Competition Policy and the World Economy

Speech given before the World Economic Forum
Davos, Switzerland

January 30, 1998

Competition policy is the most important structural issue which current world economic arrangements do not handle effectively. As border barriers decline, the behavior of firms plays an increasingly central role in global outcomes. Aside from a few nascent bilateral agreements, however, there is very little international machinery to respond to anti-competitive practices.

Two recent cases dramatize the significance of the issue. The United States and European Union came close to major conflict over the merger of Boeing and McDonnell-Douglas, illustrating the significance of different national approaches to mergers and different national interpretations of "market dominance." The United States and Japan are still in confrontation over the Kodak/Fuji film case, which exemplifies the weakness of the WTO system in handling such problems as well as sharply differing views on the impact of the vertical market restraints that clearly obtain in Fuji's distribution practices. Similar cases are at hand in sectors such as telecommunications and financial services, where deregulation and WTO liberalization are pressuring sleepy national champions. Recent system-threatening bilateral disputes, such as those between the United States and Japan, the world's two largest national economies, have in fact centered on firm behavior. These include auto parts, insurance, and semiconductors. It is imperative that the international trade rules and institutions be reinforced to address such problems effectively.

Another major reason to place competition policy at the top of the international negotiating agenda is that a very large number of emerging market economies, especially in Asia and the former Soviet bloc but elsewhere as well, are currently developing national competition policies for the first time. Every country will incorporate unique national characteristics in its approach but the world would be spared enormous future controversy and conflict if international agreement now could create norms on which those new policies could be based.

Hence competition policy, and especially its links with international trade and investment, should be a central focus of the next set of major negotiations in the World Trade Organization. The goals should be agreement on (1) common rules that can be credibly enforced at the national level and (2) effective cooperation between national antitrust authorities.

My colleagues Edward M. Graham and J. David Richardson, in two recent publications at our Institute for International Economics1, have proposed a global agreement on Trade-Related Antitrust Measures (TRAMs) akin to the Trade-Related Intellectual Property (TRIPs) and Trade-Related Investment Measures (TRIMs) agreements in the Uruguay Round. They identify four sets of issues that should and can be included in such an agreement because their economics are reasonably clear, convergence of national practices appear feasible, substantial efficiency gains could be achieved, and potential international conflicts could be reduced:

  • cartelization, notably including export cartels;
  • other horizontal restraints, especially price-fixing;
  • mergers and acquisitions; and
  • national treatment of foreign direct investors and services.

International cooperation on these issues can be initially pursued through the use of "positive comity," under which a government that has problems with another country's competition policy can appeal to the government of the latter to take action under its own laws and have the right to assume that its complaints will be taken seriously. Such an approach could have been used by the United States and European Union to address Boeing-McDonnell Douglas, and by the United States and Japan to address auto parts. A comprehensive global agreement on new rules for competition policy is clearly premature but an initial agreement on TRAMs could include the following steps in the World Trade Organization:

  • to assure contestability of markets, commitments not to discriminate against the establishment or operation of a local affiliate of a foreign firm;
  • a worldwide agreement to ban most cartels;
  • mandatory notification of mergers and acquisitions that are likely to have international effects;
  • required bilateral and/or multilateral consultations on export or investment foreclosure complaints (including on M&As, as just noted, and on vertical restraints);
  • a competition-policy-oriented safeguard agreement that would permit downsizing/rationalization cartels subject to the same consultation procedures and the usual WTO dispute settlement mechanism to avoid abuses.

A major problem in moving toward international agreement a la TRAMs has been the opposition of the United States. Part of the problem has simply been bureaucratic, with the antitrust authorities resisting a central role for the trade policy authorities in negotiating such an arrangement. Part has been a fear of a watering down of American antitrust standards, or a "race to the bottom," which seems unjustified in light of the high standards achieved in the WTO on intellectual property, services and other issues over the past decade or so. On the contrary, now is the opportune time for the United States, perhaps in league with Europe, to seek establishment of its own precedents, guidelines, and institutions as the high WTO standard to which the rest of the members should aspire in pursuit of their own self interest.

Part of the problem, however, is a fear that other countries want to use the rubric of "competition policy" to attack US (and European) antidumping practices. Whatever the merit of that case, the changes in antidumping practices sought by other countries are simply unfeasible in terms of US domestic politics at this point in time—particularly in light of the broader attack on globalization in the United States that has so far denied the President renewed "fast track" authority even to negotiate new trade agreements at all. Such changes are also infeasible in Europe. Hence there needs to be a tacit international agreement to set aside the issue of antidumping at this point to enable a serious effort on competition policy to become an integral part of the next major negotiations in Geneva.



1. See Edward M. Graham and J. David Richardson, Competition Policies for the Global Economy, Washington: Institute for International Economics, November 1997 and Global Competition Policy, Edward M. Graham and J. David Richardson, Editors, Washington: Institute for International Economics, December 1997.