Telecommunications matters

by Glen S. Fukushima

Telecommunications has long been a contentious issue between the United States and Japan. This is because although Americans believe that the U.S. has the most advanced and most competitive telecommunications system in the world, market penetration in Japan for U.S. equipment suppliers and service providers has been extraordinarily low. This has been attributed to market barriers in Japan.

Telecommunications first emerged as a major bilateral trade issue in the late 1970s, when the U.S. — as part of the GATT Tokyo Round government procurement negotiations — pressed Japan to remove barriers to selling equipment to NTT. This was followed by negotiations in 1983 and 1984 on drafts of the Telecommunications Business Law, enacted in 1985. During my time at the Office of the U.S. Trade Representative in the late 1980s, the Japanese telecommunications market remained a high priority for the U.S., as reflected by negotiations in the MOSS (Market-Oriented, Sector-Selective) talks, IVANS (International Value-Added Network Services), cellular telephones, and third-party radios. Even after the World Trade Organization basic telecommunications services agreement was concluded in Geneva in February 1997, the U.S. and Japan negotiated a further opening of the international simple resale market.

Currently at issue are NTT’s interconnection rates, which carriers pay NTT to pass traffic through NTT’s network. Since NTT currently controls about 98 percent of local wireline subscribers in Japan, all new telecommunications carriers are forced to pass significant amounts of traffic through NTT’s network.

Interconnection rates are a vital issue for telecommunications carriers to compete because they allow NTT to impose high costs on new entrants and impede their ability to price competitively. Interconnection payments to NTT equal about 40 percent of long-distance carriers’ revenues and up to 70 percent of local carriers’ call revenues. In addition, if NTT is able to establish a pricing system with low or even negative margins between the interconnection rates it charges new competitors and its own retail rates, competitors are caught in a “price squeeze” that limits their ability to lower prices and often forces losses on them.

In May 1998, the U.S. and Japanese governments issued the “First Joint Status Report of the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy.” In this document, the Japanese government committed to implement a market-based methodology for setting interconnection rates known as the Long Run Incremental Cost model in 2000. However, on Feb. 9, the Japanese government announced a decision to adopt a pricing scheme that would cut the rates by only 22.5 percent over a four-year period. A proposal that asks for a 41 percent reduction of rates is being advocated by the U.S., the European Union, foreign and Japanese new common carriers, and a major Japanese consumer group.

The gap between Japan and the rest of the world in interconnection rates is large. For a typical call, interconnection rates in Japan are over 4.5 times what they are in the U.S., 4 times those in Britain, and over 2.5 times those in Sweden and France. And according to the OECD, the cost of accessing the Internet in Japan is currently 94 percent higher than in Mexico, double that of the U.S., New Zealand and Canada, and four times more expensive than in Korea.

Some Japanese are puzzled by the U.S. focus on reducing interconnection rates in Japan. Some even argue that this is a matter of “national sovereignty” and that the U.S. is “meddling in Japan’s domestic affairs.” The reasons for the high level of U.S. interest in this issue are complex and reveal certain American assumptions about Japan and its economy. Of course, the immediate reason for the U.S. government’s focus is that there are competitive U.S. companies that wish to sell telecommunications equipment and services in Japan but are impeded by the status quo. But interestingly, there are also Japanese equipment suppliers and Japanese service providers advocating a reduction of interconnection rates. And Japanese consumers and corporate users of IT (information technology), also see benefits from the changes being advocated by the U.S.

But in addition to these specific interests, there are broader issues motivating the U.S. position. First, a more competitive telecommunications market in Japan is likely to stimulate greater use of IT, which should promote economic growth, an issue of high priority for the U.S. According to the U.S. Department of Commerce, 35 percent of the growth of the U.S. economy between 1995 and 1998 can be explained by the use of IT. Many Americans believe that IT can similarly benefit Japan. Second, greater use of IT is seen to stimulate new venture businesses and entrepreneurialism, which are lacking but could help to reinvigorate and revitalize the Japanese economy. Third, greater use of IT should help existing Japanese companies regain their vitality.

Fourth, the use of IT, especially electronic commerce, is seen as a way to erode the barriers created by “keiretsu” and exclusionary business practices that inhibit the free operation of the market. Fifth, greater use of IT is seen to promote more openness, transparency, and access to information, all goals the U.S. has requested of Japan for years, especially in the context of reforming corporate governance and giving greater power to shareholders. Finally, the use of IT is seen by Americans as having the desirable effect of furthering democracy by empowering individuals.

The current U.S.-Japan negotiations on interconnection rates is seen narrowly by some Japanese for its impact on NTT. The fear is that lowering interconnection rates as much and as rapidly as requested by the U.S. will have a negative impact on NTT’s finances and employment. However, outside observers view the issue much more broadly, as one that affects not only NTT and the telecommunications sector, but Japan’s macroeconomic growth, corporate vitality and even political and social democratization. Many observers are perplexed why some in Japan seem so resistant to take advantage of the “new industrial revolution” made possible through the active use of IT.