From international competitive carrier to the WTO: a survey of the FCC's international telecommunications policy initiatives 1985-1998.

• Author: Spiwak, Lawrence J.
• Position: World Trade Organization

1. INTRODUCTION

   In the December 1998 issue, the Federal Communications Law Journal published a law review article surveying the Federal Communication Commission's (FCC or Commission) international policy initiatives between 1985 and 1998.(1) As that article explained, one of the centerpieces of the FCC's international policies was its Benchmarks Order, in which the FCC unilaterally imposed maximum benchmarks on the amount U.S. carriers may pay their foreign correspondents to hand off U.S.-originated International Message Telecommunications Service (IMTS) traffic.(2) As that law review article further argued, the FCC's actions raised serious questions from both a legal and overall policy perspective.

   Less than one month after the Federal Communications Law Journal published that article, however, the D.C. Circuit Court of Appeals in Cable & Wireless v. FCC (C&W)--to the unbridled giddiness of the FCC and to the dismay of various parties representing over 100 foreign governments, regulators, and telecommunications companies(3)--upheld the FCC's Benchmarks Order in its "entirety."(4) In doing so, the D.C. Circuit has not only placed major areas of previously settled case law in flux, but--even assuming arguendo the court ruled correctly--also has approved nakedly the FCC's role of "cartel manager" and destroyed what little chance there was to avoid an all-out international telecommunications trade war.

2. THE COURT'S DECISION

   In upholding the Commission's Benchmarks Order, the C&W court's arguments essentially fell into two broad categories: In the first category, the court concluded that the Commission reasonably exercised its ratemaking authority under the Communications Act.(5) In support of this decision, the court held that: (a) the FCC had sufficient jurisdiction under the Communications Act to impose settlement rate benchmarks; (b) the Commission had adequately demonstrated its use of the Tariff Components Rate methodology; and (c) the FCC's actions were a legitimate exercise of its authority under the Mobile-Sierra doctrine.(6) As demonstrated below, however, the court was only able to reach this conclusion by ignoring well-settled ratemaking jurisprudence.

   In the second category, the court apparently concluded that if the political stakes are high enough, mercantile trade concerns can trump legal precedent, economic theory, and the factual record itself. To wit, the court both upheld the FCC's argument that benchmarks were necessary to protect U.S. firms against ephemeral price squeeze behavior by foreign firms and found that--international comity aside--the FCC's actions in toto did not violate international law.(7) Indeed, in finding that the Commission's actions "to strengthen the bargaining position of domestic telecommunications companies in negotiations with their foreign counterparts"(8) were a legitimate exercise of the FCC's "public interest" authority, the court violated the heretofore golden rule that the "Commission is not at liberty ... to subordinate the public interest to the interest of `equalizing competition among competitors."(9) Each category is discussed more fully below.

   1. The Demise of Ratemaking Law

      1. Jurisdictional Issues

         The court held that there were essentially three reasons why the FCC could assert jurisdiction to impose settlement rate benchmarks. First, the court held that the FCC was not asserting jurisdiction over foreign carriers or foreign telecommunications in violation of the Communications Act.(10) Rather, the FCC was asserting jurisdiction only over the settlement rates that U.S. carriers must pay their foreign corespondents for termination of U.S.-originated traffic. While the court was quick to point out that both it and the FCC were engaging in legal hair-splitting--that is, "that regulating what domestic carriers may pay and regulating what foreign carriers may charge appear to be opposite sides of the same coin"(11)--the court reasoned that:

         by focusing only on the Order's effects on foreign carriers, petitioners overlook the crucial economic reality that makes the Commission's position that it is only regulating domestic carriers reasonable: Because domestic carriers operate in a competitive market, they face a serious dilemma when they bargain with monopolist foreign carriers. As a group, U.S. carriers would be best off if each decided not to accept settlement rates higher than FCC benchmarks. But if one U.S. carrier maintained this position to the point of impasse in negotiations with a foreign carrier, a competing U.S. carrier would make the foreign carrier a higher offer.(12) The preceding analysis raises two significant concerns. First, the language cited above indicates that the court either did not understand accurately (or petitioners' counsel did not explain sufficiently), the basic facts of the case. For example, the court assumes that the United States is the only country in the world with a significant outpayment deficit. Contrary to popular belief, however, this assumption simply is not true. Indeed, this "victim" mentality is a bit disingenuous considering the facts that, for example, Japan-based carriers have large deficits with Taiwan, the Philippines, South Korea, Singapore, and other major Asian countries. Similarly, France Telecom has large outflows to Africa, the Middle East, and even Latin America. Moreover, the same holds true for British Telecom, Deutsche Telekom, Telecom Italia, and other large overseas telephone companies.(13) Similarly, the court again appears to assume that the United States is the only "competitive" market. Again, this is not so. Numerous other countries such as the United Kingdom, New Zealand, Sweden, and Denmark would probably both beg to differ and take great umbrage with the court's blanket conclusion. Moreover, if the court wants to make blanket conclusions, then it should look at the local termination markets in the United States, which, unfortunately, are still characterized by dominant providers and are likely to remain so for the foreseeable future.(14)

         The second concern is perhaps more egregious: The court's language cited above blatantly condones and indeed encourages the FCC's efforts to help U.S. firms engage in a group boycott against foreign firms. Clearly, this stretches any reasonable interpretation of either the Noerr-Pennington or State Action doctrines.(15)

         Moreover, if the court applies its factual assumptions to its reasoning, then the court actually concedes its point that U.S. firms are always at the mercy of foreign monopolists. Quite to the contrary, given the huge amount of revenue U.S. traffic represents, when U.S. firms act as a cartel, they actually have significant monopsony power--or more accurately, bargaining power--with foreign firms and should be (and are) able to exercise this power to their advantage. If readers recall from the original article, this is precisely what happened in the "Telintar Trade War."(16)

         The court next reasoned that even if the FCC was taking jurisdiction over foreign entities, this action was essentially benign because the FCC lacked an effective enforcement mechanism. Indeed, reasoned the court,

         Far from threatening foreign carriers with enforcement actions, the Order at most states that the FCC will contact "responsible [foreign] government authorities" to "seek their support in lowering settlement rates." Given the structure of the global telecommunications industry and its resulting incentives, we find reasonable the Commission's view that the Order regulates domestic carriers, not foreign carriers.(17) As explained in more detail in the original article, however, the lack of an effective enforcement mechanism is one of the primary problems with the FCC's policies, primarily because a U.S. carrier is hardly going to ask the FCC to declare its own rates unlawful if a foreign carrier refuses to negotiate a settlement rate at or below the FCC's benchmarks within the exact time specified by the FCC.(18) Indeed, the whole reason why the international telecommunications community entered into treaties such as the International Telecommunication Union (ITU) in the first instance was to mitigate the risk that traffic would be interrupted if the "negotiations" referenced by the court prove unsuccessful. As such, by flagrantly violating its international commitments,(19) the only thing the FCC's mercantile rhetoric will achieve will be to create (if not exacerbate an existing) substantial disincentive for both foreign governments and carriers to engage in good faith negotiations with U.S. carriers to enter their home markets (which, paradoxically, is supposed to be the whole goal of such an approach in the first place). As such, both U.S. consumers and business should really not be surprised when the economic costs of neo-mercantilism outweigh the very economic benefits the FCC promised that they would receive.(20)

         Finally, the court gave the "so what" defense to the FCC's actions. In the court's own words, while the "practical effect" of the FCC' s Order will be to reduce settlement rates charged by foreign carriers, "the Commission does not exceed its authority simply because a regulatory action has extraterritorial consequences."(21) Thus, reasoned the court, the FCC's actions in the Benchmarks Order are identical to the situations where "the Environmental Protection Agency regulates the automobile industry when it requires states and localities to comply with national ambient air quality standards, or [when] the Department of Commerce regulates foreign manufacturers when it collects tariffs on foreign-made goods."(22)

         Sadly, this analogy simply is not accurate--rather, it is inapposite. First, a trade tariff is nothing more than a naked barrier to entry, usually imposed by xenophobic and protectionist policymakers to insulate American firms from (and thus deny American consumers the benefits of) the lower prices and additional choices...