International Cooperation on Competition Policy

1
International Cooperation on Competition Policy
Presentation by
Frederic Jenny Chair of the WTO Working 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
restraint of international trade which may be as
detrimental to the free international trading
system as governmental barriers. As
liberalization 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 liberalization 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 another 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
capitalism 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 to the economic development of small
economies.
In small economies market concentration is likely
to be higher than in larger economies small
economies are particularly vulnerable to abuses
of market 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
rental 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
that they were forced to rent buses that were
larger than their needs at full price 

1. 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/Cadbury 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
the 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 (
with Marelli, ANSALDO etc..), France ( with
Alsthom, CGE, Merlin Gerin, etc), Germany ( with
AEG, Siemens etc), Switzerland ( with Brown
Boveri etc..), Sweden ( with ASEA etc..)
In 1947 the US Federal Trade Commission charges
the U.S. participants ( International General
Electric, Westinghouse, Ingersoll Rand, Ohio
Brass Cny) with violating the Sherman Act by
illegally conspiring to restrain internatiional
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
sixties. 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
intend 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
sequencing 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 prior 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.
water generators) have special provisions
applying to licensees in developing countries and
joint ventures with local manufacturers.
Technological cooperation with independent,
uncontrolled manufacturers in developing
countries is foreclosed by the fact that parties
collectively agree never to 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
confronted 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
predatory pricing against newcomers,
particularly from developing countries.
According to the FTC, in 1948   The fund
(made of the members contributions) could be
used to support cut-throat competition against a
nonmember competitor in any territory coming
within the scope of operation of the agreement .
Such tactics were employed in the early
seventies unsucessfully to prevent the rise of
the Japanese heavy electrical 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, Chile,Columbia,
Venezuela, Panama, Chinese Taipei, China, Korea,
Iran, Kumait, Iraq, Spain, Denmark, Greece,
Romania, Yougoslavia, Turkey, 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
promotion of the welfare of large multinational
firms.
It would contribute to achieving the goals of the
multilateral trading system by providing a way
to 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
to national competition laws could help
governments resist protectionist and corporatist
pressures by domestic lobbies and, allow them
to establish a more investment friendly legal
environment
Frederic Jenny