October 2002

United States

International Trade Commission

USITC Publication 3562
PREFACE

The Industry Trade and Technology Review (ITTR) is a quarterly staff publication of the

Office of Industries, U.S. International Trade Commission. The opinions and conclusions

contained in this report are those of the authors and are not the views of the Commission as

a whole or of any individual Commissioner. The report is intended to provide analysis of

important issues and insights into the global position of U.S. industries, the technological

competitiveness of the United States, and implications of trade and policy developments.

The information and analysis in this series are for the purpose of this report only. Nothing

in this report should be construed to indicate how the Commission would find in an

investigation conducted under any statutory authority.

Inquiries or comments on items in this report may be made directly to the author, or to:

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Industry Trade and Technology Review

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Quarterly Review Staff

Larry Brookhart

Karl Tsuji

assisted by

Zema Tucker

Sharon Greenfield

Contributing Authors

Laura S. Bloodgood

Michael Nunes

Robert A. Rogowsky

Director of Operations

Vern Simpson

Director of Industries
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INDUSTRY TRADE AND

TECHNOLOGY REVIEW (ITTR)
OCTOBER 2002

Industry Trade and Technology Review Index of Articles

i

Listing of Published Articles

(September 1998 - October 2002)

September 1998

Internet advertising

Progress in recognizing and regulating global professional service providers

Deregulation fosters globalization of the electric power industry

December 1998

Impediments to competitiveness in Russia’s minerals and metals sector

Nonstore retailing: Alternative retailers attracting customers

Apparel sourcing strategies for competing in the U.S. market

March 1999

Korea’s foreign exchange crisis and its implications for U.S.-Korean trade

Advanced structural ceramics: Vast potential has yet to be realized

June 1999

Energy services: Recent trends and future prospects

Market trends affecting the U.S. environmental services sector

Health care services: Strong fundamentals and innovations foreshadow growth 

in U.S. exports and foreign direct investment

October 1999

Outsourcing by the pharmaceutical industry provides opportunities for fine

chemical producers worldwide 

Thailand’s financial crisis and progress towards recovery—Implications for

U.S. trade

December 1999

Air transport services: International regulation and future prospects for

liberalization

Renewed services trade negotiations in the WTO

March 2000

Machine vision: Vital technology for manufacturing industries

Agriculture in the WTO: The Seattle Ministerial and beyond

July 2000

Express services: Issues for negotiation in the World Trade Organization

Production-sharing update: Developments in 1999

Apparel market: New U.S. legislation places CBERA countries on a more equal

competitive basis with Mexico

October 2000

WTO agricultural trade negotiations: An update

Steel sector explores E-Commerce although wary of quick transition

Mexico’s emergence as a global automotive production center drives 

trade and investment
OCTOBER 2002

Index of Articles Industry Trade and Technology Review

ii

Listing of Published Articles—Continued

January 2001

U.S. metal mining: Recent trends and uncertainty discourage domestic

exploration and investment

Factors affecting the competitive position of the Indian software industry

Manufacturing strategies of the North American major household

appliance industry

March 2001

Apparel: Andean countries seek parity with Caribbean Basin countries

to remain competitive in the U.S. market

Chemical trade by the Central European countries: Difficulties of sector

 transition

Commercialization of hybrid automobiles: Prospective demand for light metals

July 2001

Trends in China’s steel consumption

Production-sharing update: Developments in 2000

October 2001

E-commerce and nonferrous metals: Despite potential, adoption

has been slow

Foreign direct investment in infrastructure services in OECD countries

December 2001

Evidence of trade, income, and employment effects of NAFTA

U.S. primary aluminum: Power costs and market conditions could

cause long-term restructuring

March 2002

Dyeing and finishing of apparel fabrics

WTO agricultural trade negotiations: A second update

Aluminum metal matrix composites gaining greater market acceptance 

July 2002

U.S. telecommunication services: Industry and trade outlook

Mexico versus China: Factors affecting export and investment competition

Production-sharing update: Developments in 2001

October 2002

International trade in commercial equipment leasing services

International telecommunication markets: Accounting rate reform
OCTOBER 2002

Industry Trade and Technology Review Contents

iii

CONTENTS

Page

International trade in commercial equipment leasing

services .................................................................. 1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Categories of leases ................................................... 2

Types of equipment leasing companies .................................... 3

The U.S. leasing market ................................................... 5

U.S. market data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

U.S. cross-border trade and affiliate sales data ............................... 7

The global equipment leasing market ......................................... 9

Global and regional trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The UNIDROIT Convention on international financial leasing . . . . . . . . . . . . . . . . . 12

Foreign sales corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

International telecommunication markets: Accounting rate

reform 19

An overview of the accounting rate system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Regulatory reform and competition in global telecommunication service markets . . . . . . 20

The dissolution of the accounting rate system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

The U.S. experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Alternatives to the accounting rate system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

International simple resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Internet protocol telephony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Efforts to encourage accounting rate reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Actions by the Federal Communications Commission . . . . . . . . . . . . . . . . . . . . . . . . 26

Actions by the International Telecommunications Union . . . . . . . . . . . . . . . . . . . . . . 26

Potential impact of accounting rate reform: Developing countries’ perspective . . . . . . . . 27

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
OCTOBER 2002

Contents Industry Trade and Technology Review

iv

CONTENTS—Continued

Page

Appendix A: Key performance indicators of selected

industries and regions

A-1

Steel:

Figure A-1 Increased shipments and higher prices help reduce losses for integrated

producers while sales and profits trend upward for minimills during second 

 quarter 2002; specialty producers realized a small profit on flat sales . . . . . . . . . . A-2

Table A-1 Semifinished imports increase sharply during second quarter 2002

compared with second quarter 2001, and during first 6 months of 2002

compared to first 6 months of 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

Table A-2 Service center: Second quarter 2002 shipments hold steady

 compared with second quarter 2001 as inventories decline . . . . . . . . . . . . . . . . . . A-3

Figure A-2 Steel mill products, all grades: Domestic capacity utilization 

continues to increase as import penetration drops . . . . . . . . . . . . . . . . . . . . . . . A-3

Automobiles:

Table A-3 U.S. sales of new automobiles, domestic and imported, and

share of U.S. market accounted for by sales of total imports and Japanese

imports, by specified periods, January 2001-June 2002 . . . . . . . . . . . . . . . . . . . . . A-4

Figure A-3 U.S. sales of new passenger automobiles increased in the second

quarter 2002; sales of domestic autos as a percentage of total U.S. sales gain 

significantly compared to first quarter 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4

Unwrought aluminum:

Figure A-4 Despite little change in price and trade indicators in second quarter

 2002, concerns remain over medium-term prospects due to slower than

anticipated recovery of the global economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5

Table A-4 Inventories in LME warehouses increased to 10-year highs in

second quarter 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5

Flat glass:

Figure A-5 Japanese imports decline slows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6

Services:

Figure A-6 Balance on U.S. service trade accounts, by quarters, 2001-2002 . . . . . . A-7

Figure A-7 Surpluses on cross-border U.S. services transactions with

selected trading partners, by quarter, 2000-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . A-7

North American trade:

North American trade highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-8

Table A-5 North American trade, 1997-2001, January-June 2001, and

January-June 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 1 With assistance from Caesar Layton. The views expressed in this article are the author’s. 

They are not the views of the U.S. International Trade Commission (USITC) as a whole or of any

individual Commissioner.

 2

 Various types of leased machinery such as nuclear reactors, electrical turbines, or oil rigs are

virtually “immovable” once they begin operating, but because they are machinery equipment and

not real estate, these objects are included within equipment leases, in a subcategory known as the

leasing of “integral” equipment, or “equipment that cannot be moved without significant cost.”

Unless otherwise noted, the leasing industry statistics discussed in this article comprise

commercial equipment leasing services, and exclude real estate leases and lease contracts

involving individual consumers. Real estate leasing pertains to the leasing of property that is

defined as immovable, such as buildings, houses, office space, warehouses, and farmland. 

Andrew Murphy, “Flexible Friend: Synthetic Leases and Project Financing,” Asset Finance

International, Sept. 1999, p. 34; and Chris Boobyer, Leasing Finance, 3d

 ed. (East Rutherford,

NJ: Euromoney-World Publications, 1997), p. 20.

1

International Trade in Commercial

Equipment Leasing Services

Laura S. Bloodgood1

lbloodgood@usitc.gov

(202) 708-4726

The cross-border commercial equipment leasing industry is founded in part

on the ability of both lessors and lessees to benefit from differences in

international tax regimes, which often make it more advantageous for firms

that acquire commercial equipment to lease new assets rather than to

purchase them. Since the passage of the 1984 Tax Reform Act, many crossborder leasing companies have made use of a U.S. tax entity called a

foreign sales corporation (FSC) to lower their U.S. tax obligations on

exports of leased equipment. A recent decision by the World Trade

Organization (WTO) has determined the use of FSCs to be inconsistent with

U.S. obligations under international trade agreements. As a result, industry

representatives expect a decline in demand for cross-border leasing

services originating in the United States. This article examines the current

state of the global market for cross-border equipment leasing services by

discussing the legal and financial framework of the industry, recent changes

in global tax laws related to commercial equipment leasing, the

implications of the WTO decision on FSCs, and the outlook for crossborder equipment leasing. 

Overview

Commercial equipment leases pertain to movable equipment such as industrial machinery;

computers; automobiles, aircraft, ships, and other transportation equipment; and

telecommunication, medical, computer, construction, electric power, and agricultural

equipment.2

 The legal basis of the leasing industry is on the separation between the legal

owner (the lessor) and the day-to-day user (the lessee) of an asset. As a general matter, a

lease grants to the lessee all rights and obligations of possession, but the lessor retains legal

title to the equipment. Consequently, under U.S. and many other national tax laws, the lessor
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 3 However, large leases are included as explanatory footnotes to the balance sheet in company

annual reports.

 4

 Boobyer, Leasing Finance, pp. 185-187.

2

often retains the right to deduct the depreciation on the leased asset as a business expense,

thereby reducing its tax burden. This may be particularly desirable where the lessee has a

taxable income against which to deduct depreciation. Leasing permits a lessee to gain the

use of equipment for a limited time period, often at a lower cost than would be required to

purchase the equipment outright, and may eliminate certain costs relating to disposal of an

asset. Hence, leasing can be a particularly valuable strategy for businesses with limited

access to capital. Further, payments for leased equipment are generally not recorded in a

company’s annual financial accounts in the same way as money borrowed from banks. The

latter are considered debts for accounting purposes, whereas the former are considered

regularly incurred rental payments. Thus, leasing is often an off-balance-sheet form of

financing.3

Categories of Leases

In the United States, there are four principal categories of equipment leases. The two most

common are operating leases and capital (or finance) leases (table 1). Under the terms of the

former, lessors retain ownership rights and grant exclusive user rights to lessees for a

specified term. The lessor initially purchases the equipment and retakes possession at the end

of the lease term. Operating leases are thus considered “true leases,” as defined by U.S. tax

authorities. In the United States, the lessor can deduct from taxable income the depreciation

on the equipment over the term of the lease. The lessee can deduct rental payments from

taxable income as a business expense, and avoid incurring debt or tying up working capital

for the initial purchase of equipment, thus minimizing balance sheet debt.4

Table 1

Categories of commercial equipment (operating) leases

Category Description

Operating lease A lease which covers an asset for a shorter period of time than its useful life. The lessor thus

assumes a greater risk but retains a greater residual value in the asset, and may also provide

services such as maintenance and insurance for the leased asset. A significant portion of the

lessor’s profit comes from disposal of the asset at the end of the lease term.

Capital (finance)

lease

A lease in which the lessor retains title to an asset, but the lessee retains control over the

asset for substantially all of its useful life. The lease payments cover most or all of the

lessor’s capital outlay. The lessee is responsible for maintenance, insurance, and taxes on

the leased asset.

Leveraged lease A lease in which the lessor finances a substantial part of the cost of the leased asset through

one or more investors. In case of nonpayment by the lessor, the investor has legal recourse

against the leased asset rather than the lessor.

Synthetic lease A lease which allows the lessee the benefits of ownership of a leased asset for tax purposes,

while maintaining “off-balance-sheet” financing for accounting purposes.

Source: Chris Boobyer, Leasing Finance, 3d

 ed. (East Rutherford, NJ: Euromoney-World Publications, 1997); and

Tim Lintott, “Synthetic Leasing,” in World Leasing Yearbook 2002 (Colchester, Essex, United Kingdom: Euromoney

Institutional Investor PLC, 2002), pp. 22-25.
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 5 Ibid.

 6 World Leasing Yearbook 2002 (Colchester, Essex, United Kingdom: Euromoney

Publications, 2002) p. 30.

 7

 H. Franklin Bloomer, Jr., “Cross-Border Equipment Leasing,” presented at American Bar

Association National Institute conference, “Negotiating and Structuring International Commercial

Transactions,” June 10-11, 1999, Washington, DC, found at Internet address

http://www.morganlewis.com/spc71399.htm, retrieved Oct. 15, 2002.

 8

 Since the collapse of Enron, which was blamed in part on problems related to off-balancesheet accounting, some companies have hesitated to make use of synthetic leases, although others

continue to find the tax advantages worthwhile. See “‘Synthetic-Lease’ Arrangement Thrives in

U.S. Despite Scrutiny,” Asian Wall Street Journal, Feb. 22, 2002, found at Internet address

http://bus.colorado.edu/faculty/Buchman/, retrieved Oct. 15, 2002.

 9

 Andrew Murphy and Ian Cuillerier, “Flexible Friend: U.S. Synthetic Leases,” Asset Finance

International, Sept. 2001, found at Internet address http://proquest.umi.com/, retrieved Sept. 17,

2002.

 10 Ibid.

 11 “Monitor 100,” Monitor Leasing and Financial Services, vol. 29, No. 6 (June 2002).

3

Under the terms of the capital lease, the lessee assumes the risks and benefits inherent in

ownership of the equipment, but not the actual title. The lessee is responsible for

maintenance, taxes, and insurance for the leased equipment and may take formal title to the

equipment at the end of the lease if a buy option is available. In many cases, the lessee may

thus deduct equipment depreciation and interest payments for the lease from taxable income,

but may not deduct rental payments as a business expense. Lessors profit from the interest

payments accrued from the financing portion of the lease.5

 The majority of all leasing

contracts, both in the United States and abroad, are structured as capital leases, although the

value of operating leases has grown in recent years.6

 Leveraged leases are a specialized type

of capital lease in which the lessor finances a large part of its investment through one or

more outside investors, which can make a claim against the leased asset in the case of

nonpayment by the lessee.7

Although operating and capital leases predominate, a new lease structure that recently has

been growing in popularity due to changing tax laws is the “synthetic lease.”8

 These leases

are similar to operating leases in that the lessor owns the equipment whereas the lessee

benefits from off-balance-sheet accounting treatment. However, they differ in that the lessee

is entitled to tax deductions for both equipment depreciation and certain interest payments

related to its financing costs.9

 The lessee has complete control over the equipment being

financed and may purchase the equipment after the lease term has expired. Lessors benefit

from interest payments they collect from the lessee over the life of the lease. Synthetic

leases have been used in real estate for many years, but since 1997 have been increasingly

used to finance equipment such as ships, railroad rolling stock, and especially power

generators.10

Types of Equipment Leasing Companies

The leasing services industry primarily consists of four types of lessors: bank affiliates,

industrial affiliates, captive lessors, and independent firms. In 2001, bank affiliates held the

largest share of leasing assets in the United States with 32 percent of the market, followed

by industrial affiliates with 27 percent and captive firms with 23 percent (table 2).11 
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 12 Ibid.

 13 In July 2002, General Electric (GE) reorganized GE Capital, its financial services business,

into four separate divisions of the company: GE Commercial Finance, GE Insurance, GE

Consumer Finance, and GE Equipment Management. The bulk of GE Capital’s leasing assets will

become part of GE Commercial Finance, which will control the aviation services, commercial

equipment financing, commercial finance, and structured finance functions. “GE Announces

Reorganization of Financial Services,” company press release, July 26, 2002, found at Internet

address http://www.ge.com/company/breakingnews/news_release.htm, retrieved Sept. 10, 2002.

4

Table 2

U.S. equipment leasing companies, by type, 2001

Type of company

Number of

companies

Share of

top 100

Total

 net assets

Asset growth,

2000-2001

Percent Billion dollars Percent

Bank affiliates . . . . . . . . . . . . . . . . . . . . . . . 40 31.5 152.1 8.4

Industrial affiliates . . . . . . . . . . . . . . . . . . . . 7 26.8 129.3 17.3

Captive lessors . . . . . . . . . . . . . . . . . . . . . . 22 22.5 108.7 -0.1

Independent firms . . . . . . . . . . . . . . . . . . . . 19 11.4 55.0 -9.3

Foreign affiliates . . . . . . . . . . . . . . . . . . . . . 10 2.8 13.4 11.5

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5.0 24.0 13.1

 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100.0 482.5 7.2

Note.–Calculations based on unrounded data.

Source: Monitor Leasing and Financial Services, Monitor 100, vol. 29, No. 6 (June 2002).

Bank lessors are commercial banks that offer both direct financing of equipment purchases

and financial leasing services. During the early years of the equipment leasing industry,

banks tended to view leasing as competing with their primary commercial lending business,

so were not closely involved in the industry. More recently, however, as equipment buyers

have increasingly sought to reduce their tax liabilities, commercial banks have established

leasing subsidiaries to benefit from this growing market. This shift in strategy has resulted

in rapid growth for the bank lessor segment of the industry. In 2000, leasing assets of

commercial banks grew by 8.4 percent over the previous year, in part due to the creation of

new global leasing products and to the increasing expertise of banks in structuring and

marketing complicated leasing contracts.12 CitiCapital, Banc of America Leasing & Capital,

Fleet Capital, Wachovia Leasing, and U.S. Bancorp Equipment Finance--all subsidiaries of

leading U.S. commercial banks--are the largest U.S. bank lessors. 

Industrial affiliates are leasing subsidiaries of larger firms, which do not primarily

concentrate on financing their parent company’s products. This category includes seven

firms, most notably GE Capital, by far the world’s largest leasing firm. In 2001, GE Capital

reported net assets of $110.2 billion, accounting for 23 percent of the net assets of the entire

Monitor 100 list of top leasing companies.13 Net assets of the industrial affiliate segment of

the leasing industry rose by 17.3 percent in 2001, primarily on the strength of GE Capital’s

19.3-percent increase. Other industrial affiliates in the Top 100 listing included Philip

Morris Capital, with net assets of $8.6 billion; Verizon Capital, with $4.0 billion; and

Textron Financial, with $3.8 billion.
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 14 Captive lessors usually hold 50 percent of their assets in products that their parent company

produces. 

 15 “Monitor 100,” Monitor Leasing and Financial Services.

 16 New business volume refers to the dollar amount of new leasing contracts originating in a

given year.

 17 “Monitor 100,” Monitor Leasing and Financial Services.

 18 Frederick Wolfert, “United States: Market Review,” World Leasing Yearbook 2002

(Colchester, Essex, United Kingdom: Euromoney Publications, 2002), p. 447.

5

Captive lessors, also known as vendors, are leasing subsidiaries of equipment manufacturers

that finance sales of their parent company’s products.14 IBM Global Financing, Caterpillar

Financial, John Deere Credit, and Boeing Capital are all large, U.S.-based captive lessors.

These companies are prominent in the leasing market because they tend to represent global

firms that offer flexible, competitive leases for their products and services.

Independent lessors have no parent company with majority interest. This is a highly diverse

group, ranging from financial service firms to leasing specialists to insurance companies,

which offer leases for a wide range of equipment. Table 3 lists the five largest independent

lessors based in the United States, ranked by net leasing assets.

Table 3

Five largest independent equipment lessors in the United States, 2001

Company

2001 net 

leasing assets Primary equipment leased

Overall

rank

Billion dollars

CIT . . . . . . . . . . . . . . . . . . . . . 30.2 Manufacturing, construction, commercial aircraft .... 3

GATX Financial . . . . . . . . . . . . 10.6 Commercial aircraft, information technology,

railroad rolling stock . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ryder System . . . . . . . . . . . . . 4.2 Truck/trailer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

DVI Inc. . . . . . . . . . . . . . . . . . . 2.0 Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Financial Federal . . . . . . . . . . 1.4 Construction, truck/trailer, machine tools . . . . . . . . . . 50

Source: Monitor Leasing and Financial Services, Monitor 100, vol. 29, No. 6 (June 2002).

The U.S. Leasing Market

U.S. Market Data

The top 100 U.S. leasing companies accounted for $482.5 billion in net leasing assets in

2001 (table 4), an increase of 0.6 percent over the previous year, following average annual

increases of 16.7 percent during 1995-2000. The slowdown corresponded with the broader

slowing of the U.S. economy in 2001, after the robust economic growth during the latter half

of the 1990s, which reportedly led many firms to cancel or postpone plans for investment

in new equipment.15 New business volume16 totaled $198.9 billion in 2001. The top 10 U.S.

firms accounted for $299.4 billion, or 62 percent of all leasing assets held in the United

States.17 Transportation equipment accounts for the largest share of leased assets in the

United States (35 percent), followed by computer hardware and software, construction

equipment, and industrial and manufacturing equipment (figure 1).18 The economic

slowdown in the United States during 2000-2001 severely affected the U.S. leasing industry,
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

6

Figure 1

U.S. leasing volume, by equipment type, 2000

Table 4

Top ten U.S. equipment lessors , 2001

Firm Type of lessor Net assets

New business

volume

Asset growth

rate 

(2000-2001)

 ————Billion dollars———— Percent

GE Capital . . . . . . . . . . . . . . . . . . . . . . . Industrial affiliate 110.2 55.0 19.3

CitiCapital . . . . . . . . . . . . . . . . . . . . . . . . Bank affiliate 41.4 15.9 7.6

CIT Group (Tyco) .................. Industrial affiliate 30.2 15.2 -18.9

IBM Global Financing . . . . . . . . . . . . . . Captive 26.4 16.5 -8.0

International Lease Finance . . . . . . . . . . Other 21.1 4.1 17.4

Fleet Capital . . . . . . . . . . . . . . . . . . . . . . Bank affiliate 15.9 5.3 11.3

Caterpillar Financial . . . . . . . . . . . . . . . . Captive 15.3 6.8 -4.6

Bank of America . . . . . . . . . . . . . . . . . . . Bank affiliate 13.9 2.7 -4.6

Wachovia Leasing . . . . . . . . . . . . . . . . . Bank affiliate 13.7 1.9 25.0

John Deere Credit . . . . . . . . . . . . . . . . . . Captive 11.3 8.3 4.3

 Total (top 10) . . . . . . . . . . . . . . . . . . . (1

) 299.4 131.7 7.0

 Total (top 100) .................. (1

) 482.5 198.9 27.2

 1

 Not applicable.

 2

 Average growth.

Source: Monitor 100, Monitor Leasing and Financial Services, vol. 29, No. 6 (June 2002).
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 19 In the United States, approximately 30 percent of new business investment in equipment is

financed through leasing. World Leasing Yearbook 2002, p. 446.

 20 “Monitor 100,” Monitor Leasing and Financial Services, June 2001, pp. 4-6; and “Monitor

100,” Monitor Leasing and Financial Services, June 2002, p. 2.

 21 See the later discussion in this article regarding the UNIDROIT Convention on International

Financial Leasing.

 22 See David Porter, “European Market Soars, Lifting World Volume to Record High,” in

World Leasing Yearbook 2000, pp. 2-8.

 23 Official trade data on cross-border leasing services only cover operational leases. The data

excludes capital, or finance leases, which are defined as leases under which the lessee has the

option of taking title of the leased asset at the end of the lease term. Financial flows related to

cross-border capital leases are recorded separately from the services trade data, as part of the

Bureau of Economic Analysis’ International Transaction Accounts, except for fees that a firm

collects for arranging or entering into a financial lease contract (which are distinct from the actual

lease payments to the lessor). These fees are included within the larger category of cross-border

trade in financial services, although a breakout of such fees related specifically to leasing are not

available.

 24 U.S. Department of Commerce (USDOC), Bureau of Economic Analyisis (BEA), Survey of

Current Business, Oct. 2000, found at Internet address http://www.bea.gov, retrieved July 11,

2002.

7

as the decline in new business investment reduced demand for leasing services.19 In

particular, economic downturns and overcapacity in the transportation, telecommunications,

computer, and construction industries weakened important markets for U.S. lessors. As a

consequence, 9 major U.S. leasing companies declared bankruptcy in 2000, 13 announced

that they were for sale, and an additional 46 were acquired by competitors. Another 17

leasing firms exited the industry in 2001, either through acquisition or bankruptcy.20

U.S. Cross-Border Trade and Affiliate Sales Data

Cross-border leasing occurs when a lessor and lessee are based in different countries and

they structure a lease that transfers equipment across international borders. The contract of

sale, which occurs before the lease begins, falls under the national laws of the lessor’s

country, whereas the leasing contract falls under the jurisdiction of both countries. This

situation can create complex international transactions due to wide variations in the tax,

accounting, and legal frameworks of the contracting countries. Recent international attempts

to standardize the leasing process have met with little success.21 In general, bank lessors tend

to expand abroad to follow their domestic clients into foreign markets and captive lessors

tend to expand abroad to finance foreign sales of their products. Due to the legal costs

involved in structuring complicated leasing contracts, lessees often prefer to establish global

equipment contracts with a single lessor rather than to establish new leasing relationships in

each market.22

The United States has maintained a trade surplus in cross-border leasing for the past 15 years

(figure 2).23 Canada and the European Union (EU) are the primary foreign markets for U.S.

lessors. U.S. exports of leasing services totaled $2.7 billion in 2000, whereas U.S. lessees

imported $168 million of leasing services, resulting in a trade surplus of $2.5 billion. By

2000, U.S. imports of leasing services have declined 59 percent from a 1995 high of $407

million.24 Overall, U.S. leasing exports increased at an average annual rate of 13.0 percent

during 1990-2000. However, industry representatives expect U.S. exports of leasing
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 25 Industry representatives, telephone interviews with USITC staff, Oct. 19-24, 2002. In

addition, tax benefits that relate to cross-border operational leasing are facing restriction or

elimination based upon the finding by a Dispute Settlement Panel of the World Trade

Organization that the use of foreign sales corporations is inconsistent with U.S. obligations under

international trade agreements. This finding, and its reported potential implications for the crossborder leasing industry, are discussed under “Foreign Sales Corporations” later in this article. 

 26 Official data on affiliate sales and purchases of leasing services include both capital and

operating leases, but excludes commercial bank lessors (both bank affiliates and bank parents), as

commercial banks (or depository institutions) are not required to report affiliate trade data to

BEA.

 27 Total sales by affiliates of U.S. firms abroad was suppressed by the BEA to avoid disclosing

financial transactions related to particular companies.

 28 USDOC, BEA, Survey of Current Business, Nov. 2001, pp. 93-95.

8

Figure 2

U.S. operational leasing services: Exports, imports, and trade balance, 1990-

2000

services to decline in the near future, as the rising harmonization of tax laws, civil laws, and

accounting systems decrease the tax benefits of cross-border leasing.25

International lessors operate through foreign affiliates as well, the sales of which are reported

separately from cross-border trade statistics.26 In 1999, foreign affiliates of U.S. leasing

firms generated sales of services (exports) valued at $2.6 billion in the United Kingdom

(UK) and $1.2 billion in Canada.27 By comparison, U.S. affiliates of foreign firms recorded

$3.6 billion in total sales (imports) of equipment leasing services in the United States, of

which $1.3 billion were from UK-based firms. This represented a 38.5-percent increase over

the 1998 level, when foreign-owned affiliates recorded total sales of $2.6 billion.28
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 29 London Financial Group, “American Leasing Powers Ahead in 2000,” World Leasing

Yearbook 2002 (Colchester, Essex, United Kingdom: Euromoney Publications, 2000), p. 5.

9

Figure 3

Global equipment-leasing volume, 1995-2000

The Global Equipment Leasing Market

Global and Regional Trends

Global equipment leasing volume increased at an average annual rate of 4.1 percent during

1995-2000 (latest available), and increased steadily for all years except 1997, when both

Asian and European leasing volumes declined sharply (figure 3) during the Asian financial

crisis. The largest lessor region by far is North America, where $272.4 billion in leasing

transactions were concluded in 2000, accounting for 55 percent of the global market,

compared with 41 percent in 1996, shortly before the Asian financial crisis (figure 4).

Leasing volume in North America increased at an average annual rate of 10.0 percent during

1995-2000. In 2000, European leasing firms held 26 percent of the market with $131.0

billion in total leasing volume. The Asian financial crisis resulted in a 24.2-percent decline

in Asian leasing operations from 1996 to 1997, with a further 6.9-percent decline in 1998,

bringing Asia’s total market volume to $74.7 billion in that year. The Asian region had not

recovered much lost ground by 2000, with total leasing volume reaching $78.3 billion, or

16 percent of the global total.29
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 30 Ibid., pp. 1-3.

 31 These data are not available for other leasing countries. World Leasing Yearbook 2002,

p. 288.

 32 World Leasing Yearbook 2000 (Colchester, Essex, United Kingdom: Euromoney

Publications, 2000), p. 36.

10

Figure 4

Equipment leasing volume by region, 1995-2000

The top 10 leasing countries accounted for $445.1 billion or 89 percent of global leasing

activity in 2000, with the top five countries accounting for over 80 percent (figure 5). The

United States, Japan, Germany, the United Kingdom, and France were the largest suppliers

of leasing services in global markets in 2000, despite a 4.0-percent decline in leasing volume

for the United Kingdom from 1999 to 2000. France and Italy recorded strong growth of 9.9

and 19.1 percent, respectively, placing them fifth and sixth in global rankings. Mexico,

Argentina, and Australia recorded the largest declines in leasing volume, of 50.0 percent,

28.2 percent, and 24.7 percent, respectively.30

The annual level of new leasing business, as measured by leasing volume, closely reflects

the propensity of investors to lease new equipment rather than purchase it. Among the top

10 leasing countries, domestic leasing volume as a share of total fixed investment ranged

from a high of 32 percent in the United States to a low of 5 percent in Spain (figure 6).

Although transportation equipment accounts for the largest share of leased equipment in the

United States, computer equipment comprises the largest share of leased equipment (34

percent) in Japan.31 Overall, road transport equipment accounted for nearly 50 percent of

global leased equipment in 1998 (latest available), followed by machinery and industrial

equipment (25.5 percent); computers (12.5 percent); and ships, aircraft, and railway rolling

stock (5.3 percent).32 These shares remained virtually unchanged throughout the 1990s, with

only computers showing substantial growth. Due to rapid changes in computer technology,

many companies still prefer to lease computer systems rather than purchase them. The share
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

11

Figure 5

Shares of global equipment leasing market, 2000

Figure 6

Equipment leasing market penetration, top-ten leasing countries, 2000
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 33 Equipment Leasing Association, “State of the Industry Report 2002,” p. 16.

 34 Andrew Law, “Speak-Easy,” in The Handbook: The International Leasing Directory, Asset

Finance International, 2000/20001, pp. 14-15, 22. 

 35 UNIDROIT, the French-language acronym for the International Institute for the Unification

of Private Law, is an international organization based in Rome, which seeks to promote the

harmonization of national commercial laws, including laws related to financial leasing. As of

2002, UNIDROIT counted 59 member countries, including the United States, Japan, and all of the

members of the EU.

 36 Martin Stanford, “International Financial Leasing: The Status of the UNIDROIT Convention

and an Analysis of its Provisions,” Uniform Commercial Code Law Journal, fall 1999, p. 6.

 37 The following states signed the convention, but have not ratified it: Belgium,

Czechoslovakia, Finland, Ghana, Guinea, Morocco, the Philippines, Tanzania, and the United

States.

 38 Martin Stanford, “The UNIDROIT Convention on International Financial Leasing,” in

World Leasing Yearbook 2002, p. 53.

 39 The complete text of the UNIDROIT Convention on International Financial Leasing

(Ottawa, 1988) is available at Internet address http://www.UNIDROIT.org/english/conventions/

c-leas.htm.

12

of new leases accounted for by aircraft and rolling stock will likely decline in 2001 and

2002, due to difficult economic conditions in those industries.33

The UNIDROIT Convention on International Financial Leasing 

The global effort to change tax structures as they pertain to leasing is principally focused on

increasing transparency within the industry. Industry officials note that transparency

clarifies cross-border leasing agreements and offers information to investors, lessors, and

lessees about potentially profitable niches in the market. Enhancing market transparency

would alleviate concerns that the current global leasing market provides unequal information

by allowing firms from certain countries to exploit leasing opportunities while limiting

opportunities for others.34

The International Institute for the Unification of Private Law (UNIDROIT)35 Convention on

International Financial Leasing was drafted in order to facilitate both increased transparency

and increased cross-border trade in global leasing services,36 and was opened for signature

in 1988. As of May 2002, a total of 18 states had signed the Convention,37 but only 9 states

had ratified it (table 5), with several others expected to ratify soon.38 The UNIDROIT

Universal Uniform Commercial Code for international leasing transactions would clarify and

standardize leasing terminology, contract provisions, time frames for when a lease takes

effect, obligations of lessees and lessors if a contract is breached, and similar commercial

matters. The overall intent of the Convention is to promote international leasing by clarifying

commercial rules. The Convention does not promote specific changes in any country’s tax

treatment of equipment leases.39
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 40 UNIDROIT official, e-mail communication to USITC staff, May 13, 2002.

 41 Klaus Feinen, “The Impact of the Euro.” Leaseurope Statistics, World Leasing Yearbook

2000, p. 10. 

 42 UNIDROIT official, e-mail communication to USITC staff, May 13, 2002.

 43 Article 2A of the Uniform Commercial Code, “Leases;” and James White and Robert

Summers, “Uniform Commercial Code,” Practitioner Treatise Series, 4th ed., vol. 2 (St. Paul,

MN: West Publishing Company, 1995), p. 3.

13

Table 5

States that have ratified the UNIDROIT Convention, 2000

Country Date of accession

World rank in leasing

volume, 1998

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 1991 5

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1993 6

Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 1994 48

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 1996 27

Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1997 47

Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 1997 (1

)

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 1998 25

Belarus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 1998 (1

)

Uzbekistan . . . . . . . . . . . . . . . . . . . . . . . . . . July 2000 (1

)

 1 Not applicable.

Source: International Institute for the Unification of Private Law (UNIDROIT), “1988 UNIDROIT Convention

on International Financial Leasing: Signatures and Ratifications,” found at Internet address

http://www.UNIDROIT.org/, retrieved Oct. 9, 2002.

Several factors have discouraged additional states from becoming parties to the Convention.

Many countries do not have large cross-border leasing markets. Of the nations that have

acceded to the Convention, only France and Italy have domestic leasing industries operating

on a global scale. The fact that most of the signatories have small leasing markets suggests

that they view the Convention as a means of increasing their participation in the global

leasing industry. Anecdotal evidence suggests that lessors in industrialized countries

favorably regard lessees in emerging economies which have acceded to the Convention, as

an assurance that the lessor’s rights will be protected.40 However, industry sources report

that other exporters of leasing services remain skeptical of the Convention, since a share of

the profit from cross-border leasing transactions is derived from the differences in tax laws

between jurisdictions. Hence, if the Convention were to encourage countries to effectively

harmonize their leasing laws and tax provisions, such action might remove some of the

economic incentives that make leasing profitable.41

Even though only a small number of countries have ratified the Convention, it has served as

a model in a number of countries that have since adopted national laws pertaining to the

leasing industry. China, Ghana, Indonesia, Nigeria, Panama, the Russian Federation,

Sweden, Turkey, and the United States have enacted leasing legislation modeled on the

Convention.42 For example, in the United States, the 1985 Uniform Personal Property

Leasing Act, which became Article 2A of the Uniform Commercial Code, was largely

rewritten in 1990 following the framework of the Convention and the subsequent

UNIDROIT Union Personal Property Leasing Act.43 In Panama, the national law regulating
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 44 World Leasing Yearbook 2002, p. 55.

 45 P.L. 98-369, 98 Stat. 494, 26 U.S. Code §1 nt.

 46 According to the Joint Committee on Taxation, “A foreign sales corporation generally is not

subject to U.S. tax on its exempt foreign trade income.” Joint Committee on Taxation, “Overview

of Present-Law Foreign Sales Corporation Rules,” Description of H.R. __ (The “FSC Repeal and

Extraterritorial Income Exclusion Act of 2000") (JCX-87-00), July 27, 2000. See also H. Franklin

Bloomer, Jr., “Cross-Border Equipment Leasing,” presented at American Bar Association

National Institute conference, “Negotiating and Structuring International Commercial

Transactions,” June 10-11, 1999, Washington, DC, found at Internet address

http://www.morganlewis.com/spc71399.htm, retrieved Oct. 15, 2002.

 47 Federico Maria Giuliani, “Notes on DISCs, E-Commerce, and Tax-Sparing Credit – Part I,”

The International Tax Journal, Fall 2001, found at Internet address

http://www.proquest.umi.com/, retrieved May 15, 2002.

 48 “New Rules for Taxing Extraterritorial Income,” The Tax Adviser, vol. 33, No. 5 (May

2002).

 49 Industry representative, telephone interview with USITC staff, Oct. 22, 2002.

 50 WTO Report, “United States: Tax Treatment for Foreign Sales Corporations,”

WT/DS/108/R (99-4118), Oct. 8, 1999, p. 41, found at Internet address http://www.wto.org,

retrieved May 13, 2002; and “New Rules for Taxing Extraterritorial Income,” The Tax Adviser,

vol. 33, No. 5 (May 2002).

 51 Request for the Establishment of a Panel by the European Communities, “United States Tax

Treatment for Foreign Sales Corporations,” WT/DS/108/2 (98-2734), July 9, 1998, found at

Internet address http://www.wto.org/, retrieved Oct. 8, 2002.

14

the leasing industry (Law No. 7 of July 10, 1990) also was extensively influenced by the

UNIDROIT treaty.44

Foreign Sales Corporations

Foreign sales corporations (FSCs) were initially created under the 1984 Tax Reform Act.45

Under the statute, an FSC is a foreign corporation, generally a subsidiary of a U.S. parent,

which is exempt from tax on those portions of its income derived from sales and leases of

goods produced in the United States and exported to foreign countries (box 1).46 The

majority of FSCs are incorporated in the U.S. Virgin Islands, Barbados, or Bermuda.47 The

1984 Tax Reform Act thus enabled U.S. leasing companies to reduce their tax obligations

while encouraging exports of U.S. goods. By leasing equipment to foreign firms through an

FSC, rather than directly from the U.S. parent, leasing companies were able to reduce their

U.S. income taxes owed on foreign profits by an effective rate of 15-30 percent.48 The use

of FSCs rapidly increased during the 1990s, as the understanding of their tax benefits

became more widespread. According to one industry estimate, aircraft leases accounted for

approximately 90 percent of the total value of cross-border leases which utilized the FSC tax

rules.49 The U.S. Treasury estimated that in 1997, FSCs generated total tax benefits for all

U.S. industries of more than $2.0 billion.50

On July 1, 1998, the EU requested that the Dispute Settlement Body of the World Trade

Organization (WTO) establish a panel to examine U.S. tax treatment of FSCs. According to

the EU, FSCs violate certain provisions of the WTO Agreements on Subsidies and

Countervailing Measures (SCM) and on Agriculture.51 The EU argued that FSCs are

designed to promote U.S. exports through corporate tax reductions that act as export
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

15

Box 1

Foreign sales corporations

In 2000, the Joint Committee on Taxation prepared a report outlining the tax rules applicable to foreign

sales corporations (FSCs). The report explains the differences between the U.S. income and foreign-source

income of FSCs, and the conditions under which foreign-source income is taxable in the United States.

Specifically, the report notes the following:

• “A foreign sales corporation must be located and managed outside the United States, and must

perform certain economic processes outside the United States. A foreign sales corporation is often

owned by a U.S. corporation that produces goods in the United States. The U.S. corporation either

supplies goods to the foreign sales corporation for resale [or lease] abroad or pays the foreign sales

corporation a commission in connection with such sales [or leases].”1

• “A foreign sales corporation generally is not subject to U.S. tax on its exempt foreign trade income.”

[The exempt portion is specified under the foreign sales corporation rules.] “The exempt foreign

trade income of a foreign sales corporation is treated as foreign-source income which is not

effectively connected with the conduct of a trade or business within the United States.”

• “Foreign trade income other than exempt foreign trade income generally is treated as U.S.-source

income effectively connected with the conduct of a trade or business conducted through a permanent

establishment within the United States. Thus, a foreign sales corporation’s income other than

exempt foreign trade income generally is subject to U.S. tax currently and is treated as U.S.-source

income for purposes of the foreign tax credit limitation.”

• “Foreign trade income of a foreign sales corporation is defined as the foreign sales corporation’s

gross income attributable to foreign trading gross receipts. Foreign trading gross receipts generally

are the gross receipts attributable to the following types of transactions: . . . ; the lease or rental of

export property; services related and subsidiary to such a sale or lease of export property; . . . .”

“Investment income and carrying charges are excluded from the definition of foreign trading gross

receipts.”

 1

 Text in brackets added by author.

Source: Joint Committee on Taxation, “Overview of Present-Law Foreign Sales Corporation Rules,”

Description of H.R. __ (The “FSC Repeal and Extraterritorial Income Exclusion Act of 2000") (JCX87-00), July 27, 2000, found at Internet address http://www.useu.be/ISSUES/FSCcommittee.pdf,

retrieved Oct. 30. 2002.
OCTOBER 2002

International Equipment Leasing Industry Trade and Technology Review

 52 “WTO News: 1998 News Item,” Oct. 29, 1998, found at Internet address

http://www.wto.org/english/news_e/news98_e/wdsbsept.htm.

 53 Office of the United States Trade Representative (USTR), “US Disappointed with WTO FSC

Ruling, Vows to Work With EU to Reach Solution,” press release, Feb. 24, 2000, found at

Internet address http://www.ustr.gov/releases/, retrieved Aug. 21, 2001.

 54 Specifically, the WTO panel ruled that the United States, through its use of FSCs, acted

inconsistently with its obligations under Article 3.1(a) of the Agreement on Subsidies and

Countervailing Measures and Articles 3.3 and 8 of the Agreement on Agriculture. WTO Report,

“United States: Tax Treatment for Foreign Sales Corporations,” p. 293.

 55 “New Rules for Taxing Extraterritorial Income,” The Tax Adviser. The replacement

legislation creating the ETI rules contained a transition rule allowing the FSC provisions to

continue to be used for preexisting long-term contracts.

 56 Foreign leasing firms are eligible for the tax exclusion if they waive U.S. treaty benefits and

elect to be treated as a domestic corporation. “FSC Repeal and Extraterritorial Income Exclusion

Act of 2000.” Public Law 106-519. 106th Congress. Pg. 114, STAT 2423 (DOCID:

f:pub1519.106), November 15, 2000.

 57 The ETI regime was also found to violate GATT Article III-4, and, because of the transition

rules, the United States was found to have failed to withdraw the measure. WTO Report, “United

States – Tax Treatment for “Foreign Sales Corporations”: Recourse to Article 21.5 of the DSU by

the European Communities,” WT/DS108/AB/RW, Jan. 14, 2002. See also Office of the United

States Trade Representative, “WTO Upholds Adverse Ruling on Foreign Sales Corporation

(FSC) Tax,” press release, Jan. 14, 2002.

 58 WTO Report, “United States - Tax Treatment for “Foreign Sales Corporations”: Recourse to

Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM

Agreement,” WT/DS108/ARB, Aug. 30, 2002. See also USTR, “WTO Panel Sets Amount of

FSC Sanctions,” press release, Aug. 30, 2002.

 59 “W.T.O. Allows Europe to Impose Record Sanctions Against U.S.,” The New York Times,

Aug. 30, 2002, found at Internet address http://www.nytimes.com/, retrieved Aug. 30, 2002.

16

subsidies.52 The United States contended that FSCs are a WTO-compliant system enacted

as a result of a 1981 agreement concluded under the General Agreement on Tariffs and Trade

(GATT) to address similar complaints about the pre-FSC Domestic International Sales

Corporation (DISC) policy.53

In October 1999, the WTO Dispute Settlement Panel ruled in essence that FSCs created a

subsidy to U.S. firms which was contingent upon export performance, and found that the

FSC tax exemption conflicted with U.S. obligations under its international trade

agreements.54 In response, the U.S. Government replaced the FSC system with an

extraterritorial income (ETI) regime that offered a 15-30 percent tax exclusion from U.S.

taxes for income received from qualifying cross-border equipment leasing transactions.55

The exclusion is available to all cross-border leasing firms, whether they are based in the

United States or in foreign countries.56 In January 2002, the WTO ruled that the ETI regime

also constituted an illegal export subsidy.57 That ruling allowed the EU to proceed with its

request for authority to impose retaliatory duties on U.S. goods. In August 2002, a WTO

arbitration panel determined that the EU is permitted to suspend trade concessions to the

United States in the amount of $4.0 billion, the largest punitive tariff amount ever sought

from the WTO.58 As of September 2002, the EU had not imposed trade sanctions, allegedly

in the hope that the U.S. Government would change its tax laws to conform to WTO rules

without retaliatory measures being enacted.59

According to industry representatives, the most significant problem for the cross-border

leasing industry stemming from the WTO decision is the potential impact on lessors

currently holding existing cross-border leases. The majority of these contracts are long-term
OCTOBER 2002

Industry Trade and Technology Review International Equipment Leasing

 60 Industry representatives, telephone interviews with USITC staff, Oct. 18-24, 2002; and

Coalition of Service Industries, “The Case for Preserving Transitional Rules for FSC and ETI

Leasing Transactions,” press release, Coalition of Service Industries.

 61 Ibid.

 62 Andrew Law, “Is the Party Over?” in The Handbook: The International Leasing Directory,

Asset Finance International, 2000/2001, p. 18.

 63 “Monitor 100,” Monitor Leasing and Financial Services, June 2002, p. 12.

 64 Industry representatives, telephone interviews with USITC staff, Oct. 18-24, 2002.

17

leases of 15-25 years, for big-ticket items such as electric power plants, airplanes, and

railroad rolling stock. The pricing on such contracts, many of which were concluded in the

early and mid-1990s, takes into account the tax benefits of the FSC structure, allowing

lessors to offer advantageous lease rates to lessees. According to industry sources, if the

FSC structure is declared invalid during the life of a lease contract, there is no contingency

for renegotiating the contract terms. Reportedly, lessors could thus be forced to bear the

increased tax costs associated with the demise of the FSC structure throughout the remaining

life of these contracts, a significant expense that industry sources contend would turn such

leasing contracts into money-losing enterprises for U.S. lessors.60 The “American

Competitiveness and Corporate Accountability Act of 2002,” (H.R. 5095) which was

introduced in the U.S. House of Representatives in July 2002, is currently awaiting action

by the House Ways and Means Committee. The bill would repeal the FSC-ETI rules from

the U.S. tax code, but in contrast to the 2000 legislation that created the ETI rules, H.R. 5095

does not contain any provisions to “grandfather” existing FSC lease contracts, or to replace

the FSC-ETI system with a substitute tax system.61

Outlook

The cross-border leasing industry faces several important challenges, including changes in

global tax codes and the WTO rulings regarding FSCs and the ETI tax regime. Tax

treatment has always been one of the primary reasons to lease rather than purchase new

equipment. Industry representatives contend that these WTO rulings have already

contributed to a downturn in the U.S. cross-border leasing industry by creating uncertainty

about the tax treatment of cross-border leasing contracts. The cost and complexity of

arranging cross-border contracts has significantly increased, and the number of new leasing

opportunities has dwindled, as tax rules have been tightened in many countries.62 For

example, new business origination by the U.S. leasing industry recorded its first decline in

2001 (0.6 percent compared to 2000), with a total decrease of $7.0 billion in foreign

business.63 New cross-border leasing business has largely been placed on hold, awaiting the

U.S. Government’s reaction to potential EU trade sanctions. Several industry sources

contend that if the U.S. Congress repeals the FSC tax structure, U.S. lessors will be less able

to compete in the cross-border leasing market and their market share is anticipated to

decline.64#

OCTOBER 2002

Industry Trade and Technology Review Telecommunication Reform

 1 The views expressed in this article are the author’s. They are not the views of the U.S.

International Trade Commission (USITC) as a whole or of any individual Commissioner.

 2

 Headquartered in Geneva, Switzerland, the International Telecommunications Union (ITU) is

an international organization within the United Nations System where governments and the

private sector coordinate global telecommunication networks and services.

 ITU, “Direction of Traffic, 1996,” Trends in International Telephone Tarriffs (Geneva: ITU,

1996), p. 16.

19

International Telecommunication Markets:

Accounting Rate Reform

Michael Nunes1

(202) 205-3462

mnunes@usitc.gov

International telecommunication service markets are undergoing

technological advance and market liberalization that have intensified

competition, increasing the incentive to reform the accounting rate

remuneration mechanism for settling traffic imbalances between

international carriers. Competitive U.S. carriers have expressed growing

dissatisfaction with paying settlement rates that are higher than actual

costs. As a result, in 1997, the U.S. Federal Communications Commission

adopted a “Report and Order” that sets lower benchmarks for international

settlement rates. In addition, the International Telecommunications Union

has established a study group to undertake accounting rate reform.

Although market and remuneration reform may reduce financial flows to

net exporters of telecommunication services (typically foreign carriers),

service providers that initiate new services and become more efficient may

benefit as well. This article provides an overview of the accounting rate

system, examines the emergence of competition in the global

telecommunication services market, analyzes the dissolution of the

accounting rate system, and discusses the potential impact on developing

countries of accounting rates reform.

An Overview of the Accounting Rate System

In the latter half of the nineteenth century European countries devised the international

accounting rate system as a method for dividing revenue between carriers of international

telegraph services. The same system was later adopted by telephone companies for

international telephone services, and its principles were codified within the International

Telecommunication Union.2

 Under the system, telecommunication carriers bilaterally

negotiate accounting rates. Each carrier’s share, called the settlement rate, is usually

equivalent to one-half of the accounting rate. If outbound calling minutes (e.g. imports)

exceed inbound calling minutes (e.g. exports), carriers make bilateral net settlement

payments at the end of each accounting period. Bilateral payments are calculated by

multiplying the settlement rate by net outbound minutes (i.e. outbound minutes minus

inbound minutes). In the U.S. balance of payments, net settlement payments register as

imports, whereas net settlement receipts register as exports.
OCTOBER 2002

Telecommunication Reform Industry Trade and Technology Review

 3 Olivier Boylaud and Giuseppe Nicoletti, Regulation, Market Structure, and Performance in

Telecommunications, Organization for Economic Cooperation and Development (OECD),

Economic Department Working Papers No. 237, Apr. 12, 2000, found at Internet address

http://www.olis.oecd.org/olis/2000doc.nsf/, retrieved Feb. 21, 2001.

 4

 Ibid., p. 5.

 5

 Network digitization is enabled by technologies that convert analog signals into a series of

ones and zeros. This type of signal transmission is economically more efficient than traditional

analog systems.

 6

 Terminal equipment usually refers to telephones and other equipment that reside on the

customer’s premises.

 7

 Switching technologies refer to equipment that route calls by establishing and releasing

connections between two or more circuits.

 8

 OECD, “Refile and Alternative Calling Procedures: Their Impact on Accounting Rates and

Collection Charges,” Committee for Information, Computer, and Communications Policy (Paris:

OECD, 1995), p. 4

 9

 Resale refers to the wholesale purchase of telecommunication lines and then reselling

telecommunication services to customers at retail rates for a profit.

 OECD, “Refile and Alternative Calling Procedures,” p. 4.

 10 In addition to the reasons cited above, many countries choose to privatize their monopoly

telecommunication carriers to raise capital for infrastructure investment and to reduce public debt.

U.S. Department of Commerce, International Trade Administration, “Telecommunication

Services,” U.S. Industry & Trade Outlook 2000 (New York, NY: McGraw Hill Companies:,

2000), p. 30-1; and ITU, “Reinventing Telecoms,” World Telecommunication Development

Report (Geneva: ITU, 2002), p. 42. 

20

Regulatory Reform and Competition in Global

Telecommunication Service Markets

In the past telecommunication services in many countries came from state-owned enterprises

with monopoly rights for the provision of local, long-distance, and international services.

Regulators adopted the view that the telecommunication services industry exhibited natural

monopoly characteristics, given the large economies of scale that characterized the market.3

However, more recent technological developments have reduced the cost of market entry and

have facilitated competition in international telecommunication markets.4

 Network

digitization5

 has reduced network maintenance costs, and advances in terminal equipment6

and switching technologies7 have reduced the costs associated with establishing international

telecommunication connections.8

 Such developments have encouraged many governments

to introduce regulations that enable market entrants to access former monopolies’

infrastructure, lease circuits from former monopolies, and resell carrying capacity over such

circuits in competition with former monopolies.9

 In an effort to increase carrier efficiencies

in public telecommunication markets and to prepare markets for competition, many countries

have chosen to privatize some or all of their monopoly telecommunication carriers.10 In the

Americas, Europe, and Asia-Pacific regions, a majority of countries had introduced full or

partial telecommunication privatization by 2000 (figure 1).

Competition in international telecommunication markets has been further advanced by the

World Trade Organization’s (WTO’s) Basic Telecommunications Agreement, effective
OCTOBER 2002

Industry Trade and Technology Review Telecommunication Reform

 11 As a result of the WTO’s Basic Telecommunication services negotiations, the Fourth

Protocol to the General Agreement on Trade in Services was adopted. It provides for the

annexation of new basic telecommunication schedules to the Uruguay Round services schedules.

WTO, “Legal Texts,” found at Internet address http://www.wto.org/english/tratop_e/serv_e/

telecom_e/telecom_e.htm, retrieved Oct. 15, 2002. 

 12 A facilities-based carrier owns most of its own equipment, such as switching equipment and

transmission lines. 

 13 Interconnection involves an agreement between established telecommunication companies to

access each other’s network.

 14 Office of the United States Trade Representative (USTR), “World Trade Organization,”

2002 Trade Policy Agenda and 2001 Annual Report of the President of the United States on the

Trade Agreements Program (Washington, DC: USTR, 2002), p. 71.

21

Figure 1

Share of countries with privatized telecommunication service carriers, by

region, 2000

February 5, 1998.11 The agreement seeks to provide foreign telecommunication service

providers with access to signatories’ local, long-distance, and international service markets

using all means of network technology (e.g. cellular and satellite systems), either through

resale or on a facilities basis.12 A reference paper supplements market-access commitments

with a list of procompetitive regulatory principles. These principles discourage

anticompetitive practices, such as cross-subsidization; ensure transparency and

nondiscrimination in interconnection,13 universal service, licensing criteria, and allocation

of scarce resources; and mandate the independence of regulators and suppliers. Today, partly

as a result of the agreement, telecommunication markets accounting for 95 percent of global

telecommunication service revenues are open to full or partial competition.14

The Dissolution of the Accounting Rate System

Telecommunication market reform is contributing to the gradual demise of the accounting

rate system. The system worked well when international services were primarily provided
OCTOBER 2002

Telecommunication Reform Industry Trade and Technology Review

 15 Peter A. Stern and Tim Kelly, Liberalization and Reform of International

Telecommunication Settlement Arrangements, Latin American and Caribbean Telecommunication

Finance and Trade Colloquium, Brasilia, Brazil, July 1997, p. 7. 

 16 Carlos Braga, Emmanual Forestier, and Peter A. Stern, “Developing Countries and

Accounting Rates Reform - A Technological and Regulatory El Nino?,” Public Policy for the

Private Sector, Note No. 173 (Washington, DC: The World Bank Group, 1999), p. 3; and Stern

and Kelly, Liberalization and Reform of International Telecommunication Settlement

Arrangements, p. 4.

 17 ITU, What is the Accounting Rate System?, found at Internet address

http://www.itu.int/newsarchive/press/WTPF98/Whatisaccountrate-es.html, retrieved May 16,

2002.

 18 Ibid.

 19 Ibid.

22

by monopoly carriers and traffic imbalances between countries were not large.15 It is easy

and inexpensive to administer.16 However, the system becomes difficult to manage when

multiple telecommunication carriers enter a market, in part as a result of difficulties

associated with negotiating rates with multiple carriers. Additionally, the system places

restraints on competitive carriers because high accounting rates could significantly affect the

commercial operations of telecommunication carriers.17 For instance, if a carrier maintains

a net deficit in international settlements, its ability to reduce consumer calling rates is

limited. Conversely, a carrier with a net settlement surplus has little incentive to reduce the

accounting rate or increase efficiency.18 Telecommunication carriers with persistent net

settlement deficits (such as U.S. service providers) complain that the system subsidizes

countries with high-cost, inefficient carriers at the expense of lower-cost, competitive

carriers.19

The U.S. Experience

The U.S. market demonstrates many of the shortcomings inherent in the current accounting

rate system. The United States consistently registers net deficits in international settlements

(table 1) as the world’s largest net importer of international telecommunication services. The

U.S. net deficit is primarily a result of the large number of international calls that originate

in the United States, which obligates U.S. carriers to remit payments to foreign carriers.

Factors that affect the U.S. cross-border trade deficit include the relative wealth of the

United States and the relatively low U.S. international calling prices, both of which

encourage increased call volumes; and the average length of calls, which tends to be longer

for calls originating from the United States.

Table 1

U.S. international telecommunication transactions, 1993-99

Transaction measure 1993 1994 1995 1996 1997 1998 1999

Outbound minutes (millions) . . . . . . . . . . . . . . 11,163 13,110 15,135 18,174 21,288 21,712 25,016

Inbound minutes (millions) . . . . . . . . . . . . . . . 5,786 6,385 7,051 8,293 9,170 10,198 10,785

 Net outbound minutes (millions) . . . . . . . . 5,377 6,725 8,084 9,881 12,118 11,514 14,231

Net settlement payment (million dollars)

1 . . . . (3,706) (4,291) (4,938) (5,668) (5,429) (4,484) (4,579)

 1

 Calculated by multiplying the settlement rate by net outbound minutes.

Source: Federal Communication Communications, Trends in the International Telecommunications Industry, Apr.

2001, found at Internet address http://www.fcc.gov, retrieved June 13, 2002.
OCTOBER 2002

Industry Trade and Technology Review Telecommunication Reform

23

U.S. net settlement payments are further inflated by the provision of low-cost, customerfriendly services, such as country-direct services and call-back arrangements (table 2). These

innovations enable customers in foreign locations to place international telephone calls

through reliable, low-cost U.S. service providers. Country-direct services provide callers

with a number to access a U.S. operator, whereas call-back arrangements allow the customer

to call an assigned U.S. telephone number and receive a computer-driven return call that

provides a U.S. dial tone. Calls placed on these systems are recorded in the current account

as U.S. outbound calls, thereby driving upward U.S. net settlement payments (registered as

imports). Thus, in sum, U.S. carriers by virtue of being low-cost, reliable, and innovative

suppliers of telecommunication services, were until recently obligated to pay out net

settlements year by year, often to carriers with whom they compete abroad. In 1996, U.S. net

settlement payments peaked at $5.7 billion (see table 1).

Table 2

Alternative calling plans

Plan Description

Settlement

arrangement

Benefit to service

provider

Effect on accounting

rate

Country-direct

services (CDS)

User calls a specified

800 number in their

home country and the

call is routed to its final

destination using the

home-country service

provider. 

The call is converted

from an inbound all to

an outbound call, and

the home-country

service provider must

pay settlement fees

accordingly.

Collection charges

from consumer

usually outweigh

settlement fee

costs.

Incentive exists for

home-country service

provider to negotiate

lower accounting

rates.

Call-back

services

User calls a

designated number in

a second country and

receives a return call

with a dial-tone from

the second country. 

The service

generates an

outbound call from

the second country,

which must pay

settlement fees

accordingly.

None. The service

is offered in

competition to

traditional service

provider.

Incentive exists for

home-country service

provider to negotiate

lower accounting

rates.

International

simple 

resale (ISR) 

ISR providers route

traffic via an

international leased

line. The provider

pays a fixed rate for

the leased line and

charges customers on

a per-minute basis. 

Traditional settlement

fees do not apply. 

The service is

profitable when

large traffic

volumes are

established. It

allows the service

provider to by-pass

the traditional

accounting rate

system 

High accounting rate

countries have

incentive to reduce

rates to compete with

this service and

maintain settlement

revenues.

Refile Routes traffic through

third countries in order

to take advantage of

lower accounting

rates. 

Service provider pays

all applicable

settlement fees.

Enables service

provider to send

traffic along its

least cost route.

Incentive to reduce

accounting rates to

avoid traffic re-routing

and maintain

settlement revenue.

Source: Compiled by USITC staff from various sources.
OCTOBER 2002

Telecommunication Reform Industry Trade and Technology Review

 20 Braga, Forestier, and Stern, “Developing Countries and Accounting Rates Reform–A

Technological and Regulatory El Nino?,” p. 3.

 21 Federal Communications Commission (FCC), 2000 International Telecommunications Data,

Dec. 2001, p. 4.

 22 Latest data available.

 23 FCC, Trends in the International Telecommunications Industry, Apr. 2001, p. 46.

 24 Ibid., p. 45.

 25 Ibid., p. 43.

 26 Packet-switching networks transmit signals in electronic blocks, or packets. Each packet is

assigned an identification number and a destination code, which allow network nodes to properly

route data to its final destination. Each packet can be sent along a different route and then

reassembled to more efficiently utilize network capacity. This method is more efficient than

circuit switching, which relies on a single dedicated circuit to send information.

24

Alternatives to the Accounting Rate System

International simple resale (ISR) and Internet protocol (IP) telephony create opportunities

for carriers to entirely bypass the accounting rate system. ISR involves the reselling of

telecommunication services over lines leased from incumbent carriers. IP telephony enables

carriers to send voice signals over the Internet, thus avoiding costs associated with

conventional telecommunications. A description of each service follows.

International Simple Resale

As noted, some regulators have introduced competition into their markets by permitting

market entrants to resell network capacity.20 Resellers typically lease a line between two

popular locations and profit from the transactions by selling services to customers at prices

below those offered by incumbent telecommunication carriers. Incumbent operators usually

charge resellers a fixed rate based on the cost of connecting to the network, and therefore

resellers are not required to pay settlement fees.

As countries continue to deregulate their telecommunication service markets, ISR

transactions are increasing. In 2000, such arrangements accounted for approximately 36

percent of total U.S. billed international minutes.21 Additionally, in 1999,22 ISR revenues for

all U.S. carriers totaled $4.4 billion, a significant increase from $1.12 billion in 1994.

ISR became the dominant mode of competition during the 1990s, as an increasing number

of countries permitted it in their markets.23 Competitive resellers face relatively small

market-entry barriers and international markets provide the greatest opportunities for price

arbitrage.24 In addition to recent market entrants, incumbent telecommunication service

providers are increasingly using ISR as a means of bypassing the accounting rate system and

reducing costs. For example, in 1999, AT&T Corp. recorded resale service revenues of $254

million, representing a significant increase from $43 million in 1997, the first year in which

the company reported such revenues. Similarly, resale service revenues for MCI Worldcom

increased from $39 million in 1997 to $618 million in 1999 and for Sprint Corp. increased

from $95 million to $244 million during the same time frame.25

Internet Protocol Telephony

IP telephony uses packet switching technology26 to transmit voice signals over data

networks. The transmissions can be sent over the public Internet or through managed,
OCTOBER 2002

Industry Trade and Technology Review Telecommunication Reform

 27 Technical constraints currently limit the reliability of all IP-based telephone calls. However,

private networks provide greater sound quality than the public Internet. ITU, Internet Reports: IP

Telephony (Geneva: ITU, Dec. 2000), pp. 1 and 15.

 28 Telecommunication service providers use private networks to transmit IP-based telephone

calls. Such lines interconnect with foreign carriers’ networks, and an interconnection rate is

negotiated between the two carriers. These rates are usually lower than the accounting rate. ITU,

ITU Internet Reports: IP Telephony (Geneva: ITU, 2001), p. 26

 29 Ibid., p. 24.

 30 Patricia Riedman, “PCs, Phones Link Voices as Web-talk Proliferates,” Advertising Age,

Mar. 20, 2000, p. 60.

 31 Carolyn Hirschman, “International IP Telephony: Governments, Providers Debate VoiceOver-IP Issues, Revenue Streams,” Telephony, Sept. 11, 2000, p. 114.

 32 USITC staff research. 

 33 Net2Phone, AT&T completes Net2Phone investment, Company Press Release, Aug. 11,

2000, found at Internet address http://www.net2phone.com, retrieved Feb. 14, 2001; and Kelly

Carroll, “Preparing for Wireless Voice Over IP,” Telephony, July 10, 2000, p. 16. 

 34 Jim Barthold, “Saving Voice: Worldcom’s New Image Leans Heavily on Voice Over IP,”

Telephony, Feb. 12, 2001, p. 20.

 35 Reportedly, consumers will prefer the convenience of bundled services, as it allows them to

pay one bill each month for telephone and Internet services. Economist Intelligence Unit (EIU),

Vision 2010: New Strategies for Communication Enterprises, report published in cooperation with

Andersen Consulting, 1999, p. 4.

 36 Vincent Ryan, “A Walk on the Revenue Side,” Telephony, May 8, 2000, p. 46.

25

private networks,27 and are settled outside the traditional accounting rate system.28

International Data Corp. (IDC), an Internet consultancy, estimates that IP telephony traffic

will increase from 2.7 billion minutes in 1999 to approximately 135 billion minutes by 2004,

and Deltathree.com, an IP telephony service provider, expects IP-based telecommunication

service to account for 35 percent of all international telephone traffic by 2005.29

IP telephony market growth is attributable to the low costs associated with the service. IP

telephony service providers Dialpad.com and Net2Phone currently offer free domestic longdistance services by offsetting interconnection charges with advertising revenue.30 These

firms generate additional revenues by providing international calling services, which IDC

estimates will account for 75 percent of the IP telephony services market by 2004.31 In most

cases, IP telephony service providers offer international rates that are much lower than

traditional telecommunication carriers’ rates for the same service. For example, Net2Phone

charges 3.9, 16.0, and 7.9 cents per minute to call Canada, Mexico, and Germany,

respectively. Comparatively, AT&T charges 7.0, 35.0, and 17.0 cents to call these countries,

respectively.32

Traditional telecommunication providers are preparing for IP telephony competition by

investing in IP telephony-related technologies and acquiring stakes in IP telephony service

providers. For example, in August 2000, an AT&T-led consortium completed an investment

in Net2Phone. The investment gives the consortium, which also includes Liberty Media and

British Telecom, a 39-percent voting stake in Net2Phone.33 Similarly, Sprint Corp. and

Worldcom are developing strategies that will use IP technology to provide

telecommunication and data services to their customers.34 Such services enable traditional

telecommunication providers to bundle voice, data, and multimedia transmissions over a

single IP-based network,35 allowing them to offer high-value, customized services.36 Sema

Group, a Swedish consultancy, reports that 60 percent of traditional telecommunication

providers expect IP telephony to become the primary means of telecommunication by 2004,
OCTOBER 2002

Telecommunication Reform Industry Trade and Technology Review

 37 FCC, Report and Order: In the Matter of International Settlement Rates, IB Docket No. 96-

261, Aug. 7, 1997, found at Internet address

http://www.fcc.gov/Bureaus/International/Orders/1997/fcc97280.txt, retrieved Aug. 13, 2001.

 38 International telecommunication costs are associated with infrastructure construction,

network maintenance, and business operations. Reportedly, network construction costs and

maintenance costs are minimal, with construction costs approaching zero over the network’s

lifetime. ITU, “Direction of Traffic, 1996,” pp. 4 to 5. 

 39 FCC, Benchmark Order (IB Docket No. 96-261), publication No. 97-280, Aug. 17, 1997.

 40 Ibid.

 41 FCC, Report on International Telecommunications Markets, 1999 Update, publication No.

DA 00-87, Jan. 14, 2000 

 42 Ibid.

 43 Ibid.

 44 ITU, Accounting Rate Reform Undertaken by ITU-T Study Group 3, found at Internet

address http://www.itu.int/ITU-T/studygroups/com03/accounting-rate/index.html, retrieved

June 13, 2002.

26

and that one-quarter of them expect the majority of their traffic to be carried over IP-based

networks by that date.

Efforts to Encourage Accounting Rate Reform

Actions by the Federal Communications Commission

On August 7, 1997, the Federal Communications Commission (FCC) adopted a Report and

Order37 that established international benchmarks that would progressively lower settlement

rates to levels that better reflect actual costs.38 The benchmark rates adopted by the FCC are

based on foreign carriers’ published tariff rates, and are scheduled to be reduced to 15 cents

per minute for upper income countries, 19 cents per minute for middle-income countries, and

23 cents per minute for lower income countries.39 According to the Order, U.S.

telecommunication companies are required to negotiate settlement rates with foreign carriers

that are equivalent to or better than the target rates.40 By the end of 1999, almost all carriers

from upper income countries had complied with the FCC’s Benchmark Order.41 Middle- and

lower income countries already have reduced their accounting rates significantly;42 during

1996-2001, average accounting rates for carriers in all countries have declined by more than

14 percent (figure 2). Such reductions contributed to a 25-percent decline in international

consumer rates during 1996-98. The FCC expects international consumer rates to decrease

an additional 45 percent when the Benchmark Order is fully implemented in 2003.43

Actions by the International Telecommunications Union

The International Telecommunications Union (ITU) has established Study Group 3 within

its Telecommunication Standardization Sector to review the current remuneration system and

consider reform. Reportedly, discussions within the Group have generated considerable

interest, and ITU delegates from more than 80 countries have participated in the Group’s

meetings.44 Goals of the Group include:

• Developing general principles and guidelines for the establishment of

accounting rates;

• Determining cost components to be included in accounting rates;
OCTOBER 2002

Industry Trade and Technology Review Telecommunication Reform

 45 Ibid.

 46 Ibid.

 47 Ibid.

 48 Carlos Braga and others, Developing Countries and the Telecommunications Accounting

Rates Regime: A Role for the World Bank, Feb. 23, 1998, found at Internet address

http://www.worldbank.org/html/fpd/telecoms/subtelecom/telecommunications.htm, retrieved

Feb. 20, 2001.

27

Figure 2

Average accounting rates, 1996-2001

• Expediting development of appropriate costing methodologies; and

• Establishing a transition period to avoid drastic changes in the system.45

Although these goals were embodied in principles outlined in ITU-T Recommendation

D.140, adopted in 1992, many countries considered the rate of accounting rate reform too

slow and took additional measures to ensure a more rapid transition toward cost-oriented

remuneration methods (e.g. see FCC Actions above).46 Study Group 3 continued its work on

accounting rate reform, and in 1998, introduced alternative remuneration procedures. Such

procedures include the termination charge procedure, enabling governments to establish a

single termination charge for all operators in the country; the settlement rate procedure,

allowing carriers to negotiate cost-oriented accounting rates; and the commercial

arrangement procedure, allowing carriers to bilaterally negotiate their own alternatives to the

accounting rates. Reportedly, such procedures should facilitate the reform process.47

Potential Impact of Accounting Rate Reform: Developing

Countries’ Perspective

Developing countries have expressed concern about the potential loss of revenue that would

result from reform of the accounting rate system.48 The majority of developing countries are
OCTOBER 2002

Telecommunication Reform Industry Trade and Technology Review

 49 Ibid.

 50 Ibid.

 51 Ibid.

 52 Ibid.

 53 ITU, Internet Reports, p. 26.

 54 Pekka Tarjanne, “Preparing for the Next Revolution in Telecommunications: Implementing

the WTO Agreement,” Telecommunications Policy, vol. 23, No. 1, 1999.

 55 Ibid.

 56 Ibid.

28

net exporters of international telecommunication services49 and many depend on settlement

revenues for hard currency to support their fiscal expenditures.50 Approximately 70 percent

of U.S. settlement payments goes to developing countries.51 The 10 most dependent countries

rely on U.S. settlement payments for 40 percent to 80 percent of their total

telecommunication revenues.52 Net flows of settlement payments to developing countries

from industrialized countries totaled approximately $50 billion during 1990-2000.53

Industry observers suggest that the settlement revenue declines of developing countries may

be partially offset by new opportunities and infrastructure development created by market

liberalization.54 Foreign investment enables governments to direct funds toward upgrading

telecommunications infrastructure.55 Additionally, market liberalization often encourages

greater efficiency, improved service quality, and the rapid adoption of new technologies,

resulting in lower consumer costs and increased revenue streams.56

Summary

Pressure to reform the international accounting rate system has increased in recent years as

technological advances and market reform have intensified competition. Net settlement

payments by carriers operating in competitive markets to those in less efficient markets have

significantly increased in recent years as international telecommunication traffic flows have

become less balanced. This has created incentives for carriers from competitive

telecommunication markets to bilaterally negotiate lower accounting rates. In competitive

markets, incumbent carriers as well as new market players are increasingly seeking ways to

reduce costs associated with providing international services by entirely circumventing the

accounting rate system. Such carriers are increasingly relying on alternative calling

procedures, such as international simple resale or IP telephony for the provision of

international services. Although accounting rate reform may pose short-term disadvantages

for net exporters of telecommunication services, firms that can take advantage of new market

opportunities and infrastructure development as a result of liberalization could well benefit

from changes in the remuneration system.#
OCTOBER 2002

Industry Trade and Technology Review Key Performance Indicators

 1 The data and views presented for the following indicators are compiled from the industry sources noted and are

those of the authors. They are not the views of the United States International Trade Commission as a whole or of

any individual Commissioner. Nothing contained in this information based on published sources should be

construed to indicate how the Commission would find in an investigation conducted under any statutory authority.

A-1

APPENDIX A

Key Performance Indicators of Selected

Industries and Regions1

Title Author1 Page

Steel Harry Lenchitz

(202) 205-2737

lenchitz@usitc.gov

A-2

A-3

Automobiles Laura A. Polly

(202) 205-3408

polly@usitc.gov

A-4

Unwrought Aluminum Judith-Anne Webster

(202) 205-3489

webster@usitc.gov

A-5

Flat Glass James Lukes

(202) 205-3426

lukes@usitc.gov

A-6

Services Tsedale Assefa

(202) 205-2374

asefa@usitc.gov

A-7

North American Trade Ruben Mata

(202) 205-3403

mata@usitc.gov

A-8

A-9
OCTOBER 2002

Key Performance Indicators Industry Trade and Technology Review

A-2

STEEL

• On August 30, 2002, the Office of the U.S. Trade Representative (USTR) announced the exclusion of additional products from

the temporary steel safeguard actions imposed in March, 2002. To date, 727 products have been excluded as USTR

determined that they are not sufficiently available from U.S. producers, and that excluding these products would not undermine

the effectiveness of the safeguard actions. See http://www.ustr.gov. 

• Continuing the recent trend of consolidation in the minimill sector, on September 23, 2002, Co-Steel Inc. of Canada agreed to

merge with the North American operations of Gerdau SA. The combined firm, Gerdau AmeriSteel, to be headquartered in

Canada, will operate 11 minimills in the United States and Canada with an annual capacity of more than 6.8 million tons. See

http://www.costeel.com. 

• The OECD High Level Group Working Parties on Steel met in Paris during September 11-13, 2002, to discuss changes in

capacity in participating countries and industry practices in steel. See http://www.oecd.org/EN/home/0,,EN-home-39-

nodirectorate-no-no-no-7,00.html. The International Iron and Steel Institute Board of Directors, who met the week of October 7,

2002, to review the state of government negotiations on steel undertaken under the auspices of the OECD, issued a release

noting “a strong consensus in the industry worldwide . . to ban further government subsidies . . except to assist with the social

and environmental costs associated with the permanent closure and elimination of steel capacity” and encouraging

governments to “use the next high-level meeting in Paris in December to start practical negotiations on a new agreement

banning subsidies in the steel industry.” See http://www.worldsteel.org/news/29. 

• Trends for finished and semifinished imports moved in opposite directions during the second quarter of 2002 compared to the

second quarter of 2001 (table A-1). Quarterly imports of semifinished steel, purchased primarily by domestic producers,

increased by more than 28 percent, while imports of finished steel declined by more than 26 percent from the second quarter of

2001. 

Table A–1

Semifinished imports increase sharply during second quarter 2002 compared with second quarter

2001, and during first 6 months of 2002 compared to first 6 months of 2001

Item Q2 2002

Percentage

change, Q2 2002

from 

Q2 20011 YTD 2002

Percentage

change, YTD

2002 from 

YTD 20011

Producers’ shipments (1,000 short tons) . . . . . . . . . . . . . 25,610 -2.9 49,548 -3.0

Finished imports (1,000 short tons) . . . . . . . . . . . . . . . . . 4,890 -26.3 10,740 -7.8

Ingots, blooms, billets, and slabs (1,000 short tons) . . . . . 1,804 28.8 4,177 34.4

Exports (1,000 short tons) . . . . . . . . . . . . . . . . . . . . . . . . 1,446 -2.0 2,918 -7.1

Apparent supply, finished (1,000 short tons) ........ 29,053 -6.9 57,370 -3.7

Ratio of finished imports to apparent supply (percent) . . . 16.8 2-3.1 18.7 20.7 1

 Based on unrounded numbers.

2

 Percentage point change.

Note.–Because of rounding, figures may not add to the totals shown.

Source: American Iron and Steel Institute.
OCTOBER 2002

Industry Trade and Technology Review Key Performance Indicators

A-3

STEEL

Table A–2

Service Center: Second quarter 2002 shipments hold steady compared with second quarter 2001

as inventories decline

Item Mar. 2002 June 2002

Percentage

change, June

2002 from

 Mar. 20021 Q2 2001 Q2 2002

Percentage

change, Q2

2002 from

 Q2 20011

Shipments (1,000 short tons) . . . . . . . . 2,111 2,105 -0.3 6,636 6,605 -0.5

Ending inventories (1,000 short tons) . . 7,152 7,153 0.0 8,163 7,153 -12.4

Inventories on hand (months) . . . . . . . . 3.2 3.2 (2

) 3.8 3.2 (2)

 1 Based on unrounded numbers.

 2

 Not applicable.

Source: Metals Service Center Institute.

• U.S. service center shipments remained steady during the second quarter 2002 compared to the

second quarter 2001 (table A–2), but increased by more than 5 percent compared to the first quarter

of 2002 level of 6,279 thousand short tons. Inventories trended downward from the year-end 2001

peak of 4 months on hand. See http://www.ssci.org. 

• The American Institute for International Steel import market survey (August 2002) continues to predict

domestic shortages of semi-finished, hot-rolled, cold-rolled, and corrosion resistant sheet during the

next 1 to 3 months. See http://www.aiis.org. 

• The Institute for Supply Management’s Report On Business (September 2002) reported short

supplies of steel for the 7th consecutive month, and steel price increases for the 8th consecutive

month. See http://www.ism.ws/ISMReport/ROB102002.cfm.

• Domestic capacity utilization continued to increase, reaching its highest quarterly level in more than 2

years, while import penetration continued to fall (Figure A–2). See http://www.steel.org. 
OCTOBER 2002

Key Performance Indicators Industry Trade and Technology Review

A-4

AUTOMOBILES

Table A–3

U.S. sales of new automobiles, domestic and imported, and share of U.S. market accounted for by

sales of total imports and Japanese imports, by specified periods, January 2001-June 2002

 Percentage change 

Item

Apr.-Jun.

2002

Jan.-Mar.

2002

Apr.-Jun. 2002

from 

Jan.-Mar. 2002

Jan.-Mar. 2002

from 

Jan.-Mar. 2001

U.S. sales of domestic autos

(1,000 units)

1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,701 4,983 20.3 -9.1

U.S. sales of imported autos

(1,000 units)

2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 1,619 11.9 1.6

Total U.S. sales (1,000 units)

1, 2 . . . . . . . . . . . . . . . . . 2,296 6,602 18.0 -6.7

Ratio of U.S. sales of imported autos to 

total U.S. sales (percent)

1, 2 . . . . . . . . . . . . . . . . . . . 25.9 24.5 -5.1 8.9

U.S. sales of Japanese imports as a 

share of the total U.S. market (percent)

1, 2 . . . . . . . . 10.9 7.2 -6.6 16.2

1

 Domestic automobile sales include U.S.-, Canadian-, and Mexican-built automobiles sold in the United States. 2

 Imports do not include automobiles imported from Canada and Mexico.

Source: Compiled from data obtained from Automotive News.
OCTOBER 2002

Industry Trade and Technology Review Key Performance Indicators

A-5

UNWROUGHT ALUMINUM1

 

• The rebound in U.S. production as a result of restarts from smelters in the Pacific Northwest will be offset by idled capacity at

Alcoa’s Badin, North Carolina facility (120,000 metric tons per year (mtpy)). Further, Alcoa has decided to dismantle two

facilities in the Pacific Northwest (441,000 mtpy). 

 

• Planned expansion of smelting capacity in foreign countries (a projected 7 million metric tons over the next 5 years) has

tempered analysts’ outlook for the aluminum industry as production is expected to exceed consumption over the next 5

years. The key driver of this growth is China which, according to industry sources, is expected to expand production capacity

by 1 million metric tons in 2002 and expand export growth by 36 percent as a result.

• Declining participation in recycling programs coupled with low scrap prices has led some cities, such as New York, to

suspend curbside recycling programs. In 2001, the nationwide recycling rate declined by 6.7 percentage points from

2000—and was 12.5 percentage points off its 10-year high in 1992—while scrap prices have fallen from 60 cents per pound

to 20 cents per pound. A continuation of this trend could possibly lead to greater reliance on less energy-efficient primary

sources. 

Table A–4

Inventories in LME warehouses increased to 10-year highs in second quarter 2002

 Percentage change

Item Q2 2001 Q1 2002 Q2 2002

Q2 2002

from 

 Q2 2001

Q2 2002

from 

Q1 2002

Primary production (1,000 metric tons)............ 669 627 669 0.0 6.7

Secondary recovery (1,000 metric tons) ........... 778r 735r 741 -4.8 0.8

Imports (1,000 metric tons)..................... 616 720 738 19.8 2.5

Import penetration (percent) . . . . . . . . . . . . . . . . . . . . 31.1 36.0 35.7 1

4.9 1-0.3

Exports (1,000 metric tons) . . . . . . . . . . . . . . . . . . . . . 84 82 82 -2.4 0.0

Average nominal price (cents/lb) . . . . . . . . . . . . . . . . 71.2 65.2 65.8 -8.4 1.0

LME inventory level (1,000 metric tons) ........... 629 1,029 1,255 99.5 22.0

1

 Percentage point change

Note.–Revised data indicated by “r.”

Sources: Compiled from data obtained from U.S. Geological Survey and World Bureau of Metal Statistics.

1

 Product coverage includes only unwrought aluminum and certain aluminum alloys for improved data comparability.
OCTOBER 2002

Key Performance Indicators Industry Trade and Technology Review

A-6

FLAT GLASS

Background

• The U.S.-Japanese agreement on Japanese market access for imports of flat glass sought to increase

access and sales of foreign flat glass in Japan through such means as increased adoption of

nondiscriminatory standards and expanded promotion of safety and insulating glass. The agreement

covered the 1995-99 period and expired on December 31, 1999.1

 

• The Japanese economy slowed in 2001 along with demand for imported flat glass. The average monthly

quantity of Japanese imports from all countries decreased by 13 percent during 2001 to 2.5 million square

meters, while the average monthly value of such imports decreased by 25 percent to $19.4 million. Imports

from the United States decreased by 30 percent to 392,000 square meters and by 28 percent to $9.9 million,

respectively, and the U.S. share of the market declined. 

Current

 

• The decline in Japan’s demand for imported flat glass in 2002 slowed during May through July. The average

monthly quantity of Japanese imports from all countries was down by 13 percent for the first 4 months of

2002, but eased to a decrease of 9 percent for the first 7 months of 2002 to 2.3 million square meters, while

the average monthly value of such imports decreased by 27 percent to $14.2 million. However, the quantity

of imports from the United States decreased by 31 percent to 269,000 square meters and the value

declined by 55 percent to $4.4 million, respectively, and the U.S. share of the market has declined in terms

of quantity; imports from the United States lost market share to imports from Korea, China, and Thailand

during this period. 

• The U.S. Government continues to pursue market access for flat glass with the Japanese Government. 

Although no progress was reported, the issue was raised in Tokyo in July 2002 at the first Trade Forum,

established under the U.S.-Japan Economic Partnership for Growth to exchange views and

recommendations on trade issues and to facilitate resolution of trade issues.2

 

1

 Office of the U.S. Trade Representative (USTR), The President’s 1999 Annual Report on the Trade Agreements

Program, p. 227, downloaded from http://www.ustr.gov/reports/tpa/2000/index.html on Mar. 3, 2000. 2

 U.S. Embassy at Tokyo, Japan, U.S. and Japan Hold First Meeting of Trade Forum, downloaded from

http://usembassy.state.gov/tokyo/wwwhpr0063.html on Sept. 17, 2002.
OCTOBER 2002

Industry Trade and Technology Review Key Performance Indicators

A-7

SERVICES
OCTOBER 2002

Key Performance Indicators Industry Trade and Technology Review

A-8

NORTH AMERICAN TRADE HIGHLIGHTS

U.S. trade with its North American partners is highlighted in table A-5. The following is a summary of key

developments through the second quarter 2002.

 

• Total U.S. trade with its NAFTA partners ($286 billion) decreased by 6 percent ($19 billion) during the first half

2002 compared with January-June 2001. A slowly recovering U.S. economy that grew at an annual rate of 1.3

percent during the second quarter 20021

 resulted in less demand for Canadian and certain Mexican manufactured

products. Although a first half 2001/2002 comparison indicates the U.S. merchandise trade deficit with Canada ($33

billion) declined by 15 percent or $5.7 billion, the period’s trade deficit with Mexico ($23 billion) increased by $3.6

billion or 19 percent. 

• Mexico’s second quarter 2002 GDP expanded at an annual rate of 2.1 percent after 3 consecutive quarters of

contraction dating back to the third quarter 2001.2

 The growth in the Mexican economy is attributed to higher than

expected prices for petroleum and a modest reactivation of external demand for its products, primarily by the United

States. Increased U.S. demand for petroleum and a sparse increase in demand for some durable goods, such as major

household appliances, resulted in a modest rise in U.S. imports from Mexico which remained second only to Canada

as the largest trading partner with the United States during the period.

 

• U.S. exports to Mexico in the first half 2002 totaled $42.5 billion, a decline of 8 percent ($3.9 billion) from the

corresponding period in 2001. U.S. exports to Mexico of intermediate goods (76 percent) and, to a lesser extent,

capital goods (12 percent) are largely destined for Mexico’s Maquiladora and PITEX programs. The decrease

in U.S. exports to Mexico’s assembly industry reflects the contraction of that sector in response to reduced U.S.

demand for assembly services in Mexico, U.S. companies’ continued sell down of inventories, and switched

sourcing from Mexico to Asia by some U.S. firms. 

• During January-June 2002, U.S. imports from Mexico decreased by less than 1 percent ($282 million) to $65.6

billion from the corresponding period in 2001. The decrease in imports from Mexico was led by motor-vehicles,

computer and telephone equipment, and electrical machinery. However, an expansion in business inventories

by some multinational firms was a major factor leading to a slight increase in imports from Mexico in first half

2002. 

• The Government of Mexico announced on September 4, 2002, the immediate elimination or reduction of

customs duties on a wide range of components and products in the electronics and information technology (IT)

industries. The program, known in Mexico as “ITA Plus,” is Mexico’s version of the World Trade Organization

(WTO) Information Technology Agreement (ITA).3

 Numerous Mexican IT firms rely on imported components

that cannot be sourced entirely in North America.4

 The reported goal of the “ITA Plus” program is to provide

Mexican firms wider access to IT goods at lower prices and to facilitate improved competitiveness, particularly

with China.5

 

• Canada’s GDP grew by 1.1 percent during the second quarter 2002, and at an annualized rate of 4.3 percent. The

Canadian economy was led by strong domestic demand for consumer services, an increase in domestic business

1

 U.S. real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the third quarter 2002 led by personal

consumption expenditures, according to advance estimates released by the Bureau of Economic Analysis (BEA). BEA News

Release 02-32, Oct. 31, 2002. Many analysts attributed the “advance” third quarter increase primarily to consumer spending for

interest-free financing of motor vehicles, and are predicting that growth will fall back to a 1 to 2 percent annual rate in the fourth

quarter 2002. 2

 According to a consensus forecast published in Latin Trade, Oct. 2002, Mexico’s real GDP is expected to grow by 1.7

percent in 2002. 3

 The ITA was concluded at the WTO Singapore Ministerial Conference in December 1996. The ITA entered into force on 

July 1, 1997. At present, 58 countries accounting for approximately 93 percent of world trade in IT products have endorsed the

ITA. Mexico has not become a signatory to the ITA. 4

 The ITA eliminates customs duties, on a reciprocal basis, on a wide range of IT products, such as computers,

semiconductors, software, and telecommunications equipment, among others. For a list of products covered by the ITA visit the

WTO’s website at www.wto.org. 5

 Mexico’s “ITA Plus” program includes resins, steel, and audio and video products which are not covered by the ITA.
OCTOBER 2002

Industry Trade and Technology Review Key Performance Indicators

A-9

NORTH AMERICAN TRADE

Table A–5

North American trade, 1997-2001, January-June 2001, and January-June 2002

 Percent

January-June change

Item 1997 1998 1999 2000 2001 2001 2002 2001/02

——————————Value (million dollars)——————————

U.S.-Mexico trade:

Total imports from Mexico . . . . . 85,005 93,017 109,018 134,734 130,509 65,859 65,577 (1)

U.S. imports under NAFTA:

Total value . . . . . . . . . . . . . . 62,837 68,326 71,317 83,995 81,162 40,763 41,477 2

Percent of total imports . . . . 74 73 65 62 62 62 63 2

1

Total exports to Mexico . . . . . . . 68,393 75,369 81,381 100,442 90,537 46,455 42,512 -8

U.S. merchandise trade balance

with Mexico3 . . . . . . . . . . . . . -16,612 -17,648 -27,637 -34,292 -39,971 -19,403 -23,065 -19

U.S. -Canada trade:

Total imports from Canada .... 167,881 174,685 198,242 229,060 216,836 115,706 105,331 -9

U.S. imports under NAFTA:

Total value . . . . . . . . . . . . . . 88,949 111,675 115,715 123,052 113,179 59,438 58,020 -2

Percent of total imports . . . . 53 64 58 54 52 51 55 2

4

Total exports to Canada ...... 134,794 137,768 145,731 155,601 144,621 76,977 72,257 -6

U.S. merchandise trade balance 

with Canada4 . . . . . . . . . . . . -33,087 -36,918 -52,511 -73,459 -72,215 -38,728 -33,073 15

1

 Less than -0.5 percent

2

 Percentage point change.

3

 The negative (-) symbol indicates a loss or trade deficit. The $40.0-billion deficit in U.S. merchandise trade with

Mexico in 2001 was partially offset by a $3.4-billion U.S. surplus in bilateral services trade. 4

 The $72.2-billion deficit in U.S. merchandise trade with Canada in 2001 was partially offset by a $6.0-billion U.S.

surplus in bilateral services trade.

Source: Compiled by USITC staff from official statistics of the U.S. Department of Commerce. Statistics on U.S.

services trade with Canada and Mexico are based on preliminary data provided in U.S. Department of Commerce,

Bureau of Economic Analysis, “U.S. International Transactions Accounts Data,” tables 10 and 10a, found at

http://www.BEA.DOC.GOV/BEA/International/BP_web/list.CFM?ANON=92.

investment in machinery and equipment, as well as vigorous growth in home construction and automotive sales.

Additionally, Canada’s forest products sector benefitted from the temporary suspension of U.S. countervailing/

antidumping duties on softwood lumber from Canada.

• During January-June 2002, U.S. exports to Canada totaled $72.3 billion and declined 6 percent ($4.7 billion)

from the corresponding period of 2001. Motor-vehicle parts and engines, electrical machines and equipment,

and certain types of machinery and equipment (such as water treatment apparatus and computers) were some

of the leading product categories experiencing export declines in first half 2002.

• U.S. imports from Canada during the first half 2002 totaled $105 billion, a decrease of 9 percent ($10.3 billion)

from the corresponding period of 2001. The decrease in imports from Canada was led by petroleum oils,

electrical energy, and natural gas. A much warmer than expected winter season and a sluggish U.S. economy

were the primary factors leading to reduced imports from Canada in the first half 2002.