Dimensions: 6.5'' x 9.5'' 291 pages AEI Press  (Washington) Publication Date: February 1998 Hardcover ISBN: 0844740713 Price: $ 32.50 Add to Cart   Examination Copies

As telecommunications service markets in individual countries have become less regulated and more competitive, telecommunications equipment has developed a global market in which sales for new systems are hotly contested and competition, particularly technology-based competition, is fierce. The authors consider whether any special circumstances justify departure from free trade in telecommunications equipment and whether more efficacious means for addressing any such circumstances exist, apart from trade-related decisions.

Ronald A. Cass is dean and Melville Madison Bigelow Professor of Law at Boston University. John Haring is a principal in Strategic Policy Research, an economics consultancy based in Bethesda, Maryland.

Ronald A. Cass and John Haring explore the issues relevant to selecting an appropriate trade policy for telecommunications equipment and similar products. They have used only the simplest instruments in the economist’s "toolkit" to go exploring. They eschewed devices relied on by noneconomists for assessing good policy as those tend to provide better arguments than answers and often restate economic issues in other terms. They also abjured relying on the more sophisticated analytical tools that many academic economists favor. Those tools, the authors note, can be helpful in many circumstances, but they seldom resolve policy issues with the information available to policymakers. They commonly require data that are inaccessible, which grants primacy to the decisionmaker's assumptions. The simpler tools do not allow the authors to escape the need for data but facilitate decisionmaking on the sort of information that is generally available or that, for the most part, they can estimate with relative confidence.

The authors assert that the term relative deserves emphasis. Perfection is not a real-world phenomenon. Real-world decisionmakers do not have perfect knowledge. And real-world economic arrangements are inevitably imperfect. Policymakers always choose among imperfect alternatives, and every choice requires trade-offs. Cass and Haring have not searched for a perfect policy, one that is best under all circumstances. Rather, they have sought the best policy (or combination of policies) given reasonable expectations about circumstances, including those surrounding the decisionmakers and decision processes. The best policy may fail to satisfy conditions for optimality in theory under particular conditions, and the authors have tried to identify where those failures in principle may exist. But the more trenchant point for policymaking is that one policy's failures in principle do not make any alternative policy better in practice.

Open Markets

With that understanding in mind, Cass and Haring start with the basic policy that markets should be open and then examine conditions that, if satisfied, could make an alternative to open trade preferable. A fundamental principle of economics holds that voluntary exchange is always mutually beneficial to the transacting parties. The possibility that trade produces consequences for others besides the contracting parties, however, has supplied a rich vein for economic theorizing about the potential efficacy of various governmental restraints on (or additional inducements to) trade. The authors have described in considerable detail the principal variants of those types of arguments as they have been elaborated in the international trade context and have discussed the conditions under which those arguments would hold. Cass and Haring have also sought to determine "whether the shoe fits" (or which shoe fits) in the specific context of international trade in telecommunications equipment. Are particular types of telecommunications gear the kinds of products for which the arguments for extraordinary restraints or inducements to trade likely apply? Or are open markets more likely to secure maximum economic welfare in that trade sector?

Their answer is not an unequivocal "open markets." But they are not very far from that answer. Each of the principal arguments for trade restraint--improving terms of trade, promoting positive externalities, gaining strategic advantage, or constraining negative externalities--depends on particular factual assumptions. For much of the telecommunications industry, the assumptions necessary to any of those arguments are simply unrealistic. But for some parts of the industry or in some settings one needs to know more to select the best policy. For policymakers reaching this point, there is bad news and good news.

The bad news is that the necessary empirical information is hard to come by. It is possible that scale or scope economies are sufficiently great in specific segments of the telecommunications equipment market (such as large, central switches or cellular telephone equipment) that a nation such as the United States could profit from trade restraints. It is possible as well that the United States could benefit in some instances from threatening strategic trade closure (threatening to close its market in telecommunications equipment to force open a foreign market). Export licensing of telecommunications equipment that is useful for military purposes, that is produced by only a few nations, and that is not readily produced by other nations also might be justified. None of those restraints is demonstrably beneficial, but none can be said conclusively to be inimical to national economic welfare. Each is an appropriate policy in the right circumstances, and the right circumstances are plausibly present some of the time for some telecommunications equipment.

The good news follows directly from the bad. The rapid changes in telecommunications technology have led to similar changes in the organization of telecommunications services, telecommunications equipment production, and government regulation of this field. Ownership of telecommunications firms increasingly has opened to private investors; coordination among various firms has increased as competition among other firms has intensified; and trade restraints have been repealed or bypassed. In that context, the authors note, the empirical questions that are unanswerable also may be irrelevant.

Prescriptions for Policymakers

Cass and Haring's advice to policymakers is to take open trade as the baseline and to move away from it only when the gains are clear and the arguments compelling. Some restrictions on trade in telecommunications equipment can be supported, but in the authors' view opening the door to the possibility of such restrictions is unlikely to bring more costs than benefits. Knowing, however, that few policymakers will be satisfied with such simple counsel, Cass and Haring offer them the following six precepts.

1. As Hippocrates said, do no harm. Most trade interventions will reduce, not enhance, national welfare. Start with skepticism about the ability of government to sort through the complex arguments to identify the particular cases in which an intervention will be helpful.
2. It is better to base trade policy on data than on stories. That is true even though, as Roger Noll has said, data is simply the plural form of anecdote. Problems with most data are well known. Data are often wrong. More damning for policymakers, data are not accessible to ordinary members of the public in the same way that anecdotes are. Anecdotes are readily understood, which is why politicians and trial lawyers and ministers all use them. Further, many of the anecdotes are compelling stories, telling, for example, about the raconteur’s potential loss of a job that has been a lifetime investment if imports are not restrained or about the opportunity for adding jobs, for expanding the work force, if an export market can be opened to their products. Those stories are told with great sincerity, but each captures only a small piece of a much larger puzzle, and other stories are unlikely to fill in the missing pieces. Even bad data tend to give a more complete picture on which to base policy.
3. Arguments that a trade restriction will advantage the nation's terms of trade in telecommunications equipment can be credited, but only when three conditions are met. The restricting nation must account for a very large share of the world market for the equipment being restricted; the equipment must have a low rate of substitutability with other goods or services (or all of the goods and services must be treated as a single class of good); and the restriction must not be expected to trigger reactive restrictions by other nations. In general, those three conditions will not be satisfied for telecommunications equip ment. In large measure, the problem will be the second requirement--nonsubstitutability--as advancing technology will make most equipment reasonably fungible with other equipment or telecommunications services.
4. Arguments based on positive externalities generally should not be the predicate for trade restraint. Telecommunications equipment will be tied to important new technologies, and successful telecommunications products should provide significant returns to specialized factors of production. Some production of telecommunications equipment will exhibit economies of scope or scale, and some will yield positive externalities. Even the most knowledgeable policymaker, however, will not be able to identify the right occasions for protective interventions or to spot the right moment to remove protection. The better course for rapidly changing technology is to abandon the conceit that we have that ability or that we can have it if only we go about our business smartly.
5. Strategy can be profitable, and threats sometimes work, but ... Other nations' markets are, indeed, generally more closed to U.S. telecommunications equipment than the U.S. market is to other nations' equipment, and that difference hurts U.S. equipment producers. But that difference also advantages other parts of the U.S. economy, and the advantage is great enough--greater in all likelihood than the detriment to our telecommunications equipment producers--that the clear trend around the world is to open telecommunications markets in both services and equipment. As recent agreements on trade in information technology and telecommunications services are implemented, that difference will decline. It will not, however, disappear in the near term. For some nations, including some members of the European Union, the decline will be measured, not abrupt, taking a trajectory more gently sloped than U.S. negotiators (and some well-placed Europeans) wanted. In other nations, including Canada and Japan, significant differences will remain even after the accords are fully implemented. Strategic threats should not be taken off the policy options list and may have helped produce the recent accords, but caution should very definitely be the order of the day. U.S. commitment to the GATT framework and the World Trade Organization--a commitment that has advanced U.S. national interests--reinforces that counsel.
6. Policymakers should hesitate to impose constraints on exports just as much as on imports. The sort of market developments that undermine the capacity of even a major importing nation to improve terms of trade or to advance development of industries with substantial economies of scale also impede the efficacy of export controls. Multi-lateral controls on the export of technologies with clear military significance to nations that are seen as serious security threats by the relevant officials in all major equipment-producing nations (and all major potential equipment-producing nations) can advance national interests. Other export controls probably cannot.

Last Thoughts

The markets for telecommunications equipment and services historically have been restricted markets. Monopoly service and vertical integration were the models almost universally followed, while competition was deemed inimical to the public weal. Only recently have many of the restraints been relaxed, with results generally regarded as highly salutary.

Against that background, there is more than a little irony in calls for government intervention to restrain trade in telecommunications equipment. The arguments for restraint in the international trade context bear a close familial resemblance to the arguments for closed markets and monopoly that historically informed the organization of the telecommunications supply sector in most countries throughout the world. Those arguments point to potential benefits achievable through the realization of economies of large-scale production and integration, through the creation of an operating environment that takes the risk out of risk taking, and through the exercise of enlightened discretion within a closed system.

Those arguments may have been right when the pace of change was slower and the telephone industry was in its formative stages both technically and economically. Today, telecommunications is a massive, highly complex industrial undertaking involving a myriad of different services, thousands of equipment components, and countless industry participants, all moving figuratively and, in some cases, literally at the speed of light. Serious calculation of the effects of targeted policy interventions in that environment is an extraordinary undertaking. The most pristine and well-conceived strategies in that context are highly likely to be overtaken by events. At the same time, the most wasteful and disastrous of interventions (if applied in a static setting) may well be forgotten quickly and have little consequence in the world of tomorrow. Advocates and naysayers will happily claim victory or attribute failure, but with only the fuzziest pictures as evidence.

As telecommunications service markets in individual countries have become less regulated and more competitive, telecommunications equipment has developed a global market in which sales for new systems are hotly contested and competition, particularly technology-based competition, is fierce. U.S. telecommunications equipment manufacturers, for the most part, compete successfully in that global market. Their success cannot be attributed to their having been nurtured in a hothouse in the home market. Largely that has not been their genesis. U.S. suppliers, notably AT&T (now, for this purpose, Lucent Technologies), possess a valuable historical legacy in private ownership (with its attendant controls) and the large geographic extent of the North American market. But in the modern era, the United States has been in the forefront of telecommunications market liberalization.Thus, U.S. manufacturers have had to hone their competitive skills and have developed the competitive edge that comes only when business loss and business failure are distinct possibilities.

Perhaps a policy involving judicious use of extraordinary restraints and inducements can smooth the way to create formidable national champions. That is, however, not the policy that has produced competitive advantage for U.S. firms competing in today’s global telecommunications equipment markets. Cass and Haring doubt that such a policy will account for much future success either.