GEI Newsletter Issue No. 2

Global Competition Policy in the International Economic Order - by Peter Holmes

Also in this issue:

Editorial
by David Vines
‘Political Economy, Sovereign Debt and the Role of the IMF’ G E I Workshop, Cambridge, 7/8 July 1995
by Sylvia Vally
Seminars at Chatham House on Subsidiarity in the Governance of the Global Economy

Global Competition Policy in the International Economic Order
by Peter Holmes

Back to - 1. Introduction

4. Competition policy in international negotiations

Thus in the late 1980s a new momentum for agreement on international aspects of competition policy grew, but it was pushed by two opposing forces: liberals who want more competition, and mercantilists who wanted others to open their markets. The competition authorities themselves were clearly wary of their policy domain being hijacked and have insisted on the utmost caution. Expert Committees at the OECD have been working in this area for many years. With the commissioning of a new round of studies in the mid-1980s on international competition codes, we might have expected a common negotiating position from the advanced industrial countries to emerge quickly from the OECD and be the starting point of a WTO negotiation, as happened with the code on public procurement. In 1985 and 1986 the OECD published a set of texts on trade and competition policy and issued a set of ‘instruments of cooperation’, but these were purely voluntary. (UNCTAD has also produced a set of guidelines for national competition policy, but its brief falls short of international rules.)

In the 1990s the OECD has produced a very impressive series of technical reports, often drawing on expertise of members of the GATT secretariat. Academic proposals have also been put forward. For example, Scherer (1994, ch.5) proposes that an International Competition Policy Office should be set up in the WTO with powers to monitor and eventually enforce competition rules. It would eventually deal with world-wide monopolies, cartels and abuses of patent rights (with an allowance for the preservation of a small number of primary product cartels). A similar plan was proposed by a group of international trade lawyers known as the Munich Group, but the plan was considered too ambitious even by some of the drafting committee and was firmly shot down within OECD discussions. In fact none of the recent plans had any more success than the earlier proposals. Discussions continue yet the OECD papers have been slow even to appear in publication.

(Scherer, F M (1994), Competition Policies for an Integrated World Economy , Washington, Brookings Institution)

5. The line-up of interests

The basic reasons are complex. As we noted, the trade and competition agenda is being driven from a number of different directions, which have different aims. With the globalization of some sectors of industry and the internationalization of production, we can no longer clearly distinguish producers by nationality (for example, the case of cars), and in certain industries we have seen the emergence of what are in effect global oligopolies, and even monopolies (for example, the cases of Intel and Microsoft). The risk of predation to establish control of the global market is now not so wholly far-fetched in some markets. So there is a genuine economic case for preventing global abuses, including strategic cross-subsidizing behaviour by private firms.

But at the same time there is a worrying mercantilist angle to this. If a framework were established which allowed one country to erect barriers to entry to its markets to punish alleged anti-competitive exporters, then its own firms could exploit this in order to engage in strategic behaviour directed against other countries (and consumers might end up with the worst of all worlds). Accusing a country of rigging its home markets can seem a very good excuse for ‘retaliatory’ protectionist behaviour. The sacrosanct ‘most favoured nation’ (MFN) principle of GATT would be very vulnerable in a policy framework which allowed such action. Economic liberals are of course very sceptical as to whether there is any scope at all for such policies to be successful in the way suggested, and they believe that such government intervention would do more harm than good.

Many economists and lawyers believe that proposals for such international rules on competition policy smack too much of demands for ‘fair trade’, and that a framework of this kind would be captured by protectionist interests. Also national anti-monopoly authorities are wary of the aims of their counterparts in the trade ministries.

Many business interests have a much simpler goal in mind than avoiding global predation: cross-border mergers require the involvement of a very large number of competition authorities and incur costly legal fees. So a simplification of rules would be desirable. But as long as few mergers are actually blocked and the legal fees can be passed on to consumers, this problem is not a matter of urgency.

But big multinationals, who are always glad to see the back of barriers to entry which affect them, are understandably less enthusiastic about the prospect of international rules that might discipline their activities. So just as US enthusiasm swelled for chastising Japan about the way its anti-trust laws were applied, people began to realise that any new international rules that constrained Japan would actually have an impact on big US firms, and so unilateral action against the alleged activities of Japanese Keiretsu (big business) groups became more appealing.

But the European Commission is still keen on the idea of international competition rules for a number of reasons. More and more, the EU competition authorities are finding that their cases require cooperation with other jurisdictions (e.g. on strategic alliances in telecoms, complaints against Microsoft, etc.). Also, the Commission, embedded as it is in a rule-based system of intra-EU trade governed by competition rules, would find a broader system congenial, and is keen to see a bigger role for the WTO where the Commission alone speaks for the EU.

We have seen over the last few years a flurry of activity taking place within the OECD as a forum, with very impressive technical reports produced, but still a consensus among the OECD member states that more discussion of this kind is necessary before the topic can be allowed to escape from the closed forum of the OECD. The issue is said to be extremely technical and complex, as indeed it is. And so there is resistance against a move to a negotiating forum of the WTO, where the developing countries (and UNCTAD) could play a role.

6. What has been achieved? Competition in the Uruguay Round

Despite the interest in the subject, competition policy was not a formal topic for the Uruguay Round. And yet competition issues found their way into many parts of the Uruguay Round Agreement – other than the central area of trade in goods! The agreement on trade in services (GATS) requires member states of the WTO to take action against some forms of monopolistic abuse; the agreement on intellectual property (TRIPs) specifically authorises certain forms of action; and the agreement on investment (TRIMs) lays down a procedure for bringing international restrictive practices onto the agenda.

The GATS specifies in Article II that all parties must ensure the equivalent of the ‘most favoured nation’ (MFN) provision in the GATT agreement on goods. This is not defined in detail, but given the role of cartellistic arrangements in services, something had to be said about private restrictive practices. Article VIII states: ‘Each member state shall ensure that any monopoly supplier of a service in its territory does not in the supply of the monopoly service in the relevant market, act in a manner inconsistent with that member’s obligations under Article II and specific commitments. Where a member’s monopoly supplier competes either directly or through an affiliated company, in the supply of a service outside the scope of its monopoly rights and which is subject to that member’s specific commitments, the member shall ensure that such a supplier does not abuse its monopoly position to act in its territory in a manner inconsistent with such commitment’. In other words, no unfair cross subsidies from closed to open markets, and private firms are also covered if their monopoly status is granted by law. This is not all. Article IX states: ‘Members recognise that certain business practices of service suppliers, other than those falling under Article VIII, may restrain competition and thereby restrict trade in services. Each member shall, at the request of any other member, enter into consultations with a view to eliminating such practices’. This is slightly weaker than Article VIII but very broad. The annex on telecommunications services goes a little further in specifying what the MFN rule might mean for this sector, notably that infrastructure providers must offer non-discriminatory terms to foreign service providers, essentially a competition rule as it concerns firms not states. The annex on air transport is more cautious, exempting much of what matters from the GATS altogether – including pricing and traffic rights! But it does include some areas that have in the past given rise to legal action – including computerized reservation systems. We can see that the issue is being driven by supplier interests, but as with domestic competition law, when there are enough of them around the pressure to give equal rights to all producers will be a bonus for user interests.

The agreement on ‘trade related intellectual property’ issues (TRIPs) was driven by the owners not the users of patents and know-how licences etc.. Nevertheless, Article 40 states: ‘Members agree that some licensing practices or conditions pertaining to intellectual property rights which restrain competition may have adverse effect on trade and may impede the transfer and dissemination of technology’. It allows measures ‘to control such practices’, which ‘may include for example, exclusive grant-back conditions, conditions preventing challenges to validity and coercive packaging licensing’. This refers to overburdensome conditions that the licensor may impose on the way a licensee uses the know-how acquired. Thus a hard core of practices regarded as internationally abusive has been defined. Of course, this text merely permits measures by user countries without requiring any action by the dominant firms or their home states.

These agreements leave the central area of trade in goods untouched, but there is a provision in the Uruguay Round that refers to international competition rules for goods. The agreement on ‘trade related investment measures’ (TRIMs) concludes with a brief statement (Article IX) that five years after the WTO Agreement comes into force the Council for Trade in Goods, one of the governing bodies of the WTO, ‘shall consider whether the Agreement should be complemented with provisions on investment policy and competition policy’. This does not mean there must be an agreement, but it means there must be some debate, and the European Commission cites this in its July 1995 report.

So we see that competition issues can be addressed in the WTO framework. Why should there have been agreement on the elements of a restrictive practices code in services but not in goods? The procedural and substantive problems faced by the GATS for services were definitely worse. Noone knows, for example what ‘most favoured nation treatment’ means in the case of telecommunications services. But service markets are such that any agreement on services would have been very insubstantial without progress on competition-related issues, so there had to be something there. There were service exporter lobbies at work. But, opposing them, there were also monopoly providers and national cartels working on the other side whose handiwork is evident in the weakness of the air transport agreement.

7. Conclusions: The scope for future negotiations

The WTO secretariat had no official mandate to work in this area at the time of writing. The European Commission continues to push the case, however, and in July 1995 published a report advocating further progress both in bilateral agreements, notably with the US and the Central and East European region, and in the development of an international agreement which would include a set of minimum competition rules and a dispute settlement procedure.

Progress will be modest. As we have noted, there is a timetable for the initiation of discussion and substantive problems are already arising notably in the field of telecommunications. Here strategic alliances (BT–MCI, France Telecom–Deutsche Telekom–Sprint) have to be vetted and the tail end of the Uruguay Round negotiations on services must be sorted out by April 1996, and this includes discussions on private firms’ access to private facilities. There will be a mixture of negotiations: multilateral (e.g. on WTO codes), bilateral (e.g. on information exchanges), and ‘plurilateral’ (i.e. bargains involving a subset of WTO members). At the multilateral level, there is little prospect of a supra-national international anti-monopoly agency for a long time. Anti-dumping laws will not be scrapped and replaced by international predation rules. Consumer interests will take second place, but need not be excluded altogether, as business interests increasingly represent user sectors as well as suppliers.

There are a number of only moderately controversial areas where further initial steps could be made. Agreement is possible, for example, on information exchanges for merger control, and for a ban in principle on export cartels in OECD countries. There is likely to be some form of dispute settlement procedure to deal with cases where competition rules and state policies are alleged to be barriers to trade. It must be recognised that there will also be pressures to incorporate some of the less appealing aspects of anti-dumping rules into any rules that may be developed to discipline ‘unfair’ strategic or predatory behaviour.

Even a small agreement on trade in goods would be helpful. If it is possible for services, why not for goods? One could envisage a WTO text that simply said: ‘Members recognise that certain business practices of goods suppliers may restrain competition and thereby restrict trade in goods. Each member shall, at the request of any other member, enter into consultations with a view to eliminating such practices’.

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