Competition Law in a Global Economy

Frederic JENNY

I will discuss global fragmentation, the rise of the market economy and market internationalization, and some consequences of those somewhat contradictory movements, with an eye on future market governance. I will explore areas of convergence, areas of coherence and obvious and persistent gaps in the world, and finally I will discuss future possibilities and areas of perceived progress.

First, the fragmentation of the world into nation states has increased considerably over the last 50 years. The number of countries has doubled since 1945 due to international trade. In the pre-World War II period, there was much less trade liberalization, including a long period of protectionism. Since 1945, there has been a trade liberalization push and a considerable increase in trade. Between 1870 and 1945, the number of countries in the world was stable, but over the next 60 years, it doubled. Countries became smaller geographically while increasing in population. Very small countries have great difficulty producing necessities because of economies of scale and the small size of their domestic markets. Without trade, production of goods or services requiring very large operations becomes impossible, making economic independence unsustainable. With international trade, and the law of comparative advantage, a country can benefit from its competitive advantage through trade and also from economies of scale because of its much larger potential market, making economic independence viable even for very small economies.

The first movement which contributed to the fragmentation of nation states was the independence of many African countries, which were very small economies, in the 1960s. The second movement was the collapse of the Soviet Union and the creation of many countries in the 1990s. As well, in the 1970s and the early 1980s, the Caribbean independence movement created microstates. Finally, there is the present situation—Scotland, Catalonia, Ukraine, etc.

In addition to the great movements, there is a tendency by smaller geographical units to consider the possibility of independence. There are advantages, but the more pronounced fragmentation of the world has consequences. This political fragmentation was allowed by economic unification. The problem is that these don't go well together as it is a complex relationship.

Largely because of trade liberalization and the emergence of the market economy in many countries, 72 countries have newly adopted competition laws. Consensus has emerged on the importance of protecting the logic of markets and the logic of competition in markets, and countries need the legal instruments to do so. This mostly came in the wake of trade negotiations in which governments worried that if, for example, they negotiated decreased governmental trade barriers, private barriers would replace them. Countries wanted a quid pro quo for reductions in protectionism. Competition law made it politically acceptable to enter into universally resisted trade agreements. Competition law provided reassurance in the wake of the trade agreements, and a theoretical possibility of complaining if private trade barriers emerged. Support by free-marketers and economists also contributed to the rise of competition law regimes.

A certain amount of heterogeneity exists among national competition law systems. Dealing with multiple competition laws increases transaction costs due to conflicts and contradictions. In a sense, the rise of the world's myriad competition laws is an added difficulty which belies the notion that they are neutral and aid globalization.

The proliferation of nation states and competition laws has caused two main problems: conflicts of laws and gaps. The existence of national competition law regimes does not ensure that authorities have operational sovereignty—some practices may be initiated in places where they cannot investigate, which would be difficult to sanction, etc. At the same time, globalization increases competition in markets, again illustrating the complex relationship between nation states and market globalization.

There are substantive differences in competition law. The laws are very general as economic analysis tells us they should be—for example, the Sherman Act. Whether something is anti-competitive depends on the context. On top of this, most countries have exceptions and exemptions to protect agriculture or small and medium-sized firms, etc. Their scope depends on a country's economic history and political consensus. South Africa has an exemption for anti-competitive mergers which contributes to employing the disenfranchised population.

The most notable substantive difference is that between the United States and the European Union (EU). The EU, like many other countries, has abuse of a dominant position, which is quite different from monopolization under the Sherman Act. The notion in the EU is that economic power corrupts the political process. Europe is wary of dominant firms and therefore not only the statutes themselves but also their interpretations are quite strict. The United States is more concerned with what we call type I error: the risk that intervention could reduce the dynamism of competition, and Europe is more worried about possible abuses by dominant firms—type II error. This leads to interpretive conflicts. Many practices considered to be abuses of dominant position under European law would not be considered so in the United States. In some cases, diametrically opposed judgments actually have been handed down in the United States and the EU interpreting the same laws.

In a number of young jurisdictions, competition laws function more like regulations than real competition laws by providing a rigid list of prohibited conduct. This simplifies the work of the competition agency or the courts. Parallel pricing is a crucial issue for businesses. In Turkey, for example, merely having the same price can be a violation. Other jurisdictions might understand this as competition or price agreement.

Strategic use of competition law and fear thereof are much talked about, particularly with regard to China. Looking at competition law and its enforcement in China, a distinction must be made between merger control, which is controlled by the three competition agencies, and to the very active enforcement of competition law by the court system. The courts learn quickly and basically apply the law sensibly. There is not much evidence of bias against foreign companies, for example. The law contains troublesome provisions, but the courts apply it as written.

Procedural differences are particularly troublesome in transnational mergers because countries have different schedules for approving or rejecting mergers. Contradictory results are possible, which may be justified given that the markets are not completely unified and that a merger may be more anti-competitive in one jurisdiction than in another. They are the most difficult to solve because they originate in civil or administrative law procedures that are not specific to competition law; changing them would require changing the entire legal system.

Negative externalities and gaps exist. There is also the issue of the operational jurisdiction of national competition law authorities—how can one fight an abuse of dominance which originates in another country without the means to investigate in that country?

A great deal of trans-Atlantic conflict existed until the early 2000s, when the EU shifted its competition law interpretation toward a more economic approach between 2001 and 2004, making it more homogenous with U.S. law. For example, discounts and exclusive arrangements used to be prohibited in Europe, but are now approached similarly to the United States. Real conflicts virtually have been nil between the United States and Europe since 2004. Chicago-Kent College of Law Professor David J. Gerber stated that these conflicts may become more frequent and costly and that they will attract increasing attention and concern. I think there are fewer conflicts, but if we think about Chinese law and merger law, conflicts could develop. What should we do to try to fix this?

The hallmark of the period from the 2000s up to the present has been a tendency for laws to converge, as in the previously mentioned U.S.-EU case. Various forces are pushing countries to harmonize their laws to decrease conflict.

One analytical framework indentifies four forces that produce convergence: 1) economic threat, where a law is adopted out of the fear of being left out; 2) external pressure, which constrains national autonomy; 3) autonomous agents—advocates who promote a law; and 4) ideational pressures. The economic profession was one agent. The Organisation for Economic Co-operation and Development (OECD) exerts peer pressure, for example, through its peer reviews.

Stricter jurisdictions tend to win over less severe ones even when it may be wrong to prohibit some practices. China raises this issue because, given the volume of potential trade, its interpretation of its laws has significant global effects. Firms have to conform to how a law is interpreted in China by its agencies.

Convergence has been increasing across the board with the major exception of state aid. The general understanding of the domain of competition law is increasingly similar. Goals also have become growingly similar. In terms of substance, there has been a convergence around analyzing a practice in context to determine whether any potential or actual anti-competitive effects exist, rather than prohibiting categories. One of the areas with the most convergence is that of the instruments used by competition authorities. There is a shared focus on cartel enforcement and bid-rigging, considered to be hardcore violations that competition authorities should try hardest to eliminate. Some convergence has been seen in remedies, mostly through coordination.

One example remedy is the leniency programs which originated in the United States, whereby competition authorities give a maximum sentence to all firms in a cartel, but the firm that brings the evidence to the competition authority goes away scot-free, a neat application of game theory to competition law, and it certainly reduces the workload of competition agencies. This has spread practically the world over. All 34 OECD jurisdictions have a leniency program, something which didn't exist 15 years ago.

Convergences have not been so great in the state aid control regimes and the abuse of buying power. The reason for this is that while the EU has transferred a lot of power to the European Commission over the individual member states, in the United States, the federal government has very limited power and the states are quite powerful, and it is the individual states that give state aid.

Other areas where convergence have not been so great include the relationship of competition authorities with sectoral regulators, the position between type I versus type II errors, abuse of dominance and monopolization, the relationship between competition law and consumer law, state interventions, sanctions, and due process. It has been very difficult to get to a unified notion of due process. What does this mean? Depending on who you read, there are different interpretations about whether we have a lot of convergence.

Because there isn't a unified system and because there are external effects, practices in country A affect competition in country B. The only way to solve this is through some form of cooperation. Forms of cooperation, voluntary, bilateral or regional, differ in scope, context, level, and types. There was an attempt in the World Trade Organization (WTO) to have a mandatory system of cooperation under which there is a duty to cooperate with other jurisdictions; when a practice in your jurisdiction is hurting another jurisdiction, you should help them through the competition authorities, though this was not implemented.

The fact that cooperation has remained voluntary is easy to understand. The requested country is the country which bears the cost, and the requesting country is the beneficiary of cooperation, resulting in a very uneven system with involuntary cooperation. Larger countries happily cooperate with one another, but with a smaller country, the probability that practices originating in the former would hurt the market in the latter is much higher. In that case, the larger country won't receive the benefits of cooperation.

There are many bilateral agreements between the major jurisdictions, and most developing countries are left out from cooperation with the big jurisdictions. Many agreements have been made in the 2000s among developing countries partly because regional trade is important for them and partly because no one else will cooperate with them so they cooperate among themselves.

So, there is a convergence of laws and development of cooperation. Now, as for the gaps, one of the most stunning developments in terms of export cartels is the potash cartels. Potash is salt, which is necessary for certain crops. Production of potash is very unevenly distributed—every country in the world uses potash, but there are only four or five production centers.

The three Canadian potash producers have created an export cartel called Canpotex. They fix the price to buyers. Their agreement is for the whole world, except the United States to which they sell individually. Russia and Belarus created cartels as well, the International Potash Company (IPC) and the Belarus Potash Company (BPC). To keep prices up, they reduce output. This is done openly. There also has been East-West collusion, raising the price of potash by more than 400%. The Canadian government gets royalties from the sale of potash based mostly on price.

They asked a consultant to compare two scenarios: 1) with cartels, what is expected of prices until 2020? 2) what would the price of potash be if a major producer were to break away and commence maximized production? The largest importer in the world is India. The overcharging to India in the first scenario would be almost $1 billion a year. There is a subsidy that goes to the Indian taxpayer because the government of India subsidizes the farmers so that they can buy potash and be more productive to feed the people. The overcharging comes out of the pockets of the Indian taxpayers and into the pockets of the Canadian taxpayers.

In 2013, India deciding to cut on the exorbitant subsidies to farmers. In turn, the farmers purchased less at the higher prices, shrinking demand. Along with the Indian rupee devaluating, demand from India went down significantly. Belarus decided to sell on the side, which the Russians discovered, and they intended to leave the cartel. The president of Belarus was very upset and imprisoned one of the Russian cartel leaders for months until Russia rejoined the cartel. The price of potash declined as a result, making it a good year for India, if only a short-term gain. All of this has been out in the open.

Export cartels completely contradict both fair trade and competition, yet nobody seems to be able to do anything about it. India doesn't have the power to use its competition law to prohibit what they are doing. If India did this, the cartels would choose not to sell potash to India. Although this is detrimental to world trade and competition, there is no international power which is able to stop it. This is clearly an enormous gap. And there are many export cartels. India itself has its own export cartels. There will be huge gaps irrespective of whether trade liberalization and competition law progress. We have no good system of governance of markets.

These problems are not going to go away. There is a need to have international discipline, at least on export cartels. We are in a very unstable situation, where the economic reality is completely at odds with the legal environment. The more countries there are around the table, the more difficult it is to find an agreement in a multilateral context. Bilateral and regional solutions are only partial. Even though all we do is in the name of more competitive markets and more market-oriented economies, there are severe limitations in our approach.

Q1. I have two questions. The first issue is on the rules or disciplines on state-owned enterprises. You referred to the case of potash. I think this relates to state-owned enterprises, too. Australia has been promoting the idea of so-called "competitive neutrality," for example, which is the idea of a level playing field between the private sector and public sector. What is your view regarding the future of the disciplines of state-owned enterprises? How can we make rules on this area? Second, as for the future of the WTO, what is your suggestion regarding the items in competition and trade when we resume the discussions on trade and conventions?

Frederic JENNY
Indeed, there is the question of state-owned enterprises and the idea of a level playing field. This is a topic which has not been explored greatly. One of the interesting developments has been the concept of competitive neutrality, which goes beyond subsidies. At the level of the competition committee, we have short-term and long-term strategy projects. One is on new ways to promote international cooperation. The other is competitive neutrality, and there was much support by countries for this. The United States basically vetoed the possibility of this, seeing the issue as a trade issue and that the competitive committee should not interfere with its trade negotiations. There is a second round where Japan is going to be quite important: a ministerial meeting of the OECD with Japan as the chair. My understanding is that Japan would like to push the competitive neutrality idea. I hope that it happens, and we can explore good practices to ensure that there is a level playing field. I've got great hopes that the Japanese presidency of the ministerial meeting in April or early May will be able to put this on the agenda.

On the second question, what is the future or prospect for the resumption, first, many more developing countries now have competition laws, and one of the arguments of developing countries to be quite reserved about this issue of competition in WTO was their fear that it would be used as a Trojan horse to bring in the multinationals and harm them domestically, but this was mostly because they were not familiar with the instrument. Now, most countries have passed this stage.

The second point is the fact that China seems to have a keen interest in resuming the work or advancing the agenda in the WTO. China has sent signs recently that it thinks investment and competition could be good topics to add or accept. China is interested in seeing discipline in the world so that some foreign countries will not be as tough on Chinese investment, and it wants to avoid being cornered in a position of having to have a one-to-one discussion because it's easier to create alliances and to maneuver in a larger forum.

On the negative side, progress is very difficult in the WTO, and it is made more complex by the procedural rules. There was a question in the past that while maybe some international discipline would be useful, is the WTO the right place for it? It is the right place because it is the only place that has teeth in its settlement mechanism, but it is also not the right place because it is so complex in negotiation that nothing much can be achieved there. However, I don't see easily creating new international organizations, so we have to make do with the ones that exist. I still believe that the WTO working group on trade and competition is the best place. If the WTO negotiations restart in a meaningful way, competition and investment will be a part of the agenda.

Q2. In the 1980s, I was in the U.S. Department of Justice. You mentioned one of the areas in which there is less convergence is abusive buying power. Were you talking about concerted buying power or monopolistic buying power? In the area of concerted buying power, one of the things that we did was to bring criminal prosecutions in the area of import cartels. Do you feel that that is a controversial area at all? Second, in terms of future institutions, most people have thought always that the Havana charter was a naïve dream, but based on your comments, I wonder, if you're going to start second rounds, if you might do one on the Havana charter negotiations?

Frederic JENNY
On the very last question, trade negotiations are naïve dreams that occasionally have an element of truth, and it's a very slow process. The Havana charter would assume a wide consensus, so it might be too ambitious even now. Focusing on one particular issue would be a way to start.

Abuse of buying power absolutely can be a tool against import cartels. If one has provisions that state that there can be such a thing as an anti-competitive abuse of buying power, it would certainly apply equally to concerted buying power, and it could apply to import cartels and facilitate the penetration of goods. In the context of the OECD and the International Competition Network (ICN), there are regular discussions about this. I believe Japan's idea that there can be such a thing as an abuse of buying power which is anti-competitive, and it has some support in negotiation theory. There is a bit more talk now about monopolistic practices, so there is some progress. So, we have to wait a couple of decades and then it will be fine.

Q3. You hinted at some potential problems of leniency programs. Can you elaborate on that?

Frederic JENNY
What we see is even more than a potential problem; it's a direct conflict between civil enforcement of competition law and administrative enforcement of competition law, because of leniency of problems. It's also a direct conflict between the fight against corruption and the fight in favor of competition. Competition authorities resist the idea that civil enforcement of competition law should develop because they are afraid that they cannot give leniency for the damages that may be ordered by the courts; they can only give leniency for the administrative section. They rely on leniency applicants to reveal cartels to them, but they're afraid that leniency applicants are going to worry about civil damages. The victims of cartels then cannot get compensation because the competition authorities are not cooperating with the civil courts, as they want to protect the leniency or because they are pushing for exemption from damages for leniency applicants.

In some countries, you have a quasi-refusal to cooperate between competition authorities and anti-corruption bodies, which is completely unacceptable. Brazil is the most recent country to have adopted a system where a leniency applicant has an exemption from criminal proceedings for anti-bribery. But this is only in a minority of countries.

Thinking about the origin of the problem, competition authorities rely too much on leniency applications nowadays. Cartels were found before leniency applications existed. While I agree that leniency can be a deterrent to anti-competitive practices, there is no evidence that it works. As a matter of fact, we know of more cartels nowadays and leniency applications have been around for a long time. Civil enforcement also deters cartels, because firms have to pay damages. If we want to consider seriously the interaction of those two, we have to question whether they would mutually reinforce one another or would gains in one be taken away by the other.