Interaction between trade and competition policy

The interaction between Trade and Competition Policy has been the interaction between trade policy and development on the one hand and competition policy on the other. As such, there has been particular attention to the overall analysis of the relationship of trade and competition policy to development.

In this context, it has been seen that in several countries competition laws and policies had been implemented or strengthened not in isolation, but rather as one package of interrelated reforms of policies aimed at promoting economic and social development. A central feature of these reforms had been greater reliance on market forces as an engine of development and on the creation of a framework aimed at ensuring that such forces operate in the public interest, by promoting or maintaining competition in markets.

The related reforms included external market-opening measures, including liberalization of trade and foreign investment, privatization and sector-specific regulatory reforms/ deregulation. Competition Policy has got importance as a tool of development in the current globalized economic environment, as compared to the previous eras. It has been argued that in the past countries could hope to achieve development through more intervention approaches, but now such approaches are no longer tenable/workable. It is because of the extent to which trade liberalization and globalization of business activities had taken place and the increased importance of foreign direct investment as an engine of growth in the present economic environment. As a result of these developments, anti-competitive practices of enterprises were increasingly international in scope and appeared to be more significant than in the past. Consequently, according to this view, a vigorous competition policy was necessary to respond appropriately to these concerns and to establish a climate conducive to investment and economic growth.

While the view that competition has a role to play in economic development received broad support from many countries, a view was also expressed that a comprehensive competition law might not be necessary to ensure the desired degree of competition Many members of the WTO have competition laws. Even in countries where such laws exist, enforcement may in some cases be lax because of the lack of financial resources and of persons with expertise in competition law. Given the extremely complex nature of the law, its adoption by countries which do not have such legislation at present is going to be time-consuming.

Further, if competition laws are to meet the objective of promoting economic growth by improving economic efficiency and making markets competitive, many WTO members believe that they must take into account the particular characteristics of developing countries such as low-income levels, skewed distribution of wealth, low level of education and asymmetric information. These may require the adoption of a more flexible approach and selective government intervention in the market. The competition legislation of most developed countries provides for special treatment of small and medium-sized industries. But in developing countries, the need to extend these industries’ special treatment –by providing them tax and other incentives and access to finance on concessional terms may be even greater. The government of these countries may also find it necessary to play a more active role in markets to save guard national security by maintaining production capacities in industries considered essential, protecting labour rights, and preserving national identity.

The impact of anti-competitive practices of enterprises on international trade focused mainly on three areas. They are (a) Practices affecting market access for imports; (b) Practices affecting international markets, where different countries are affected in almost the same way; (c) Practices with a differential impact on the national markets of countries.

From the above-cited cases, a point can be made that anti-competitive practices of these types could have the effect of reducing or eliminating the potential gains from trade liberalization. As an example of this point, several case studies could be cited where conventional external trade barriers had been removed. The presumption underlying these studies is that, when a country implements far-reaching trade liberalization, there is an expectation that domestic prices should tend towards import parity levels.

However, it has been seen that in several situations where the response had not been forthcoming, owing to anti-competitive practices of enterprises. Factors that tend to facilitate or underlie such anti-competitive practices include high market concentration levels, inelastic demand (reflecting lack of substitutes), the prior existence of a cartel and control by the dominant enterprise of scarce facilities that are necessary for import to take place. In reflecting on the effects of these practices and their implication for international trade, the point is made that the nature and the severity of these effects would vary depending on the type of practice, the market power of incumbent firms and other circumstances.

Practices affecting international markets where different countries are affected in the same way:

An example of anti-competitive practices in the category is the problem of international cartels that affect price and output across multiple country markets. A large number of cases in which competition authorities in various countries have uncovered such cartels are brought to the attention of WTO. Cartels operating in certain service sectors such as international maritime shipping or financial services are harmful to trade since they not only restrain trade within the relevant service but also raise the price of that service to exporters, introducing another level of distortion.

An example of a widely cited anti-competitive practice in this category is that of export cartels. It is said that the victims of export cartels would often include developing countries which are importing machinery or consumer products. It is suggested that the extent of such cartels and their deleterious effects on international trade and development may well be greater than is known since most countries do not insist on the registration of such cartels. The matter of mergers which are judged to be benign or beneficial in one market may not be so in another market.

The incidence of such cases may well be less frequent where countries employ a consumer welfare standard, rather than a total welfare standard to evaluate mergers. The reason is that under the latter approach, mergers that yield significant efficiency gain in the home market may be deemed acceptable even where they entail substantial anti-competitive effects, including effects which may be felt in foreign markets.

In several countries, government policies and measures facilitate harmful anti-competitive practices by enterprises and thereby undermine the potential benefits of trade liberalization. Factors referred to in this context include The non-existence of a well-constituted competition policy, statutory exemptions or protective regulatory regime covering such conduct, a failure to adequately enforce existing laws and policies relating to anti-competitive practices, the existence of some government policies that implicitly or explicitly sanction or encourage anti-competitive conduct. The lack of effective rules governing access to essential facilities in the context of deregulation.

It has been observed that the problem of eradicating anti-competitive enterprise practices could be quite challenging in circumstances where former state enterprises that had exercised self-regulatory power are privatized without necessary steps being taken to limit their market power.

The harm that state monopolies and exclusive rights have on both competition and market access has been discussed at WTO many a time. WTO recognizes that in their operations enterprises enjoying such privileges may create serious obstacles to trade. These effects could arise in the market where exclusive rights are being exercised in upstream or downstream markets. In this respect the impact that monopoly buyers and sellers could have in restricting competition and trade. State monopolies and exclusive rights have played a positive role in developing countries where market forces are at times in their infancy. Several times it is shown that a commitment to competitive markets rather than a regulatory approach as a primary instrument of economic governance, yields major benefits for competition, trade and consumer welfare, creates efficiencies and promotes innovation. The result at times is to reduce the prices of consumer goods. If regulatory reforms are properly carried out, they promote economic efficiency and economic performance. OECD is the best example of this.

A well-constituted competition policy promotes investment, protects trade-related aspects of intellectual property rights, and helps bilateral, regional, and international agreements dealing with trade and investments. Delegates at WTO often discuss the impact of trade policy on the competition. In this context, the WTO members often try different approaches to deal with ‘Predatory pricing’ (selling a product below the marginal cost of production /dumping approach) to drive competitors out of markets and to raise prices subsequently. However, under competition law complaints about anti-competitive behaviour can be made only where predatory intent on the part of the monopoly producer is established.

The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com.