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Speeches and Papers

International Competition Policy and the WTO

by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Jisun Kim, Peterson Institute for International Economics

Paper presented at a conference titled One Year Later: The Antitrust Modernization Commission's Report and the Challenges that Await Antitrust, New York University
April 11, 2008

© Peterson Institute for International Economics


Despite seven years of negotiating effort, the Doha Round of multilateral trade negotiations, launched in November 2001 under the auspices of the World Trade Organization (WTO), remains stalled. The agenda spelled out in the Doha Declaration was quite ambitious: It addressed not only traditional trade issues such as tariffs but also new issues such as investment, competition policy, and environment. Unfortunately the breadth of the agenda contributed to disarray in the ensuing negotiations. In hopes of expediting talks, the General Council of the WTO subsequently dropped several controversial issues, among them competition policy, but the Doha talks are still deadlocked.1

Even though competition policy was deleted from the Doha agenda, anticompetitive practices continue to attract attention. The covert growth of murky cartels and the well-publicized boom (until the recent financial crisis) in cross-border mergers and acquisitions (M&As) raised concerns about possible negative impacts. While developed countries generally enforce competition policies at the national level, many developing countries do not. Moreover, cross-border practices often escape the scope of national regimes (except perhaps EU and US authorities). Therefore, several international institutions—the Organization for Economic Cooperation and Development (OECD), the International Competition Network (ICN), the United Nations Conference on Trade and Development (UNCTAD), and the WTO—actively discuss the creation of international frameworks to shape competition policy; they also publish relevant studies.


Singapore
Ministerial and the Doha Declaration

Notwithstanding the absence of binding competition rules within the WTO, competition concerns have long been a staple question within the international trading system. The draft of the 1948 Havana Charter, which was designed to create the International Trade Organization (ITO), addressed the possibility that international cartels and restrictive business practices would frustrate market access. After the ITO was informally rejected by the US Senate, all that survived (by virtue of President Truman's executive agreement) was the General Agreement on Tariffs and Trade (GATT). In 1995, the GATT was superseded by the WTO, and the General Agreement on Trade in Services (GATS), along with codes on several specialized subjects, were added to the mix to form the WTO. While the WTO system has not succeeded in dealing broadly with competition policy issues, several existing GATT/GATS articles and some of the other WTO agreements have implicitly embedded competition policy concerns. These specific provisions may find application in specific cases where anticompetitive practices restrict trade.2

A formal and more structured effort within the WTO began when members agreed to launch the Working Group on the Interaction between Trade and Competition Policy (WGTCP) at the WTO Ministerial Conference in Singapore in 1996. At the 2001 WTO Ministerial Conference in Doha, Qatar, members put the competition question on the agenda, and defined a focus of future work for the WGTCP in paragraph 25 of the Doha Ministerial Declaration. The text reads (emphasis added):3

"In the period until the Fifth Session, further work in the Working Group on the Interaction between Trade and Competition Policy will focus on the clarification of: core principles, including transparency, non-discrimination and procedural fairness, and provisions on hardcore cartels; modalities for voluntary cooperation; and support for progressive reinforcement of competition institutions in developing countries through capacity building. Full account shall be taken of the needs of developing and least-developed country participants and appropriate flexibility provided to address them" (Paragraph 25, Doha Ministerial Declaration)

At subsequent WTO meetings, however, members failed to reach a consensus on the content of possible rules, mostly due to the objections of developing countries. As mentioned, after the September 2003 Cancún Ministerial Conference ended in deadlock, the General Council of the WTO dropped competition policy from the Doha agenda in 2004.4 Jackson (2006) later reasoned that the WTO's reluctance to explicitly address competition policy could be explained by various constitutional and procedural constraints. For example, it is difficult to harmonize existing national regimes into a single standard, especially since national competition policies not only entail different standards but also require complex factual determinations of changed performance in specific markets as a result of designated actions (e.g., tying agreements, parallel import restrictions, and M&A deals).


Disagreement among Countries

In their landmark study, Graham and Richardson (1997) contended that national competition policies around the world commonly seek a blend of efficiency and fairness for domestic markets. However, cross-country conflicts are highly likely because the weights assigned to efficiency and fairness often differ between countries, as well as the meaning of these crucial terms. Thus while most countries agree that a strong relationship exists between trade and competition, and that a fundamental purpose of the WTO system is to open markets to fresh competition, countries diverge on the merits, potential modalities, and even the necessity of adopting competition law in the WTO.

The most energetic proponent of an international competition regime is the European Union. Indeed, for some years, the European Union has advocated the integration of competition policies into international institutions. EU competition policy has played a significant role both in fostering the single market and in curtailing the reach of major US firms (notably GE and Microsoft). These successes have inspired EU officials in their quest to "export" EU competition policy, and they have also inspired other countries to explore similar disciplines within the WTO framework.

US enthusiasm is lukewarm at best. The Havana Charter of 1948 was informally rejected by the US Senate partly because leading US business firms feared that limitations on restrictive business practices might be used as a club against their commercial interests. Fifty years later, in the 1990s, the United States still opposed multilateral negotiations on competition policy, but in the wake of 9/11 a compromise was reached in order to launch the Doha Round. Since then, US firms have come to appreciate that anticompetitive practices in China, India, Brazil, and other important emerging countries are limiting their commercial opportunities. Consequently, the United States has expressed more willingness to cooperate with the European Union on the central issues of a competition agreement. However, the United States and the European Union continue to advocate different points of view on key modalities—each espousing its own approach and standards.

By contrast with EU and US positions, many developing countries stoutly oppose an international competition regime. They have two sorts of reasons: those the countries talk about in international gatherings and those that actually drive the political decisions in their own capitals. As talking points, many developing countries argue that they have little experience with competition laws and that creating a meaningful competition policy would cost time and money. At the level of political decisions, the reality is that many developing countries fear that international competition rules, based on US or EU models, would interfere with their preferred industrial policies and investment screening techniques. Bluntly speaking, many countries want "policy space" to nurture monopolistic practices in selected industries. In 1948, at Havana, most developing countries favored competition rules because they viewed themselves as powerless hewers of wood and drawers of water, subject to the predatory behavior of US and European industrial firms. Sixty years later, the same countries enthusiastically support infant industry policies for selected manufactured products and business services—including limits on competition.


Export Cartels and M&A Activity

Quite recently, with the growth of export cartels and M&A activity, some developing countries are again beginning to appreciate their vulnerability to anticompetitive practices. Empirical studies find that cartels exist on a large scale and that imports by developing countries are often subject to cartel influence.5 Hoekman and Saggi (2004) argued that, in principle, by invoking the effects doctrine, domestic competition policy can be enforced against cartels organized abroad. But in the real world, many developing countries lack the expertise and resources to pursue this avenue of relief.

Moreover, export cartels are often exempted from home country discipline because the firms joining these cartels arguably do no harm to domestic consumers. But starting with the Organization of the Petroleum Exporting Countries (OPEC), and ranging across multiple commodities, transport services and industrial products, export cartels clearly impose higher prices on importing countries, many of them impoverished nations.

As criticisms of export cartels have mounted, some exporting countries have voluntarily eliminated or circumscribed their legal exemptions. Yet many countries still maintain exemption rules. Developing nations have urged that foreign export cartels which inflict high prices on poor countries be abolished. At the same time, many developing countries—especially those that produce natural resources—want to preserve their own ability to forge export cartels.6

International mergers present another challenge to developing countries. Since the 1990s, the pace of M&As has significantly increased, though the past year has seen a sharp drop. Cross-border M&As have enhanced the market power of certain giant multinational corporations. Fox (2003) has argued that global mega mergers could have harmful effects in nations that have economically separated markets, no local competition, and lack the legal power to protect themselves. As examples, she has pointed to Boeing/McDonnell Douglas, Exxon/Mobil, Sandos/Ceiba-Geigy (Novartis), Gencor/Lonrho, British Oxygen/Air Liquide, WorldCom/Sprint, and GE/Honeywell. Like export cartels, cross-border M&As are usually not restricted by the home jurisdiction where the MNE headquarter offices are located, because there seldom is a significant reduction of competition in the home market. On the other hand, few developing countries have the legal or economic clout to tackle large MNEs.


Bilateral and Regional Agreements

While WTO negotiations on an international competition regime have stalled, some countries have addressed competition policy issues in their bilateral or regional agreements. The most successful case is the European Union. Over several decades, the European Commission has developed a body of European law (drawing on the laws of member states), and has worked out a division of competence between the European Commission and national authorities. As a result, the European Union has made great strides toward creating a single market, now covering 27 countries. The United States has enacted its own laws related to international competition policy, notably the International Antitrust Enforcement Assistance Act (IAEAA) of 1994. This statute authorizes US authorities to enter into agreements for sharing business information in the context of investigations of cross-border transactions.

Bilateral and regional trade agreements have blossomed since the early 1990s, and they have become an effective alternative to the WTO for addressing competition policy questions. According to the UNCTAD (2005), of the 300-odd bilateral and regional trade agreements in force or in negotiation, over 100 contain provisions related to competition policy. The main reason is to ensure that efforts to liberalize trade by eliminating border barriers are not undercut by restrictive practices behind the border. The United States is quite active among countries that have incorporated competition policy provisions in trade agreements. Several US free trade agreements (FTAs), either in force or awaiting congressional ratification, include chapters on competition policy.7 However, by contrast with competition laws in the European Union and ASEAN, which promote high-level economic integration, the competition provisions in most bilateral and regional agreements are not binding commitments, and instead depend on the goodwill of the parties to have meaningful effect.

Nonetheless, these agreements may offer an opportunity for developing countries to level up their competition policy. In its study, the OECD (2006) analyzed 86 trade agreements that include competition-related provisions, and found that about two-thirds were between developing countries (often referred to as South-South agreements), and more than a fourth covered signatories from developing and industrialized economies (so-called North-South agreements).8 This pattern suggests an opportunity for developing countries to address their own competition policy concerns in bilateral or regional trade agreements.


Perspectives on Future Competition Policy under the WTO

A multilateral agreement on competition policy may be highly desirable. Given sharply divergent views, however, the prospect for a WTO agreement covering all 150-odd members is remote. Over the next decade (after the Doha Round is concluded or abandoned), the best prospect is for a plurilateral agreement reached among a subset of WTO members. Within this more limited ambit, it would be important to have some developing countries on board. An acceptable agreement under WTO auspices should thus resolve some issues of interest to developing countries, such as export cartels and the anticompetitive aspects of large M&A deals. To end on an optimistic note, scope exists for a constructive WTO competition policy agenda that covers the interests of both developed and developing countries.


References

Fox, Eleanor M. 2003. International Antitrust and the Doha Dome. Virginia Journal of International Law 911.

Graham, Edward M., and J. David Richardson, eds. 1997. Global Competition Policy. Washington: Institute for International Economics

Hoekman, Bernard, and Kamal Saggi. 2004. International Cooperation on Domestic Policies: Lessons from the WTO Competition Policy Debate. Discussion Paper No. 4693. Centre for Economic Policy Research.

Jackson, John. 2006. Sovereignty, the WTO, and Changing Fundamentals of International Law. New York: Cambridge University Press.

Levenstein, Margaret C., and Valerie Y. Suslow. 2001. Private International Cartels and their Effect on Developing Countries. Background paper for the World Bank's World Development Report 2001 (January 9). Washington: World Bank.

Levenstein, Margaret C., and Valerie Y. Suslow. 2004. The Changing International Status of Export Cartel Exemptions. Working Paper 897. University of Michigan.

OECD (Organization for Economic Cooperation and Development). 2006. Competition Provisions in Regional Trade Agreements. OECD Trade Policy Working Paper No. 31. COM/DAF/TD(2005)3/FINAL. Paris.

UNCTAD (United Nations Conference on Trade and Development). 2005. Competition Provisions in Regional Trade Agreements: How to Assure Development Gains. New York: United Nations.


Notes

1. Issues that the General Council decided to exclude are Relationship between Trade and Investment, Interaction between Trade and Competition Policy, and Transparency in Government Procurement. These are enumerated in the original Doha Ministerial Declaration in paragraphs 20-22, 23-25, and 26, respectively. Even though the Working Group on the Interaction between Trade and Competition Policy (WGTCP) is inactive, the WTO Secretariat continues to respond to national requests for technical assistance. For more details, see the WTO website (www.wto.org/english/tratop_e/dda_e/draft_text_gc_dg_31july04_e.htm#invest_comp_gpa).

2. The core GATT articles such as Article II, III, XI, some GATS articles, and some WTO agreements such as Trade-Related Aspects of Intellectual Property Rights (TRIPS) contain elements of competition policy.

3. Issues related to the interaction between trade and competition policy are identified in paragraphs 23, 24 and 25 of the Doha Ministerial Declaration. The text of the entire Doha Ministerial Declaration can be found at www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm#interaction.

4. After the Cancún Ministerial, WTO members came up with the so-called July package, in an effort to put the negotiations and the rest of the work program back on track. The text of the General Council's decision on the Doha Agenda work program (the "July package") was agreed on August 1, 2004.

5. In the 1990s, EU and US authorities investigated a number of cartels in industries such as vitamins, steel, and animal feeds, and found that cartels often affected more than one national market. Levenstein and Suslow (2001) report that developing countries import many goods from industries where a price fixing conspiracy and cartels existed.

6. For more details, see Levenstein and Suslow (2004).

7. For example, FTAs with Canada and Mexico (NAFTA), Chile, Singapore, Australia, Peru, Colombia, and Korea include a chapter relating to competition policy. For details, see the USTR website.

8. The OECD (2006) also identified eight types of competition policy–related provisions in these 86 agreements. Not every agreement contained all eight types of competition provisions. For more details, see OECD (2006).


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