Select Committee on European Union Fourteenth Report


Record of meetings held in Washington, 10-12 April 2000

10 April 2000

Dr Robert Shapiro, Under Secretary for Economic Affairs, Department of Commerce


  • The US lead in information technologies, primarily resulting from defence expenditures in the 1960s and 1970s.
  • Deregulation of telecoms in the 1980s and of financial markets in the 1970s.
  • The policies of successive administrations to encourage business formation generally, even at the expense of social welfare policies. In short, the policy of US government had been to "get out of the way".


New analysis demonstrated that access was "almost exclusively income-related": the findings were that there was an 80 per cent take-up amongst people with incomes of over $75,000. "Race was not an independent factor". "The divide looks more like a lag"—this could be partly attributed to rapidly falling prices of PCs, as well as developments such as encouragement by companies. Ford has decided to provide all its employees with a PC.

He added that Government had to make a commitment for universal access to the Internet and should set a goal for this of, say, 2005.


Defence-related R&D had played an important part in creating the IT on which the US lead in e-commerce was based but R&D was not predominately a private sector function. There was private sector work, particularly in the 1960s and 1970s at the Bell Labs. There had also been tax breaks for R&D but these had not singled out IT. Productivity gains in IT had averaged 10 a year for the past decade.

It is not clear whether there has been a spin-off from "Star Wars" policies. They could have spurred the development of certain technologies but IT is not now the leading edge technology. The focus is on biotechnologies and nanotechnologies.

Web TV could develop as a major means of delivering e-commerce, but Dr Shapiro remained sceptical. Microsoft had invested in it but it had flopped. For example, entertainment had not been particularly successful on the Web.


There are four fundamental areas for regulation by government:

    1.  Privacy
    2.  Fraud
    3.  Taxation
    4.  Intellectual Property

Privacy regulation was difficult to achieve, and there was political controversy about confidentiality. Much depended on cultural acceptance; for example the criminal law on the census was weaker than criminal law on the Internet, but there had been, so far as he was aware, no breach of census confidentiality. A company called MicroStrategies had been engaged in 'data mining', which was considered an infringement of privacy. The US was at the point of becoming aware of the problem, and the public was now sensitive. This could lead to restrictions on the sale of information.

On taxation the most challenging issue was jurisdiction. Taxation was determined by geography but the debate in the US was about whether to apply offline taxes to online. He thought that the US would ultimately apply a sales tax. The alternative was to raise income and property taxes, and this would be politically unacceptable. So it seemed that there would be an inexorable move towards sales tax online, possibly replacing the Federal system by a national system—Dr Shapiro thought this was "several years" away. Retail transactions on the Internet were a very small proportion of GDP so there was time to decide. International agreements were necessary to make such legislation effective.

With regard to corporation tax and offshore havens, the major economies had too much invested in the status quo to play the comparative advantage game. However, companies would undoubtedly work the market. Dr Shapiro referred to an Israeli firm operating in the UK which offered documentation handling services.

IPR is an important new issue. For example, had taken a patent out for "one click operations", not the kind of procedure that was normally patentable.


In Dr Shapiro's view (unsurprisingly), the Justice Department was right. Microsoft had been a classic case of leveraging a monopoly market into an adjacent market. Many IT markets had a tendency to create dominant players, and were driven by a desire to create a network effect. Virtual monopoly of systems was not in itself a violation, but it was improper to use forms of coercion to maintain monopoly.


The US did not see the EU as monolithic. Most commercial relations between the two existed through investment and not direct trade. The US approached Europe on a country-by-country basis. It did not yet see Europe as a Union; the EU was moving towards the state of union but in a rather inward-looking fashion.

With regard to the major problems between the US and the EU, there were lots of issues but nothing fundamentally difficult. There had been, after all, a 60-year trend towards greater liberalisation.

Asked whether this would lead to a change in US policies, for example a more liberal regime on patenting, or how the US would respond to, for example, the EU use of US patents, Dr Shapiro did not answer the questions directly. He argued instead that the spread of IT increased the value of information. He thought there would be more conflicts over IP rather than bananas.

Jeanine Poltroneri, Director Telecoms Strategy and Regulation, and Terri O'Connor, Director Global Regulatory Relations, Motorola

There was a short presentation of Motorola's business. In the ensuing discussion, the following points arose.


Ms O'Connor referred to a recent report by the Legg Mason Precursor Group, The Building Blocks of Growth in the New Economy, a guide to global investment precursors in telecom, Internet and e-commerce. She drew attention to the executive summary, which categorised countries according to their e-commerce environments. Only four countries—the US, the UK, Canada and Ireland (the "broadband four")—had relatively high growth prospects in the new economy, having created a very hospitable environment. The report had a matrix incorporating 25 building blocks of growth for the new economy, divided into three sections; the base being telecom, the next stage being Internet, and the top electronic commerce.


Ms O'Connor and Ms Poltroneri repeated much of the argumentation which Dr Shapiro had advanced.

  • The kick-start provided by defence-related R&D
  • A liberal view of Internet regulation


Self-regulation worked, for example privacy notices on websites. The government had a role, and that was to apply existing law. The Federal Trade Commission (FTC) had a range of instruments and could regulate when cases were clearly in breach of contract.

Ms O'Connor did not think that additional protection was needed: the private sector would act like a vigilante. The situation was one of flux. The regulated telecommunications world had crashed into the unregulated Internet world, and had thrown up issues for regulation. Consultation on what to do about these issues was only just beginning. The FTC was eager to understand trends and technologies, not necessarily to regulate for change.

The big self-regulation issue was privacy. Other issues were security and control which could be contracted out to website auditors. This form of control would help global expansion. The overriding theme was that regulation should be minimal and Federal, leading thus to a common standard. Unfortunately, individual States were beginning to introduce stage-by-stage regulation. The prime principles for all regulation should be that it be predictable, minimal, consistent and simple.


Ms O'Connor did not know whether there was a European lead. Motorola, like most of the US players, simply wanted to grow the market. They did not want mandated IP standards. Motorola shared the European perception that WAP was the growth area, and was convinced that the US would do as well as the EU because of the incidence of high use plus mobility, and the fact that it appeared to be an inevitable trend. But mobile telephony did not exclude the continued growth of the PC Internet ("We'll have both").

The US had been held back by the lack of a common standard. Also, US carriers did not understand how important number portability was (Single Transferable Number). In the US, a rather invidious position obtained, whereby airtime was paid for both by the calling party and the party called. This inhibited widespread use. Another factor was that the US land-based system was cheap and universal. Conversely, the use of the PC was helped by the flat fee rate. Manufacturers had not so far focused on price: downloading on the Internet, it was a question of speed. There were also other price variants such as the "buckets of minutes", which provided considerable flexibility.

Both Ms Poltroneri and Ms O'Connor thought that regulation in mobile telephony was now imperative because of the lack of standards. But there was no need for regulatory mandate, simply more consensus. There was also need for regulation on bandwidths. Motorola was not a big fan of the spectrum auction because of the pressure this imposed on price. Auctions were "the stop gap of the Federal government".


There are different tax regimes in the different States, in relation to e-commerce. This stimulated migration between the States. Large companies have no choice but to adopt the highest level of regulation because this governs the market standard. Industry would therefore press government to introduce standards.

Lunchtime discussion at the residence of HM Ambassador

Towards the end of lunch, HM Ambassador invited the Chairman to explain the aims of the current inquiry and the reason for the visit to Washington. Lord Brooke did so, and HM Ambassador then invited the American guests to comment.


He spoke of the digital divide and the importance of mobile telephony in dealing with this and the problems of disabled people. Help is need in many areas. For example, fewer than 50 per cent of native Americans are connected to the telephone system. Nevertheless, the FCC believes it is right for the US to rely on the market mechanism.


The attitude of US administrations has been "hands off the Internet" but the issue is not that simple because electronic contracts are enforceable as contracts - the law has to be applied, offline and online. Telecommunications companies have to be regulated and there have been different governmental responses to each issue. What would be a sensible approach? Regulation is essential for privacy, access, certainty and predictability. The appropriate government response is increased consultation between the private and public sectors.

The US regards the UK as an intermediary with the EC. For the future, the situation is that experts have different opinions and the best advice is to leave the Internet and e-commerce alone. It is bound to develop differently in different parts of the world, in response to different cultures. Standardisation is not so important as interoperability.


There is a digital divide between government and the private sector. The public sees governmental processes, which had been designed to move slowly. There will be problems ahead. The government will have to take a careful look at its own performance and lead by example. It needs to re-engineer the process of government - it is not sufficient merely to give everybody a PC and say, "we are now e-government". IBM has had "a near death experience" but has now seen the light. What does digital trade policy look like? There are a number of essential elements: market access, different framework for digital buyers and sellers, and digital non-tariff barriers.


Dr Shapiro picked up the theme of the previous speaker. It is true that government has to lead by example but there are plenty of areas where strange conventions still operate. For example it is impossible to introduce a laptop into the Senate and the Supreme Court has banned television. However, in his Department, the census form is now online, as is the patent and trademark office. Government should be a neutral platform but it has a social contract with the people to protect certain values, such as privacy.

There followed a discussion of the role of consumer power. Is it a "good thing" that the Internet empowers consumers or can consumer power block development - for example, the pressure for more regulation of GM crops. In Dr Pepper's view, the pressure comes not so much from the consumer as from incumbents who are not keen on competition. According to Mr Maxwell it is also a question of localism versus internationalism. For example South Carolina is currently introducing a Bill to control e-commerce activity and Texas has already passed such legislation. This is nothing short of "digital protectionism". The question is really 'how can we achieve on the Internet what we have already achieved in the physical world?'. The unique attribute of the Internet is the rise of consumer power.


It is important for Federal agencies to co-ordinate their perspectives, to make the change from the physical to the virtual, to bring about the education of Congress and government. There are changes in the pipeline that will appear towards the end of the current year, regardless of who wins the election. But, at the end of the day, the Administration's view is that the private sector has a better idea of what is necessary to promote e-commerce.


The relationship between government and the country it governs needs to be re-examined. The three elements of government are: responsibility, authority, and capability. Historically, governments have monopolised all three elements. Now, government retains responsibility because that is what people want but at the same time it lacks authority. In the US citizens are wary of giving the government any more authority. It also lacks capability, which has moved into private industry and the government has not yet found a way of adjusting to the new elements. Two years after the presidential address on 23 May, there has been no real progress. As for leadership by government departments, they are extraordinarily diverse. The State department in particular is Dickensian.

Dr Shapiro's response was that the prime role of government is to measure the e­economy. His group has spent the past 18 months determining measures for e­retail and has also just completed work on B2B. This has led to a revision of the GDP accounts in order to recognise software as invested capital. Neither business nor government can make intelligent policy unless they have the means to measure the effect of policy. In Mr Maxwell's view, Federal agencies vary. On the Department of Commerce website there is a picture of the Secretary of State and a website address, but no real information. This is rather as though had a picture of Jeff Bezos, and its stock exchange listing, but no information about the business it transacts.


e-Commerce rides on the back of the telecommunications infrastructure, which has to be right if e-commerce is to flourish. In the US patent law could be a restraint on the growth of the Internet, and this was an area where Europe and parts of Asia undoubtedly have an advantage.


The globalisation of the Internet depends on the telecommunications infrastructure. On new policies of reward options and of fulfilment, and a modern customs system, the US and industry has to work with other governments.


The discussion was impressive, probably more articulate and straightforward than would have been the case in a United Kingdom setting. One of its benefits was to put opposing views, particularly of the government and its role, alongside one another. Later meetings in the visit seemed to reinforce the view that Federal government is taking a back seat, especially in G2C, and not leading by example, in contrast to the leading roles of state governments.

Mr Bob Litan, Vice-President and Director of Economic Studies, Brookings Institution


"e-Commerce was an accident", resulting from a combination of factors and led by Silicon Valley.

  • The government invented an Internet browser (Netscape) in 1993.
  • AT&T was broken up in 1984. Until then copper wire had been universal and cheap, and there was no incentive for a monopoly to move to fibre-optics. The break-up "freed" Bell Labs to compete with Corning. Thus the backbone was in place when the browser arrived.
  • The growth of clusters, for example at Austin, Texas, Cambridge, Massachusetts, Seattle and in DC, where it had been centred around the George Mason University.
  • The most important factor was the parallel rise of venture capital firms and the liquid securities market. $50 billion has been produced over the last 10 years. Membership of the venture capital firms is by invitation, and confined largely to universities, pension funds, and very rich people.
  • The role of capital gains tax and the use of stock options. However, e-commerce is not being driven by capital gains alone.


  • Regulation. The US government operated a hands-off approach for a five-year period but is now moving towards the European model.
  • Taxation. There is a powerful anti-taxation feeling in the US, which is unlikely to go for VAT. There is no pressure to do anything about sales tax because individual states are currently in surplus. If there were an economic downturn, the States would either a) abandon sales tax and go for income tax or b) harmonise sales tax with an appropriate re-allocation between states. Producing a standard tax jurisdiction would be difficult—there are over 30,000 separate taxing jurisdictions in the US.
  • IPR is causing problems, particularly the latest trend of taking out patents on business processes. Amazon and its "one click" identification of customer, and Priceline and its customer bidding for airline seats are examples. It seems that if you have a bright idea and embed it in software, it becomes a "business process" and thus able to be patented. The government is being dragged in because the Internet is colliding with the real world.
  • Corporation tax is not a current problem apart from the issue of money laundering. The US operates the "elephants and mice" model. "Elephants", such as IBM or Microsoft, can be controlled but "mice", such as the Cayman Islands, cannot. The right policy is not to worry about the mice.
  • Fraud. The FCC is concerned about stock fraud, particularly emanating from the Internet "chat rooms".


In Mr Litan's view the US lags behind Europe in terms of civil R&D spending on new technologies but is ahead on defence R&D spend.


This is the future of the Internet. The EU has had the advantage of the GSM standard whereas the US has no common standard. Access is cheaper but usage is not. Costs are dropping.


In May Microsoft will roll out their new strategy on Windows for the Internet. They will apply Windows to everything—hand-held sets, refrigerators, cars. This is bad news for Symbian, who would be swept aside by the Microsoft juggernaut.

With reference to the anti-trust dispute, the Justice Department is insisting not only on separating the browser business but also on continuing judicial supervision. Quite reasonably, Microsoft will not accept this. There will be a hearing on about 24 May, followed by an appeal to the Supreme Court. There is no guarantee that the Supreme Court will take the case, and if it does, the outcome might be clear a year hence. The most likely outcome is that there will be some controls on Microsoft and Microsoft will not be able to discriminate ie sell at different prices to different people. But it is not likely that the Supreme Court will allow a judge to continue to supervise the company. In Mr Litan's estimate there is only a 30-40 per cent chance that the courts will rule on the break-up of Microsoft. His solution is to separate Microsoft's operating systems from its other businesses and then sub-divide the operating systems and make them compete against each other. This could lead to the fragmentation of standards but the technology will adapt to deal with this. In 1999 Microsoft made $90 billion, of which 43 per cent came from Windows. "Linux is for geeks."


No one knows the extent but industry should be able to handle the problem. The only blatant example is scams with credit card numbers. With reference to "denial of service" attacks—flooding ISPs with messages which put them out of action for a number of hours—the company RSA has now introduced a deflecting shield which can give protection but at the cost of slower reaction times.


The Administration consults academia, largely informally. There are a number of agencies, such as the Council of Economic Advisers and the National Science Foundation. There is also the ARPANet for defence-related research and the National Institute of Health for biomedical research. Government funding is by competitive grant with peer review panels. There is considerable choice in the US.


No one really knows. The OECD has conducted a survey but it was on the lines of "yes" and "no" questions, in other words it was historical and did not give any idea of future trends. The Brookings Institute will convene a seminar in September to debate the future of e-commerce—its impact on the environment, employment, energy, transport and distribution systems. The biggest problem is the lack of skilled workers. Mr Litan's solution is an extension to the college loans system to cover lifetime learning. There has been a case of a non-profit foundation taking young people (150 so far) from inner city problem areas, giving them two months intensive training in HTML (Hypertext Markup Language) and feeding them. This is the sort of initiative the government should support.


The Brookings Institute is a prestigious centre of economic studies. Mr Litan's views on Microsoft may be the most insightful we have received. The same applies to his views on taxation policy.

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