouded the prospect for negotiations on service transactions. In particular, many countries are reluctant to open the Pandora’s box of rules governing foreign investment (involving so-called “rights of establishment” and “national treatment” regulations) and foreign labor.
It has been argued that the advent of information technologies has largely eliminated these issues because it now “makes little difference

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where in the world the buyer and the seller or user and provider are located, as long as their computers are linked together through modern communications systems” (Feketekuty and Hauser 1985, 7).
My own view is that this argument needs to be qualified. The enhanced tradability of services is partly offset by a quality-uncertainty problem that arises because of the intangible nature of services. Contrary to most goods where buyers can rely on physical attributes to judge the quality of a product, with services it is reputation that plays an overriding role in the selection of suppliers. To be sure, uncertainty about product quality is a feature of markets for many goods, but
services are “[v]irtually all . . . impossible to evaluate until they are
used” (Shapiro 1982,20). There is a continuum of services from highly tangible ones (almost goods-like) to highly intangible ones. For instance, most insurance services are highly intangible, while routine transportation services tend to be very tangible. The more intangible the service, the more its market structure tends to be characterized by nonprice competition.
The reputation of producing a quality product is also the major intangible asset of service firms. As discussed in the vast literature on multinational enterprises (for recent surveys, see Caves 1982; Dunning and Rugman 1985; and Teece 1985), the possession of intangible assets creates an incentive to sell in foreign markets in order to maximize the rent that can be gained. Although this is equally true for both goods and services, there is a fundamental difference between the two. In the case of most goods, intangible assets owned by producers are embodied in the physical attributes of the product. However, for service activities the product itself is intangible. Therefore, goods do not generally require consumers to be close to producers for ascertaining quality and can be exported to foreign markets. In contrast, services generally require such a close interaction between producers and consumers that they must often be produced in the markets where they are consumed.
Several authors have noted that service firms often become multinational in order to follow their customers (see Caves 1982 and references cited therein). Service firms tend to acquire an intangible asset: a quasi-contractual relation with their customers “based on trust that lowers the cost of contracting and the risks of opportunistic behavior. If the service firm has such a quasi-contractual relation with a parent MNE (Multinational Enterprise), it enjoys a transactional advantage for supplying the same service to the MNE’s foreign subsidiaries” (Caves 1982, 11).
The more intangible a service, the more difficult it is to export, especially to an unrelated party. This proposition has two implications. First, the principle of comparative advantage might not apply to highly intangible services in the sense that the country with the lowest pro-

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duction cost might not be able to export a service for which it lacks reputation. Second, the degree of tangibility of a service determines the channel for possible trade flows. The less intangible it is, the more likely it is that international trade will consist of arm’s-length transactions between unrelated parties. Conversely, the more intangible a service, the more trade will tend to flow through intrafirm channels. In other words, the more intangible the service, the more transborder data flows can be expected to take place outside the international market place and within multinational firms. An important policy implication is that, contrary to what might have been expected, transborder data flows have not eliminated the issues of “rights of establishment” and “national treatment,” but they have changed the nature of the service establishment that is required to conduct business in a foreign country.
9.3 Telecommunications Services
9.3.1. Telecommunications Services as an Infrastructure
To what extent do telecommunications services serve as an intermediate input for other industries in the economy? In principle, the answer could be obtained from input-output tables that provide interindustry linkages. However, in most countries (particularly in Europe), telephone and postal services are jointly operated so their activities cannot be distinguished in input-output tables.
The United States, where the businesses of telephone and postal services are totally unrelated, is an exception. Consequently, one can use the 1977 input-output table of the U.S. economy (disaggregated into 537 industries) to estimate the role of telecommunications services as an infrastructure input in the United States.
Table 9.1 shows that the telecommunications sector sells 44 percent of its output to intermediate users. The bulk of this demand comes from service industries: “wholesale and retail trade,” “finance and insurance,” “business services,” and “health, education, etc.,” account for over 50 percent of the output sold to industrial users.
Table 9.2 examines the “telecommunications intensity” of various industries-that is, the direct requirements of telecommunications services per dollar of industry output-of the various industries. The table reports only on industries with requirements of one percent or more. Service industries are obviously the largest relative users of telecommunications inputs. In the case of “business services” and “finance and insurance,” inputs of telecommunications services are about 2 percent of output and over 5 percent of intermediate inputs.

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Table 9.1

Distribution of the TelecommunicationsSector’s Output, 1977 (millions of dollars)

Total demand Total intermediate demand Wholesale and retail trade Finance and insurance: Banking Credit agencies Brokers Insurance carriers Insurance agents Business services: Computer services Consulting services Legal services Other business services Health, education, etc. Total final demand

52,868 23,404
5,584 2,523
933 356 311 53 1 392 2,619 272 287 374 1,686 1,868 29,464

Source: U . S . Department of Commerce, Bureau of Economic Analysis, Detailed fnputOutput Structure of the U S . Ecomony, 1977, (Washington, D.C.: Government Printing Office, 1984).

Table 9.2

Telecommunications Service Inputs as Share of Total and Intermediate Inputs in Selected Sectors (in percent)

Sector
Amusements Automobile services Printing and publishing Health, education, etc. Hotels Wholesale and retail trade Communications services Business services:
Computer services Consulting services Legal services Other business services Finance and insurance: Banking Credit agencies Brokers Insurance carriers Insurance agents

Share of Total Inputs
I .oo
1.10 I .20 1.20 1.40 1S O
1 .so
1.90 (1 3 3 ) (2.09) (1 3 2 ) (1.97)
2.00 (2.07) (3.81) (3.51) (1.12) (2.1 1)

Share of Intermediate Inputs
2.07 2.33 2.26 3.30 3.90 5.26 9.00 7.20 (8.02) (6.19) (9.14) (7.19) 5.08 (6.84) (6.28) (9.76) (2.10) (12.56)

Source: U . S . Department of Commerce, Bureau of Economic Analysis, Detuiled fnputOutput Structure of the U . S . Economy, 1977, (Washington, D.C.: Government Printing Office, 1984).
ServicesTradeTelecommunications ServicesData FlowsService