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Competition

WHY DO WE NEED MORE COOPERATION IN THE FIELD OF COMPETITION POLICY?

Speech delivered by Mr Jonathan Faull
third european union - JAPAN COMPETITION POLICY SEMINAR
Tokyo, Japan
22/11/95

Why do we need more cooperation in the field of competition policy ?

Globalisation is no longer a trend, it is a reality which is changing our lives. Within the last 30 years total production of industrial countries increased at a rate of some 9% a year while their exports grew at an average rate of 12% and lending and borrowing across national borders through banks grew at a rate of 23% per year (1)

We know that this process will continue to accelerate in the coming years : if the "container revolution" of the 70's and 80's was decisive in enhancing trade in goods throughout the world, the "telecommunications revolution" will have a much more dramatic impact and has only just started. As a result of these developments, traditional "horizontal" trade in finished products is being replaced by "vertical trade" in which different stages in the production chain are completed by companies (and sometimes by the same company) in different countries. In his book "The Work of Nations" Robert Reich reminds us that when an American citizen purchases a General Motors' Pontiac Le Mans, out of the $20.000 charged by GM, about $6.000 will be transferred to South Korea (basic production and assembly), $3.500 to Japan (components for engine and electronics), $1.500 to Germany (mainly design), $800 to Taiwan, Singapore (for small components), $500 to the UK etc. Only $800 will remain in the US for the General Motors Company itself, its managers, shareholders (some of whom are foreigners), law firms, insurance companies and so on.

Another effect of globalisation is that regulatory measures adopted in one country may have (positive or adverse) impact on many other countries. This is clearly true as far as the environment is concerned but the same can be said about tax and monetary policies, securities regulation, standards, certification procedures and no doubt many other fields of Government activity too.

Similarly the way competition policies are (or are not) enforced, at least by the main partners in world trade, has an inevitable impact on the rest of the world.

More specifically two different problems may be identified :

Firstly, in a world where state imposed trade barriers are disappearing, particularly in the wake of the Uruguay Round, private restrictive practices are becoming more prominent in determining the development of cross-border trade. There is a risk that public trade barriers may be replaced by private restrictive practices, thus undermining years of efforts to liberalise world trade.

We have experience of this problem in the EU. As we completed our Single Market Programme, businesses were sometimes tempted to erect new barriers to protect their traditional "national markets". We have seen horizontal cartels designed to divide the European Market. We have enforced our competition law vigorously against such practices and have imposed fines at high, deterrent levels. We have also acted against vertical distribution arrangements which partition markets within the EU.

I believe we are today confronted with a comparable challenge at a worldwide level, with a comparable need to provide, at least among the world's main trading partners, for a degree of uniformity of enforcement of competition rules against all kinds of restrictive practices the effect of which is to undermine international trade. If we fail in taking up this challenge, we risk seeing some countries act unilaterally by extending the territorial scope of their competition policy enforcement. This might lead to conflict and undermine the newly born world trade order.

Secondly, even if competition law were was enforced with equal determination by all the world's main trading partners, closer cooperation among competition agencies would still be necessary because more and more competition problems transcend national boundaries. International cartels, mergers or abuses of market power are rarely limited to one country these days.

It is not surpising that national authorities face increasing difficulties in dealing with such cross-border practices. The evidence of practices which have a detrimental effect on their national territory may be located outside their jurisdiction. Other agencies, looking at the same case, might adopt a different approach or consider different remedies. In both cases consultation and some exchange of information and/or coordination of enforcement action may be the only way to apply the competition rules effectively.

2. Impediments to closer cooperation

Why, then, has there been so little cooperation between competition authorities until recently?

One reason may be that countries do not always agree on the purposes of competition policy. Even if the details of tax law differ from one country to another, most countries would agree that tax fraud is an offence. More generally, democratic countries share basically the same approach on the scope of the criminal law, although rules differ from jurisdiction to jurisdiction. Perhaps this sort of broad consensus has not yet been achieved in some areas of competition policy.

Within the same country, policy emphasis may vary over time. Competition policy is influenced by political change and our developing understanding of economics. Above all, policy must change and adapt to the rapid evolution of the industries and markets which are its focus of attention. I am sure that no-one pretends that our policies in the EU and in Japan must remain static and impervious to changes in the world around us. Our friends in the USA have lived through such changes recently: U.S. competition policy today is somewhat different from the one conducted by the Reagan administration, which was itself different from the policy implemented by previous administrations.

We must also acknowledge that competition policies focus on domestic markets. A good illustration of this approach is the fact that export cartels, which have harmful effects on foreign markets, are, in most instances, not subjected to competition rules. However, in Europe I think it is fair to recognize that our active competition policy in support of the completion of the Single Market has helped third country firms establish themselves on an equal footing.

A second obstacle to cooperation among competition authorities stems from the very nature of competition policy. This can be better understood if we compare competition policy with trade policy.

Trade policy deals with measures adopted by countries, which in most cases, are publicly known and easily identifiable. It has therefore been possible under the GATT (and now under the WTO) to set up dispute settlement mechanisms in order to ensure that measures adopted by national authorities are consistent with internationally agreed principles and rules. Assuming that comparable sets of common rules could be negotiated among competition authorities, we would still have a specific difficulty with fact-finding, which is after all an essential part of competition policy. Restrictive practices are often concealed and are certainly not readily identifiable. Even if all the contracting parties to a possible international agreement on competition rules undertook to put an end to certain restrictive practices, it would be far from easy to make sure that these commitments were fully complied with.

3) Existing models of cooperation

3.1 Bilateral agreements

In spite of these difficulties, competition agencies in many parts of the world have tried to find ways and means to exchange views on general or specific issues and to develop cooperation schemes.

Several bilateral agreements have been concluded. Some contain far reaching provisions. For instance, the arrangement between the USA and Canada has made it possible for both sides to carry out joint investigations in both territories in the premises of companies allegedly involved in cartel practices (a criminal offence under US and Canadian legislations). Even more far-reaching is the agreement between Australia and New Zealand which allows each of the authorities, in some circumstances, to extend its jurisdiction to the territory of the other.

Our own agreement with the USA is more limited in scope. Some of its provisions, however, deserve consideration as a possible model for future bilateral agreements. In substance, this agreement provides for :

extensive exchanges of information about enforcement activities which might affect the interest of the other party;

a procedure of so-called "negative" or "traditional" comity whereby each party within the limits of its legal obligations refrains from measures which could affect the interests of the other party;

a more innovative procedure of "positive comity" whereby a party may invite the other party to act under the latter's own laws against practices which have a harmful effect on the former's interests. Some degree of coordination of enforcement activities is also provided for.

In practice, this agreement has resulted in a much closer relationship between the competition authorities of the two parties. Cooperation has developed even further in the last few months, as a result of experieince of cases of major importance dealt with by both authorities.

So, in spite of different legislation, constant contacts between authorities, often confronted with similar problems, offer great opportunities to bring their approaches closer together.

Our experience also points to limits for at least three reasons :

Differences in procedural rules make coordination difficult: for example, time limits and other procedural rules are different from one system to another.

As I noted earlier, each system of competition rules deals with practices which harm its own markets. We in Europe, have, for example, no legal power to investigate practices which have no effect on our own market and we could not therefore assist our American colleagues in circumstances in which US interests were allegedly harmed by practices which have no impact in Europe, even if they were are partly or wholly implemented on our side of the Atlantic).

The content of the information we can exchange is limited by confidentiality rules. Although we are free to exchange a lot of information about procedural aspects of a case, we can share substantive analysis and details of the timing or the content of the next step only if we get the consent of the party or parties involved.

In spite of these limitations, the experience we have gained so far under the agreement is highly valuable and will, we hope, be developed further in the future.

3.2 Multilateral and regional cooperation

Two international organizations (UNCTAD and OECD) have made efforts to develop principles for cooperation.

The UNCTAD "set of rules" provides an interesting model for possible future common basic rules on competition.

The 1986 OECD recommendation on cooperation among authorities, although no more legally binding than the UNCTAD set of rules, has been used as a reference for the negotiation of several bilateral agreements. It is a useful instrument for providing some cooperation between authorities which are not party to more far-reaching bilateral agreements.

Many regional organizations provide for some degree of cooperation among their members. This is the case for NAFTA (Canada, the US and Mexico), although these provisions, if they are to be effective, remain to be developed and clarified in a further stage, as provided for by the agreement.

The most sophisticated mechanism of cooperation has been developed in the European Union. It is built on the secure foundations of Community law, which is directly enforceable by the courts of the EU Member States and prevails over national law in the event of a conflict. An independent authority, the European Commission, is granted extensive enforcement powers.

This audacious model whereby Member States have shared part of their national sovereignty has been undoubtedly effective in promoting a genuine level playing field in the Union.

Along with other provisions for the elimination of state restrictions to trade, the implementation of an effective and uniform competition policy in Europe has made it possible to dismantle within the Union trade instruments such as antidumping and countervailing duties. Moreover, these principles (uniform competition policy and abolition of trade instruments have been extended to the European Economic Area (EU and EFTA countries with the exception of Switzerland).

Agreements concluded with six Central and Eastern European Countries (CEECs) also provide for competition rules on the EU model. Implementing rules contain detailed provisions to make effective the implementation of competition policy and cooperation between the European Commission and the CEECs' new competition agencies.

Agreements are being negotiated or have been completed, with other European countries (the Baltic States, Slovenia), Turkey and other Mediterranean countries.

As a result a wide area is being created in Europe and in the Mediterranean Basin in which similar competition rules are or will be applied and close cooperation among competition will be the order of the day.

4. Future developments

What has been achieved so far in a short period of time is impressive. However, in today's globalised world, regional cooperation, even extended to very large areas, may not be not enough. We think the time has come to take new steps forward.

The world "competition community" is under increasing pressure from the "trade community". Our trade colleagues, who are not necessarily aware of all the practical difficulties in establishing cooperation among competition authorities, find it difficult to admit that their tremendous efforts to achieve a new trade order could be undermined by the inability of competition authorities to tackle effectively private restrictive behaviour which results in the partitioning of world trade.

Countries involved in bilateral cooperation have gained experience from the "first generation" agreements concluded in the last few years. It is now time to think about new steps, building on this experience.

It is difficult at this stage to say exactly what will happen next in this fast-moving field. It may be helpful to look at interesting developments which are taking place in certain countries and regions of the world.

For instance, the US Congress adopted last year an important law which enables the Federal antitrust agencies to negotiate "Second generation agreements" with agencies of third countries. Such new agreements would provide, under certain conditions, for the exchange of confidential information and the US antitrust authorities could, under conditions of reciprocity, collect information and evidence from companies located in the US on behalf of foreign competition authorities in order to facilitate the enforcement of the latter's competition rules even when the practices at issue would not violate US competition laws.

We understand that Canada, where a review of competition law is under way, is considering relaxing rules on the protection of confidentiality for the purpose of international cooperation.

In Europe, Commissioner Van Miert invited last year a small group of independent experts to consider the issue of international cooperation in the competition field.

In its recently published report, the group suggested as a main recommendation that the EU should negotiate a "second generation bilateral agreement" including provision for the exchange of confidential information and more far-reaching positive comity instruments. Positive comity (which I described shortly earlier) could progressively lead to some burden-sharing among partner agencies, whereby the requesting agency would refrain from acting (or, at least would delay action) in respect of behaviour which, although under its jurisdiction, is mainly implemented on the territory of the requested agency. The latter would then "go first". If successful such a development should replace efforts to enforce competition law extraterritorially.

Of course this might appear a distant goal. Well balanced bilateral cooperation between authorities equally involved in the enforcement of effective competition policies might be the most fruitful approach in the short term.

The other major recommendation of the group of experts set up by Mr. Van Miert is the development of a plurilateral framework which might include elements already incorporated in the bilateral agreements. Through a binding positive comity instrument and an effective dispute settlement mechanism, a progressive solution might be found to the problem of trade distortions arising from the unequal effectiveness of the enforcement of competition policies throughout the world.

Interestingly, the report does not stress the need to harmonise national competition rules. By putting forward a proposal on a dispute settlement mechanism, the experts assume that some common internationally agreed principles might be enshrined in the plurilateral framework.

I should add, for the sake of clarity, that these recommendations by independent experts do not bind the Commission, although Commissioner Van Miert feels they may play a positive role in generating wide-ranging and international discussion.

  • (1) See F.M. Scherer "Competition Policies for an Integrated World Economy", Brookings Institution, Washington D.C., 1994.


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