Members of Congress and officials from the European
Union (EU) are engaged in a bitter war of words over
telecommunications trade and investment issues. If tensions
continue to escalate, this rhetorical battle could become a
full-blown trade war.
dispute stems from an amendment to the Commerce, Justice, State,
and Judiciary (CJSJ) appropriations bill offered by Senator Ernest
Hollings (D-SC), ranking member of the Senate Committee on
Commerce, Science, and Transportation. The amendment would prohibit
the Federal Communications Commission (FCC) from expending funds
"to grant a license, permit, or operating authority" to any
corporation in which a foreign government has more than a 25
percent direct or indirect ownership interest.
30 Senators have written to the FCC expressing concern over the
attempt by German communications giant Deutsche Telekom AG to
acquire the American cellular company Voice Stream Wireless in a
deal valued at roughly $51 billion. The Hollings amendment would
sabotage this deal by prohibiting FCC officials from reviewing and
signing off on the merger. EU officials have responded by
threatening to withdraw from the World Trade Organization (WTO) if
the Hollings amendment becomes law. Even if the EU does not take
this radical step, other retaliatory efforts are likely to follow
if the issue is not settled soon.
a trade war would be a tragic setback for the cause of free trade
and global telecommunications competition. Moreover, although
policymakers on both sides of the Atlantic claim to have the best
interests of their citizens in mind, a telecom trade war would hurt
the interests of consumers worldwide by hampering communications
industry liberalization, market competition, and consumer choice.
American and European officials should do all in their power to
avoid such a calamity by working through institutions such as the
WTO and multilateral accords to resolve this dispute.
Both Sides to Blame.
The current United States-EU telecom trade scuffle has its
roots in a recently rejected merger of American telecom giants
WorldCom, Inc., and Sprint Corp. Regulators on both sides of the
Atlantic refused to allow this combination to go forward on the
theory that the aggregate market power of the new company would be
anti-competitive and harm consumer interests. Many U.S. lawmakers
have hinted that they believe the EU's rejection of the deal had
more to do with Deutsche Telekom's ongoing interest in acquiring
Perhaps in reaction to the heated climate
surrounding that merger, Deutsche Telekom set its sights on a
smaller target, VoiceStream Wireless. Like Sprint, VoiceStream
possesses a nationwide cellular communications network, though it
is not as well-known. The decision to switch acquisition targets to
the less well-known carrier did little to diminish the heat from
Capitol Hill legislators. Senator Hollings and his congressional
supporters argue that it would be unfair to allow Deutsche Telekom,
which is 58 percent controlled by the government of the Federal
Republic of Germany, to obtain control of an American
Opponents of the amendment, however, point
out that it would violate America's commitments under the WTO's
Basic Telecommunications Agreement. Although this agreement is
complicated and riddled with ambiguities, its general thrust is
that signatory states will grant each other favorable trade and
investment treatment and not seek automatically to block
investments by foreign carriers in domestic communications
does not mean that domestic regulators are prohibited from
attaching certain safeguards and requirements to investment efforts
or blocking them after thorough review. In fact, the FCC has
authority under Section 310(b) of the Communications Act of 1934 to
review foreign investments in excess of 25 percent in a licensed
American communications company. Rather, the Basic
Telecommunications Agreement merely aims to encourage participating
countries to allow for the possibility that global investment
opportunities in domestic communications markets can have
beneficial results. In other words, the benefit of the doubt should
be in favor of allowing investment by foreign carriers.
Hollings amendment would reverse this approach by not even allowing
the FCC to review proposed investments by foreign carriers when
they are more than 25 percent owned by a foreign government.
Because this would violate previous agreements made by the United
States under the WTO Basic Telecom Agreement and would encourage
retaliatory measures by other countries, the Clinton Administration
and many American business groups have signaled their opposition to
Hollings' effort. Senator John McCain (R-AZ) is leading an effort
in the Senate to strip the Hollings language out of the CJSJ
appropriations bill to head off a potential full-blown trade
Better Way to Resolve Differences.
The McCain effort is vital in the short term to keep the peace
between the United States and the EU. But longer-term problems
remain that must be dealt with to discourage other telecom trade
wars. Specifically, two objectives should be pursued in ongoing
talks in this area.
Push complete privatization.
U.S. officials should push governments that own a stake in their
domestic carriers to divest themselves of these holdings. The
German government's ownership interest in Deutsche Telekom will
fall to 45 percent by the time the VoiceStream deal is finalized,
and the government has made a commitment to divest itself further
over time. But governments should no longer be involved in the
communications business. Governments that control an interest in
domestic carriers should privatize these interests on the most
rapid timetable possible to avoid trade conflicts.
- Work within multilateral accords and
institutions to resolve transitional issues.
As governments divest themselves of their communi-cations
holdings, any trade and investment disputes that arise should be
settled through the WTO and the Basic Telecom Agreement. Congress
should not attempt to micromanage this process, but instead should
encourage the U.S. Trade Representative to work within the WTO
process and institutions to achieve complete telecom trade
liberalization as quickly as possible.
Adam D. Thiereris a former the
Alex C. Walker Fellow in Economic Policy in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage