IV The International Dimension of Competition Policies

Peter Uimonen, Arvind Subramanian, Naheed Kirmani, Nur Calika, Michael Leidy, and Richard Harmsen
Published Date:
February 1995
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Arvind Subramanian1

The globalization of the world economy has increased attention on domestic policy instruments that have an impact on the conditions of competition between domestic and foreign sources of supply (imports and foreign direct investment). Competition policy is one such domestic policy—its formulation and enforcement has led in some cases to trade frictions between countries. The Uruguay Round agreement has widened the scope of domestic policies (subsidies, standards, government procurement, services, intellectual property, and so on.) addressed internationally. At the April 1994 Marrakesh meeting concluding the Uruguay Round, a number of countries expressed the view that competition policies should be included in the World Trade Organization’s (WTO) future work agenda.

Some aspects of competition policies (e.g., subsidies) have featured prominently in the Fund’s work, while other aspects (e.g., antitrust policies) have not. The increasing internationalization of competition policy issues and related scope for trade frictions suggest that the Fund should be aware of developments in this area and their impact on members.2 This paper focuses on the international dimension of competition policy, in particular on its trade effects. It discusses recent developments in trade relations that have addressed competition policy issues, the potential for conflict arising from competition policies, ongoing mechanisms for international cooperation on competition policies, and the possible elements of a future agenda for cooperation.

Recent Developments

In this paper, competition policies are defined to include laws and regulations (of economy-wide application) that govern private producer behavior and the market structure within which interactions between producers take place.3 Aspects of producer behavior covered include practices of individual firms (e.g., pricing and advertising) as well as arrangements—horizontal and vertical—between firms (Box 1). Horizontal arrangements refer to those between firms selling the same product or group of products (e.g., price fixing, output restrictions, and cartelization); vertical arrangements refer to those between manufacturers and their suppliers, and manufacturers and their distributors.4 Mergers and acquisitions, which have an important effect on market structure because of increasing the concentration of existing capacity, are also covered in this paper.

Competition policies have recently attained greater prominence because of questions related to market entry into Japan (particularly in the context of trade relations between the United States and Japan), the role played by the enforcement of competition policy in the context of implementing the Internal Market Program in the European Union (EU), and certain other developments.

Competition Policy in Japan: Selected Issues

Some of Japan’s trading partners have the perception that the conduct of competition policy in Japan has reduced market access for foreign firms in the Japanese market. This perception is reflected, for example, in several U.S. initiatives against Japan, including possible use of domestic legislative tools,5 the Structural Impediments Initiative (SII) and, more recently, the United States-Japan framework agreement6 (see Table 1 for United States-Japan bilateral issues related to competition policy).

Table 1.Selected Competition Policy Issues in United States-Japan Bilateral Relations
Issues (Year)1Result
1. Under the framework agreement, the United States has raised the issue of possible exclusionary impact of arrangements between Japanese manufacturers and distributors in autos and auto parts, flat glass, and paper industries. (1993)The Japan Fair Trade Commission (JFTC) has conducted surveys of the four industries to assess whether private arrangements and the structure of the industries (including cross-holdings of equity, common management) result in the exclusion of imports into the market.
2. The United States alleged that the Japanese Government allowed a boycott by Japanese electric utility companies of purchases of foreign amorphous metal transformers, and tolerated the refusal by certain individual Japanese companies to negotiate separate license agreements with the foreign supplier. (1990)Agreement guaranteeing the purchase of foreign-made metal transformers.
3. The United States alleged that the Government of Japan tolerated anticompetitive practices by Japanese construction companies, including inadequate use of administrative measures restricting collusive activities such as bid rigging, impeding sales of foreign construction firms. (1988)Agreement to extend an earlier agreement between the United States and Japan to more construction projects, which provided for special measures designed to facilitate foreign access to construction projects.
4. U.S. suppliers of paper and paper board products complained that alliances between producers and distributors in Japan impede the imports of foreign products. (1986)Agreement was reached requiring the Japanese Government to encourage Japanese paper distributors to increase imports and to enforce effectively the competition law with respect to the paper market. Private sector compliance was to be monitored through JFTC surveys of the paper industry.
5. The United States alleged that the Japanese Government created a market structure in the semiconductor industry dominated by a small number of semiconductor-using companies with strong interlocking lies in research and development, production, and sales, which created barriers to entry for foreign firms. (1985)Undertaking by Japanese Government to lake measures to improve access for foreign firms. When market access was subsequently determined by the U.S. to be inadequate, an agreement was negotiated that contained a reference to a 20 percent market share for foreign firms.
b. The United States alleged that four importers of soda ash formed an import cartel restricting imports of foreign soda ash into Japan. (1983)Following a complaint by the U.S. Government, the JFTC investigated the case and determined that the cartel violated Japanese competition law, The cartel was revoked.
7. The U.S. Justice Department challenged an arrangement between Japanese firms for the exchange of price information alleging that it amounted to fixing prices of imports. (1982)The Japanese Government issued an “administrative guidance” to the defendant companies to refrain from exchanging price information.

Box 1.Illustrative List of Practices Regulated by Competition Policy

Horizontal arrangements refer to arrangements between firms selling the same product or group of products; they include price fixing, output restrictions, and other forms of cartelization.

Vertical arrangements refer to agreements or relationships between manufacturers and suppliers, and manufacturers and distributors. Important vertical arrangements are:

  • tying, when a seller requires that, as a condition for buying one product, the purchaser must buy another product as well;

  • exclusive dealing, when a seller requires that, as a condition for buying a product, the buyer commits to buy only the items sold by the seller;

  • territorial restraints when a seller requires that, as a condition for buying a product for resale (i.e., acting as a distributor), the buyer agrees to resell the product within specified geographic areas;

  • resale price maintenance, when a seller requires that, as a condition for buying a product for resale, the purchaser agrees to resell the product only at a specified price.

Arrangements in technology licensing agreements include:

  • patent pooling, where three or more parties each grant an interest in an intellectual property right;

  • grant back, when the licensee is required to assign inventions made in the course of working the transferred technology back to the licensor; and

  • challenges to validity, when the licensee is prevented from contesting the validity of the intellectual property rights or other rights of the licensor.

Several observations may be made on the nature of trading partners’ concerns about Japanese competition policies and the manner of their resolution. Many of them relate to perceptions about inadequate enforcement of domestic competition laws rather than inadequate standards. Japan has taken a variety of measures to improve the general enforcement of competition laws. These include increasing the fines fourfold and twentyfold, respectively, for administrative and criminal violations of the Anti-Monopoly Act (AMA), increasing the resources of the Japan Fair Trade Commission (JFTC) (the agency implementing the AMA), and issuance of guidelines clarifying the standards and enforcement of competition policy, particularly with respect to distribution systems and keiretsu.7 As a consequence of the new regime, the number of formal actions initiated by the JFTC has increased; for example, the number of identified violations of the AMA increased from 7 in 1989 to 31 in 1993, and the first criminal action for violation of the AMA was taken in 1991. Increased enforcement of the AMA has also led to a sharp reduction in the number of exemptions from competition laws granted by Japan.8

Many of the concerns have focused on the potential exclusionary impact of vertical relationships and arrangements between manufacturers and distributors. A central theme in discussions of barriers to trade in Japan has been that vertical keiretsu involving equity holdings by manufacturers in their distributors, common management, and inducements offered by manufacturers, result in distributors choosing not to deal in the products of foreign suppliers even where the latter are competitive9 (see Box 2 for the results of a survey on distribution of foreign automobiles). Empirical evidence on the trade impact of keiretsu is mixed (see Box 3). While a few studies show a negative impact of vertical keiretsu on imports of manufactured goods,10 others have challenged these results and the methodology used.11 Furthermore, vertical business relationships are not unique to Japan. Indeed, in some sectors the level of formal vertical integration is higher in the United States than in Japan, but in the latter the relationships tend to be informal and less transparent.12

In addition to undertaking efforts to better enforce competition policy, Japan has attempted to improve access for foreign firms and stimulate import demand—though trading partners have considered such efforts insufficient thus far. In some cases, enhancement of market access has taken the form of numerical indicators of foreign market shares (semiconductors) or commitments to specific firms (Motorola).13 Japan has declared its intention to avoid future market opening based on numerical targets.

While evidence on the role of competition policies in preventing market access may be inconclusive, there remains an extensive net of sector-specific rules and regulations (e.g., in construction, transportation, tele-communications, and wholesale and retail trade), the elimination of which would lead to greater market access for domestic and foreign firms. The deregulation measures made public by the Japanese Government in June 1994 attempt to address the adverse welfare consequences of excessive regulation.

Competition Policy in the KU

Establishing strong competition policy standards and enforcing them have been an important element in the EU’s trade and industrial policies.

External Trade Impact

Two examples of recent competition policy actions by the EU Commission serve to illustrate their potential trade impact. In 1985, under a block exemption from EU competition laws, car manufacturers and importers were allowed to exercise control over their choice of distributors, and the products handled by the latter (including the right to prevent distributors from handling competing products), and were also given the (qualified) right to determine the territorial operation of their distributors. Conditions were attached to the grant of the exemption, including the possibility of its revocation if large price differences (greater than 18 percent in the short run or 12 percent for at least one year) emerged between member countries, Mattoo and Mavriodis (forthcoming) argue that this block exemption has facilitated the implementation of the 1991 EU-Japan consensus on cars, in particular in sustaining the market segmentation created by the country-specific VER on Japan.14

While the above exemplifies the potential market access consequences of competition policies, another example points to the possible use of competition policies to promote the competitiveness of EU industries in international competition. In a 1990 decision, the European Commission granted an exemption from competition laws for a cooperative research and development, production, and marketing venture between two EU companies; the Commission argued that “Community companies … find it difficult to compete with other larger non-European competitors,” and the success of the latter in winning international contracts was adduced to support its case.15

Box 2.Survey of Japan’s Car Distribution System from a Competition Policy Perspective

The Japan Fair Trade Commission (JFTC) in 1993 conducted surveys of distribution practices in four industries—flat glass, paper and paper products, passenger cars, and automobile parts—with a view to ascertaining if such practices raised concerns from a competition policy perspective, leading to exclusion of potential entrants from the market.1 Of particular interest was the exclusionary impact on foreign suppliers stemming from arrangements or relationships between domestic car manufacturers and distributors.

The survey covered 9 domestic manufacturers, 9 Japanese subsidiaries of foreign manufacturers, and 3,759 domestic dealers (distributors) of passenger cars. It showed that domestic manufacturers had equity holdings in about 16 percent of distributors, were represented through their personnel in the boards of about 13 percent of distributors, and provided loans to about 15 percent of distributors (with significant overlap in these indicators).

From a competition policy perspective, one of the critical issues is whether local distributors sell the products of one manufacturer (“exclusive dealing”) or also handle competing products. A survey conducted in 1979 showed that most contracts between manufacturers and distributors contained a clause preventing distributors from handling products of competing firms. Guidelines published by the JFTC in 1991 sought to eliminate this clause by persuading manufacturers to write to their distributors granting them the freedom to handle products of competing firms (without prior consultation with domestic manufacturers). The 1993 survey showed, however, that almost half the dealers had not received this communication from manufacturers; about 50 percent of dealers did feel that they were expected not to handle competing products. But the survey also showed that in practice about 56 percent of distributors handled imported cars in addition to domestic cars.

Another competition policy-related issue concerned whether distributors were restricted in their territorial sales activity by virtue of conditions on territorial allocation imposed by manufacturers. While the Anti-Monopoly Act prohibits such territorial allocation, some distributors felt they were not free to sell outside their territory (e.g., there were rebates attached to respecting territorial allocation). In a few cases, distributors were also forced to sell products that they did not wish to. Thus, overall the JFTC survey concluded that there were some problems, from a competition policy perspective, relating to distribution of cars. Domestic manufacturers were expected to take voluntary measures to resolve these problems and the JFTC would continue to monitor developments to ensure that the domestic market remained open.

1Japan Fair Trade Commission (1993a), (1993b), (1993c), and (1993d).

Impact on the Internal Market

The increased attention given to competition policies in the European Union results from the recognition that the fruits of a single market without official impediments to trade cannot be fully reaped if private barriers continue to distort free competition. An active enforcement of competition rules is therefore an indispensable complement of the Internal Market Program.16 The increased emphasis on merger control, liberalization of public monopolies, and reduction of barriers in the regulated services sector is a reflection of this notion.

This increasing role of competition policy in ensuring the free movement of goods under Articles 85 and 86 of the Treaty of Rome is reflected in the number of formal decisions of the Commission relating to these Articles: 163 decisions were taken in the 1980s compared with 115 decisions between 1970 and 1979.17

In light of the sharp increase in mergers and acquisitions involving the EU’s top 1,000 firms (from 303 in 1986-87 to 622 in 1989-90)18 and the consequent potential for adverse effects on the Internal Market, active and efficient merger control at the EU-wide level assumed greater importance.

The legal basis of merger control was strengthened with the introduction of the 1989 Merger Control Regulation. The enforcement of merger control on a day-today basis requires the reconciliation of two considerations. On the one hand, it is recognized that mergers often lead to increased efficiency and contribute to the adaptation of industries to the new environment created by the Internal Market Program. On the other hand, mergers and acquisitions should not be allowed to establish dominant positions. Between the entry into force of the Regulation in September 1990 and 1993, the Commission has handled 193 notifications. In the great majority of cases, no objections were raised. In one case (the intended acquisition in 1991 of the Canadian aircraft producer De Havilland by two European companies (Aerospatiale and Alenia)), the operation was blocked. This decision was considered as an important precedent in the enforcement of merger control. In eight other instances, the Commission made its consent dependent on the fulfillment of a number of conditions, such as the sale of subsidiaries that, if merged, would create an undesirable dominant position in certain markets.

Box 3.Impact of Keiretsu: Empirical Evidence

In Japan, corporate groupings involving formal or informal business relationships between members are commonly termed keiretsu. Horizontal keiretsu involve affiliations between firms in different industries. Typically, such groups include manufacturing companies, a lead bank, a trust bank, a trading company, and an insurance company. The nature of relationships include common management, interlocking directorates, joint investment, joint appointment of key personnel, and so on. Vertical keiretsu are composed of similar links between manufacturing companies and their suppliers and distributors.

The debate on the economic impact of keiretsu is whether they represent efficient forms of corporate organization rendering valuable insurance benefits, facilitating pursuit of efficient long-term objectives, and providing (in the case of vertical keiretsu) for an appropriate mix of integration and autonomy in business dealings or whether the closed relationships exclude entrants—domestic and foreign—from the market.

The empirical evidence in favor of the exclusionary hypothesis comes from the work of Lawrence (1987), (1991), and (1993) who analyzes Japanese trade structure in a cross-industry framework. The main results are that keiretsu—horizontal and vertical—have a significant negative impact on imports; however vertical, but not horizontal, keiretsu also positively influence exports. These results, particularly in relation to vertical keiretsu, which are the focus of trade tensions, are compatible with both the efficiency-enhancing and exclusion-resulting hypotheses.

These cross-industry results have been criticized on a number of grounds including the poor explanatory power of the estimated equations, low goodness-of-fit statistics, and sensitivity to the industry coverage.1 In response to the critique that cross-industry models do not permit conclusions about the contribution of keiretsu to Japan “underimporting” relative to other countries, Lawrence (1991) examines the extent to which keiretsu can explain the observed Japanese import “shortfalls” in an earlier cross-country study, which showed that Japan “underimported” relative to other OECD countries. The results indicated a statistically significant positive relationship between vertical keiretsu and shortfalls in manufactured imports, supporting the exclusionary hypothesis. This study has, however, been criticized for a number of deficiencies. The cross-country model underlying the results is misspecified and subject to simultaneity bias. The same exercise of explaining shortfalls caused by keiretsu when performed on an alternative cross-country model by Saxonhouse (1991) shows statistically insignificant effects of keiretsu. A similar exercise carried out by Noland (1992) showed that keiretsu are consistently associated with lower-than-expected imports and higher-than-expected net exports, indicating that they could be efficiency-enhancing or exclusionary or both. Furthermore, it has been argued that imports and keiretsu affiliations are jointly determined so that a negative statistical relationship between imports and keiretsu cannot assign causality to the latter. For example, if comparative advantage leads to a manufacturer using domestic rather than foreign suppliers, a vertical keiretsu relationship will develop. In such cases, keiretsu, rather than impeding imports and comparative advantage, “may be one of the ways comparative advantage gets institutionalized within the economy.”2

The evidence is therefore not conclusive on whether or to what extent keiretsu impede Japanese imports.

1Saxonhouse (1991) and (1993).2Saxonhouse (1993), p. 37.

Extraterritorial Application of U.S. Policy

Another significant development in the international dimension of competition policies concerns an evolution in the stance of the United States, when it announced in 1992 that the Justice Department would, in appropriate circumstances, challenge foreign business conduct that harmed American exports; the proviso is that such conduct would need to have violated U.S. antitrust laws if it had occurred in the United States and to have a direct, substantial, and foreseeable effect on U.S. commerce. This decision superseded previous provisions (of the Department of Justice’s 1988 Guidelines), which had been interpreted as prohibiting challenges to anticompetitive conduct in foreign markets unless there was direct harm to U.S. consumers.19 This enlargement in the scope of U.S. law to extraterritorial conduct was the basis of the action in May 1994 against a U.K. company alleged to have engaged in practices adversely affecting U.S. companies. The specific complaint was that the U.K. company had imposed stringent conditions on companies that bought licenses for its technology. These included restrictions on sublicensing and requirements to report back to the licensor any improvements in technology made by the licensee. As a result of this action, exports of firms as well as foreign direct investment by U.S. firms in Eastern Europe and southeast Asia are expected to increase substantially.

In the past, extraterritorial application of U.S. antitrust law has been the object of disputes with several trading partners, and some countries (e.g., Australia, Canada, and the United Kingdom) have enacted legislation to block the application of U.S. laws to their domestic industries.20

Developing Countries

Many developing countries have not instituted a legal or administrative framework for competition policies, but some are in the process of doing so, a trend likely to be reinforced in the future. Although developing countries may not have competition policies, they have expressed interest in regulating practices of foreign enterprises that might have adverse effects on their economies.

In the past, developing countries have been active in seeking a code of conduct on restrictive business practices, particularly in relation to agreements licensing the transfer of technology.21 Developing countries’ concern stemmed from the possible abuse by multinational enterprises from the exercise of their monopoly power inherent in control over proprietary information. As technology importers, abuse of such a dominant position could result in higher prices for technology and greater royalties, resulting in a loss of economic welfare. Developing countries also expressed concerns, in the context of the Uruguay Round investment negotiations (TRIMs), about the negative impact of practices by multinational enterprises that require subsidiaries to purchase imports from their parent company rather than sourcing locally and that prevent exports by subsidiaries in order to segment world markets. The exemption from competition laws granted by major industrial countries for export cartels, which could inflict terms of trade losses on developing countries, is another source of concern.

The Need for International Cooperation on Competition Policies

Scope for Conflict

The preceding discussion suggests that competition policies are an increasing feature of international trade relations. The potential for conflict between countries on account of competition policies goes beyond that suggested by recent developments. The case for international cooperation on competition policies would thus stem not only from a need to manage current tensions that reduce global welfare, but also possible future ones. Conflicts could arise from competition policies in several ways.

Weak or nonexistent competition policy standards could serve as de facto industrial policies, by promoting the competitiveness of or giving advantage to domestic industries in domestic or foreign markets. The specific competition policy provisions that could entail such consequences include exemptions for export and import cartels from the provisions of competition law. Export cartel exemptions are found in all competition laws (see Appendix I). They could result in raising export prices, thereby securing a terms of trade gain for the exporting country and a corresponding loss for the importing country.22 Another example is exemptions of research and development joint ventures from competition law. In the EU, United States, and Japan, certain cooperative ventures are promoted despite their static anticompetitive effect, on the grounds that they increase the incentives for research and development that might otherwise be blunted. The lenient treatment so accorded, however, could have effects analogous to subsidization and thus confer benefits on domestic firms vis-à-vis foreign rivals.23 This is exemplified in the European Commission’s decision on a cooperative research and development venture between European firms described above.

Low standards of competition policy could in principle reduce access for foreign firms in the market where such standards are low, thereby acting as trade barriers. An exclusionary impact could arise through restrictive arrangements between manufacturers and distributors such as exclusive dealerships, preventing distributors from, or reducing their incentives to, purchase foreign products. Conditions in Japan in this respect have in the past been raised as concerns by trading partners. The EU’s block exemption for cars also gives rise to market access issues as explained above.

The overall strength of competition policy is determined not merely by the rules but also the effectiveness of their enforcement. As mentioned earlier, trading partners have raised this as an issue of concern in Japan. Weak enforcement of competition policy in the Japanese construction market has featured in U.S.-Japan discussions on competition policy. Recently, the United States filed a suit in Japan against 53 Japanese companies for colluding in bids for construction contracts. It has been argued that weak enforcement of competition policy sustains collusion, excludes foreign (and other domestic) companies from the market, and thereby inflates government expenditures and imposes costs on consumers and taxpayers.24

The preceding discussion exemplifies the manner in which the absolute standards of competition rules could give rise to friction. However, differences between countries in standards could also do so, even where the interests of different competition authorities coincide. This was illustrated in the merger bid for a Canadian aircraft company by two European companies. The Canadian and European competition authorities agreed that the world was the relevant antitrust market in evaluating the economic consequences of the merger. They disagreed, however, on the standard for the evaluation (i.e., whether the merged entity would hold a dominant position with the market share it would obtain) and hence arrived at different decisions on the appropriateness of approving the merger.

In a variety of instances, competition authorities may not be able to control the activities of firms whose structure or activities may have an anticompetitive effect on the market because they are outside the jurisdiction of the relevant authorities. The most obvious examples are the operation of export cartels or mergers in foreign countries where the relevant firms do not have a presence in the market of the affected country.25 The problem of jurisdiction is more acute when anticompetitive practices in foreign markets are determined to affect a country’s exports. Conflicts from overlapping jurisdictions are exemplified in the merger case mentioned above.

The Case for Cooperation

The preceding discussion shows that competition policies have the potential for negative international spillovers. When used to promote competitiveness of domestic firms, such policies could have the effect of improving the welfare of individual countries. However, given the fact that competition policies intrinsically address situations of imperfect competition, this welfare gain could be at the expense of other countries. Where competition policies create a terms of trade gain for one country, they entail a corresponding loss for another country; and the appropriation of rents that they facilitate in one country implies a redistribution away from firms in another country. This gives rise to the familiar “prisoner’s dilemma” rationale for cooperation: each country is better off if it employs competition policies to secure national advantage, but the pursuit of such a strategy by all countries renders them collectively worse off. Cooperation then is a way of precommitting countries to avoid such collectively welfare-deteriorating outcomes.

The discussion also shows, however, that there is a class of situations where competition policies have effects similar to those of protectionist trade policies; they could reduce market access for foreign suppliers that also induces welfare losses for domestic consumers. Unilateral liberalization of competition policies that would eliminate barriers to entry and augment national welfare should be pursued; international cooperation could provide additional incentives (e.g., when trading partners also undertake similar liberalization) for countries to adopt policies that are welfare-enhancing from a national perspective.

Ongoing Cooperation on Competition Policy

There are several ongoing initiatives—multilateral and bilateral—aimed at securing greater international cooperation on competition policy.

The Final Act of the Uruguay Round contains provisions on competition policy in three agreements: trade-related investment measures (TRIMs), trade-related aspects of intellectual property rights (TRIPs), and the General Agreement on Trade in Services (GATS). The TRIMs agreement provides for a review, to be conducted within five years of its entry into force, which would inter alia consider whether the agreement should be complemented with provisions on competition policy.

The TRIPs agreement contains provisions on the control of anticompetitive practices or conditions in contractual licenses relating to the transfer of technology or of other proprietary information. The agreement recognizes the rights of countries to regulate such practices through their domestic laws. It also provides for consultations and exchange of information between governments where there is reason to believe that licensing practices or conditions constitute an abuse and have an adverse effect on competition in the relevant market.

The GATS agreement contains provisions on consultation and exchange of information similar to those in the TRIPs agreement. In addition, it requires countries to ensure that monopoly service providers do not abuse their position in activities outside the scope of their monopoly privilege.

In addition to the work done in the past in this area, the OECD has an extensive work program on the interface between trade and competition policies. This includes a study on the economic effects of antidumping, a project on the convergence of competition policies that would embody the consensus that has been reached within the OECD on this issue, and a study on control of mergers and simplifying merger procedures. The proposed program of work in the next two years aims at identifying ways in which competition policy approaches can be used to ensure that business practices do not unduly impede market access and to analyze the potential benefits of tighter disciplines regarding trade interventions that have anticompetitive effects.

In addition to multilateral initiatives, there are several bilateral agreements intended to facilitate international enforcement of competition policy. For example, the 1991 United States-EU agreement, based on the role of “comity,” or mutual respect for the sovereignty and interests of other states, aims “to promote cooperation and coordination and lessen the possibility or impact of difference between the Parties in the application of their competition laws.”26 Both authorities have agreed to take into account the other parties’ interests, and to exchange information, subject to certain conditions; however, neither party is obliged to respond positively to calls for enforcement from the other party.

Possible Future Agenda for Cooperation

The discussion in the preceding sections demonstrates that, in recent years, trade frictions emanating from competition policies have grown. Although in practice many of these have involved Japan, the potential for conflict between other countries exists, as competition policies could have negative international spillovers. Problems could arise because weak standards or enforcement can be used as industrial policy to favor domestic firms over foreign firms; they could also effectively act as trade barriers, impeding market access. There is a case for international cooperation based on the argument that if each country pursued defensive competition policies, all countries might be worse off.

At present, there is no agreement on what a future agenda would include, and it is clear that work in the initial stages will need to identify the issues and concerns of countries with a view to determining the approach and contents of future cooperation.27 In terms of the approach, there are several possibilities. An ambitious approach would be to agree to commonly applicable multilateral standards, rules for national enforcement, and multilateral dispute settlement procedures.28 The experience of the EU in using competition policy to eliminate intra-EU barriers to trade and factor mobility is instructive as a possible approach for multilateral cooperation in the future, although certain special features, including the supranational authority of the EU’s implementing agencies, might preclude the replicability of this approach. An alternative would be to undertake multilateral commitments concerning enforcement of existing national competition policies and exchange of information to assist international enforcement of competition policies. The objectives, pace, and forum for future economic cooperation are also likely to be conditioned by the position of developing countries and the time frame for adoption by them of national competition policies.

Appendix I Competition Policies in the United States, the European Union, and Japan

This appendix delineates the salient features of competition policies in the three major industrial country jurisdictions (Table 2). A broad comparison would yield the following conclusions.

First, the structure of enforcement varies among the three jurisdictions. The United States relies more on a judicial system with courts ultimately clarifying and enforcing the rules, while the EU and Japan rely more on an administrative system with substantial administrative discretion regarding antitrust enforcement. Private parties initiate more suits in the United States than in the EU and Japan.

Second, the United States has placed greater emphasis on regulating the structure of markets than the EU and Japan; however, since the enactment of merger control guidelines, the attention to structure has increased considerably in the EU.72

Third, the three jurisdictions have very similar regulations on horizontal arrangements, such as price fixing and output sharing, which are prohibited outright (i.e., under a per se standard).73 This reflects a common view that horizontal arrangements diminish efficiency and economic welfare through output restrictions and price increases. An exception to this rule is that Japan has been more permissive until recently in allowing cartelization when an industry is in crisis (“depression” cartels) or to rationalize an industry to achieve more efficient levels of operation (“rationalization cartels”).74

Fourth, the rules on vertical arrangements are usually not prohibited outright but evaluated on a situation specific basis (according to the so called rule-of-reason test). This differential treatment of vertical arrangements in turn reflects recent developments in the theory of industrial organization.75 Theoretical analysis of vertical arrangements highlights their ambiguous welfare effects: outcomes depend crucially on the particularities of market structure, cost-and-demand conditions, presence of risk and uncertainty, and technological interdependence.

Although all three jurisdictions tend to use a rule-of-reason test, the treatment of important vertical arrangements differs among them in some respects. For example, territorial restraints are more likely to be deemed illegal in the EU than in the United States, while tying arrangements are more likely to be prohibited in the United States than in the EU, which prohibits it outright only when practiced by a dominant firm. There are also inconsistencies of treatment within jurisdictions: formal vertical integration is treated differently from vertical arrangements between separate firms; in the United States, vertical price restraints are treated less leniently than nonprice restraints, despite similarities in their economic effects.

Fifth, all jurisdictions have similar policies with respect to certain exemptions from competition law, such as those for export cartels, price fixing for exports, and for cooperative research and development ventures. However, Japan tends to have a wider range of exemptions to cover import cartels and depression and rationalization cartels.

Sixth, the financial penalties for anticompetitive behavior tend to be higher in the United States and the EU than in Japan (which recently increased the magnitude of administrative and criminal penalties).

Finally, the United States is becoming more active than other countries in the geographic application of its competition laws. Not only does it appear to show more concern about the effects in its market of the behavior of firms outside its boundaries, but also appears to be unique in extending jurisdiction where adverse effects are felt on U.S. firms in foreign markets.

Table 2.Salient Features of Competition Policies in the United States, European Union, and Japan
United StatesEuropean UnionJapan
1. Nature of enforcementJudicial/administrativePredominantly administrativePredominantly administrative
2. Right to initiate casesPublic enforcement agency and private parties. Many more private suits than in the EU and Japan.Public enforcement agency and private parties.Public enforcement agency and private parties.
3. Possibility of reviewJudicialJudicialJudicial
4. Treatment of vertical restraints1
a. Exclusive dealingNonprice vertical restraints are usually per se legal in the absence of collusion between suppliers and dealers.Exclusive dealing, territorial restraints, and tying are per se illegal when practiced by a dominant firm; determination of a dominant firm is done on a case-by-case basis.Per se illegal if imposed by a dominant firm; otherwise adjudicated on a case-by-case basis.
b. Territorial restraintSee 4(a) aboveSee 4(a) aboveSee 4(a) above
c. TyingDespite exceptions, this is usually viewed as a per se offense.See 4(a)aboveSee 4(a)above
d. Resale price maintenancePer se illegal but under more narrowly defined circumstances than in EU and Japan.2Suppliers can maintain exclusive national distributors, but strict enforcement of parallel importation renders price discrimination and resale price maintenance infeasible.Per se illegal
5. Treatment of horizontal restraints1
a. Price fixingPer se illegalPer se illegalPer se illegal
b. Output restraintPer se illegalPer se illegalPer se illegal
c. PredationProhibitedProhibitedProhibited
6. Exemptions from competition lawUnlike in the United States and EU, many exemptions can be granted by nonenforcement agencies such as the Ministry of International Trade and Industry (MITI).
a. Export cartelsExempted if the effects are felt in foreign markets. Price fixing for exports is legal.Exempted if the effects are felt in foreign markets. Price fixing for exports is legal.Exempted if the effects are fell in foreign markets. Price fixing for exports is legal.
b. Import cartelsExplicit provision is made in the statute permitting their exemption from competition laws.
c. Research and development joint venturesThe National Cooperative Research Act of 1984 lifted research and development joint ventures from the suspicion that they are pet se illegal and put them under a rule of reason test, and protected firms from extreme penalties in the event that their research and development venture is found to be anticompetitive.Under Article 85(3) of the Treaty of Rome, a 13-year block exemption from competition laws was granted to certain categories of research and development agreements, and to joint exploitation of the results therefrom, The exemption applies even if the participants to the research and development venture together account for not more than 20 percent of the market.Research and development joint ventures between firms not in a competitive or potentially competitive relationship are permitted. Ventures between companies whose collective market share exceeds 20 percent are more likely to violate the Anti-Monopoly Act.
d. Small and medium-sized enterprisesSuch enterprises are not specifically exempted from competition laws should they form cartels.See 6(b) above
e. Rationalization cartelsNo explicit provision exists exempting rationalization cartels from competition laws.See 6(b) above
7. RemediesAdministrative and criminal remedies provided for in all three jurisdictions. Private parties can sue for compensatory damages, but the United States provides for greater deterrence by allowing recovery of punitive damages. (Three times the amount of compensatory damages.)
8. Merger
a. Premerger proceduresPremerger notification required if U.S. sales or U.S. assets of the acquiring and acquired parties exceeds $100 million and $10 million and the size of the transaction is at least SI5 million or 50 percent of the voting securities of the acquired party.

Timing of procedure is open ended.
Any merger would require prior notification if (1) annual world sales of the merging parties together exceed ECU 5 billion and (2) at least two of the merging parties have, between them, annual KU sales of at least ECU 250 million, unless (3) a single member state accounts for more than two thirds of the sales of each party to the agreement.

There are strict time limits to be followed for merger procedures.
Premerger notification required of all corporate asset transfers. Extent and nature of scrutiny by the JFTC depends broadly on total assets of merging companies, their market shares, whether merger is horizontal or vertical, etc.
b. Substantive standardMergers for which the postmerger HH1 is less than 1,000 are unlikely to be contested. Mergers producing a postmerger HHI exceeding 1,800 and an increase in the HHI of at least 50 will usually result in an injunction, for mergers resulting in a postmerger HHI between 1,000 and 1,800 and an increase in the HHI of over 100, enforcement depends on factors other than concentration.3The legality of a merger would depend on whether the merger would create or enhance a dominating position that would considerably hinder competition in the EU. While clear patterns have not emerged, mergers that result in a combined market share of less than 25 percent would not be disapproved.A number of market share criteria, including when the combined market share of the merging parties exceeds 25 percent or is the largest and exceeds 15 percent, are used to evaluate the legality of mergers from a competition perspective.
9. Definition of dominant position/monopolizationDefined as a firm having at least 33 percent of the market.See 6(c) and 8(b) aboveA monopolistic Situation exists when an enterprise has at least 50 percent market share or two enterprises have an aggregate market share of at least 75 percent.
10. Extraterritorial applicationCompetition laws in the United States and the EU have been used against actions taking place in foreign markets, the effects of which are felt in the domestic market. This is particularly true when the firm or firms involved in the action abroad has some presence (through a subsidiary) in the domestic market. However, competition laws in the United States, unlike in the EU and Japan, have also been applied even where effects are in foreign markets on the grounds that exports of U.S. firms have been affected.

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The principal author.

Recent Fund Article IV consultations with some major industrial countries have addressed competition policy issues, such as the impact of distribution systems on market entry.

This definition covers antitrust laws in the United States and the Anti-Monopoly Act (AMA) in Japan. In the EU, competition policies are defined more broadly to include state aids, public enterprises or others with special privileges, and regulatory policy.

Sector-specific regulations and laws affecting foreign direct investment have an important bearing on competition, but are not considered in this paper. Also excluded from its scope are the effects on competition of trade policies such as antidumping and VERs. For a discussion of these effects, see Kelly, McGuirk, and others (1992) and Ordover, Goldberg, and OECD (1993).

Section 301 of the U.S. Trade Act of 1988 includes in its definition of “unreasonable” practices the “…toleration by a foreign government of systematic anticompetitive activities by private firms or among private firms in the foreign country that have the effect of restricting…access of goods to purchasing by such firms” (as quoted in Finger and Fung (1994), pp. 4–5).

Formally called the United States-Japan Framework for a New Economic Partnership. The final report of the SII called for changes in Japan’s distribution system, including deregulation of the retailing industry, better enforcement of the Anti-Monopoly Act against exclusionary business practices, and improved monitoring, particularly of formal or informal relationships between companies, referred to in the Japanese context as keiretsu.

Pursuant to the SII, the JFTC conducted surveys of the Japanese flat glass, paper, auto, and auto parts industries with a view to ascertaining the existence of exclusionary business practices (see Box 2).

Total exemptions have fallen from 1,079 in 1975 to 219 in 1992; this number is likely to fall to 71 in 1994 with the elimination of the exemptions for textiles-related cartels. The number of export cartels fell from 42 in 1990 to almost 28 in 1992, all of which exist as a means of enforcing VERs and hence likely to be eliminated because of the Uruguay Round. There is currently one import cartel, compared with four in 1989.

To defuse trade tensions, several Japanese car manufacturers recently announced their intention to purchase certain amounts of foreign auto parts

In granting the exemption, the European Commission cited its potential benefits to consumers, including the promotion of competition between manufacturers and the assurance of a reliable network of repair and service facilities.

The experience of the EU is instructive on the use of competition policy to eliminate barriers to trade and factor mobility.

A growing share of these mergers and acquisitions have involved operations across EU member states and also non-EU countries (Jacquemin (1993)).

These efforts are embodied in UNCTAD’s work (see UNCTAD (1980) and (1981)).

In fact, VERs, which allow exporters to appropriate rents, are enforced in Japan by allowing the formation of export cartels.

Antitrust jurisdiction is well recognized for parties owning assets (e.g., a national subsidiary) within the nation administering the law but not for parties over whom jurisdiction would be based on a competitive effect realized solely through imports.

As quoted in Jacquemin (1993), p. 99. The United States has similar agreements with Australia and with Canada.

An important aspect that could be considered is how to incorporate antidumping into a competition policy framework, thereby rendering it less susceptible to protectionist abuse.

This approach was adopted in the Uruguay Round agreement on intellectual property.

A general caveat that should be noted is that competition law at the level of the EU may differ substantially from that prevailing in the member states. In dealings on competition policies between individual member states and nonmembers of the EU, the relevant rules would be those of the individual member state, unless such dealings had an EU-wide dimension.

An important distinction in competition policy rules is between a per se and a rule-of-reason standard for determining the illegality of a practice. Per se illegality amounts to an outright prohibition. A rule-of-reason standard amounts to a case-by-case determination based on the effects of the practice in the light of underlying market conditions.

However, as described above, the number of exemptions from competition laws for such cartels has declined recently.

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