European Competition Policy and Globalization

Chad Damro, Terrence Guay

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137318671
• Topic: Politics & International Relations
• Subtopic: Globalisation
• Index: Politics & International Relations

This book examines the domestic and international dimensions of European Union (EU) competition policy, particularly mergers, anti-competitive practices and state aids. The authors argue that important changes in EU competition policy are having profound effects on the global political economy, and these changes are best understood as European Commission responses to new domestic and international pressures. Using a two-level game analytical framework that is both intra-EU and global in scope, Damro and Guay investigate a wide variety of domestic and foreign public and private actors that interact in crucial ways to determine the development and implementation of EU competition policy. They address this broad question: In what ways do changing external and internal factors affect the evolution of the EU's competition policy and the role that the Commission plays in it? Among the conclusions is that the EU – and particularly the European Commission – has become a leading global regulator.

1

Introduction: Globalization and Public Policy

Since the European Union’s (EU) founding treaties, competition policy has become an increasingly important tool for constructing and maintaining what is now known as the Single European Market (SEM). By prohibiting anticompetitive business activities, competition policies are intended to create a level playing field among competitors and, ultimately, to increase economic efficiency and to determine opportunities and incentives for producers and consumers within the SEM.¹ At the same time, the EU relies heavily on domestic competition policy to prevent anticompetitive business activities and encourage rivalry among firms in its free market economy.² The importance of this policy for European integration has led scholars to claim that ‘[t]he concept of a competition policy is the foundation stone of the entire European Union’ (McGowan and Wilks 1995, 141).

While competition policy remains central to the internal process of European integration, it also is affected by and must take account of external changes. Indeed, as international trade and foreign direct investment (FDI) grow and firms and markets become more global, anticompetitive activity based in multiple jurisdictions challenges the ability of purely domestic competition policies to ensure the ‘public good’ of fair competition in their respective domestic markets. In short, in a globalizing world, the EU’s prospects for economic growth are undermined without a competition policy that effectively addresses internal and external challenges. Reflecting these changing internal and external dynamics, Heimler states, ‘Competition has been the driving force of European integration, but it also had a foreign policy dimension, a standard to be imposed on candidate countries and on the world at large’ (Heimler 2010, 83).

European integration is seen by some as an important example of globalization. As such, this book sets out to investigate the ways in which globalization and European integration fit together and the roles of prominent actors within the EU, especially the European Commission. The changes associated with globalization also require us to think about the various nonstate actors (especially firms) involved in competition policy. The remainder of this chapter introduces crucial issues for studying and understanding EU competition policy and how we approach the subject in the context of globalization.

Context and challenge: Globalization and public policy

For almost half a century now, the phenomenon of globalization has shaped international business and its regulatory environment. While many books have been written on various dimensions of globalization, two aspects are particularly relevant to the competition policies addressed in this book. The first aspect is the increased internationalization of multinational enterprises (MNEs). While the trade and investment opportunities beyond home markets have expanded in this millennium, cross-border links have accelerated in recent decades due to technological changes that facilitate business opportunities in foreign markets, and the emergence of countries onto the global marketplace that had played little or no role during the Cold War, with hundreds of millions of their citizens now working for MNEs or within their supply chain and purchasing their goods and services. Data from the World Trade Organization (WTO) indicate that total world merchandise exports totaled $62 billion in 1950.³ This figure increased to $317 billion in 1970, $3.5 trillion in 1990, $10.5 trillion in 2005, and $18.9 trillion in 2014. Similarly, according to the United Nations Conference on Trade and Development (UNCTAD), the world’s total stock of FDI totaled $698 billion in 1980.⁴ This figure represents the amount invested by companies outside their home country. By 1990, this figure rose to $2.1 trillion. A decade later it was $7.5 trillion, and in 2013 it was $25.5 trillion. Not only have many MNEs experienced tremendous growth beyond their home markets, but the mix of companies has become more diverse. In 2005, 350 of the world’s largest 500 companies according to the Fortune Global 500 rankings (based on revenues) were from Europe or the United States. By 2015, the number had dropped to 270.⁵ During this period, Chinese firms on the list increased from 16 to 98, those from Brazil, India, and Russia grew from 11 to 19, and those from other countries that are not part of the Organization for Economic Cooperation and Development (OECD), whose members traditionally are viewed as comprising the world’s most economically advanced countries, expanded from 6 to 18. Consequently, the dynamics of international business in terms of processes and actors makes the regulatory environment far more complex than it was in the last decade or two of the 20th century.

The post–World War II economic boom in Europe and the United States fueled demand for goods and services and provided business opportunities for companies beyond their home markets. As economic growth in Europe, North America, and other advanced industrialized countries slowed in recent decades, MNEs have sought new markets in Asia, Latin America, and Africa. Much of the increase in global trade and investment is due to the end of the Cold War and the opening of markets in China, India, and other so-called emerging market countries. As scholars like Dunning (1988) suggest, the motivations for MNEs to expand internationally are manifold and include utilizing lower labor costs or more specialized human resources, seeking new consumers (particularly, the rapid growth of middle classes in most countries), organizing around regional supply chains, and accessing capital, among other reasons. Choosing whether to export to or invest in another country is a complex strategic decision for MNEs, and it is beyond the scope of this book to review the literature here. But the point is that MNEs are increasingly drawn into the legal, regulatory, and administrative jurisdictions of a wide range of countries, and that is where differences in competition policies become an issue.

The second aspect that is relevant to the competition policies addressed in this book is that the nexus of international business and government regulation presents challenges for the range of actors affected. For firms, the primary issue is managing their relationships with entities outside of the marketplace, including government officials, policymakers, regulators, nongovernmental organizations (NGOs), international organizations (IOs) like the EU and WTO, and the media. To accomplish this task, firms must develop nonmarket strategies (Preston and Post 1975, Shipper and Jennings 1984) and, ideally, integrate market and nonmarket strategies (Baron 1995) to maximize success. Related streams of study focus on corporate political activity (Hillman, Keim and Schuler 2004), lobbying (Greenwood 2011, Mahoney 2008), and identifying strategies that are more and less successful as firms navigate and influence the political process. Other scholars have explored the impact of business beyond lobbying to examine, for instance, their influence on policy convergence, that is, the gradual harmonization of regulations and public policies across different political jurisdictions (Bennett 1991, Dahan, Doh and Guay 2006, Drezner 2001). Finally, it is increasingly important to analyze the interactions of MNEs and NGOs (Yaziji and Doh 2009), since both sets of actors aim to obtain influence over policymaking within governments and institutions (Doh and Guay 2006).

The implications of these two dimensions of globalization for governments are to develop public policies and a regulatory environment that achieve economic and societal goals. As Lehne puts it, ‘[t]he challenge for major industrial nations then is to design governing arrangements that deliver the greatest prosperity for their citizens from the activities of private corporations while still championing their basic political rights and social principles’ (2006, 27). With respect to competition policy, it will become evident in Chapter 2 and in subsequent chapters that EU competition policy has evolved in response to changing economic and political forces internal to the EU, as well as the pressures and challenges presented by globalization. These latter issues include developing competition policies that support a vibrant and competitive environment that bolsters the ability of European firms to succeed in a global marketplace while, at the same time, nudge authorities in other countries and institutions to develop similar policies through convergence.

Combining the domestic and the international

Despite the long existence and central importance of competition policy to European integration, there is a surprising paucity of scholarly attention from political scientists in this policy area. Long the domain of economists and legal scholars, it is largely since the EU’s 1986 Single European Act that significant theoretical work from political scientists has begun scrutinizing the dynamics of European competition policy (Karagiannis 2010, McGowan and Wilks 1995).⁶

Much of this political science literature on European competition policy has focused on the internal politics of the policy area.⁷ A growing subset of this literature has begun to focus its analytical lens on the important external dimensions of competition policy.⁸ While this literature is growing, there remains a gap, due to the tendency to focus on either domestic or international factors without combining the two. This book aims to fill that gap by updating previous arguments and developing new ones to expand our understanding of external dimensions of European competition policy.

In order to combine the various domestic and international actors and factors identified above, this book employs a cross-level approach and analytical device known as the two-level game. While it is important to point out that the two-level game is not a rigorous explanatory theory, it does provide a useful conceptual framework that simplifies and directs the analysis toward the most important actors and factors. By scrutinizing these actors and factors in subsequent chapters, the book is able to highlight and clarify the complex cross-level dynamics of EU competition policy that arise from globalization, especially the interactions between MNEs, IOs, and national governments.

Putnam’s (1988) original study on international bargaining provided the first powerful metaphor for scholarly work on cross-level analysis.⁹ Putnam relies on the conceptualization of international bargaining as a game between two different levels of analysis: domestic politics and international politics.¹⁰ The interface of these two levels is the chief negotiator (labeled the chief of government, or COG) of an international agreement. In international negotiations, the COG negotiates a preliminary agreement but is engaged simultaneously in a domestic game. For example, there are likely to be prior consultations at the domestic level in order to generate an initial position for the negotiations at the international level. The COG is, therefore, engaged in interactive domestic–international games and constrained by the need for ratification of a given agreement by other international negotiators (Level I), as well as respective domestic constituents, including both elites and the general public (Level II).

The domestic Level II game is contested because ‘domestic groups pursue their interests by pressuring the government to adopt favorable policies, and politicians seek power by constructing coalitions among those groups’ (Putnam 1988, 434). The different interests of domestic groups determine the win-sets available to the COG. According to Putnam, a win-set is defined ‘for a given Level II constituency as the set of all possible Level I agreements that would “win” – that is, gain the necessary majority among the constituents – when simply voted up or down’ (1988, 437). Thus, by increasing the size of the win-set, the COG increases the likelihood of ratification of the Level I agreement. At the same time, the COG must engage in the international Level I game where ‘national governments seek to maximize their own ability to satisfy domestic pressures, while minimizing the adverse consequences of foreign developments’ (1988, 434). Because Level I agreements need to be ratified at Level II, a crucial link is developed for cross-level analysis.¹¹

For Putnam, the COG is an individual who acts as an ‘honest broker’ or as an ‘agent’ on behalf of its government or constituents (Putnam 1988, 456). In the current study, the chief negotiator is understood as the European Commission, in particular the Competition Commissioner and Competition Directorate. While the Commission comprises a number of directorates that cover different policy areas, such distinctions will be made in this study only when analytically necessary.¹² This simplification, while not a perfect reflection of reality, can be justified for analytical purposes because the Commission’s supranational authority is comparatively high in competition policy (see Chapter 2). Since the 1957 Treaty of Rome, the EU’s member states have formally delegated considerable authority in competition policy to the Commission. Most recently, the Lisbon Treaty (Article 3, 1, b) clarified that competition policy is an area of exclusive competence for the EU, meaning only the EU can adopt legal acts in this area. In general, legal competence is important because it determines who has formal authority to legislate and adopt legally binding acts (Keukeleire and MacNaughtan 2008, 99).¹³ This helps clarify which EU institutions are most involved in policymaking in particular policy areas. The designation of exclusive competence (as opposed to, for example, shared competence) indicates that the Commission has a predominant role to play in competition policy (Aydin 2012, Damro 2006a). Due to its high level of competence in competition policy, the European Commission is the crucial interface in competition issues that run across both the international (Level I) and domestic (Level II) levels.

The Commission’s ability to gain support among its various constituents (that is, expand its win-set) is crucial to its performance in two-level games. Putnam identifies three important factors that help to determine the size of the win-set. These include (1) Level II preferences and coalitions, (2) Level II institutions, and (3) Level I negotiators’ strategies.

Regarding Level II preferences, the chief negotiator interacts with a wide variety of domestic actors. In the context of competition policy, the Commission interacts with EU member states’ regulators and politicians, firms, and domestic NGOs and nonstate actors like labor unions. While the Commission has its own particular motivations, these various Level II actors may have different preferences and interests. These different preferences may vary depending on the international venue or specific competition case in question. For example, different EU member states may view Commission efforts as greater threats to their national interests in WTO negotiations than in a single merger prohibition. Likewise, different member states will likely have different preferences when it comes to state aids. Of course, firms will also have different interests and preferences, often depending on whether they are importers or exporters, competitors to state aid recipients, or are the subject of a competition investigation. These different preferences and interests among the various actors determine the size of the win-set available to the Commission. Because the interests may be homogenous or heterogeneous, the Commission, as chief negotiator, is left to find ways to construct coalitions among these different Level II actors. The Commission must also consider the level of politicization of the issue and the extent to which the issue is part of a multi-issue negotiation, both of which can affect Level II preferences and coalitions (Putnam 1988, 446). This level of politicization is also important for individual competition decisions that involve non-EU firms.

Putnam initially simplifies the COG as an honest broker that represents the interests of its government(s) or constituents without a strong independent policy view. But when this assumption is relaxed, Putnam argues that the COG can be seen as motivated by a desire to (1) enhance its standing in the domestic Level II game by increasing political resources or by minimizing potential losses, (2) shift the balance of power in the domestic game toward policies favored by the COG, and (3) pursue its own conception of the ‘national’ interest. This study considers the possibility that the Commission may have its own interests that reflect these three motives. More specific to competition policy, the Commission seems to prefer limiting the role of politicians in domestic and international competition decision-making and implementation (Damro 2006a). Likewise, given the history of European integration, the Commission may be strongly compelled to pursue competition policy in a way that generally expands its decision-making ‘power and autonomy’ vis-à-vis the member states (Aydin 2012, 667). The Commission may, therefore, be understood as a ‘competence-maximizer’ (Pollack 2003, 34–35) which is generally guided by Putnam’s three motivations and more specifically motivated by complementary desires that arise from the specificities of competition policy and European integration. All such motivations will be considered as potential foundations for the Commission’s behavior in the following analytical chapters. Our goal is not to compare the relative strength of each motivation for explaining the COG’s behavior but to use them to guide the analysis and demonstrate that the Commission has a strong independent policy view and, therefore, should not simply be assumed to be an honest broker that represents the interests of EU member states.

Regarding Level II institutions, the statutory requirements for ratification influence the ability of the chief negotiator to engage at both levels. These requirements can create veto points and may oblige the chief negotiator to pursue a high threshold of agreement among decision-makers (consensus, majority, two-thirds, etc.) to ratify the Level I agreement. In addition, the extent of institutional autonomy enjoyed by the chief negotiator matters. As Putnam argues, ‘The greater the autonomy of central decision-makers from their Level II constituents, the larger their win-set and thus the greater the likelihood of achieving international agreement’ (1988, 449). As discussed above, the Commission enjoys exclusive competence in competition policy. This does not mean that the Commission is perfectly isolated from its domestic constituents and their preferences. But it does mean that the Commission is more autonomous from other Level II actors than it would be in other EU policy areas characterized by more restrictive shared competence. Beyond exclusive competence, the Commission also has to take into consideration the legal constraints laid down in the EU’s primary and secondary legislation.¹⁴ The Commission’s decisions, therefore, in international competition negotiations can be brought before the European Court of Justice (ECJ). Similarly, the decisions the Commission makes in individual competition cases can be reviewed by the ECJ.

Regarding Level I negotiators’ strategies, the chief negotiator will not necessarily (or often) prefer precisely the same policy option as other international negotiators. The Commission, therefore, needs to consider different strategies that will satisfy its Level II domestic constituents while also meeting the needs of other Level I negotiators. When engaging with other Level I negotiators, the Commission may use ‘conventional side ...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures and Tables
• Acknowledgments
• List of Abbreviations
• 1. Introduction: Globalization and Public Policy
• 2. Development of European Competition Policy
• 3. EU Merger Review
• 4. The EU and Anticompetitive Practices
• 5. State Aids
• 6. The EU and Global Competition Policy
• 7. Competition Policy in the 21st Century
• Notes
• References
• Index