Telecommunications trade tensions stuff (from WSJ) (may already have been posted).
January 4, 1999
A Bad Start to a New Year
By Thomas J. Duesterberg, a senior fellow at the Hudson Institute. He served
as assistant secretary of commerce for international economic policy, 1989-93.
On Jan. 1, a new European Union directive will take effect that could well spur
the first digital trade war. The law will impose a new, largely untested standard
for advanced wireless phone communications and will all but exclude
non-European technologies from this huge market. And the EU is not stopping
there. Next on the agenda is an effort to convince the U.N.'s International
Telecommunications Union (ITU) to endorse the same standard for the rest of
the world. The results could be catastrophic.
These initiatives will undoubtedly provoke a trade row with the United States,
where competing technologies are made and widely used. Furthermore, they
will impose a second-best technology on stagnant European economies and on
the developing world at a time when the telecommunications gap is an
increasingly important reason why there is an economic divide between
nations.
In the 1980s, European researchers, generously supported by EU grants,
developed a digital cellular telephone system called GSM. The EU quickly
adopted GSM as the exclusive standard for its member nations. When the
digital system was deployed in the 1990s, Europeans flocked to it partly
because of the high prices imposed on wireline users in Europe. The boom in
Europe led to economies of scale, which in turn fueled exports.
The American-engineered standards, known as CDMA and TDMA, were
introduced in the U.S. at about the same time, but American regulators wisely
took a more liberal approach, opening the U.S. market to Europe's GSM
standard as well. CDMA proved to be the superior technology. Compared to its
competitors, CDMA permits two to four times more connections for voice or
data transmission in a given amount of spectrum (this, according to
Datacomm, a U.S. telecommunications research firm). The technology also
produces a better signal, allowing for more security; requires less power, and
hence fewer cell sites; and can be used for a greater variety of functions.
CDMA is now the world's fastest growing cellular technology, although
worldwide it still lags behind GSM in subscribers. The looming fight is over the
so-called 3rd generation, or 3G, digital cellular systems, which promise to
provide faster data and Internet connections. Current systems only permit data
transmission at about 14.4 thousand bits per second, too slow to support the
burgeoning array of data and Internet applications now sweeping the world.
The EU is pushing the ITU to endorse only 3rd generation technology that
favors GSM as a worldwide standard.
There are three serious problems with the EU approach:
For starters, depending on the government rather than on the private
marketplace to choose technical standards is bad economics. Adhering to an
open marketplace is especially important in high-tech industries where intense
competition usually yields the best technological solutions. The Japanese
bureaucracy learned this when it mandated analogue high-definition television a
few years ago only to discover that digital television is of a far superior quality.
Second, Europe's exclusion of other technologies amounts to an unfair trade
practice under the rules of the World Trade Organization. Both second- and
third-generation CDMA is now excluded from Europe, currently the world's
biggest cellular market. And since the 3G standard the Europeans are
promoting at the ITU is incompatible with existing non-GSM standards, other
countries are reluctant to buy the more efficient 2nd generation CDMA
technology. This helps explain why the $20 billion market for U.S. exports of
telecommunications equipment, which had been growing by 15-20% annually,
is down by 10% this year. U.S. manufacturers will suffer even more as the
EU's 3rd generation GSM standard comes on-line. U.S. firms would be
crippled if nations outside of Europe are also forced to use the EU's standard.
Analysts estimate as many as 1 billion mobile communications users worldwide
early in the next century, more than triple the current number. Why does the
EU want to prevent competition in this fast growing market.
The third problem is that the European standard is simply not the most efficient
one. Even the current generation of CDMA networks have proven to be more
efficient in high density areas like Hong Kong, Korea and Japan. GSM
networks, by contrast, have become saturated quickly and had to be replaced
in Australia. As 3rd generation systems come on-line, the efficiency gap will
widen. A 3G system based on CDMA technology would operate at speeds of
1.5 million bits per second or more, and thus facilitate the new generation of
hand held computers and Internet phones (gadgets which are mostly produced
by Qualcomm, the inventor of CDMA). 3G systems based on GMS
technology would operate at much lower speeds. In tests already conducted on
various 3G systems, the Chinese found that the proposed American CDMA
standard would be more efficient.
Due in part to its less efficient technology, Europe has lagged behind the U.S.
in crucial high-technology indicators like personal computer use, Internet
access and investment in information technology. When Europe adopts the
new, 3G standard, this gap will also widen. It would be an even bigger tragedy
to use the leverage of the EU market and its influence in the ITU to foist a
less-efficient technology on the developing world. Economic development in
struggling countries like Russia, China, Brazil, Pakistan, Mexico and India is
increasingly tied to their ability to overcome a severe telecommunications gap.
To combat this problem, most have already decided to use wireless networks,
which can be deployed more quickly and less expensively than wireline
systems. As we move into an Internet economy, the ability of 3G systems to
move data and enhance user access only increases the importance of deploying
the best wireless technology as part of any economic growth strategy in the
developing world.
U.S. trade officials led by Trade Representative Charlene Barshefsky have been
pleading with the EU to let the marketplace decide this crucial standards issue,
but with little success. As the Europeans implement their new law and the
battle moves to the ITU, it is worth taking a principled stand in favor of
market-based standards, fairness to the developing world, upholding WTO
rules and supporting innovative American manufacturers. There is much more
at stake in this dispute than bananas.
--From The Wall Street Journal Europe
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