competition law and international trade

Competition Law

And International

Trade

NAME: VAINY GOEL

Competition Law and International Trade

Abstract

Competition law has a huge impact on foreign commerce of a country because it partially regulates the conduct of the country during the international trade activities. The competition law herein referred to includes national legislations, international conventions and any other applicable bilateral, multilateral or regional agreements. The sweeping ambit of both trade and competition law has also made a large number of companies to deal with legal issues in the international context that they may have previously considered only in terms of their domestic impact. Thus, with the growth of the international trade, the need for internationalization of competition policy was also recognized and a number of attempts have been made to develop an international competition policy. The increased globalization of markets and companies has prompted the question of what the response to globalization should be for competition policy. This is already being considered in a number of international organizations including the World Trade Organization for Economic Co-operation and Development. As the importance of some of the government imposed barriers to market access, such as tariffs, has diminished, attention has focused on other issues, in this case the effectiveness of national competition policies in tackling the anti-competitive behavior of firms. The global expansion of competition law influences cross– border commerce. National or regional antitrust systems frequently endorse the comparatively broad view of extraterritoriality pioneered by the United States and the European Union (EU). This development ensures that individual transactions or practices involving major suppliers of goods and services often will be subject to scrutiny under the competition laws of more than one (often many) jurisdictions. Despite important similarities, the world’s competition systems do not conform to a single model. When the world’s major trading partner travel down the path of harmonization of trade laws, there is a need to harmonize world’s competition laws. Also to ripe the fruits of lifting up of the trade barriers, it is very necessary to deal with international effects of anti-competitive activities and maximize efficiency by way of free trade contemplated by the WTO.

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Contents

Introduction ..............................................................................................4 Trade and competition policy ...................................................................5 Tariffs and other barriers to trade. Protectionism?.................................6 International trade and competition policy - complementary and

contradictory..............................................................................................7 Competition Policy at International Level................................................8 WTO enforcement actions.......................................................................10 International Competition Policy Agreements.......................................11 International Effects of Cartel................................................................13 International cooperation : INDIA........................................................14 Extra territorial jurisdiction: INDIA.....................................................15 Conclusion..............................................................................................16 References...............................................................................................17

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Introduction

Competition law and international trade law traditionally have “sailed under different flags.” Competition laws sanction business conduct that is deemed to harm the competitive process—in particular, collusive or exclusionary agreements among competitors, anticompetitive mergers, and abuses of monopoly power. Trade laws, by contrast, generally impose specific limitations (tariffs and Non-tariff barriers) on business transactions that cross national boundaries. Competition law is necessary for market regulation both at national and international level for preventing firms from practicing anticompetitive behavior. The consistency between two captioned policy fields depends upon the method of enforcement. however, broadly speaking that trade and competition policy both works in tandem with each other wherein both contributes in making the domestic market more competitive through some way or the other for achieving an enhanced efficiency and promoting consumer welfare.

However, notwithstanding their distinct legal traditions, international trade policy and competition policy, properly applied, are mutually reinforcing methods for promoting welfare. Changes to trade laws and regulations that reduce or eliminate national barriers to trade and investment (such as high tariffs, quotas, and investor nationality restrictions) promote welfare-enhancing contractual relations that expand trade and, more generally, raise aggregate welfare in the liberalizing nations.

1) The benefits of trade liberalization are magnified by competition law rules that lower the incidence of consumer welfare-reducing restrictions on the competitive process.2) Multilateral welfare-enhancing initiatives characterize modern trade policy. In the post-World War II era, the General Agreement on Tariffs and Trade (GATT) negotiating framework, and its successor, the World Trade Organization (WTO), have substantially reduced tariffs and non-tariff trade barriers, promoting global trade liberalization import competition and thus economic growth.3) Also, regional and bilateral trade liberalization compacts, such as the European Union (originally a “Customs union” that was transformed into a vehicle for large scale European Economic integration), the North American Free Trade Agreement (“NAFTA,” Covering the United States, Canada, and Mexico), and the US-Korea Free Trade Agreement (one of several such agreements entered into by the United States), have been a force for increasing welfare by extending the geographic extent and scope of trading and investment opportunities.4) However, as the WTO-led trade law system has expanded, it has not wisely brought national competition laws within its purview. There is a role for International competition law policy in an increasingly globalized economy through Voluntary efforts at building understanding across jurisdictions and thereby gradually Converging towards best (or “better”) practices. The role of the International Competition Network (ICN) in furthering this aim is touched upon later in this Article. In addition, in the area of public sector restraints on trade there may be scope for an international agreement.

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Trade and Competition Policy

There are number of areas where enterprise behavior could give rise to problems in international trade relations and the responses of governments to such behavior. These are:

1. Market access for imports: trade concerns have arisen in the past where vertical market restraints have prevented foreign firms from having access into the market. For instance, by making it difficult for foreign firms to access the distribution network that is controlled by domestic suppliers. The kodak-fuji case explains it better. It includes exclusive dealing requirements, tied selling, loyalty or sale rebates, etc.

2. market power in export markets: several tools used to exercise such power is export cartels, international cartels, mergers and acquisitions(M&A), abuse of dominant position, price discrimination, dumping etc.

3. Intellectual property rights: anti-competitive practices in connection with IPRs have been an important issue in international economic relations since long. such could take form of horizontal or vertical restraints such as intellectual property licensing agreement among competitors like patent pooling serve as a vehicles for establishing cartels to fix prices, allocate markets, limit output etc. the Pilkington case explains the situation better.

4. Foreign investment: the increasing reliance in FDI by producers to supply foreign markets and as an engine to growth by host countries has increased the importance of FDI. Competition police can play in removing barriers to market entry for foreign investors.1

From the above discussion, it is clear that there is a significant amount of interaction between international trade and competition policy. Also, such is on increasing trend which has resulted in the internationalization of competition policy.

1 Essays on the International Trading System: An Unfinished Journey

By Pradeep S. Mehta

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Tariffs and Other Barriers to Trade. Protectionism?

Would you mind opening your suitcase? Your heart sinks as you picture that extra bottle of perfume the custom officers are going to find. - You may not think about this in these terms, but you have just entered the world of trade barriers. Tariffs and non-tariff barriers, quotas and prohibitions affect us all, either directly as when our luggage is examined at a border crossing, or indirectly through the price we pay and constraints on what we can and cannot buy. Custom inspectors are not just trying to catch people going over their duty free allowance but they are also looking at the dangerous items or items that are banned for and also controlling the import of entire categories of merchandise.

Tariff Barriers - By making products more expensive to consumers, tariffs hamper demand for imports. They can also alter the relative price of the product and protect uncompetitive companies and their overpriced products. With the reduction of tariffs, consumer have more choice, with more products and a wider price range. For developing countries, improved resource allocation and higher export revenue contribute to national income and increase the pool of resources available for development related investment. Most studies suggest that the developing countries with the highest initial tariff rates stand to gain most from reducing their tariffs. Trade liberalization will have social and economic cost associated with it, still, these costs tend to be the short term and are outweighed on average by the potential welfare gains that result from lowering trade barriers. Complementary economies, social or labor market policies can help ease the pain of adjustment and make trade liberalization more effective in promoting growth.

Non-tariff barriers - Today exporters are concerned less by traditional measures applied 'at the border', like quotas and prohibitions, than by difficulties arising from product standards, conformity assessment and other 'behind the border' policies in importing countries. Multilateral trade rules exist to ensure that neither consumer protection nor other interests are used as an excuse to penalize foreign companies or keep prices high. It include prohibitions and quotas, procedural barriers, custom fees, export duties and export restrictions, technical barriers, etc.2

Making trade policy-

Trade barriers could have positive and negative consequences, depending on whether you look at their economic, social, environmental or other motivations and consequences. Trade barriers and trade policy can promote equities and should not be examined in isolation from their political economic environment. As an example3, imagine that how the price of sugar influenced Hershey’s decision to move chocolate production to Mexico. The US sugar

2 See International trade: free, fair and open? by Patrick Love and Ralph Lattimore 3 Hershey's chocolate bar company shifted its plant to Mexico from US because wages are lower in Mexico; under NAFTA, Hershey could import the candy made in Mexico back into US and factories in Mexico can buy sugar at world prices, where sugar producers in the US are protected from foreign competition and prices are two to three times higher than on world prices.

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industry is often quoted as an example of how poor trade policy can harm business and consumers.

International Trade and Competition Policy - complementary and contradictory:

International trade policy and competition policy, properly applied, are mutually reinforcing methods for promoting welfare. Changes to trade laws and regulations that reduces or eliminate national barriers to trade and investment 9such as high tariffs, quotas, and investor nationality restrictions promote welfare enhancing contractual relations that expand trade and more generally, raise aggregate welfare in liberalizing nations. The benefits of trade liberalization are magnified by competition law rules that lower the incidence of consumer welfare-reducing restrictions on the competitive process.

GATT and WTO, have reduced the trade barriers, thereby promoting trade liberalization, import competition and economic growth. Regional and bilateral trade liberalization compacts such as European Union, North American free trade agreement (NAFA) have increased welfare. However WTO trade laws have expanded, it did not brought national competition laws within its purview. There is a role for international competition law policy in an increasingly globalized economy through voluntary efforts at building understanding across jurisdictions and thereby gradually converging towards better practices such as ICN (international competition network).

The consistency between the two captioned policy fields depends upon the method of their enforcement. however, broadly it seems that trade and competition policy both works in tandem with each other wherein both contributes in making domestic market more competitive through someway or other for achieving an enhanced efficiency and promoting consumer welfare. Trade liberalization without a sound competition policy might result in engulfing of small and medium size enterprises by big giants of the market or may lead to anti-competitive/restrictive business practices.

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Competition Policy at International Level

a) Initial efforts at Havana charter:The relation between the trade and competition policy was discussed at an international forum for the first time in Havana charter 1996. The charter though could not establish the international trade organization but the serious considerations of these two policy fields were recognized by the member states. It envisaged the mechanism for consultations, reports and recommendations on such practices, with a view to discouraging them. But the issue was dropped at the final stage by developed countries being encroaching their national sovereignty.

b) Issues at Singapore ministerial conference:The issue was substantially debated at Singapore ministerial conference in December 1996, wherein relationship between trade and competition policy was one of the four 'Singapore issues' which was put on two agenda for discussion. The WTO working group on interaction between trade and competition policy (WGTCP) was established to consider issues raised by members of these two policies. The group identified three broad categories: practices affecting market access for imports, practices affecting international markets and practices having a differential impact on the national markets of countries. These practices not only effects trade but also on economic welfare and development. Consequently the 2001 Doha ministerial declaration recognized developing countries need for technical assistance and capacity building in this area in order to enable them to evaluate the implications of closer multilateral cooperation. In July 2004 the General Council of the WTO decided that the interaction between trade and competition policy (in addition to investment, and transparency in government procurement) would no longer form part of the Work Programmed set out in the Doha Ministerial Declaration and therefore that no work towards negotiations on any of these issues will take place within the WTO during the Doha Round.

c) Efforts at the UNCTAD:National competition laws and law enforcement institutions, are not always fully equipped to deal with Trans boundary anti-competitive practices. UNCTAD adopted a comprehensive code on restrictive business practices on 5th December 1980. The "set of multilaterally agreed equitable principles and rules for the control of restrictive business practices" includes:(1) Guidelines addressed to enterprises, (2) Recommendations to governments for effective control, (3) Provisions for bilateral consultation between governments to resolve issue.(4) The establishment of follow up machinery in UNCTAD to continue work designed to improve developing countries ability to deal with these practices.

The set seeks to attain greater efficiency in international trade and economic development through promoting competition, control of concentration of economic power and encouragement of innovation.

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d) The organization for economic co-operation and development's (OECD's) committee on competition law and policy:The OECD provides a forum to discuss and debate upon the issues relating to competition law and policy. the competition committee, made up of the leaders of the world's major competition authorities, is the premier source of policy analysis and advice to governments on how best to harness market forces in the interests of greater global economic efficiency and prosperity. The committee also examines the possibility of convergence of substantive competition laws, and the conjunction with OECD's trade committee, the interface between competition and trade policies and the future prospects for integrating competition rules into an acceptable multilateral framework.

e) GATT/WTO connection: Absence of competition provisions in GATT: Unfortunately, the concerns regarding

anti-competitive practices of multinational corporations were not discussed during debates of GATT. The Uruguay round was concluded without including competition policy as a separate item to debate upon. GATT rules recognize the right and liberty of contracting parties to accord greater importance to the protection of certain legitimate national public goods or interests than to more liberal trade practice. In 1960, s GATT decision recommended bilateral and multilateral consultations among governments which was a detailed proposal for a binding international competition agreement put forward by a private group of scholars. This code however never came into effect.

Non-Comprehensive approach in the WTO agreement: while not directly addressing competition law per se, there has been a lot development of competition related rules in the WTO system, which are binding, albeit not in the form of an explicit comprehensive body of rules but rather scattered in an archipelago of legal basis in the WTO Agreement. A number of agreements entered upon under the WTO encompass provisions relating to competition laws. The Agreement on Trade-Related Intellectual property Rights (TRIPs) ensures that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade. On other hand it fail to provide effective tools against anti-competitive practices. the Agreement on Technical Barriers to Trade (TBT) provide detailed rules aiming to ensure that the preparation, adoption, and application of technical regulations, standards, and conformity assessment procedures by non-governmental bodies are not more trade restrictive than necessary fulfill legitimate objectives.

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WTO Enforcement actions

Kodak/Fuji Film4

Kodak claimed that it was seriously handicapped in its efforts to enter the Japanese film market by a combination of Japanese government and private restraints that, cumulatively, blocked efficient entry into the Japanese film market by foreign firms. Kodak asserted that its market share in Japan had been kept to less than 10 % by anticompetitive actions by the Fuji Photo Film Company and counter-liberalization measures taken by the Japanese government. In particular, the four largest wholesale distributors of photographic film products in Japan handled Fuji products exclusively. These exclusive relationships allegedly resulted from various Japanese Government actions and regulations designed to offset the opening of Japan’s film market to foreign firms and from certain allegedly anticompetitive actions by Fuji. Fuji claimed that it had not engaged in anticompetitive behavior and asserted that Kodak actually had access to all film retailers in Japan. The fact that Fuji had exclusive ties to the major wholesalers did not keep Kodak from distributing to retailers through its own channels, according to Fuji. Fuji also emphasized that Kodak had taken similar actions in the US market to maintain its high market share there. Citing these concerns, the US Trade Representative initiated WTO dispute resolution proceedings against Japan in 1996. The WTO Appellate Body in 1998 found that the restraint in question—involving practices that included government supported restrictions on film distribution channels—did not implicate violations of Japan’s WTO trade commitments.

Canada Wheat Board5

WTO jurists also applied competition disciplines to a WTO provision drawn from the competition lexicon in the “Canada Wheat Board” case. The Panel and Appellate Body were asked to interpret Article XVII of GATT 1947. Article XVII, as we noted previously, provided that where an STE was buying or selling in the commercial market, it should be subject to “commercial considerations.” The US asserted that “commercial considerations” meant that behavior had to be profit maximising, and any revenue-maximizing behavior could not be seen to be “commercial.” The case concerned the role of an STE, the Canada Wheat Board (CWB) in the purchase and sale of wheat on international markets. The US challenged the CWB’s practices as violating Article XVII. The US contended that Canada and the CWB must afford competing wheat sellers as well as potential wheat buyers an “adequate opportunity . . . to compete for participation in [the CWB’s] sales.” The US argued that the CWB had to act like a commercial seller, and that it could not use its special privileges to the disadvantage of other commercial actors. The US charged that because the CWB Act was a mandate to promote sales, rather than profits this necessarily led CWB to 4 see Article on Competition Policy and International Trade DistortionsAlden F. Abbott and Shanker Singham5 ibid

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take unfair advantage of its privileges. Unfortunately, the Panel took a very simplistic view of “commercial considerations,” noting that this merely required STEs not to act like “political

Actors.” The panel rejected the US’s thesis that the structure of the CWB necessarily resulted in sales inconsistent with Article XVII. It is noteworthy that the Appellate Body reviewing the case returned to the principle of non-discrimination as axiomatic in WTO cases. Proof of discriminating conduct had to come first, and then (and only then), evidence had to be adduced of conduct that did not satisfy “commercial considerations.”

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International Competition Policy Agreements

In the absence of any agreed framework regarding competition policy and trade under WTO, there are a number of multilateral and bilateral agreements entered upon by different countries.

1. Positive comity:It requires active cooperation which involve requested countries conducting a law enforcement proceeding into conduct in its territory that is allegedly harming the interests of some other country. It requires competition policy authorities to consider complaints against anti competitive conduct by firms in their jurisdiction which adversely affect parties in the other jurisdiction.6 The first noted agreement was signed by EU and US. Such agreement laid an affirmative duty on both the parties to investigate each other's complaint. But such agreement is applicable fairly only to the homogeneous states at the same level of development.

2. Coordination and cooperation:The extent of coordination depends upon the relative abilities of the parties and the extent to which either party's competition authorities can secure effective relief against anti-competitive activities involved. This leads to better understanding and acceptance. An example of bilateral cooperation is MICROSOFT's case, which was investigated by both the US and EU competition authorities and with the exchange of information between them, they came up to the same solution.

3. Exchange of information:The agreements usually contain a provision for mandatory exchange of information between the relative parties. Most of the agreements commit party's competition authorities to: provide information already in their possession on request, and provide information voluntarily. However, the parties are not bound to take any action or disclose any information inconsistent with their national laws.

4. Negative comity:It requires each party undertakes to notify the other when it is proposing to enforce its competition law in a way that night affects the latter's important interests, and to take their views into account.

6 see Abir Roy and Jayant Kumar: Competition law in India

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International Effects of Cartel

The increasing globalization of trade, financial transaction and business has highlighted the importance, applications and enforcement of competition rules at an international scale. Cartels affect both developed and developing world economies whose total damage may be significant.

1. International cartel:These are business arrangements with the object of eliminating global competition by direct price fixing, allocation of production, sales, shipments or trade territories in order to destroy incentives toward price cutting, limiting out so that prices do not fall, by quota arrangements, agreement on patent license. The present international law does not provide for a proper remedy. Even if strong international agency is created, the nations never will confer powers on an international body. Practical approach will involve parallel national and international action.7 A suitable program must be accepted by an international conference and such international institutions set up as agreed upon. Each participating government must undertake to enforce the provisions of contention within its own jurisdiction.

2. Hardcore cartels8:It is an agreement by competitors to fix prices, make rigid bids, establish output restrictions and quotas, or share or divide markets by allocating customers, suppliers, territories or lines of commerce. The OECD has recommended bilateral cooperation and comity in enforcing laws prohibiting hard core cartel. the committee has recommended following factors to be taken into account while ensuring cooperation between the countries: cooperation to be in consistent with the requested country's laws, regulations and important interest; cooperation by sharing documents and information in their possession with authorities voluntarily or compulsorily; member may refuse to comply with the request for assistance or limit its cooperation as it may consider such not in accordance with its laws and regulations; members should agree to engage in consultation with the issues relating to cooperation.

3. Export cartels:It is an agreement between firms to charge a specified export price and to divide export markets. They can be categorized into two heads: pure export cartels, directing their efforts exclusively at foreign market with motive to transfer income from foreign consumers to domestic producers, and, mixed export cartels, which restrain competition in domestic as well as foreign market. Export cartels enable producers in the exporting nation to profit at the expenses of consumers in importing nations resulting in dead weight loss. This may result in reciprocal import cartels. The rules regarding export are as extensive and not all aspects of export cartel conduct that impede international trade are addressed by WTO. Furthermore, the

7 see Abir roy and Jayant kumar : competition law in India 8 Many a times there is an overlapping area between hard core cartels and the export cartels. The export cartels are also known as hard core cartels. A hard core cartel has the goal of price fixing or market fixing. An export cartel may also have the same primary goal but sometimes, they might have strictly efficiency enhancing goals.

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WTO does not mandate the member states to prohibit export cartels and it acts as a flexibility, which can be used by the member states.

International Cooperation: INDIA

1. Memorandums or Arrangements signed by the Commission with Foreign agencies:

A memorandum of understanding (MOU) between INDIA and US on competition law cooperation was signed on September 27, 2012 in Washington DC. The MOU establishes the framework for voluntary cooperation between the US antitrust agencies and the Indian competition authorities. It is recognition on both the sides that the two countries can effectively cooperate for mutual benefit in the field of competition law enforcement and policy.

Communication: the MOU establishes a framework for the Indian competition authorities and the US antitrust agencies to consult on matters of competition enforcement and policy. It also contemplates periodic meetings among officials to exchange information on policy and enforcement priorities.

Cooperation: the MOU provides that the Indian competition authorities and the US antitrust agencies will work to keep other informed of significant competition policy and enforcement developments in their jurisdictions, and establishes a framework for technical cooperation.9

2. Memberships of International Organizations: International Competition Network: CCI has been member of ICN

since its establishment in October, 2003. Since then, CCI has been an official invitee to all the meetings, seminars, conferences. Organized by ICN. CCI is also a member of four Working Groups Advocacy, Agency Effectiveness, Unilateral Conduct and Mergers and has been actively participating in their activities.

BRICS: INDIA is a member or BRICS -the group of emerging economies of Brazil, Russia, India, China and South Africa. The competition authorities of above said nations expressed their support each other regarding the cooperation on any issue emerging in their areas regarding competition.

Organization for Economic Co-operation and Development (OECD): Senior functionaries of CCI have been regularly attending meetings of competition committee and working parties as well as those of global competition forum. The OECD has been one of the major supporter of CCI in the area of capacity building activities.

9 annual report 2012-13 of CCI

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EXTRA TERRITORIAL JURISDICTION: INDIA

Due to the overreaching effects of anti-competitive activities of a domestic firm especially in cases of exports, Competition laws are applied to the conduct of foreign companies. If any problem occurs outside the country but it's affecting our domestic market then it can be resolved at two levels 1) at international level 2) at domestic level. In the absence of binding international policy every country likes to have a national solution. The international component of Competition Law was predominantly concerned with the question of whether one Country could apply its competition rules extraterritorially against an undertaking or undertakings in another country, where the latter behave in an anticompetitive manner having adverse effects in the territory of the former and whether there should be laws to prevent the “excessive” assertion of extraterritorial jurisdiction. Section 32 of the Competition Act, 2002 we find that it makes provision with regard to Extraterritorial jurisdiction of Indian Competition Authority. The Provision of Section 18 states the Competition Commission may enter into any Memorandum or arrangement with the prior approval of the Central Government, with any agency of any foreign country in order to discharge its duty under the provisions of this Act. There is difference between a treaty and understanding. Thus the mandate of the Competition Commission extends beyond the margins of India.10 In case any agreement that has been arrived from outside of India and is anticompetitive under sec.3 of the Act; have an appreciable adverse effect on competition or likely to have in the Indian market, the CCI shall have the power to inquire into such agreement, combination or abuse of dominant position.

10http://cci.gov.in/images/media/ResearchReports/Competition%20Issues%20in%20Foreign%20Trade_With%20Special%20Reference%20to%20India.pdf

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Conclusion

The foregoing pages show that how competition law is interlinked to the international trade. When the world's major trading partners travel down the path of harmonization of trade laws, there is a need to harmonize the world's competition laws also to ripe the fruits of lifting up the trade barriers. It is very necessary activities and maximize efficiency by way of free trade contemplated by the WTO. Any number of factor may be more important than a particular trade opportunity. But what is important is that such decisions are clear and transparent and that the benefits and costs are well understood. Government have full responsibility to ensure that the full range of impacts of tariff and non-tariff barriers, and anti-competitive law, is considered before putting them in place. The ‘first best’ course of action is to avoid poor policy choices.

CCI, despite of having extra territorial jurisdiction under the Competition Act, 2002, still it requires cooperation arrangement and substantial capacity with the foreign authorities in order to make it effective and such be judicious.

Though there is exemption on export cartels, the CCI should see that such exemption is not favoring our nation at the cost of domestic consumers.

Competition authority should look after it that if there is any harm to our country by importing those finished products whose raw material is exported by India itself.

Areas should be found where the international cooperation can take place.

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References

1. International trade: fee, fair and open? by Patrick Love and Ralph Lattimore

2. Competition law in India by Abir Roy and Jayant Kumar

3. Essays on the International Trading System: An Unfinished Journey by Pradeep S. Mehta

4. A General Theory of Trade and Competition: Trade Liberalisation and Competitive Markets by Shanker Singham

5. www.cci.gov.in

6. www.wto.org

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