Competition Policy in the Global Economy

William S. Comanor, Akira Goto, Leonard Waverman

• Publisher: Routledge
• Year: 2005
• ISBN:
  9781134766390
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

International agreements on competition law and policy are notoriously difficult to implement. This collection of essays examines the complexities involved when the issues of international co-ordination and harmonization of competition law and policy are considered.

1
INTRODUCTION

Leonard Waverman, William S.Comanor and Akira Goto

Globalization—the increasing integration of national markets—has undergone various phases, until recently largely fuelled by the explosion of world trade following the implementation of GATT and successive tariff-reducing rounds of multilateral negotiations. As Ostry (1989, 1990) points out, we are now in a phase of globalization dominated not by trade, but by foreign direct investment (FDI) under the aegis of multinational enterprises (MNEs). The multinationals of today are not searching for resource inputs as in the earlier portion of the twentieth century (see Krugman 1990) but are spreading the economies of scale and scope of increasingly technology-driven production across borders and among firms. This increasing globalization of product and capital markets, combined with the accelerating rhythm of technological innovation, has significantly altered the competitive environment of the large corporate enterprise.

This spread of technology-driven FDI is manifesting itself in a wide array of horizontal global organizational forms, including mergers, joint ventures, strategic alliances, research consortia and production consortia. Besides these horizontal manifestations of FDI, differing vertical arrangements (producer-supplier relationships) are also being put in place. Together, new ‘networks’ of corporate affiliations are proliferating, with the traditional structure of the firm becoming blurred.

Important conflicts exist between these new intrafirm and interfirm relationships, driven by global forces and existing national competition policies, primarily between Japan and the United States but also involving the European Union and other OECD nations.¹ These conflicts intermingle trade policy and competition policy and may interfere with the free flow of FDI and technology. Conflict between national competition policies is a crucial issue of global concern, especially critical to Japan-US relations. The purpose of this book is to investigate how domestic competition policies mesh in a world of increasingly international domestic markets. Do domestic competition policies interfere with FDI and trade, can they represent advantages to domestic firms, and if there is a case for coordination or harmonization of these domestic laws, how do we go about doing that?

In 1990 the US Federal Trade Commission launched an investigation of Japanese keiretsu, arguing that these long-term alliances may be exclusionary and employ discriminatory vertical (buyer-seller) practices. Also in 1990, the US FTC specifically began to investigate the purchasing practices of Japanese auto transplants in the United States to determine whether the ‘exclusive’ relationships they established with component manufacturers were consistent with US antitrust law. The United States has shown that competition policy and trade policy are inexorably linked. In the trade talks on Japanese structural impediments to US exports to Japan (SII) the United States has demanded and has received a commitment from Japan to enforce its competition policy more aggressively and to amend the law to increase penalties. In the 1990 SII talks Japan agreed ‘to specify and make clear the practices that are unlawful in the distribution system in Japan and within the system of keiretsu…’²

An example of the potential for uncoordinated domestic competition laws to interfere with investment lies in merger policy, which differs so markedly in its interpretation across countries (and across jurisdictions within a country such as the United States) that multinational mergers require multiple applications to competition authorities, taking time and adding uncertainty. Some form of harmonization among jurisdictions may be required.³ In addition, new forms of corporate affiliation such as strategic alliances where firms enter into longer-term cooperation to share or develop technological developments are not well captured in traditional antitrust nets. Thus the issues of cooperation and competition, in particular with respect to interfirm arrangements and innovation, are as yet little researched. As a result, traditional competition policy may prove unable to deal adequately with innovation-driven mergers, strategic alliances and vertical integration. As there is no multinational competition authority, cross-border ventures (such as strategic alliances) may cause international competition problems (such as a dominant position) which require examination and solution.

Today, as Sylvia Ostry has stated, we are on a path to moving ‘Beyond the Border’⁴ or more appropriately ‘Inside the Border’. Increasingly, what were once considered as purely domestic policies—policies such as patent laws, the setting of standards for high-tech products, government procurement, trade-related investment measures (TRIMS), subsidies and competition policy—are all on the international negotiations agenda. Competition law and policy may be at the top of the agenda because market access has become such a crucial subject and because domestic competition laws are seen as important in setting the terms of market access.⁵ Yet there is little agreement on the appropriate arena for discussion of these issues or what aspects of domestic competition policy should be on the negotiating table. In this book we examine both of these issues, primarily the latter, concentrating on the analytic questions of whether various forms of inter-firm relationships (mergers, joint ventures and strategic alliances, vertical arrangements) can raise cross-border issues amenable to bilateral or multilateral disposition.

The arena for discussions is a crucial subject (see Chapter 15). The recently signed GATT/WTO undertakings do not address competition policy explicitly although several sections are clearly related. Villambrosa (1994) sees the Agreement on Trade Related Investment Measures (TRIMS) as having clear competition policy consequences, since these measures were introduced to affect the business practices of MNEs. Villambrosa suggests that domestic competition law will be necessary in the aftermath of the disappearance of TRIMS. The Trade Related Intellectual Property Measures (TRIPS) section of the GATT/WTO agreements provides for consultations between governments where there is reason to believe that licensing practices or conditions pertaining to intellectual property rights constitute an abuse of these rights and have an adverse effect on competition (Villambrosa 1994:3).

Other sections of the agreements—on the new subsidies codes (the traffic lights), the revised anti-dumping agreement (which some see as a backward step)—are all consistent with reducing trade and investment barriers to foreign firms.

Still there is no coherent understanding of the role of competition law and policy in the GATT/WTO agreement. Ostry (1994) suggests, after Hoekman and Mavroidis (1994), that GATT Article XXIII:1(b) on ‘nullification and impairment’ of benefits could be used to bring a complaint to the GATT dispute resolution process about some anti-competitive practice. In addition, the dispute resolution process in the WTO is likely to be open to a complaint brought forward on some aspect of another country’s domestic anti-competitive behaviour. However, rather than being dragged, without analysis and without discussion, into some form of ‘top-down’ finding on the merits or demerits of a particular business practice, it is wise to begin analysing the international aspects of domestic competition policy. The recent trade dispute on market access to the domestic Japanese auto parts sector mixed market access and competition policy issues and would have been a difficult test case for the new WTO.

Bilateral and trilateral cooperation on competition policy has already started among countries and regimes. Among Asia-Pacific countries, Australia and New Zealand have harmonized their competition laws and policies as part of the ANZCERTA agreement. The NAFTA also has provisions regarding cooperation on competition policy. Broader multilateral cooperation has yet to begin but initiatives are being proposed. In the report of the Eminent Persons Group (EPG) of APEC, it was recommended that APEC ‘consider adopting a policy based on the existing models of international cooperation on competition policy’ (1993:43, Recommendation 6). Bilateral codes exist between the United States and Canada, the European Union and the United States and are near finalization between the EU and Canada.⁶ The OECD has played an important role in developing dialogue and informal cooperation among competition policy authorities and sponsoring research and analysis. The OECD is likely to play an increasingly crucial role in the next stage—formal multilateral cooperation.

PRESSURES FOR AN INTERNATIONAL COMPETITION POLICY AGENDA

Besides globalization, other pressures exist which increase the desire to place competition law and policy on the international bargaining agenda:

1. Policy awareness—economies, such as the US, which were once less involved in world trade are now deep in trade. One may argue that the US views of the origins of its trade deficit are misplaced (see Krugman 1992) but now other countries’ trade, investment, and domestic policies are breakfast table discussion in policy corridors.
2. Policy fairness—the concept of what is ‘reciprocal is fair’ and what is ‘level [as in a playing field] is fair’ has now arisen and will not be done away with. Therefore countries can no longer claim ‘sovereignty’ or ‘that it is purely domestic’ as the excuse for not discussing the impact of regulatory, purchasing, or competition policy regimes.
3. Effective access⁷—along with globalization, awareness and fairness has come the recognition that the end of the process must be effective access, that true national treatment requires the opening of markets. The speed of opening and the impediments to the large MNEs while domestic economies prepare for competition is open for discussion.
4. Spillovers—as the activities of MNEs become more important and cross over many borders, the spillovers from domestic policies such as competition policy become greater. Examples will be given below, but a simple case is a proposed merger where the multilateral nature of the corporations involved requires the approval and consent of many antitrust authorities. Thus any antitrust authority acting alone can end the merger even if it has benefits in the other jurisdictions. In addition, a fear exists that others will compete towards the lowest common regime in order to acquire footloose investment (see Trachtman 1994).
5. New forms of interfirm arrangements—new and evolving patterns of interfirm behaviour, collaboration and alliances are emerging (see Chapter 3 below), making effective analysis of interfirm behaviour difficult (see Bureau of Competition Policy, Canada, Draft Guidelines on Strategic Alliances 1995). Thus enforcement by a single national antitrust authority may be constrained as many of the new forms of behaviour cross borders.
6. Dumping—95 per cent of observers would likely agree that anti-dumping practices as commonly employed are basically, although not exclusively, protectionist, raise domestic prices and lower welfare (see Council of Economic Advisers, Report to the President 1994). In addition, anti-dumping is inconsistent with free trade and violates principles of national treatment (Waverman 1994). Ninety-five per cent of observers also agree that replacing anti-dump by competition policy procedures would be superior. To do this, however, requires some overall international competition policy agenda and a competition policy in each country which addresses predatory practices.
7. Strategic dumping—‘strategic dumping essentially involves subsidizing exports through higher home prices sustained by collusive price behaviour and a protected home market’ (Ostry 1994:15). The view that strategic dumping exists is growing and thus must be dealt with through rational analysis and discussion.
8. Competitive exclusionary practices—a danger exists that without competition policy convergence, nations will act unilaterally to defend what they consider to be their strategic interest. For example, the European Commission has complained that recent US competition law legislation (in this case the National Cooperative Production Act of 1994 extending permissive antitrust treatment to the production end of R&D collaborations) was conditioning the principle of national treatment so as to assist US firms (Services of the European Commission, Report on US Barriers to Trade and Investment, April 1994).
9. Extraterritoriality—as a function of all the points raised above, national governments are unilaterally extending the reach of their laws, including antitrust laws. In 1991 the US Federal Trade Commission concluded a consent decree with Institut Mérieux of France, which purchased Connaught Laboratories of Canada, neither having production facilities in the United States, and without informing the Canadian counterpart agency. In 1994 the US Department of Justice concluded a consent decree with Pilkington UK, a decree which stated that Pilkington’s restrictive business practices affected the ability of US firms to export technology to build turnkey glass plants overseas. No impact on welfare in the United States was discussed.

THIS BOOK

The purposes of this book are threefold—first, to analyse the role of national competition policies in a world of increasingly interconnected markets; second, to produce a consistent framework to investigate the differences in domestic competition policies in the United States, Japan, the European Union and Canada, that impact competitiveness, international trade, investment and innovation; third, to propose alternative policies designed to reduce system friction.⁸ This investigation of conflicts and frictions is based on the modern tools of industrial organization and strategic trade theory, focusing primarily on issues of dynamic efficiency.⁹

The chapters of this book are both an examination of legal differences in competition policies and an analysis of the impacts of globalization on domestic markets and competition. Researchers today do not analyse domestic macroeconomic policies without consideration of the global capital market. Similarly, one cannot discuss the impacts of domestic competition policies which affect real capital flows and innovation without an understanding of the constraints imposed by international markets and global competition. Moreover, unlike capital markets, goods markets can be impacted by market power. Thus we examine both the need for harmonization of domestic competition policies as well as the need (if any) for control of the degree of competition in multinational markets.

Below, we highlight the major issues which are examined under the headings of the trends in the forms of international corporate organization (how prevalent are cross-border intercorporate ties), mergers (ownership of horizontally connected means of production), other horizontal arrangements (joint ventures, consortia and alliances), vertical arrangements (ties between pieces of a vertically connected chain) and policy (the potential steps which are feasible in reducing undesirable barriers created by domestic antitrust policy). In each of these parts of the book the impact of competition policies on static and dynamic efficiency, innovation and technical advance is stressed. While each part has a different structure, several themes are maintained—what are the economic motivations for differences in observed structures; do domestic competition laws affect FDI, the uses of productive assets and the pace of innovation and, if so, what are the options to minimize conflict; are there international competition implications and if so, what can be done?

The chapters of the book are much more than a set of individual writings; they evolved over several years through a set of workshops and presentations. An Advisory Board was organized from key members of the legal and Competition Law Agency communities to provide comments on early drafts. The workshops (Santa Barbara, January 1993; Paris, May 1993; Tokyo, April 1994) proved so animated that a number of Advisory Board members decided to write papers for the volume (Goldman and Rill, Baker, Campbell, Reynolds and Rowley). We, the editors are indebted to the authors and Advisory Board members for the amount of time and energy that they put into the volume and the discussions. The majority of the funding was supplied by the Centre for Global Partnership of the Japan Foundation and we are extremely indebted to their generosity and their interest in the subject. We are also deeply grateful to the Bureau of Competition Policy in Canada, which provided the seed money for the project, and Howard Wetston, then its Director.

The workshops proved effective not just for the participants. The researchers and Advisory Board met with the Fair Trade Commission in Tokyo (May 1993), the International Trade Research Institute in Beijing (April 1994), the World Bank (November 1994) and the Chinese Taipei Fair Trade Commission and the Pacific ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• LIST OF FIGURES
• LIST OF TABLES
• CONTRIBUTORS
• 1: INTRODUCTION
• PART I: THE ISSUES
• PART II: MERGERS
• PART III: R&D CONSORTIA
• PART IV: VERTICAL ARRANGEMENTS
• PART V: COOPERATION, HARMONIZATION, CONVERGENCE?