RESTRICTED
WORLD TRADE WT/WGTCP/W/22
9July1997
ORGANIZATION(97-2862)
Original: English Working Group ontheInteraction
between Trade andCompetition Policy
COMMUNICATION FROM THE WORLD BANK
TheWorld Bank welcomes thisopportunity toinform theWorking Group about itsactivities
andexperiences thatmight helptoinform about therelationship between trade liberalization and
competition policy.
InresponsetotheDirector-General’srequest,wepresenthereabriefsummaryofBankactivities
tosupport trade reform andtosupport bestpractice inthefieldofcompetition lawandpolicy. This
isfollowed byalikewise brief listing ofsome ofthelessons onemight draw from Bank experience
about thecritical links between trade liberalization andcompetition policy.
Wehaveseparately provided aselection ofreports prepared attheBank thatwethink might
berelevant totheWorking Group ’sdeliberations. They willnotbesummarized inthisstatement.
Bank support fortrade liberalization andforcompetition policy
Thefirstgeneration ofeconomic reforms thatweresupported bytheWorld Bank andother
international institutions dealt withthebasic framework foramarket economy: macroeconomic
soundness, price stability, reduction offiscal deficits, improved balance ofpayments andopening to
external competition viatheliberalization oftraderestrictions, particularly theremoval ofquantitative
restrictions andthelowering oftariffs.
Inthatgeneration ofwork1,theBankmade 238policy-based loans thatsupported liberalization
oftradepolicy orforeign exchange policy. These loans, made to75different countries, specified over
2000 trade orforeign exchange policy reforms asconditions forborrowing, andabout 80%ofthese
reforms havebeensubstantially implemented. Through theseloans, theBankhassupported developing
country tradereforms thathaveaffected imports ofoverUS$500 billion, in1993values. AttheUruguay
Round, bycomparison, developing countries agreed totariff reductions thatwillaffect 32% or
$393 billion oftheirtotalmerchandise imports (likewise in1993 values).2
Assomecountrieshavemovedtowardcompletionoffirstgenerationreformssuchasestablishing
macroeconomic stability andremoval ofmajor impediments tointernational trade, theBank hasadded
asecond focus: toassist governments tocreate anenabling environment forprivate-sector ledgrowth.
Thisenabling environment isaseamless webofgovernment policies andinfrastructure within which
economic activity takes place, i.e.,people produce, consume andtransact. Theenabling environment
1Thefigures thatfollow arefor1981, when theWorld Bank’spolicy-based lending began, through
1994.
2Thefigure above of$500billion refers toimports affected bypolicies thathavebeensubstantially
implemented.WT/WGTCP/W/22
Page2
includes aneffective legalcodethatprovides forintellectual andphysical property rights, forcontracts
andfordispute resolution. Italsoincludes education, health, thehonesty ofthepoliceman onthecorner,
andaccess byallmembers ofthesociety toalltheelements thatmake uptheseamless web. Competition
policy isanimportant setoftools forshaping theenabling environment.
Competition policy hasmany constituent parts: privatization, deregulation, tradeliberalization -
allthedimensions ofpolicy andeconomic environment thatinfluence thedegree andquality ofrivalry
thatwillexistamong enterprises thatoperate inthedomestic market. Competition lawisoneofthese
elements; itsdevelopment anduseindeveloping countries isanimportant partoftheBank’scurrent
concerns. Since 1990, approximately thirty fivecountries haveeither enacted orsignificantly revised
existing competition laws-including virtually allthepreviously centrally planned economies. Inthis
regard, theBankhasassisted inthedesign, implementation orstrengthening ofcompetition legislation,
institutions andenforcement incountries likeArgentina, Brazil, Cameroon, Colombia, ElSalvador,
Gabon, Jordan andPeru. Incooperation withtheOECD, UNCTAD andother institutions, theBank
hasorganizedseminarsandworkshopsoncompetitionpolicyforgovernmentofficialsandotherinterested
parties ofColombia, Chile, India, Indonesia, Nepal, Peru, Turkey, Latvia, Estonia, theCzech and
Slovak Republics, Lithuania, Poland, andtheUkraine.
Some ofthemajor lessons theBank hasdrawn fromitsexperience withtrade reform andthe
implementation ofcompetition policy arepresented below.
Trade liberalization must bepartofgeneral reform
Trade liberalization bydeveloping countries immediately brings forward theideaofexport
ledgrowth, buttrade liberalization inisolation from other policy reforms willbeineffective. The
various elements ofpolicy reform aresynergistic, reform isolated toonepolicy isnotaseffective as
coordinated reforms inseveral areas. Trade liberalization, forexample, willbeineffective without
sound exchange ratepolicy. Iftheexchange ratedoesnotaccurately reflect relative economic costs
between thedomestic andtheworld economies, integration intotheworld economy willstifle rather
thanpromote efficiency. Likewise, tradeliberalization willbeineffective anddifficult tosustain without
sound macroeconomic policy. Adomestic macro imbalance willquickly haemorrhage through an
unsustainable expansion ofimports, andtrade liberalization --rather thanthemore basic cause, the
domestic macroeconomic imbalance -willoftenbearthepolitical brunt ofthatexpansion. Furthermore,
unless labour markets arereformed, theeconomy willnotmake adjustments towhere andhowlabour
isused, andwithout suchadjustments, thepotential benefits fromtradeliberalization willnotbegleaned.
Trade liberalization, competition policy andlegalreform arecomplementary
Even after considerable trade liberalization, privatization, deregulation, andpassage of
competition lawsindeveloping andtransition economies, many markets there arenotyetworkably
competitive. Efficiency effects areoften notrealized because enterprises takeadvantage ofprivate
arrangements orother government regulations toavoid rivalry.
Sometimes governments, under pressure fromdomestic enterprises, fudge theremoval oftrade
barriers.Theymanipulateproductandprocessstandards,orbusinessregulations,sothattheydiscriminate
against imports. Theymight alsoresort toanti-dumping, oranyofalonglistofdevices, some explicitly
GATT-legal, some questionably GATT-legal, allquiteeffective forkeeping outimports. Particularly
ineconomies inwhich thedomestic market isnotlargeenough toabsorb theoutput ofseveral enterprises
thathaveachieved efficient scaleofproduction, genuine opening totrade--notcircumvented opening -
willbeanecessary partofestablishing competition.WT/WGTCP/W/22
Page3
There arehowever cases inwhich theremoval ofgovernmental restrictions onimports will
noteliminate market power enjoyed bylocalproducers. Non-traded goods, orgoods thataredifficult
totradeinternationally because ofhightransportation costsorperishability areobvious examples. Where
tradedgoodsareconcerned,therearewaysinwhichalocaloligopolycaneffectivelycontrolcompetition
from imports aswellaslocal competition. Where local producers have integrated forward into
distribution, including thedistribution ofimports, theycanusethisposition toprevent imports from
gaining afoothold.3Also, cases havebeenidentified inwhich allproducers inaregion were under
common ownership --theoligopoly extended pastnational borders toinclude nearby sources ofpotential
competitive pressure. Insome instances, control overaccess tointernational business services has
beenthebasis forlocalenterprises tomaintain anon-competitive arrangement.
Ininstances suchasthose listed intheprevious paragraph, openness tointernational investment
andopenness ofthemarket forservices tointernational competition areimportant complements to
trade liberalization andcompetition policy.
Where there iscollusive action bylocalproducers, trade liberalization, tobeeffective, must
beaccompanied byappropriate policies todealwiththatcollusive action. Oneshould caution however
thatapplication ofcompetition policy correctly identify thesource oftheproblem. Ifthelegalsystem
isweak (inadequate property rights, contract lawanddispute settlement) collective action bylocal
enterprises (horizontal orvertical) maybeanecessary partofdoing business locally. Trade reform
andcompetition policy, tobeeffective, mustbecomplemented bylegalreform. Competition agencies
canbeeffective instruments foridentifying missing institutions aswellasprivate andgovernmental
actionsorpoliciesthatareanticompetitive.Therehavealsobeeninstancesinwhichcompetitionagencies
haveseentheirfirstdutyaspolicing the“fairness ”ofdomestic competition andhavestrengthened
themarket power ofestablished enterprises byprohibiting competitive practices thatinmostcountries
areconsidered beneficial tocompetition andtothepublic interest. Governments areanxious tofind
ways todealwiththesocial andeconomic disruptions thatsometimes occur withtheintroduction of
increased competition.
Althoughtradeliberalizationandeffectivecompetitionlawcancountervariousrestrictivebusiness
practices indomestic markets, countries have expressed concerns about anticompetitive business
arrangements thatstemfromoutside theirnational jurisdiction. Competition lawsinseveral countries
exempt export cartels. Apart from legally recognized cartels ,there areallegations thatsome multi-
national enterprises havethepower tofixprices andallocate markets internationally. Also, when
multi-national enterprises merge, divest andorrestructure theirinternational operations, there may
beadverse consequences inother countries which maynotbeexplicitly taken intoconsideration in
thedecision-making process.
Anti-dumping issafeguards policy, notcompetition policy
While anti-dumping issometimes discussed asanapplication ofcompetition policy, theBank
hasfound itmore useful tothink ofitassafeguards policy. Assafeguards policy isoutside thescope
ofthisworking group, wewillnotreview ourexperiences withanti-dumping, butiftheworking group
isinterested, wewould beplease toprovide suchareview.
3Theresult ishigher profits tolocalproducers-distributors (because theynowhavebetter access
toimports forresale), butnocompetitive pressure forincreased efficiency, andnoreduction ofprices
toconsumers.WT/WGTCP/W/22
Page4
Thefuture
Human development andthestrengthening oftheenabling environment forprivate-sector led
growth, areimportant partsoftheBank’soperational concerns. TheBank’sresearch programme will
continue tosupport these operational goals. Besides additional work onhowdeveloping countries '
markets canbemade more effective instruments fordevelopment, theBank hasunder wayastrong
programme ofresearch onthefunctioning andeffectiveness oflabour markets, ofcapital markets and
thefinancial sector generally. Likewise, thereisongoing work ontheroleinthedevelopment process
ofother business services suchastelecommunications. TheBank willwelcome every opportunity to
work withtheWTO onthetrade related aspects ofthese issues, andwill,ofcourse, bepleased to
share ourfindings withtheWTO andwithother interested organizations.