International Cooperation on Competition Policy

1
International Cooperation on Competition Policy
Presentation by
Frederic Jenny Chair of the WTO Wo
rking Group
On Trade and Competition Policy
Seminar on Hemispheric Cooperation on
Competition Policy, Santiago , Chile May 15-16
2
On Competition in the WTO
  WTO agreements as they exist today are not
efficient in dealing with issues of private restr
aint of international trade which may be
as detrimental to the free international trading
system as governmental barriers. As liberalizati
on of trade progresses through
trade negotiations and government trade barriers
are lowered and eliminated, the WTO has to deal
with issues of restrictive business
practices of private entrerprises which restrain
trade and counteract the effect of liberalizatio
n achieved through trade negotiations. In
the long run, therefore, the WTO system will not
be complete without the inclusion of competition
policy within its framework in one form or anoth
er and this is indeed the lesson of the Japanese
Photographic Film Case 
 Basic principles of the WTO and the role of
competition policy,Professor Matsuo
Matsushita, April 2002

F.Jenny
3
Competition policy and economic development
Competition policy is necessary
1) to prevent domestic monopolization, crony c
apitalism and anticompetitive practices leading
to inefficiencies 2) To allow economic agents to
reap the benefits of economic freedom
Industrial policy and capacity building are also
useful in the initial stages of economic
development because of imperfect markets, scale
economies, need to transfer technology
Developing countries need an  optimal amount 
of competition ( a blend between competition
policy and industrial policy)
As economic development progresses,competition
policy
plays an increasingly important role
F.Jenny
4
Competition policy in small economies
Competition law should promote competition
whenever competition is likely to promote
efficiency Thus competition law is not inimical t
o the economic development of small economies.
In small economies market concentration is likely
to be higher than in larger economies small econ
omies are particularly vulnerable to abuses of ma
rket power.
Small economies tend to be more dependent on
foreign trade than larger economies and more
vulnerable to offshore anticompetitive practices
(World Bank study)
F.Jenny
5
Domestic Bus Cartel Jordan1
 () the governement allowed the licensing of
three additional tour bus operators to share the
market with the government owned tour
bus company in 1994. The three entrants competed
well at first due to an excellent tourist season
. However when the market shrank ()
the three tour bus companies formed one booking
agency to regulate the rental of buses and avoid
what they termed   harmful competition . As a
result, tour operators could only deal with the
marketing or booking entity, which allocated ren
tal among the three companies according to their
turn at set quotas and prices. Many
tour operators complained that bus rental fees
increased after the move and several claimed tha
t they were forced to rent buses that
were larger than their needs at full price 

• From  Competition Law and policy in Jordan  by
  Yusuf Mansur and Bashir Zubi , presented at the
  Expert group on Competition Laws and Policies
  Identification of Common Ground in ESCWA Member
  Countries Abu Dhabi 28-30 January 2002

F.Jenny
6
The medical drug market in Lebanon1
 Lebanon has few importers of food and medical
drug products who dominate the business and set
prices with and without collusion.
The number of importers is decreasing as mergers
of medical drug companies are happening
internationally and therefore affecting internal
competition The medical drug market is tightly
controlled by fewer and fewer importers
effectively controling the US 270 million annual
market and realizing large markups. As social
security in lebanon is not universal, the price
of drugs becomes extremely important for
everybody, especially for the poor and old
people .

• From  Competition Issues in lebanon ,by Louis
  G. Hobeika, presented at the Expert
  
• group on Competition Laws and Policies
  Identification of Common Ground in ESCWA Member
  
• Countries Abu Dhabi 28-30 January 2002

F.Jenny
7
Transnational Private Practices and transactions
Horizontal cartels (Examples Lysine, Vitamins)

• Vertical arrangements
• (Example Kodak/Fuji)

Abuses of dominant position (Examples Pilkington
, Microsoft

Mergers (Examples GE/Honeywell, Coca-cola/Cadb
ury Schweppes)

F.Jenny
8
Transnational anti-competitive practices which
affect trade a typology
Defeating trade liberalization (import cartels,
domestic abuses of dominant position, vertical
restraints, some international cartels)
- Example Kodak/Fuji
Depriving trading nations of the benefits of
trade (export cartels, domestic abuses of
dominant positions, anti-competitive
transnational mergers, international cartels)
-Example the East of Burma agreement between
the European and Asian steel mills


F.Jenny
9
The cost of trans-national anticompetitive
practices
Contrary to frequently held misconceptions,
trans-national anticompetitive practices

-inflict serious harm to consumers (examples in
the graphite electrode case, the cartel members
increased their price by 60 resulting in an
overcharge of nearly US 1 billion a year in the
lysine cartel prices were doubled)
-are often stable over time ( average duration of
cartels for which there is publicly available
information is 6 to 8 years but ome cartels may
last considerably longer( up to 40 years for
Internat. electrical cartel)
-affect a large number of sectors ( examples
steel, plastic dinner ware, thermal fax paper,
heavy electrical equipment, glass , graphite
electrodes, vitamins, lysine, citric acid etc)
F.Jenny
10
(No Transcript)
11
The International Heavy Electrical Equipment
Cartel
Under the auspices of   The International
Electrical Association , a seemingly innocuous
trade association incorporated in 1945
Duration from 1930 until , at least, until the
middle of the 1980s (current status of the cartel
unknown)
Membership over 50 European and Japanese firms
Products covered all heavy electrical equipment
( turbines, generators, condensers, switchgear,
rectifiers, rolling mills)
12
The International Heavy Electrical Equipment
Cartel geographical coverage
 The known agreements () cover   all countries
of the world  except where otherwise specified.
After considering the exclusions, however, the
cartel members mainly the developing countries
(). The territories excluded or exempted from t
he agreements are usually home territories of the
member companies, plus those regions in their
traditional sphere of influence.() Not
coincidentally these same developed countries
commonly have passed antitrust legislation
prohibiting such practices when they prejudice
national interests.  (report p. 75)
 Most of the importing countries are developing
countries with little or no domestic
manufacturing capacity for heavy electrical
equipment. These countries typically are engaged
in ambitious programs of industrialization and
development. As a group, the developing countries
thus represent the fastest growing segment of
world demand in the industry and hold the
greatest potential for future growth. No leading
manufacturer can afford to be foreclosed from
these markets and still expect to retain its
long-term position of technological leadership. 
(report p. 133)
13
The cartel membership
. The largest contingents are from the UK ( with
General Electric and 16 other firms), Italy ( w
ith Marelli, ANSALDO etc..), France
( with Alsthom, CGE, Merlin Gerin, etc), Germany
( with AEG, Siemens etc), Switzerland ( with Br
own Boveri etc..), Sweden ( with ASEA etc..)
In 1947 the US Federal Trade Commission charges
the U.S. participants ( International General El
ectric, Westinghouse, Ingersoll
Rand, Ohio Brass Cny) with violating the Sherman
Act by illegally conspiring to restrain internati
ional trade. The US firms were enjoined
from further participating in any international
cartel.
Japanese manufacturers (Hitachi, Mitsubishi, Fuji
Electric) become important players in the late s
ixties. After having failed to eliminate
the Japanese firms through predatory pricing, the
cartel members convince them to join the cartel
in the mid seventies. They become
associate members.
14
The practices (I)
Notification system members must notify the
cartel secretary if they receive an enquiry or in
tend to submit a tender. The secretary advises
all members who have notified that enquiry.
Consultations between the firms submitting a bid
will follow.
Price fixing ex. agreement for steam turbines
and generators  any
partyshallquote not lower than the price
determined from and in accordance with the Price
and Heat Consumption Manual multiplied by the
factor stated in Appendix 1 hereto 
Market allocation the parties agree on a
market shares allocation, on an initial sequenci
ng of orders and a procedure for the subsequent
Period  upon notification of an enquiry from
one or more members, The Secretary assesses the
value of the project according to the Price
Appendix. Orders are then allocated to the
member whose total Allocation Value was lowest p
rior to the tender. 
15
The practices (II)
Compensation payments the unsuccessful
participants in a (rigged) tender are compensated
for the cost incurred in preparing their bids
with a flat sum of money paid through the IEA.
The successful tendering party pays a percentage
of his bid ( between 1 and 7) to allow for this
compensation.
Penalties non compliance with respect to pricing
or market allocation
leads to severe fines.
Limitation of transfers of technology to
developing countries Some agreements ( ex. wate
r generators) have special provisions applying
to licensees in developing countries and joint ve
ntures with local manufacturers. Technological c
ooperation with independent, uncontrolled manufa
cturers in developing countries is foreclosed by
the fact that parties collectively agree never t
o tender in collaboration with
such firms ( exception for Communist countries
where access to the market can be obtained only
through joint ventures).
16
The practices (III)
Exceptions The members of the cartel are not to
cooperate with non cartel members. When confront
ed with outside competition and if a
qualified majority of members involved in a
transaction agree   all Members concerned shall
meet in an effort to conclude a special
arrangement, which may, inter alia, suspend or
modify the effect of the agreement in respect to
that particular transaction .
Predatory practices The cartel members are known
to have used their profits to engage in predator
y pricing against newcomers, particularly
from developing countries. According to the FTC,
in 1948   The fund (made of the members cont
ributions) could be used to support
cut-throat competition against a nonmember
competitor in any territory coming within the sco
pe of operation of the agreement . Such tactics
were employed in the early seventies unsucessful
ly to prevent the rise of the Japanese heavy ele
ctrical equipment industry. Subsequently,
predatory pricing was used successfully in Brazil
to drive the independent local
manufacturers to bankrupcy. ( see B Epstein and
K Mirow  Impact on developing countries of
restrictive business practices of
transnational corporations in the electrical
equipment industry a study of Brazil, Unctad,
1977) .
17
The effects of the cartel on importing countries
 From the cartels documents, it is seen that
the IEA annually covers almost US 2 billion of
sales of heavy electrical , including nuclear
power equipment 
 These cartel arrangements directly harm
importing countries because of the onerous
mark-up on cartellized sales as well as common
policies among members restricting technology
transfers to nonproducing countries. On the
basis of data from one product section, it is
estimated that succesful collusive agreements may
raise prices 15 to 25 percent above the
competitive rate. If this rate held for all sales
made under the IEA agreements, the amount of
overcharges on IEA sales would range
from US 300 to 500 million per year, which
ultimately would be reflected in the cost of
electric power and all products dependent on
electricity 
18
The Scope of the Heavy Electrical Equipment
International Cartel
Published records concerning transactions
recorded by the  transformers  section of the
cartel suggest that the following
countries were victims of bid rigging by the
cartel members Australia, New Zealand, India,
Pakistan, South Africa, Zambia,
Nigeria, Ivory Coast, Hong Kong, Malaysia,
Jamaica, Ireland, Cyprus, Brazil, Paraguay, Chil
e,Columbia, Venezuela, Panama,
Chinese Taipei, China, Korea, Iran, Kumait, Iraq,
Spain, Denmark, Greece, Romania, Yougoslavia, Tur
key, Philippines, Indonesia, Israel, Saudi Arabia
, Syria, Lebanon, Morocco
19
International Anti-competitive Practices and
Developing Countries
International anti-competitive practices
Are often aimed at preventing the emergence of
local industries in developing countries ( cf use
of dumping by heavy electrical equipment
manufacturers and in the steel industry)
Are most harmful in countries which do not
have strong antitrust laws ( many developing
countries)
Hurt developing countries which are
crucially dependent on imports ( for access to
basic industrial products not produced locally)
or on exports ( for their growth) and have weak
industrial structures
In 1997, developing countries imported US
81 billion of goods from industries which had
been affected by price fixing conspiracies during
the 1990s.These imports represented 6.7 of
imports and 1.2 of the GDP of the developing
countries ( World bank study).
F.Jenny
20
Where to go from here ?
Excerpt from a U.S. State Department document,
part of the preparatory work for the ITO in 1945
  Goods can surmount a tariff if they pay the
duty they can enter despite a quota if they are
within it. But when a private agreement divides
the markets of the world among the members of a
cartel, none of those goods can move between the
zones while the contract is in force 
1944 letter from Franklin Roosevelt to Cordell
Hull Cartel practices which restrict the free
flow of goods in foreign commerce will have to be
curbed .
F.Jenny
21
National competition laws and transnational
anticompetitive practices
Increasing gap between the geographical contours
of relevant economic markets and the
territorially limited areas of jurisdiction of
national competition authorities.
National authorities cannot use their powers of
investigation to investigate practices having an
effect on their domestic markets
but implemented in other countries.
Economic globalization leads to a loss of
operational sovereignty for national competition
authorities

International cooperation can help national
authorities regain part of their lost operational
sovereignty
F.Jenny
22
International cooperation

• Scope Bilateral (EU/USA USA/Can. Aust/NZ)
• Regional (Mercosur,
  Andean Pact, Caricom)
  
• Plurilateral (OECD)
• Multilateral (Unctad,
  WTO)
  

• Levels Consultations
• Exchange of non
  confidential informations
  
• Positive and negative comity
• Joint investigations
• Exchange of confidential
  informations
  

• Types  optional  ( ex bilateral)
•  commitments  (ex WTO)
• All types of agreements have advantages and
  limitations
  

F.Jenny
23
Optional Cooperation Agreements

• For cooperation to be balanced, cooperating
  countries must have relatively similar levels of
  development and equal trade flows. Hence few
  bilateral agreements between developed and
  developing countries or between large and small
  countries

• In an optional agreement countries can refuse to
  cooperate in specific cases if their trade
  interests diverge. Little cooperation on
  competition cases which create trade frictions (
  ex Boeing/Mc Donnell Douglas GE/Honeywell)

F.Jenny
24
A multilateral framework for cooperation on
competition ?
Progressivity and flexibility?

• Extent of substantive commitments
• -Transparency, non discrimination, due process?
• -Hard core cartels?
• Full fledged competition law?
• Market access commitment?

• Extent of cooperation
• Consultations?
• -Exchange of non confidential information?
• -Peer reviews?

Dispute settlement mechanism?
F.Jenny
25
Possible benefits of a WTO agreement on
competition ?
It would send a signal that the multilateral
community is not exclusively interested in the pr
omotion of the welfare of large
multinational firms.
It would contribute to achieving the goals of the
multilateral trading system by providing a way t
o fight anticompetitive private practices which
are defeating or confiscating the
benefits of trade liberalization
Applying the WTO principles of national
treatment, non discrimination and transparency t
o national competition laws could help governmen
ts resist protectionist and corporatist pressure
s by domestic lobbies and, allow them to
establish a more investment friendly legal
environment
Frederic Jenny