International Cooperation on Competition Policy

Seminar on Hemispheric Cooperation on Competition Policy, Santiago , Chile May 15-16

Presentation by

Frederic JennyChair of the WTO Working GroupOn Trade and Competition Policy

On Competition in the WTO

«  WTO agreements as they exist today are not efficient in dealingwith issues of private restraint of international trade which may beas detrimental to the free international trading system as governmental barriers. As liberalization of trade progresses throughtrade negotiations and government trade barriers are lowered and eliminated, the WTO has to deal with issues of restrictive businesspractices 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 frameworkin one form or another and this is indeed the lesson of the JapanesePhotographic Film Case »

« Basic principles of the WTO and the role of competition policy,Professor Matsuo

Matsushita, April 2002»F.Jenny

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 policyplays an increasingly important role

F.Jenny

Competition policy in small economies

Competition law should promote competitionwhenever competition is likely to promote efficiencyThus competition law is not inimical to the economic development of small economies.

In small economies market concentration is likely tobe higher than in larger economies; small economiesare 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 (WorldBank study)

F.Jenny

Domestic Bus Cartel: Jordan1

1) From « Competition Law and policy in Jordan » by Yusuf Mansur and Bashir Zu’bi , presented at the Expert group on Competition Laws and Policies: Identification of Common Ground in ESCWA Member Countries Abu Dhabi 28-30 January 2002

« (…) 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 »

F.Jenny

The medical drug market in Lebanon1

1) 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

« 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 ».

F.Jenny

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

Transnational anti-competitive practices which affect trade: a

typologyDefeating 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

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

The International Heavy Electrical Equipment Cartel

Membership: over 50 European and Japanese firms

Duration: from 1930 until , at least, until the middle of the 1980s (current status of the cartel unknown)

Products covered: all heavy electrical equipment ( turbines, generators, condensers, switchgear, rectifiers, rolling mills)

Under the auspices of «  The International Electrical Association », a seemingly innocuous trade association incorporated in 1945

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)

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, IngersollRand, Ohio Brass Cny) with violating the Sherman Act by illegallyconspiring 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 eliminatethe Japanese firms through predatory pricing, the cartel members convince them to join the cartel in the mid seventies. They becomeassociate members.

The practices (I)

Notification system: members must notify the cartel secretary if theyreceive 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 party…shall…quote 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. »

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.

Limitation of transfers of technology to developing countries: Some agreements ( ex. water generators) have special provisions applying tolicensees 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).

Penalties: non compliance with respect to pricing or market allocation leads to severe fines.

The practices (III)Exceptions: The members of the cartel are not to cooperate with non cartel members. When confronted with outside competition and if aqualified majority of members involved in a transaction agree «  allMembers 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, particularlyfrom developing countries. According to the FTC, in 1948 : «  The fund (made of the members’ contributions) could be used to supportcut-throat competition against a nonmember competitor in any territorycoming 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, predatorypricing 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) .

The effects of the cartel on importing countries

« From the cartel’s 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 rangefrom US$ 300 to 500 million per year, which ultimately would be reflected in the cost of electric power and all products dependent on electricity »

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

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

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

National competition laws and transnational anticompetitive

practicesIncreasing 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

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

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

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

Possible benefits of a WTO agreement on competition ?

It would send a signal that the multilateral community is notexclusively interested in the promotion of the welfare of large multinational firms.

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 toestablish a more investment friendly legal environment

Frederic Jenny

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