International Settlement Rates and U.S. Exportation of “Procompetitive Deregulatory Principles” After the WTO Agreement on Telecommunications Services

Paul W. MacAvoy & J. Gregory Sidak


On February 15, 1997, seventy countries working within the framework of the World Trade Organization (WTO) agreed on a multilateral reduction of regulatory barriers to competition in international telecommunications services. The signatory nations to the WTO agreement, representing markets generating 95 percent of the $600 billion in global telecommunications revenues in 1997, are now legally bound to open their telephone markets to competition. Within months, however, the Federal Communications Commission (FCC) injected controversy into the new multilateral arrangement by proposing to dictate the prices that other nations may allow their domestic telephone companies to charge to international long-distance carriers for terminating incoming calls from the United States. Those charges for terminating access, known as settlement rates, involve billions of dollars annually and are set pursuant to an international regime that is one of the more arcane niches in the foreboding sprawl of telecommunications regulation.

The FCC justified its 1997 benchmarks policy by noting that, at the time, “international calling rates remained high because in many countries, competition was non-existent or insufficient to drive settlement rates down to cost-based levels.” The goal of that policy was to reduce “above-cost settlement rates paid by U.S. carriers to foreign carriers for the termination of international traffic, where market forces had not led to that result.” However, the FCC eventually acknowledged that its 1997 policy had shortcomings. The rigid benchmarks of the 1997 policy “prevented U.S. carriers from negotiating flexible, individualized rates and terms that are responsive to changing market conditions and beneficial to U.S. customers.” Consequently, in 2004, the FCC revised its international settlement rates policy to relax its benchmark requirements for cases in which U.S. carriers had negotiated benchmark-compliant rates. In 2012, the FCC went further, finding that regulation of international settlement rates was “no longer necessary” and could, in some cases, be “unnecessarily burdensome.” The FCC therefore eliminated such regulation between U.S. carriers and carriers in international countries, with the exception of Cuba. Then, in February 2016, the FCC proposed eliminating the Cuba exception, which, if adopted, will mark the end of the FCC’s policy of regulating international settlement rates. The eventual demise of international settlement rate regulation confirms our diagnosis in 1997 that such regulation as had little, if any, benefit for U.S. consumers.

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