Exporting Telecommunications Regulation: The U.S.-Japan Negotiations on Interconnection Pricing

Jeffrey H. Rohlfs & J. Gregory Sidak


Since 1997, the U.S. government has attempted to use the World Trade Organization (WTO) agreement ontelecommunications services as a vehicle for exporting American principles of telecommunications regulation to other nations. The United States took the position in 1997 that the WTO telecommunications agreement requires its signatory nations to follow the practices of the Federal Communications Commission (FCC) on telecommunications regulatory policy. Subsequently, the Office of the U.S. Trade Representative (USTR) has sought to influence, under the implicit threat of trade sanctions, Japan’s domestic regulatory policy on the pricing of mandatory competitor access to the unbundled elements of the local network belonging to the operating companies of Nippon Telegraph and Telephone Corporation (NTT).

In this Article, we examine the substantive difficulties of engrafting the FCC’s interconnection policy onto thetelecommunications marketplace of another nation. For more than six years, many American experts ontelecommunications policy have disagreed whether American consumers have benefited from the very FCC policies that the USTR would have Japanese regulators emulate. The USTR’s initiative appears to ignore that the transition to cost-oriented rates for interconnection and retail telecommunications services has been a difficult and unfinished process in the United States; that the cost models used by the FCC to set interconnection prices have significant deficiencies; that actual interconnection prices both within and outside the United States diverge considerably from the estimates of the FCC’s cost models; that variations across countries in the prices of inputs have a significant effect on the costs of interconnection; and that, with respect to depreciation in particular, regulators treat this cost differently — and, from an economic perspective, more reasonably — in Japan than in the United States. Such substantive economic considerations suggest why the FCC’s policy in this area has generated continuous litigation, including two Supreme Court cases since 1996, and consequently is too unresolved at this point in the American experience for the United States to force on its trading partners.

Next, we ask whether the USTR has the detailed knowledge required to negotiate trade agreements on interconnection pricing. We question the propriety of using the USTR to influence the domestic regulatory policy of another country on a topic as complex as the efficient pricing of mandatory access to unbundled network elements. The USTR’s power to formulate trade policy on this subject resides in officials who are unlikely to possess the economic expertise and resources necessary to evaluate the consumer-welfare implications of the policies that they would have Japan and other nations adopt. For these reasons, the USTR cannot credibly make the interconnection pricing policies of another nation a legitimate concern of U.S. trade policy.

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