Laura S. Huffman, a Comparative Review of Foreign Direct Investment Policies for Telecom Services in the United States, India, and Australia: Why Back to the Multilateral Future Is the Best Choice for States, Consumers, and Suppliers

• Citation: Vol. 22 No. 1
• Publication year: 2008

A COMPARATIVE REVIEW OF FOREIGN DIRECT INVESTMENT POLICIES FOR TELECOM SERVICES IN THE UNITED STATES, INDIA, AND AUSTRALIA: WHY BACK TO THE MULTILATERAL FUTURE IS THE BEST CHOICE FOR STATES, CONSUMERS, AND SUPPLIERS

INTRODUCTION

International law has struggled for years to find the balance between the advantages and disadvantages of multilateral investment treaties.¹As the global economy develops, states want a well-understood, level playing field for their commercial parties doing business internationally, so the number of bilateral and multilateral agreements has grown significantly in the last several decades.²At the same time, for a variety of reasons, both host and investor states want to be able to have some individual control over foreign direct investment (FDI). An investor state that is a friend today may not be a friend tomorrow.³Foreign investment may hold back development of a national industry.⁴Host states want to ensure that foreign-owned companies follow domestic health, safety, and welfare regulations (e.g., environmental protection and discrimination).⁵Investor states want to protect their nationals' investments.⁶For all of these reasons and more, no attempt to develop a multilateral agreement on foreign investment has yet come to fruition, although the international law community continues to pursue the goal.⁷

Certain industries, such as telecom and financial services, have characteristics that present additional problems in the consideration of World Trade Organization (WTO) multilateral agreements on FDI because of the WTO requirements for Most-Favoured-Nation treatment of all members.⁸In the 1990s, between the end of the Cold War and the start of the War on Terror, it appeared that restrictions on FDI in telecom services would be a thing of the past. In 1998, sixty-nine WTO members, representing over 90% of the basic telecom services market, agreed to the WTO Basic Telecom Agreement (BTA), and the industry believed a new day of an internationally open market had dawned.⁹

Because the United States brought national security concerns about telecom services to the forefront after the September 11 attacks,¹⁰there currently is no driver in the WTO to follow through with a multilateral investment treaty covering telecom services.¹¹This reticence, based on risk-adverse fear- mongering, serves no one-not the citizens of developing states, which could benefit from FDI in their telecom systems; not the multinational telecom service suppliers, which could expand their market penetration while bringing efficient and advanced telecom services to those who need them; and not even the national security organizations, which would benefit from increased competition and efficiency in the same way as would every other consumer of telecom services. As will be seen, states already regulate telecom services for the benefit of both the citizens and the service provider. Those same regulations would apply to a service provider that would benefit from FDI, so a state would lose nothing and gain much by allowing unrestricted FDI. This Comment will argue that the international law community, through the WTO, should return to the promise started by the BTA through creation of an agreement on FDI in telecom services.

In practice, states have continued to regulate FDI in telecom services more stringently than FDI in other industries because of the particular roles telecom services play in a state.¹²Telecom services are directly involved in national security and law enforcement,¹³as evidenced by the recent United States controversy over potentially illegal wiretapping of international calls to and from suspect states.¹⁴Historically, the telecom service provider in many states has been one of the biggest national employers.¹⁵States recognize the role telecom services play in improving a national economy and the growing importance of telecom services to the population.¹⁶

National regulations need to keep pace with evolving technologies.¹⁷

Regulations that are technology specific rapidly become obsolete.¹⁸When the BTA was completed, telecom and computer services were essentially separate entities,¹⁹but now Voice-Over-Internet-Protocol (VoIP) services use the

Internet to provide telecom connections.²⁰Global deployment of mobile phones has grown from 275 million at the time of the BTA²¹to more than two billion in 2005,²²with many people using a mobile phone instead of a land line rather than in addition to one.²³As technology reduces the cost of providing telecom services, regulations must address national economic and social concerns.²⁴Regulators need to take care that new entrants with lower costs still maintain critical services to consumers,²⁵but that can be done while allowing foreign suppliers to participate fully in a state's telecom services.

This Comment will examine conditions that led to the signing of the BTA ten years ago, review the current policies of the United States, India, and Australia as examples of how divergent positions on foreign investment can be between states where services are established and those where services are growing, and argue that because the trend away from open market access in the name of national security is misguided, the international community should return to the spirit of the BTA. The United States, India, and Australia are a representative subset of the participants in the BTA and their varying concerns-the United States as a global leader, the leadership of which sees it as a target; India as a fast-developing nation with a high level of interest in improving technology generally and communications in particular; and Australia as a highly developed nation with less concern about sabotage by stateless entities than is the United States. Part I provides a brief overview of the process that led to the adoption of the BTA in 1998. Part II discusses the United States' regulations on FDI in telecom services, which have seen more stringent application after the September 11 terrorist attacks. Part III discusses how India encourages FDI in telecom services as the fastest way to bring its telecom infrastructure up to world standards. Part IV reviews Australian requirements that are a reasonable compromise between addressing national security concerns and opening the telecom services market to global competition. Part V argues that although both technology and global politics are in quite different positions than they were at the time of the BTA, the intended global opening of the market for foreign investment in telecom services still would provide the most effective global telecom system, and the application of national security regulations to thwart it leads to poorer service and higher costs for users.

I. GLOBAL POLITICS, TECHNOLOGY, AND THE BTA: THE 1990S WAS A

GOLDEN AGE FOR A MULTILATERAL TELECOM SERVICES AGREEMENT

Regulating telecom services now presents a challenge unlike any other industry in the intersection of national and international demands with constantly changing technologies. For much of their history, telecom services were viewed as a utility similar to electricity or water.²⁶In most states, the provider of telecom services was a state-owned monopoly that provided services to all citizens at a fixed rate independent of cost.²⁷Even in countries where service providers were private companies, such as in the United States, they enjoyed a monopoly in exchange for providing universal service.²⁸The service provider controlled all aspects of the customer's experience-what type of service would be available and when, and what equipment the customer would use.²⁹States considered telecom services to be a "natural monopoly," where the benefits of universal service outweighed the potential issues associated with monopoly supply.³⁰In that environment, any foreign ownership of the telecom service provider was unthinkable.

Beginning in 1984 with the divestiture of AT&T in the United States, states began to realize that advances in technology were leading telecom services away from the configuration of a natural monopoly.³¹In the late 1970s and early 1980s, technology made the cost of service provision almost independent of distance, but the state-owned monopolies used profits on long-distance calls to subsidize the cost of providing local service.³²States began to realize that their population would reap more benefits from competition than from a strict monopoly, and by the early 1990s a wave of privatization of telecom services was sweeping the globe.³³

At the same time, technology advances continued to decrease costs and increase capabilities.³⁴The analogy of telecom service with other utilities was completely breaking down, with one of the key changes in the industry being the growth of international service.³⁵Unlike providers of electricity or water, providers of telecom services needed access to their counterparts in virtually every state in the world because users needed to communicate with people all over the world on a regular basis.³⁶Globalization brought the need for cost- effective communication, and the industry used technology to respond.³⁷

The WTO General Agreement on Trade in Services (GATS),³⁸which covers both trade and investments, provided the framework for an agreement on telecom services.³⁹Motivated by a desire to open the global market to United States telecom service suppliers and the potential additional market for domestic telecom equipment providers, the United States took a lead position in the negotiations.⁴⁰Domestically, the United States had followed through on the 1984 divestiture of AT&T by opening the local service market through the

Telecom Act of 1996.⁴¹It wanted to drive similar behavior in the global market in a fair manner.⁴²In its initial proposal to the negotiating group, the United States listed four conditions for an open market: 1) set disciplines for interconnection of competing suppliers; 2) competition safeguards on dominant suppliers...