Prospects for Transatlantic Competition Policy
by Mario Monti
© Institute for International Economics. All rights reserved.
The author is commissioner of the European Union for competition and has been a member of the European Commission since 1995. He was previously rector and then president of Bocconi University in Milan after a decade of distinguished service as professor of economics at the university. This is a slightly edited version of the presentation he made at the inauguration of the Whitman International Lecture Series, supported by the Whitman Family Foundation, at the Institute on March 30, 2001.
This policy brief presents recent examples of, and trends in, EU-US cooperation in relation to merger control, with particular emphasis on how it is facilitating an increasing convergence in our respective approaches. The brief also discusses our initiatives in the multilateral arena. I am referring to the European Commission’s initiative to persuade our World Trade Organization (WTO) partners that negotiations should commence on the conclusion of a competition agreement and on the ideas for the creation of a global competition forum. I have taken note with satisfaction that the Institute for International Economics as well as other research organizations have for some time been supporters of the idea of negotiating a WTO agreement on competition policy.1
Globalization and the “Merger Boom”
The world economy has undergone profound change in recent times, as a result of which competition policy has taken on greater importance than ever before. Not only have we witnessed the remarkable spread of market capitalism to most parts of the globe but we have also seen the liberalization of many formerly monopolized and state-controlled sectors. Parallel to this worldwide economic liberalization, we have witnessed a progressive reduction in trade barriers and a dramatic increase in the volume of goods and services being traded across borders. This, in combination with remarkable technological advances, has resulted in marked interdependence among economies worldwide.
One of the principal effects of these economic developments has been a dramatic growth in merger activity in general, and in the number of cross-border mergers in particular. The merger boom of the 1990s has been particularly influenced by the globalization and growing integration of world financial markets, and in Europe by the advent of a single European currency. This recent merger wave is noteworthy—not only for its sheer size in terms of value and range of industries involved but also for its truly global scale. Today’s global mergers go be yond the simple combination of activities in different regions of the world: they might be better described as the worldwide integration and consolidation of such activities. As a result, many of the transactions, which have taken place in recent years, have significantly modified on a global scale the fundamentals of competition in the industries concerned.
Globalization and the growth in these cross-border mergers present major challenges for competition authorities around the world and have highlighted the importance of seeking to ensure a degree of convergence and coordination among the world’s competition law enforcement systems, particularly between the EU and US antitrust authorities.
Recent Developments in EU-US Cooperation in Merger Control
Over the past decade we have concluded two competition cooperation agreements with the United States: the 1991 (basic) and 1998 (“positive comity”) agreements. Our experience of EU-US cooperation has been that it works very effectively, particularly in merger cases, thus substantially reducing the risk of divergent or incoherent rulings. Commission staff are in close and daily contact with their counterparts at the Antitrust Division of the US Department of Justice (US DOJ) and Federal Trade Commission (FTC). Indeed, I am proud to say that EU-US cooperation in competition/antitrust law enforcement has become something of a model for transatlantic cooperation generally.
Cooperation in merger cases has been more intensive than ever during the past year or so: an unprecedented large number of operations have been scrutinized simultaneously on both sides of the Atlantic. Interagency discussions can focus on any or all of the main issues likely to arise in the context of a merger investigation: the “definition” of markets, the likely competitive impact of a transaction on those markets, and the viability of any remedies suggested by the merging parties. Following is a more detailed insight into a number of merger investigations involving close transatlantic cooperation in recent times. This will give you a flavor of how it works in practice and of the kinds of issues that can arise.
Some Recent Examples of EU-US Cooperation in Merger Cases
In the MCI WorldCom/Sprint investigation, the cooperation between the European Commission and the US DOJ involved (with the help of waivers from the merging companies of their confidentiality rights) exchanges of, and concerning, information submitted by the merging parties. In addition, on the basis of waivers much information gleaned from third parties was also shared between the agencies. The European Union had to collect Internet traffic and revenue data from a large number of companies domiciled in the United States. This was made possible only due to the intense cooperation that took place between the Commission and the US DOJ. Such an extensive sharing of information allowed both case teams to discuss in-depth the merits of the case as well as the submissions from the merging parties and the third parties, thereby facilitating consistent assessments of the competitive impact of the transaction in the area of joint concern.
When we reached the stage of formally stating our competition concerns to MCI WorldCom and Sprint, representatives of the US DOJ attended the Commission’s “oral hearing” of the merging parties’ reply to our objections. Indeed, it has now become standard practice for representatives of the antitrust agencies to attend oral hearings in cases involving close EU-US cooperation—a virtually unprecedented step forward in EU-US regulatory cooperation. And during the MCI WorldCom/Sprint investigation, a representative of the Commission attended for the first time one of the so-called “pitch-meetings” (a rough equivalent of the Commission’s oral hearings) that took place at the US DOJ.
Finally, we discussed at length the proposed divestiture of the Sprint Internet business. But in the face of our opposition, the parties eventually withdrew the proposal. Indeed, cooperation at the remedy stage of proceedings has become much more prominent recently. Last year, for example, in the Alcoa/Reynolds and AstraZeneca/Novartis investigations the EU and US authorities conducted parallel negotiations with the merging parties and assessed the remedies together. As a result, the risk of incompatible remedies being agreed to was avoided. In the latter case, this was particularly important because, even though the relevant geographic markets were national, the commitments had to be implemented worldwide.
Convergence in EU and US Approaches to Merger Control
Our respective rules (EU competition law and US antitrust law), while phrased in quite different language and with very different historical antecedents, are in most respects pursuing the same objectives. There has never been any attempt to harmonize those laws and yet commentators acknowledge with virtual unanimity that the application of EU and US competition law—notably in the field of merger control—has seen a marked convergence in recent times. This is an organic process and it is a trend that is very much welcome and to be encouraged, particularly in view of the increasing convergence of the world’s economies.
For obvious reasons, convergence is particularly beneficial with regard to the assessment of large, transnational mergers requiring clearance on both sides of the Atlantic. Our rules prohibit mergers that lead to the creation or strengthening of a dominant position, while US law prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” While you might think that the application of these seemingly different tests would at times lead to divergent outcomes, that has not been our experience. The main reason why we do not see such divergence, in my view, is that both the EU and US authorities are applying the same analytical framework when examining the competitive effects likely to result from a proposed merger: we share a common understanding of what the correct microeconomic analysis of these operations should be.
The MCI WorldCom/Sprint and Alcoa/Reynolds cases are good examples of substantive convergence despite different laws. In the former case, both the Commission and the US DOJ concluded that a prohibition was warranted. Regarding the latter transaction, we both agreed there were competition problems that required serious remedial action. We also agreed on the existence of a relevant worldwide geographic market with different effects being produced in the United States and in the European Community. Ultimately the most significant part of the remedy involved divestiture of one of the party’s major production plants, which happened to be located neither in the European Union nor in the United States, but in Australia.
Where we do reach different conclusions about whether a particular transaction should be allowed to go ahead, this is generally because the effects of the merger are likely to be different in the two jurisdictions. Merger assessment in certain industries may be less likely to lead to similar remedies being imposed. This occurs notably when the markets have a more regional scope. For example, while major competitors in industries such as pharmaceuticals and chemicals are present throughout the world, the main competition effects in these industries have often differed between the United States and the European Union. This happened, for example, in the recent cases of AstraZeneca/Novartis and Dow Chemical/UCC, where the remedies that were fashioned by the EU and US authorities were customized to meet the specific problems identified in their respective jurisdictions.
In Air Liquide/BOC, another case where EU-US cooperation was extremely close throughout the proceedings, the geographic market was worldwide in scope. And yet the competitive effects, and as a result the remedies required, were quite different between the European Union and the United States.
This divergence occurred not because of different laws but because of different competition concerns. In the European Community, the Commission found that the “serious doubts” raised by the combination of two competitors—one with a dominant position in France, and the other with a dominant position in the United Kingdom—could be resolved by a remedy requiring BOC’s divestiture of its 25 percent share in the UK market, thereby immediately introducing a new competitor to outweigh the loss of potential competition. In the United States, however, the issue was one of elimination of actual, not potential, competition—and the consequent reduction of players from four to three in a highly concentrated market. As a result, the type of remedy that was found satisfactory in the European Union was not considered to be adequate in the United States. Consequently, the US FTC sought to impose stricter measures—measures that the parties found so burdensome that they abandoned the deal entirely. So, a deal that was authorized in the European Union subject to very substantial commitments fell apart in the United States in the face of strong FTC opposition.
Where cases may produce differing competitive impacts on the two sides of the Atlantic, what is important is to ensure that companies are not harmed by the two parallel investigations and remedies. This is what we tried to avoid when, in the Exxon/Mobil case, we accepted that, if another jurisdiction imposed remedies that were incompatible with those negotiated with the European Commission, the parties could come to the Commission and request that the incongruity be removed. Of course, any alteration would, to the greatest extent possible, have to be in keeping with the competition goals of the remedies originally agreed upon.
Procedural Differences Have to Be Lived With
The principal differences between the EU and US merger evaluation processes are procedural rather than substantive. While our competition analyses are increasingly convergent, it is true that our procedures—and particularly our time limits—do differ to some extent. This can lead to some practical difficulties, though not insurmountable ones, in that one jurisdiction (and very often the European Union, given our strict deadlines) has to make a decision first. There are calls for some international harmonization of procedures and I recognize that those calls—objectively speaking—do have some merit. At the same time, we must be realistic in our ambitions: our procedural differences reflect, to a large extent, different legal and administrative cultures—these are not things that can be changed overnight.
Policy Dialogue as a Facilitator of Convergence
Close dialogue and cooperation between the Commission and the US antitrust authorities (the DOJ and FTC) has made a substantial contribution to the trend toward convergence. Indeed, it is a sine qua non for any really effective and substantial cooperation in antitrust enforcement that the authorities see more or less eye to eye on how to assess and deal with similar competition problems.
There are always things that we can do better—I am very conscious of this. But we are constantly seeking to reduce the scope for differences between us. For example, just over a year ago, we (Commission/DOJ/FTC) agreed that a transatlantic working group should be set up to seek further EU-US convergence on two crucial aspects of merger control: first, our approaches toward the identification and implementation of remedies (in particular, divestitures) and post-merger compliance-monitoring; and, second, our analytical approaches toward oligopolistic/collective dominance or “coordinated interaction” as it is termed in the United States.
To date, this working group has been focusing its energies primarily on remedies. These discussions have proved very useful to us—and I think to the US agencies also. The working group will soon shift its attention toward the issue of oligopoly in merger control, a subject that is pointed by some commentators
as one where the European Union and the United States sometimes take different approaches. The phenomenon of oligopolistic dominance is, in my view, of particular pertinence in the examination of global markets. While a finding of single firm dominance is in most instances unlikely in such markets, these markets can often be characterized by the presence of a small number of globally active companies. Such a market structure can be the result of a wave of concentration in a particular sector, such as the one that has recently occurred in the oil industry. In order to be able to address—in the merger control context—the potential competition problems that may arise in such oligopolistic markets, it is necessary to develop a concept of collective dominance; such a concept is now well established in EC law.
One example, I think, clearly illustrates the importance of the concept: in world markets, characterized by the presence of a small number of global players, potential entry by firms in neighboring geographic markets is by definition impossible. Without a concept of collective dominance, it would not be possible to challenge a merger that would result in the creation of a global oligopoly of this kind.
This pooling of ideas is a mutually beneficial exercise and I think it represents an important aspect of our efforts toward ensuring a more convergent analysis of the impact of cross-border mergers on the two sides of the Atlantic.
The European Union has recognized, for some time, that bilateral cooperation has its limitations: we cannot realistically expect to build the same intensive cooperative relationship that we have with the United States, with all of our counterparts around the world—the price, in terms of expenditure of scarce administrative resources, would simply be too high. It is therefore time, in my view, to intensify the pursuit of multilateral and plurilateral solutions.
A WTO Competition Agreement
I am convinced of the need to put in place a WTO framework agreement ensuring the respect of certain basic competition principles. The Commission (with the whole-hearted support of all the member states of the European Union) has been the principal advocate of such an initiative and has, through deliberations of the WTO Working Group on Trade and Competition, been attempting to persuade member countries of its merits. We are convinced that a framework agreement would serve to underpin the impressive progress that has been made in trade liberalization over the past few decades, by ensuring that governmental barriers to trade are not replaced by private ones that have the same effect.
A WTO agreement on competition would be firmly premised on a commitment by member countries to have in place, and to enforce, domestic competition laws. The European Union is suggesting that these laws be based on “core principles” reflecting what we believe already represents a consensus among WTO members: the principles consist of a set of systemic guarantees, coupled with a commitment to outlaw the most economically harmful forms of anticompetitive behavior.
Regarding systemic guarantees, one is the fundamental WTO principle of nondiscrimination, meaning that domestic laws should not discriminate against firms on the basis of their “nationality”. In addition, we believe the principle of transparency should apply: competition laws and regulations should be publicized, including any exclusions or exceptions, thereby enabling firms to familiarize themselves with the applicable law. Finally, enforcement should respect the “due process” of law, including the opportunity for those being investigated to put their case to the authorities before a decision is made, as well as the right to appeal such decisions to another body, be it administrative or judicial.
Regarding substantive commitments, the European Union is proposing that all WTO members should outlaw cartels. We are convinced that this reflects a common view among members, not just among developed countries but in the developing world as well, as to the economic harm that such behavior engenders. Building consensus about the need to regulate other anticompetitive practices will be an ongoing process and the WTO agreement would evolve to accommodate such common views.
But I should be clear about one thing: in calling for a WTO agreement, we are not seeking to establish by stealth a global competition authority, which would erode the sovereignty of national authorities. On the contrary, strong national enforcement agencies are indispensable to the success of a framework agreement. Nor is the European Union proposing a harmonization of substantive competition laws or that individual decisions of national competition authorities should be subject to dispute settlement under the WTO.
I am very hopeful that we can convince our trading partners—and not least the United States—of the importance of this initiative and that substantive negotiations can be undertaken as part of the next trade round which, I hope, will be launched at Qatar in November 2001.
A Global Competition Forum
There has been considerable talk over the last year or so about the idea of creating some kind of a broad-based global forum for the discussion of competition policy issues generally. I am an enthusiastic proponent of the idea. As I explained during a speech I gave at the European University Institute in October 2000, I am convinced that the creation of such a forum would meet the need to put in place a focal point for discussion between those responsible for the development and management of competition policy worldwide. There are today over 80 countries that have enacted some form of competition law regime, many of which have only been introduced during the past decade—and more are in the pipeline.
There is a clear need for a place where the whole range of competition policy issues—substantive, systemic and enforcement-related—can be debated. The end-objective should be to achieve a maximum of convergence and consensus between participants through dialogue, and an exchange of experiences on enforcement policy and practice.
Earlier this year, I joined a number of like-minded senior competition law officials and professionals at an informal gathering for the first “brainstorming” to discuss how we should go about launching what has become known as the “Global Competition Forum”.
We agreed that the forum should not be a new international institution and that it should involve a minimum of permanent infrastructure, with support primarily provided by its participants. It should be first and foremost a competition authority forum but would draw together all interested parties—both public (e.g., other international organizations) and private (e.g., business, professional, consumer and academic or research bodies), who could all be appropriately associated with the forum as participants and “facilitators”. The support of facilitators could take a variety of forms including the provision of venues for discussion or of technical expertise; the International Bar Association has already generously provided its services to the development of the initiative.
I know that many will ask: but aren’t we already committed to pursuing multilateralism in competition policy in the next trade round? Wouldn’t this initiative risk to undermine those efforts? So let me be clear about this: the forum is not being proposed as an alternative to a multilateral competition law framework at the WTO. Rather, the two should be regarded as complementary. As I have just explained, our WTO initiative is currently aimed at putting in place a set of basic systemic guarantees, coupled with certain minimum substantive requirements, that would be binding on member countries. The European Union believes that this agenda reflects an existing consensus about what should be the central features of a sound competition policy. The work of the global forum will, in my view, reinforce that consensus and extend it to other aspects of competition policy. So the two avenues can be followed in parallel and be mutually reinforcing in their pursuit of the same ultimate competition policy objectives.
Developing Countries to Benefit from These Multilateral Initiatives
The global forum, and indeed a WTO competition agreement, will—in my view—be of particular benefit to developing countries. Closed and nontransparent markets, and the absence of effective competition between enterprises, are obstacles to economic growth in much of the developing world. The pursuit of a robust competition policy by developing countries should be an important ingredient in any economic reforms designed to promote growth: it encourages industrial competitiveness by rewarding efficiency and innovation, thereby fostering investment.
The fact that many developing countries are still in the process of developing a competition law framework renders the advent of the forum—and, in due course, of a WTO competition agreement—all the more timely: this would help ensure that new competition regimes are based on commonly agreed principles and that developing countries can benefit from the experience acquired by other countries in the establishment of effective enforcement structures. Moreover, these initiatives will ensure that competition authorities in developing countries benefit from enhanced international cooperation, including the provision of technical assistance.
1. See Global Competition Policy, Edward M. Graham and J. David Richardson, eds. Washington: Institute for International Economics. December 1997.