International Competition Law: A New Dimension for the WTO?

by Martyn D. Taylor

Overview

Should an international competition agreement be incorporated into the World Trade Organization? Taylor examines this question, arguing that such an agreement would be beneficial. Existing initiatives towards the regulation of cross-border, anti-competitive conduct have clear limitations that could be overcome by an agreement, and the WTO would provide the optimal institutional vehicle for it. At a practical level, Taylor points out, an international competition agreement could address under-regulation and over-regulation in the trade-competition regulatory matrix, realizing substantive benefits to international trade and competition. This book identifies the appropriate content and structure for a plurilateral competition agreement and proposes a draft negotiating text with accompanying commentary, and as such will be an invaluable tool for policy-makers, WTO negotiators, competition and trade lawyers, and international jurists.

Product Details

ISBN-13:	9780521102278
Publisher:	Cambridge University Press
Publication date:	01/08/2009
Pages:	520
Product dimensions:	6.00(w) x 9.00(h) x 1.40(d)

About the Author

Senior Associate, Mallesons Stephen Jaques, Sydney.

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Cambridge University Press
978-0-521-86389-6 - International Competition Law - A New Dimension for the WTO? - by Martyn D. Taylor
Excerpt

1

Introduction

Modern business operates in a world that is highly economically integrated, but that remains politically, culturally and legally diverse. Notwithstanding globalisation, law and politics is still organised primarily on the basis of nation-states. National laws reflect significant social and political differences between nations. A fragmented international regulatory environment has evolved in which each government has developed its own unique approach to the regulation of conduct that affects its territory, often without regard to the effect of that regulation on other nations.

   Competition law (or ‘antitrust law’ as it is known in the United States) is one form of such regulation. Competition law involves laws that promote or maintain market competition by regulating anti-competitive conduct. However, modern competition laws have traditionally evolved to promote and maintain competition in markets principally within the territorial boundaries of each nation-state. Domestic competition laws are not usually concerned with activity beyond territorial borders unless it has significant domestic effects.

   This limited territorial approach has created difficulties in an increasingly globalised world in which transactions subsume multipleterritorial spaces. Anti-competitive conduct may have adverse economic effects in multiple jurisdictions, unconfined by territorial boundaries. In this manner, while competition law remains essentially national, competition issues have become increasingly international, creating a regulatory disjunction. To the extent the effect of anti-competitive conduct crosses territorial boundaries, it may escape effective regulation.

   On the one hand, under-regulation may occur. Anti-competitive conduct may not be prevented due to ineffective regulation, particularly as firms have every incentive to structure their arrangements to arbitrage cross-border regulatory differences. Conversely, over-regulation may occur. Legitimate competition may be impeded by excessive regulation, particularly where regulation aggregates over multiple jurisdictions.

   Historically, to address perceived under-regulation of anti-competitive conduct, nations commenced applying their domestic competition laws on an extraterritorial basis to regulate foreign anti-competitive practices with adverse effects on their domestic markets. As identified in Chapter 3 of this book, such extraterritorial application of competition laws remains limited and has created significant jurisdictional conflict.

   More recently, to address both under-regulation and over-regulation, nations have sought to negotiate bilateral co-operation agreements in relation to competition law matters. As identified in Chapter 5 of this book, while such bilateral agreements clearly assist, they do have clear limitations. As a result, international attention has turned to the possibility of negotiating a multilateral agreement on competition law, referred to in this book as an ‘international competition agreement’.

   Historically, the potential for an international competition agreement has been recognised by several initiatives. In 1945, in negotiations preceding the adoption of the General Agreement on Tariffs and Trade (‘GATT’), limited international competition obligations were proposed within the Charter for an International Trade Organisation. While these obligations were not adopted within the GATT at its inception in 1947, a number of attempts were subsequently made to incorporate competition provisions. In 1994, with the conclusion of the Uruguay Round of GATT Multilateral Negotiations, the World Trade Organisation (‘WTO’) was created. The Agreement Establishing theWTO included a range of limited provisions addressing various cross-border competition issues on a sector-specific basis

   Following further consideration of international competition issues, a formal WTO Working Group on the Interaction Between Trade and Competition Policy was established by a WTO Ministerial Conference in Singapore in 1996. The WTO Working Group has investigated various issues relating to the incorporation of competition law and policy into the WTO. Other organisations, such as the World Bank, the Organisation for Economic Co-operation and Development (‘OECD’), and the International Bar Association, have also contributed to the analysis under a variety of different initiatives. More recently, WTO Ministerial Conferences in Doha (2001) and Cancún (2003), have contemplated formal WTO negotiations on competition law and policy.

   Accordingly, international competition issues now have a prominent position on the international trade policy agenda.

   With this background in mind, this book proposes that an international competition agreement should be incorporated into the WTO in the form identified in this book.

Figure 1: Structure of this book

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Proposal

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A plurilateral competition agreement should be incorporated into the WTO in the form identified in this book.

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Parts of this book	Chapters of this book
An international competition agreement is desirable (Part I).	An international competition agreement is desirable and would be welfare-enhancing relative to the status quo (Chapters 2 and 3).
	There is a sufficient basis for an international competition agreement (Chapter4).
	Existing initiatives towards the regulation of cross-border anti-competitive conduct have clear limitations that could be overcome by an international competition agreement (Chapter5).
The WTO could provide a suitable institutional vehicle for an international competition agreement (Part II).	The WTO could provide a suitable institutional vehicle for an international competition agreement. The relationship between international trade law and international competition law can be reconciled at a theoretical level by the concept of market contestability (Chapter 6).
	At a practical level, an international competition agreement could address under-regulation and over-regulation in the trade-competition regulatory matrix, realising substantive benefits to international trade and competition (Chapters 7, 8 and 9).
The optimal form for an international competition agreement at the present time would be a plurilateral WTO agreement in the form identified in this book (Part III).	The WTO would provide the optimal institutional vehicle for an international competition agreement (Chapter 10). The optimal content, approach and structure for a WTO competition agreement can be clearly ascertained (Chapters 10, 11 and 12).
	A multilateral WTO competition agreement would not be politically achievable at the present time. However, a plurilateral WTO competition agreement would be politically achievable (Chapter 13).
	Bearing the above in mind, a plurilateral agreement should be incorporated into the WTO in the form set out in the Appendix to this book (Chapter14, Appendix).

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   In order to work through these issues systematically, this book is divided into three main parts as identified in Figure 1:

• Part I of this book identifies that an international competition agreement is desirable. Such an agreement would be welfare-enhancing and would address externalities in the cross-border regulation of competition. There is a sufficient basis for such an agreement. Existing initiatives towards the regulation of cross-border anti-competitive conduct have clear limitations that could be overcome by such an agreement.
• Part II of this book identifies that the WTO could provide a suitable institutional vehicle for an international competition agreement. The relationship between international trade law and international competition law can be reconciled at a theoretical level by the concept of market contestability. At a practical level, an international competition agreement could address under-regulation and over-regulation in the trade–competition regulatory matrix, realising substantive benefits to international trade and competition.
• Part III of this book identifies that the optimal form for an international competition agreement would be a plurilateral WTO agreement. A multilateral WTO competition agreement would not be politically achievable at this time. This book concludes by identifying the appropriate content and structure for a plurilateral WTO competition agreement and proposes a draft negotiating text with accompanying commentary.

   This book is intended to make a substantive contribution to knowledge in this area with the intention of assisting policy-makers, lawyers, diplomats, officials, academics, jurists and experts alike in identifying the basis for, and formulating, an international competition agreement.

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PART I

An International Competition Agreement is Desirable

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2

Is competition law beneficial?

Of all human powers operating on the affairs of mankind, none is greater than that of competition.

(Henry Clay, 1832)¹

Part I of this book establishes that an international competition agreement is desirable.

An important first step in analysing the desirability of an international competition agreement is to determine the extent to which competition law is beneficial. While it is widely assumed that competition law is beneficial, the precise causal reasons why (and the magnitude of those benefits) are not widely understood. This chapter addresses these issues in the following manner:

• Section 2.1 examines the theoretical rationale, modus operandi and philosophy underlying modern competition law. Modern competition law is principally concerned with economic goals, namely promoting the efficient operation of markets in order to maximise social welfare. Section 2.1 concludes that the welfare benefits of competition law are significant.
• Section 2.2 identifies that the efficiency objective of competition law may be complemented by distributional objectives. Such distributional objectives are controversial. Modern competition laws often attempt to reconcile inherent tensions between the objectives of economic efficiency and distributional fairness.
• Section 2.3 examines the relationship between competition law and other economic policies. Competition law is the principal instrument of competition policy and creates an environment conducive to sectoral deregulation. Section 2.3 identifies that such deregulation itself has a significant impact on economic welfare.

   Chapter 2 confirms that competition law has a significant positive effect on economic welfare. Competition law deters anti-competitive conduct that may otherwise result in welfare losses to society. Competition law also supports sectoral deregulation, which may have significant positive welfare effects. In this manner, competition law is clearly beneficial.

2.1 What is competition law and what is its rationale and philosophy?

2.1.1 The role of competition in promoting market efficiency

It is common knowledge that competition law is concerned with the promotion and maintenance of competition for the benefit of society. However, the precise rationale, philosophy, modus operandi and causal theory behind competition law are relatively complex and not so well known. An understanding of this background is essential when determining whether competition law is, in fact, beneficial.

The intellectual foundation and conceptual framework for competition law is provided by neoclassical microeconomic theory. As such, the rationale, philosophy and causal theory underlying competition law closely reflect the assumptions, reasoning, and philosophy underlying neoclassical microeconomic theory. Indeed, the starting point for an understanding of the rationale behind competition law is to understand the micro-economic theory concept of a ‘market’, the perceived benefits of market efficiency, the role of competition, and their causal inter-relationship. In particular, it is necessary to understand that:

• markets allocate scarce resources between competing end uses;
• economic efficiency refers to the optimal use and allocation of such resources by markets, thereby maximising social welfare;
• competition enhances market efficiency;
• market power is anathema to competitive processes and, in the presence of market power, markets may not maximise social welfare; and
• competition law regulates market power in order to promote competition, thereby enhancing economic efficiency and increasing social welfare.

Each of these elements are considered in turn below.

   Markets allocate scarce resources between competing end uses At its most basic level, the discipline of economics involves the study of the allocation of society’s scarce resources between competing end uses and the use of those resources in production and consumption. Neoclassical microeconomic theory analyses the allocation of resources by modelling the interaction of individual agents pursuing their private interests, as represented by markets. Markets are perceived as the mechanism by which an economy allocates its scarce resources, via a series of transactions, to those persons who value them the most.² Fundamentally, markets provide a mechanism for decentralised decision-making in which resources are allocated by the collective decisions of those most directly involved.

A ‘market’ is an abstract concept describing the range of actual and potential transactions between producers and consumers. Neoclassical microeconomic theory assumes that these producers and consumers behave in the following manner:³

• Producers will seek to recover their long-term costs while individually optimising production to maximise their profits. In doing so, they will engage in rivalry with other producers for the patronage of consumers. As producers face increasing short-run marginal production costs, it is optimal for them to increase production if the market price rises.⁴ The aggregate effect of price changes on the level of production, ceteris paribus, is modelled by a market supply function, as illustrated in Figure 2. The market supply function may change over time for such reasons as firms entering or exiting the market, or changes in production costs.
• Consumers will seek to maximise their individual utility by purchasing the products they most value at the lowest available price. In doing so, they will engage in rivalry with other consumers doing likewise. As the price of the product declines, each consumer is willing and able to acquire more of the product, leading to increased demand.⁵ The aggregate effect of price changes on consumer demand, ceteris paribus, is modelled by a market demand function, as illustrated in Figure 2.

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Figure 2: Neoclassical (Marshallian) graphical representation of a market.⁶

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The market demand function will change over time for such reasons as changes in real disposable consumer income and changes in consumer preferences.

The market model used by neoclassical economics involves the realisation of a market equilibrium (E) by the interaction of consumer demand with producer supply. The equilibrium price (P) and quantity (Q) occur where the level of supply meets the level of demand such that an equilibrium number of market transactions occur.

   Producers realise area (PEQO) in revenue to cover their costs and make a profit; equivalent to the total amount paid by consumers. Consumers realise a surplus utility after paying producers equivalent to triangle (DEP), known as ‘consumer surplus’. Producers realise a surplus equivalent to triangle (PEO), known as ‘producer surplus’.

   In neoclassical microeconomic theory, a market transaction occurs when a particular producer and consumer agree on a price for a particular product. The point of coincidence of demand by consumers with supply by producers is known in neoclassical microeconomic theory as the ‘market equilibrium’ (E), as illustrated by Figure 2, and is the point at which an equilibrium number of transactions occur in the market.⁷

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© Cambridge University Press

Table of Contents

1. Introduction; 2. Is competition law beneficial?; 3. Is an international competition agreement desirable?; 4. Is there sufficient basis for an international competition agreement?; 5. Have existing cross-border initiatives proved sufficient?; 6. Would the WTO provide a suitable institutional vehicle?; 7. Would a WTO competition agreement promote international trade?; 8. Would competition regulation of trade promote competition?; 9. Should competition principles be introduced into anti-dumping law? 10. Optimal objectives and principles for a WTO competition agreement; 11. What is the optimal content for a WTO competition agreement?; 12. What is the optimal structure for a WTO competition agreement?; 13. Would a WTO competition agreement be politically achievable?; 14. Conclusion: A plurilateral agreement should be incorporated into the WTO; Appendix: Draft negotiating text for a plurilateral WTO competition agreement.