WORLD TRADE
ORGANIZATIONWT/WGTCP/W/82
14 August 1998
(98-3179)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM NEW ZEALAND
The following communication, dated 22 July 1998, has been received from the Permanent
Mission of New Zealand with the request that it be circulated to Members.
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The Impact of State Monopolies, Exclusive Rights and Regulatory Policies
on Competition and International Trade
Introduction
1. Profound changes in the world economy caused through economic liberalization and
technological advances have led to a broadening of the discussion of world trade issues.  This
broadened discussion reflects the push from within business communities around the world for
governments to redefine and refocus effort to reduce the barriers to commercial endeavours in global
markets.  Many business communities, as well as seeking assurances that traditional barriers will
continue to fall, are increasingly focusing their attention on the barriers existing behind the border.
2. This examination of the impact that state monopolies, exclusive rights and regulatory policies
have on trade and competition illustrates why business is increasingly looking behind the border.  It
indicates that a range of government policy instruments and private restraints distort the competitive
process in markets and thus restrain international trade.
3. It also highlights that the performance of economies is increasingly shaped by the quality of
their regulatory environments.  Countries that  operate regulatory environments that foster
competition, create a certain business environment and impose low compliance costs will be
advantaged.  Globalization also means that one nation’s economic performance will be increasingly
affected by the quality of the regulatory environment of those with which they have economic links.
4. Finally, the paper concludes that there are a wide range of regulatory tools open to
governments to protect local firms from import competition, some obvious, others subtle.  ThisWorking Group has already discussed at length many of the other trade and competition issues over
the last year, and it is only now turning to consider the issues of state monopolies and regulatory
policies.  Furthermore, much of the economic literature that has appeared on trade and competition in
the 1990s has focused on the narrow areas of antitrust and anti-dumping.WT/WGTCP/W/82
Page 2
5. New Zealand’s views are that:
• more theoretical and empirical work would he lp inform discussion on the trade effects of
state monopolies, badly designed regulation, and regulation that serves to discriminate
against imports;  and
• the issue of state monopolies and regulatory policies should be placed on the WTO
agenda for more intensive study and possible negotiation.
State Monopolies
6. State monopolies are typically established in an economy on the grounds of either:
• avoiding market failure eg. under-provision of  socially desirable goods and services, such
as electricity;
• preserving equity by providing access to goods and services at reasonable prices, eg
telephony services;  or
• maintaining control of goods, services or natural resources regarded as being of national
importance, eg steel and broadcasting.
7. In New Zealand’s experience, state production and control of commercial goods and services
was a key factor that resulted, in the early 1980’s, in poor economic performance.  This reflected,
among other things, the lack of competitive disc ipline in the economy that flowed from placing
barriers, in this case state control, to the entry of potential domestic and foreign competitors.
8. This poor performance forced four realizations upon New Zealand policy makers:
• State ownership has costs.  It typically impedes trade and competition and thereby
impedes investment, innovation, gains in economic efficiency, economic growth,including sustainable employment growth.
• The public policy objectives specified in paragraph 4 could frequently be more efficiently
and transparently achieved through taxes, the regulation of privately-owned companies,or through the provision of selected subsidies to enterprises, rather than through state
ownership.
• Often market mechanisms, rather than state control, can be used to address market failure
such as the presence of public goods or externalities.
• Where there are market failures, intervention in the form of state monopolies should only
occur if it is clear that a net benefit will result.  In many cases the costs imposed by state
control are greater than the welfare losses imposed by the original market failure.
9. New Zealand has, over the last 13 years, focused on introducing greater competition across all
sectors of the economy and redefined the role of the Government in the economy.  The Government
has abandoned or greatly reduced its role of providing commercial goods and services such as railway
services, venture capital, forestry products, steel, telecommunications and housing mortgages.  Its roleis now focused on providing a regulatory environment which supports open competitive markets and
which encourages businesses to pursue opportunities and to manage risk.WT/WGTCP/W/82
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Exclusive Rights
10. An exclusive dealing contract commits a buyer to deal only with a particular seller.  Exclusive
dealing arrangements have the potential to foreclose a portion of the market from competitors.  In a
globalized world economy this means that all competing suppliers, both domestic and foreign would,if one supplier captures all of the leading distributors, be severely handicapped in their efforts to reach
consumers - even if their product was cheaper and/or of a higher quality.
11. However, such arrangements promote efficiency in most circumstances.  For example, for the
supplier selling expenses may be greatly reduced, whereas buyers may be able to plan production or
distribution more efficiently with the stable supply.  Buyers may also enjoy a reduction in transaction
costs caused but not having to deal with a multitude of competing suppliers.  As exclusive dealing
arrangements have the potential to both improve or diminish efficiency, it suggests that sucharrangements should be judged on a case-by-case basis.
12. Where exclusive dealing arrangements impose efficiency losses they illustrate that it is
increasingly difficult to draw distinctions between trade policy and competition policy.  In such cases
the barrier posed by exclusive rights is a trade barrier, a competition barrier and a barrier to the
development of local industry.  This example supports the notion that one of the key issues isminimizing government and private barriers that distort competition in world markets.
Regulatory Policies
13. Regulation refers to the full range of legal instruments by which governments impose
obligations or constraints on citizens, enterprise s and the government itself.  Used appropriately
regulation is a tool that allows governments to achieve their public policy goals such as increasing or
maintaining environmental quality, improving hea lth and safety, and protecting the competitive
process in markets where high market power exists.
14. However, used inappropriately regulatory policies can impede trade and competition.  This
can occur directly for example by blocking entry, controlling prices and output, or by deterringinnovation.  Indirect effects arise where poorly designed regulations, too much regulation, or
regulations that have become obsolete over time, limit trade and competition by imposing
unreasonable compliance costs on business.
15. Many domestic regulatory policies directly limit competition from foreign suppliers when:
• a regulation is applied exclusively to foreign firms;  and
• a regulation is designed in such a way that although it is applied equally to both domestic
and foreign firms, it creates significant disadvantages to firms which are not located in the
country in which the regulation is imposed.
16. Further, it is common for trade and competition to be impaired where regulations implicitly
favour incumbents and/or prevent new entrants.  This situation is typical in utility markets.  Countries
commonly extend monopoly rights beyond the network to upstream or downstream activities where
competition is possible, or they fail to acknowledge the dynamic nature of markets.  For instance,
technological change can mean that utilities once considered as natural monopolies to become
increasingly competitive over time.  An example is the development of telephony services that usecable, cellular, or satellite technology as an alternative to the existing network.WT/WGTCP/W/82
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17. Discrimination against foreign competition achieved though regulatory policies is most
visibly evident in the services sector.  Here the discrimination typically takes the form of restrictions
on foreign direct investment, either by sector or by level of foreign ownership, the regulation of
occupations, and access to infrastructure services.
Conclusion
18. National treatment is a well-established pr inciple of the multilateral trading system.
However, the design of some regulations means that this principle often does not apply in practice.  In
some cases the impact on international trade is quite obvious, in other cases it can be subtle.
Examples of the ways that regulation is misused include:
• Failure to recognize other countries’ technical standards.
• Standards and technical regulations that are more difficult for foreign firms to meet.
• Quantitative restrictions on market entry.
• Unnecessarily restrictive zoning laws that limit particular types of economic activity or
favour incumbents.
• The use of phytosanitary and sanitary regulations to block imports that do not create a
health or environmental risk.
• Legal systems that encourage the strategic use of court or regulatory processes to delay
competitive entry.
• Discriminatory research and development funding.
• Discriminatory public procurement practices.
• Professional licensing requirements that deny competent foreign-qualified persons the
opportunity to migrate or force them to duplicate courses of study before they may
practise.
19. Unfortunately little empirical work has been done on the impact of state monopolies and the
misuse of regulation on international trade.  Instead the debate has tended to focus on some more
visible issues such as the abuse of anti-dumping laws and whether the WTO should develop an
antitrust code.  The issues of state monopolies and regulatory policies merit more prominence.
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