Pradeep S Mehta: Crossed connections in open markets

The first WTO dispute on trade and competition in the telecom sector points to some dangers for smaller economic powers.

The first WTO dispute on a matter related to trade and competition has been reported rather scantily in the Indian media. This case is about a dispute between US telecom operators and Mexico's Telmex.

But it will have great repercussions and assumes importance since it has close bearings to a similar case that may arise between American telcos and India's dominant international long distance (ILD) services operator, VSNL.

The US Telecommunication Industry Association (TIA) has accused VSNL of anti-competitive practices and has asked the US government to monitor them.

It alleges that VSNL is undertaking anti-competitive practices by keeping the bandwidth price high and preventing upgradation of undersea cables landing in India.

India has denied these charges in spite of the fact that the Telecom Regulatory Authority of India (Trai), too, raised the same issue in a discussion paper.

Somewhat similar charges were made by the US against Mexico in the Telmex case a few months ago. The US had charged Mexico for nurturing a monopoly in the telecom sector by allowing Telmex to provide discriminatory access to only one US operator, Sprint.

The dispute that was raised mainly by two other US telecom giants, AT&T and MCI, was won by the US, who alleged that Mexico had failed to prevent anti-competitive practices in its telecom market.

It had relied on the WTO Reference Paper on pro-competitive regulatory principles under the agreement on telecommunications, a part of the General Agreement on Trade in Services (GATS) framework.

This contains broad directions obligating signatories to enact "appropriate measures" to prevent "major suppliers" from engaging in "anti-competitive practices", and to provide interconnection on terms, conditions and cost-oriented rates that are reasonable.

In the mid-1990s, Sprint had partnered with Mexico's largest supplier of telecoms services, Telmex (with a market share of 74 per cent in international traffic and 75 per cent of international gateway capacity), to provide long distance services between the two countries. AT&T and MCI had to settle for lesser Mexican players and could not benefit from Telmex's large network.

Therefore, they called on the US Trade Representative to help them get the same type of access that Sprint enjoyed. This finally led to the dispute requiring Mexico to provide these US firms with non-discriminatory access as provided in the WTO Reference Paper.

The Telecom Reference Paper is a separate accord signed by around half of WTO's members (including Mexico) setting out self-regulatory principles.

The Reference Paper establishes disciplines on telecom competition safeguards, interconnection guarantees, transparent licensing, independence of regulators from telecom operators, and fair allocation of resources such as frequencies, numbers, and rights of way. India has also committed itself to the reference paper, albeit with qualifications.

What were the main allegations? First, Mexico's ILD rules require Telmex to negotiate a settlement rate for incoming calls from abroad and apply that rate to interconnection for incoming traffic from the US.

Telmex must also give up or accept traffic from other suppliers, regardless of whether the proportion of traffic is less or more than the proportion of its outgoing traffic through that supplier's network. To this end, Telmex may enter into "financial compensation agreements" with other operators, which are then approved by the Mexican authorities.

The US alleged that this was a state-authorised cartel, benefiting Telmex and Sprint at the cost of other US rivals. Mexico countered that its ILD rules set up a pricing mechanism that allocated revenues with responsibilities, and to prevent predatory pricing by foreign companies with deep pockets. Mexico added that by having a competition law in place, it did maintain "appropriate measures" to prevent anti-competitive practices.

As an intervener, the European Union argued that even if Telmex's acts were "anti-competitive", they could not be "practices" in the true sense of the word, as they were not freely undertaken.

"If Mexico does not allow competition between telecom operators on a certain matter, there is no scope for anti-competitive practices. It is not possible to restrict competition where competition is not allowed."

The point here was that Mexico's telecom policy decided to regulate its telecom networks in a manner so as to promote growth in an orderly way. Following North American Free Trade Agreement (NAFTA), public sentiments in Mexico may want the government to ensure the primacy of national champions in most fields of the economy, especially when it is faced with the powerful US, which is its free-trade partner.

In fact, the Telmex case is the first of its kind in the telecommunications services in the history of the WTO. Experts argue that the Reference Paper is only a broad enunciation of principles that straddle both the competition and the regulatory aspects of telecom.

Writes Philip Marsden, a noted trade and competition lawyer, in Competition Law Insight, (May, 2004): "Competition lawyers in any jurisdiction should be surprised at the decision, and dismayed by the reasoning behind it.... It seems that when trade negotiators fail to reach agreement, dispute settlement panels will create new commitments to open markets. This is troubling in itself but even more so when panel decisions affect terms of competition in the markets without applying disciplined competition analysis."

What is more surprising is that Mexico has decided not to appeal against the panel report. Says former ambassador to the WTO and former Deputy Chairman of Trai B K Zutshi: "Mexico did not wish to appeal because it suited the government. This was a good way to reduce Telmex's dominance. Second, Mexico has an agreement with the US on Mode-1 of the GATS, which relates to cross-border supply of telecom services."

An appeal would have certainly explored the manner in which the panel went about the interpretation of competition issues. While any panel decision is not a precedent in WTO jurisprudence, unchallenged decisions create an adverse situation for developing countries when faced with such disputes.

To apply the same analogy in the VSNL case, if recourse in taken to the WTO dispute settlement panel, the management of the telecom market will get influenced by the greater economic powers.

The anti-competitive behaviour of VSNL has already been brought to the notice of Trai by users, and which were found to be true to an extent. Trai officials had, in fact, acknowledged the absence of effective regulations designed to prevent and remedy VSNL's behaviour and the fact that VSNL is taking advantage of such regulatory loopholes.

A recent research project of CUTS, "Towards a Functional Competition Policy for India", has thrown up several issues in better regulation in the telecom sector that need to be resolved.

Given the current scenario, unlike Mexico, we cannot even argue that we have a competition law. The extant MRTP Act is toothless, while the Competition Act, 2002, will only begin to take effect now "" after the Supreme Court dismissed a writ petition over whether a judge or a bureaucrat should head the Competition Commission last week.

(The author is secretary general of CUTS International, a research and advocacy body, and can be reached at psm@cuts.org)