Competition policy

The term competition policy is typically taken to include all government policies that influence the degree of competition in a nation’s markets, including trade policy. Competition law, in contrast, refers to a specific set of legal provisions concerning themanner in which firms collaborate and compete with one another. That set usually includes measures on cartels, other forms of interfirm collaboration (including so-called vertical restraints), mergers and acquisitions, and abuse of market power. Competition law, therefore, is an element of competition policy but not vice versa.
The appropriate relationship between national trade and competition policies and the merits of different international initiatives on competition law have long been controversial matters both in economic analysis and in international deliberations. Indeed, if Adam Smith’s critique in The Wealth of Nations of granting monopolies on trade with Britain’s colonies is considered, then these debates are of very long standing. The spread of competition law and the strengthening of existing laws during the current era of international market integration accounts for the renewed interest in the relationship between trade and competition policies.
Many argue that open borders and competition laws are substitutes. Bhagwati (1968) was among the first to show that the pricing power of incumbent firms would be restrained by foreign firms that are prepared to supply domestic customers at world prices. In recent years empirical support for this contention was first provided by Levinsohn (1993) and Harrison (1994). Both showed that the markups of domestic firms declined as tariff rates fell. It should be pointed out, however, that such findings need not imply that setting zero tariffs eliminates market power.
The case for complementing trade reforms with active competition law has been made on several grounds. In the 1980s and 1990s the claim was frequently advanced that prior reductions in tariffs on imports into Japan had not led to greater foreign access to itsmarkets because agreements among Japanesemanufacturers,wholesalers, and retailers effectively blocked distribution channels to foreign suppliers (Lawrence 1993; Saxonhouse 1993). More generally, the argument has been made that tariff reductions provide incentives to import-competing firms to take steps, including engaging in anticompetitive practices, that frustrate imports. Private barriers to trade, according to this argument, replace state barriers. A related but distinct argument is that sometimes these anticompetitive practices are facilitated by national unfair trade laws, in particular antidumping measures. The policy implications of the last two arguments are different, however: the former calls for enforcement action against private anticompetitive acts; the latter for reform, if not outright abolition, of unfair trade legislation.
The resurgence of national enforcement actions against international cartels that has taken place since 1993, when the U.S. antitrust authorities offered more generous terms to cartel members to ‘‘defect’’ and turn state’s evidence, revealed other complementarities between open borders and competition law (Evenett, Levenstein, and Suslow 2001). Underenforcement of national cartel law creates safe havens where international cartel members can hide evidence, thereby creating a negative cross-border spillover for trading partners. Successful prosecution of an international cartel in one jurisdiction has often prompted investigations in other jurisdictions, creating a positive cross-border spillover. The case for international discipline requiring nations to properly enforce a cartel law can be justified by reference to the first spillover. The case for promoting cross-border cooperation among national competition agencies, which would include the sharing of evidence on cartel investigations, can be made on the basis of the second spillover. Both forms of international collective action would enhance the deterrent effect of national cartel law enforcement.
Since 1995 there has been another wave of crossborder mergers and acquisitions (Evenett 2003). These combinations can involve commercial operations in many jurisdictions and, under current merger review legislation, are often subject to investigations by many national competition agencies. Decisions by national competition agencies to allow or refuse proposed combinations can have crossborder ramifications and from time to time have become the subject of commercial disputes between nations (Muris 2001; Neven and Roller 2000). The adverse reaction of certain U.S. commentators and policymakers to the European Commission’s decision on July 3, 2001, to prevent the merger of General Electric and Honeywell is an example. Suboptimal resource allocation is not just a matter of potentially poor analysis of mergers by competition agencies or of different substantive welfare standards, but is also due to the generalized practice of competition agencies of taking into account only those effects of a merger that fall within its jurisdiction’s borders. The absence of any compensation mechanism to take account of all relevant crossborder spillovers, similar to the cross-sectoral bargaining in trade negotiations, is at the center of the inefficiency of simultaneous national merger enforcement. Economic analyses that endogenize the decision to engage in cross-border mergers and acquisitions (Horn and Persson 2001) and that examine the effects of such consolidation in a general equilibrium setting (Neary 2004) have also been developed.
Although considerable attention has been given to competition policy in international forums since the late 1990s, two significant international initiatives predate them. The first was the failed attempt to include binding disciplines on ‘‘restrictive business practices’’ in the postwarmultilateral trading system. The chapter on such practices in the Havana Charter, elements of which subsequently provided much of the legal foundation for the General Agreement on Tariffs andTrade,was rejected by the U.S. Congress. Second, in 1980 themembers of the UnitedNations (UN) adopted a nonbinding Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices. The latter remains the only multilateral instrument on competition law.
In July 2004, World Trade Organization (WTO) members decided not to act on proposals tonegotiate amultilateral framework on competition policy. The proponents of such a multilateral framework advocated binding obligations to enact and enforce national anticartel law and to adhere to core WTO principles. In addition, provisions to promote both voluntary cooperation between competition agencies and technical assistance for developing countries were advanced (Clarke and Evenett 2003). Some of the strongest opponents to negotiating competition rules at the WTO were the leading competition agencies, fearful of a loss of discretion. These parties created the International Competition Network in 2001, and its numerous activities have contributed to the sharing of best practices in many aspects of competition law. The Organisation for Economic Co-operation and Development has developed a number of recommendations pertaining to competition law and its enforcement. Binding provisions on competition law have been included inmore than 80 free trade agreements, but the evidence to date on these provisions’ effectiveness is too sparse to draw any broad policy conclusions. See also corporate governance; Organisation for Economic Co-operation and Development (OECD); United Nations Conference on Trade and Development; World Trade Organization