A WTO case stays in the background as Telmex gradually opens its network to U.S. competitors.

Not long ago it looked like Mexico and the United States were headed for a showdown over telecommunications.

Citing a list of obstructive sector practices, in April the U.S. Trade Representative's Office said Mexico had better shape up by June 1 or the U.S. "would decide what actions to take, including moving the WTO case forward."

That case had been put on hold by some encouraging moves to increase competition in the Mexican telecommunications market, but it was clear that the USTR was not satisfied.

Telmex, the former telephone monopoly that still holds all the aces in the Mexican telecommunications game, fired back with a far less subtle response. Referring to a deal cut with competitors over charges for carrying long-distance calls, Telmex Director of New Technologies Arturo Elias Ayub said his company had complied with all requirements and that "now nothing is left to discuss."

On top of that, he said the U.S. market, not Mexico's, was closed to competition, citing the difficulty that Telmex USA has had in gaining a foothold there.

Since those comments, the USTR's June deadline has come and gone yet all remains quiet on the telecom front, especially after Telmex ceded some ground on settlement rates--the amount it charges U.S. carriers to complete an international call.

There are a couple of reasons why the WTO case may be on hold for now. First, whereas the case was launched last year during the outgoing administrations of former presidents Bill Clinton and Ernesto Zedillo, we are now m the era of good feelings between the respective leaders of the United States and Mexico. On a number of policy issues, Fox and Bush are working together to push closer integration through their respective Congresses. Since Fox came to power last December, Telmex has knuckled to pressure and made two major concessions to U.S. competitors. It wouldn't be seemly for Bush's USTR to kick up a fuss now.

Especially not since Mexican telecommunications regulations are up for an overhaul in this session of Congress. Possible outcomes, according to Chamber of Deputies communications committee chairman Alonso Ulloa, are autonomy for telecom regulator Cofetel, allowing 100% foreign ownership of telecom companies, regulation of Telmex, and the setting of settlement rates.

Not coincidentally, these issues go straight to the heart of much of the USTR complaint.

Taking them one by one, the issues are:

* Cofetal

Telmex repeatedly has used the courts to run circles around the telecommunications regulatory agency, filing over 30 injunctions that have stalled all attempts to force the former monopoly to cede any advantage to the competition. Anything that could be done to give the agency teeth would be welcome to U.S. telecom companies operating in Mexico.

* Regulation of Telmex

Although "dominant carrier" rules have been issued, the USTR is unimpressed with their weak enforcement by Cofetel. As the holder of the nation's telecommunications infrastructure, the company is required under WTO regulations to allow competitors equal access to the network. According to the USTR, Telmex has withheld critical technical information that would allow competitors to use its network, and has failed to offer them non-discriminatory service.

* Settlement rates

The USTR figures the cost of carrying an international call into Mexico to be four U.S. cents a minute, whereas Telmex is charging 15.5 cents as of May. Although Telmex has announced it will drop the amount it charges to 10 cents by 2003--way down from the 37.5 cents it was asking for in 1998--the USTR is asking for the charges to be cost-oriented as is obligated by WTO regulations.

* Foreign ownership

Currently, AT&T and WorldCom hold slightly less than 50% of their Mexican subsidiaries, as current law holds land-line communications (but not wireless, interestingly) to be of vital national interest that must be in majority Mexican hands. Although not directly part of the USTR complaint, being allowed to hold controlling stakes in Mexican companies would surely please U.S. carriers. Congress' hand has been somewhat forced in this issue, as Citigroup's takeover of BanamexAccival gave it a 55% stake in Avantel. With the other 45% in the hands of U.S. Worldcom, Inc., either the foriegn ownership restriction will have to go or Citigroup will be forced to give up control of Avantel. It's too soon to tell how legislators will handle these issues, which may simply be overlooked in the battle over fiscal reform during this session of Congress. But since Telmex has gradually given in to USTR demands, we can hope that the companies involved can get down to the business of connecting phone calls rather than coming to blows in court.

Josh Tuynman is a Mexico City-based freelance techonology writer.