On the border

U.S. takes dispute with Mexico to the WTO Frustrated by the difficulties that U.S. carriers face in Mexico, U.S. trade officials are taking the unprecedented action of conducting a sanctioned World Trade Organization consultation with Mexican representatives, which could lead to the WTO's first formal telecom-related case.

"Basically, it's the first step to taking a case before the WTO," said a spokesman for the U.S. Trade Representative, or USTR, which requested the consultation. "We want to make sure [Mexican government officials] actually do what they've been saying they will do."

Telmex, Mexico's dominant carrier that serves 98% of the country's landline customers, has long employed anti-competitive policies, which violate stipulations that Mexico agreed to when it signed the WTO agreement in 1997, according to U.S. carriers.

The U.S. companies - primarily AT&T and WorldCom - cited three key problems: Telmex's high interconnection rates, high termination fees for international long-distance calls and a general lack of cooperation with competitors.

Specifically, Telmex's interconnection rate of 4.6cents per minute is significantly more than other countries, which typically charge 1cents or less, according to the USTR. Telmex's 19cents per minute termination charge for long-distance calls triples the 6cents fees charged in Canada and the U.K.

In addition, the Mexican government failed to discipline Telmex for taking actions to stagnate competition such as denying competitors local lines, refusing to interconnect calls and refusing to pay fees owed to competitors.

"We have informally consulted with the Mexican government on these issues for some time... and have repeatedly been promised decisive action," said U.S. Trade Representative Charlene Barshefsky in a prepared statement announcing the U.S. request for consultation. "However, U.S. carriers continue to face serious barriers to competition in the Mexican market, and the time has come to address these issues in the WTO."

One problem is that Cofetel - Mexico's equivalent to the FCC - recently had its power undermined by a court that ruled the regulator did not have the authority to impose certain sanctions against Telmex, said Rudy Baca, global strategist for The Precursor Group.

"Telmex is your classic monopoly incumbent - it didn't have to do anything," he said.

By taking the matter to the WTO, U.S. officials hope the embarrassment factor will spur the Mexican government to take action, Baca said.

Similar tactics were used when he worked for the FCC during negotiations with Mexico, which has a reputation of not taking action until facing an imminent deadline, Baca said.

U.S. officials are encouraged by the July election of Mexican President Vicente Fox, who has vowed to open his country's telecom market. To that end, Cofetel is designing rules to improve the regulatory situation - "good first steps," said the USTR spokesman - but U.S. officials are concerned by the absence of a clear timetable to implement any measures.

But the fact that the U.S. is pressing a matter that Mexico is trying to solve internally reflects the power of the AT&T lobby in Washington, said Dataquest analyst Ron Cowles.

"To me, it's an outrage because every-thing's pretty much going to be put in place by the beginning of the year," said Cowles, whose company is working to help develop the Cofetel recommendations to address many of the issues involved in the WTO complaint. "The FCC has already torn apart a Sprint/Telmex deal because of interconnection rates," Cowles said."This is the U.S. trade representatives being pushed by the same crowd. It's the same philosophy the FCC uses."

Mexico's higher interconnection and termination rates are used to fund service to poorer, rural areas of the country - markets that AT&T does not want to serve, said Cowles, who is a former AT&T employee. The WTO complaint is a "self-serving" effort by AT&T, he said.

"If Telmex is smart, they'll say, `OK, I'll lower the rates, but here's what you have to do,'" Cowles said.

A similar scenario was played out this summer when the Japanese govern-ment - majority owner of NTT, Japan's dominant telco - lowered interconnection rates on the eve of the G8 economic summit in Okinawa, Japan, Cowles said.

A year from now, it'll be just as tough to compete in Japan; [NTT] will have the same dominance of the market."

Meanwhile, the fact that U.S. officials will complain about Mexico not opening its telecom market may have a hollow ring with the WTO - an organization with members voicing concern about pending U.S. legislation that effectively would block foreign government-owned companies from entering the U.S. market.

"If I was the advocate for [Mexico], I would put that as my first, middle and final argument," Baca said. "It may not have much legal basis, but it might win them some points."