RESTRICTED
WORLD TRADE WT/WGTCP/W/54
8December 1997
ORGANIZATION(97-5349)
Original: English Working Group ontheInteraction
between Trade andCompetition Policy
SUBMISSION FROM MEXICO
Thefollowing communication, dated 28November 1997, hasbeenreceived fromthePermanent
Mission ofMexico withtherequest thatitbecirculated toMembers.
_______________
Competition LawandPolicy inMexico
1. Introduction
Mexico 'sFederal LawofEconomic Competition (FLEC), inforce since June1993, isbased
onArticle 28oftheMexican Constitution (from 1917) which prohibits monopolies andrestrictions
tofreecompetition ofanykind. Theobjective oftheFLEC, which isanadministrative law,isto
protect thecompetitive process through preventing andeliminating monopolies, monopolistic practices
andother restrictions toefficient market functioning.1TheFederal Competition Commission (FCC)
wascreated asanautonomous body incharge ofapplying theFLEC.
Mexico 'scompetition policy istobeconsidered asanimportant complement tothree other
economic policy areas:
- Thecountry 'stradeliberalization policies, which began in1985andculminated inthe
1994North American FreeTrade Agreement (NAFTA), withCanada andtheUnited
States. Between 1985 and1989, thevastmajority ofimport permits waseliminated,
while theaverage import tariff decreased from 23.5percentto12.5percent
advalorem .WithMexico 'sadherence totheGeneral Agreement onTariffs andTrade
in1986, practically allofficial import prices wereabolished. NAFTA willeliminate
alltariff andnon-tariff barriers toregional trade ingoods basically within tenyears,
aswellasreduce restrictions onforeign investments andtrade inservices. Mexico
hasfurther signed trade agreements withanumber ofCentral andSouth American
countries andisamember oftheAsian Pacific Economic Cooperation (APEC)
mechanism.
- Theprivatization ofanumber ofstateenterprises, since thesecond halfofthe1980s.
Forone,theGovernment solditsfirms inthesteel, automotive andsugar industries,
among others. However, themostimportant privatizations tookplace intheservices
sector, especially between 1991and1992. During these years, 18commercial banks
wereprivatized foralmost US$39 billion, while thetelephone monopoly Telmex was
1FLEC, Article 2WT/WGTCP/W/54
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soldforUS$17.5 billion. Further privatizations took place inairlines, public
broadcasting andrailroads, among other sectors.
- Deregulationandregulatoryreform,whichstartedinthelate1980s.Legislationenacted
overrecent years toregulate sectors suchasportservices, civilaviation, airports,
telecommunications, railroad transportation andnatural gasdistribution, ismeant to
encourage competition inthose areas where itispossible. Atthesame time, activities
thatarestillconsidered natural monopolies remain regulated.
Trade liberalization, privatization and,toalesser extent, deregulation, canbeseenastransitory
policies. Once theyarecompleted, competition policy becomes more important asapermanent
mechanism toensure thatmarkets remain competitive. Competition policy should prevent thatofficial
tradebarriers arereplaced byprivate onesaftertradeliberalization. Competition policy together with
regulatory reform should prevent thatofficial monopolies become private monopolies afterprivatization,
orshould limittheabuse ofsuchmonopolies incasetheyarenatural.
2. Instruments ofthecompetition law
Theenforcement oftheFLEC comprises threemainelements: (i)theprohibition ofso-called
monopolistic practices; (ii)theprohibition ofofficial barriers tointerstate commerce; and(iii)merger
control. These elements apply toallareas ofeconomic activity within theMexican territory, andmake
nodistinction between national andforeign, orpublic andprivate economic agents. Theonlyexemptions
from theFLEC arestrategic areas reserved tothestate (among which arepetroleum andother
hydrocarbons, electricity andpostal services), tradeunions, privileges granted tointellectual property
rights and,under certain circumstances, export cooperatives.2There arenospecial situations, such
aseconomicrecessions,orpolicyobjectives,suchasemploymentprotection,thatgiverisetoexemptions
from competition rules.
2.1 Monopolistic practices
Mexico relied heavily onother countries 'lawsandexperiences indesigning itscompetition
law.3Asaresult, theFLEC issaidtoappropriately reflect current competition policy practice around
theworld. Thisisespecially thecaseforthedefinition andtreatment ofmonopolistic practices, as
described below.
TheFLECdistinguishesbetweenabsoluteandrelativemonopolisticpractices.Absolutepractices
areagreementsorcombinationsbetweencompetingagentsinordertofixpricesoroutput,dividemarkets
orrigpublic biddings.4These practices areprohibited perse,asisusual inmost competition laws
around theworld. Some countries allow suchhorizontal agreements under certain circumstances, such
aseconomic recessions, orforsmall firms. InMexico there arenosuchexceptions andneither does
ademinimis ruleexist. However, theFCC hasexpressed thatprice standardization byso-called
"integrating companies" isnotnecessarily illegal. These companies arecombinations ofsmall-scale
producers taking advantage ofeconomies ofscaleinpurchases, production andsales, andareconstituted
under aDecree bytheMinistry ofTrade andIndustry.
2FLEC, Articles 2to5
3Inturn,theFLEChasservedasamodelforrecentcompetitionlawsinanumberofLatinAmericancountries,
especially Costa Rica.
4FLEC, Article 9WT/WGTCP/W/54
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Relative monopolistic practices, inturn,areevaluated under aruleofreason. Thiscategory
includes anumber ofvertical restraints, suchasexclusive territories, resale price maintenance, tied
salesandexclusive dealerships, aswellasother practices suchasgroup boycotts, refusal todeal,price
discrimination andpredatory pricing.5Inorder forthese practices tobeinviolation oftheFLEC,
itmustbedetermined thattheyunduly displace, orintend todisplace, competitors from themarket,
andthatthepresumed responsible party hassubstantial power intherelevant market.6
Thus, substantial market power constitutes oneofthemain criteria fortheruleofreason in
Mexican competition policy. Without suchmarket power theabove-mentioned practices areallowed.
Thisapproach isinlinewiththemonopolization concept inUnited States antitrust lawsandwiththe
abuse ofdominance concept intheEuropean Union (Article 86oftheTreaty ofRome). However,
there isanimportant difference withArticle 85oftheTreaty ofRome, which prohibits (with some
exceptions) alltypes ofagreements, including vertical ones, inrestraint ofcompetition, thusmaking
itpossible fortheEuropean Commission todisapprove ofavertical restraint evenintheabsence of
market power. While sucharulegives authorities more power tointervene, italsoimplies agreater
workloadduetomanynotificationsofverticalagreements,mostofwhichwouldinfactnotbeconsidered
anti-competitive under theMexican market power criterion.
Adifference withUnited States antitrust enforcement liesinthetreatment ofresale price
maintenance (RPM). IntheUnited States, thispractice isprohibited perse.Industrial organization
theory suggests thatRPM hasbasically thesame economic effects asother vertical restraints, sothat
theruleofreason approach toRPM under theFLEC seems appropriate.
2.2 Official barriers tointerstate commerce
TheConstitution prohibits Federal States frompreventing theentryorexitofnational orforeign
merchandise toandfromtheirterritories. Because ofitsrelation withtheprotection ofcompetition,
thisprovision wasincorporated intheFLEC, stating thatallsuchrestrictions shallbevoidofeffect.7
Intheperiod from1993to1996, theFCCdetected theexistence ofbarriers tointerstate trade infour
states, referring toflowers andeggs, among other products. Afifthstatewasrecommended tomodify
draft legislation thatwould restrict theparticipation ofout-of-state suppliers inlocal government
procurements.
2.3 Merger control
Asmostother competition legislations, theFLEC empowers theFCCtodeter those mergers
andacquisitionsthatwouldhaveanti-competitiveobjectivesoreffects.8Article20oftheLawestablishes
thatmergers mustbeprenotified inthefollowing cases: (i)thetransaction involved hasavalue higher
than12million times theminimum daily wage fortheFederal District (equivalent toroughly
US$38.5 million)9;(ii)thetransaction implies anaccumulation ofmore than35percentofthecapital
ofaneconomic agent whose capital value orannual salesexceed 12million times theminimum wage;
or(iii)themerging parties together account foracapital value orannual salesofmore than48million
5FLEC, Article 10
6FLEC, Articles 10and11
7FLEC, Article 14
8FLEC, Article 16
9Determined withthe19November exchange rateofUS$1.00 =8.25 Mexican pesos.WT/WGTCP/W/54
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times theminimum wage (US$154 million) andthetransaction implies anaccumulation ofcapital of
more than48million times theminimum wage (US$154 million).
Inpractice, thenumber ofmergers andacquisitions inMexico hasbeenincreasing substantially
since 1994, atrend thatreflects thecorporate response totheglobalization ofeconomic activities, the
federal government 'sderegulation policies andthemicroeconomic impact oftheDecember 1994peso
crisis. Accordingly, thenumber ofmerger cases increased from slightly more than100ineachof
theFCC'sfirsttwoyears ofactivities (mid-1993 tomid-1994 andmid-1994 tomid-1995, respectively),
to189between mid-1995 andmid-1996, and144inthelastsixmonths of1996. Itshould benoted
thatthese figures include evaluations ofpotential participants inprivatizations andincertain auctions,
which require authorization from theFCC.
3. Competition advocacy bytheFCC
Competition advocacy isextremely important incountries where market forces wereliberalized
onlyrecently andwhere aculture ofcompetition notyetexists. Moreover, untilwellintothefirst
halfofthe1990s, many services sectors inMexico were stillsubject tostrongly anti-competitive
economic regulation. Atpresent, theFCCplays acrucial roleincompetition advocacy attwolevels.
Thefirstisintheregulatory reform ofsectors under thejurisdiction ofother ministries orregulatory
bodies. Thesecond levelofcompetition advocacy iswiththebusiness community ingeneral.
3.1 TheFCC'sroleinregulatory reform
Asnoted above, theFLEC applies toallareas ofeconomic activity, including sectors thathave
theirowneconomic regulation. TheFCC maythusactagainst monopolistic practices andmergers
occurring inregulated sectors. TheFLEC alsoempowers theFCCtoissueopinions onexisting policies
andlegislations, andonmodifications thereof, implemented byothergovernment entities.10Inaddition,
some sectoral lawsinclude provisions thatallow theFCCtodetermine whether effective competition
exists inacertain market, orwhether certain firms havesubstantial market power. Suchadetermination
maytrigger, initsturn, price andother types ofregulation. Toparticipate inprivatizations andto
beabidder inspectrum auctions alsorequires authorization bytheFCC. Finally, theFCCparticipates
intheinterministerial commissions thatoversee privatizations andregulatory reform.
Since 1994, theFCC hasbeen active intheregulatory reforms forport services,
telecommunications, airtransportation, airports, railroads andnatural gasdistribution. Particular
emphasis wasplaced onfreeaccess bycompetitors andonnon-discriminatory granting ofconcessions.
Inthenextstage, theFCCparticipated indesigning strategies forprivatizing ports andrailroads and
forallocating theradio spectrum forcertain telecommunication services. Inthemost recent stage,
theFCC evaluated theparticipants intheauctioning ofseveral portfacilities, tworegional railroad
companies, anumber ofradiofrequencies, natural gasdistribution concessions andthesatellite system.
3.2 Competition advocacy towards thebusiness community
TheFCChasinvestigated anumber ofmonopolistic practices thatreflect thelackofaculture
ofcompetition among businesses. Aclearexample isthecaseofprice-fixing inthelaundry anddry
cleaner industry (1994). Itwasfound thatthenational chambers forlaundries andprofessional cleaners
distributed among theirmembers listsofratesandprices tobecharged tothepublic. Similar conduct
wasdetected among purified water distributors andmotorway carriers. These firms hadalways been
fixing prices collectively, oftenevenencouraged bythegovernment itself. TheFCChasbeencautious
10FLEC, Article 24WT/WGTCP/W/54
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inimposing finesinthesecases because many economic agents wereunfamiliar withtheFLEC during
thefirstyears following itsentry intoforce. Instead theFCChastriedtoinduce companies tocomply
withthecompetition rules voluntarily.
Other practices under theFCC'sscrutiny reflect thetraditional power ofcertain trade unions
inMexico.11TheFCC intervened inanumber ofcases where economic agents wereboycotted for
leaving thedominant trade union orcreating theirown, independent union. Forexample, inonecity
thedominant union induced animportant magazine distributor toboycott anumber ofnewspaper stands
whohadrecently established anindependent trade union. Inanother city,theFCC interfered when
thelocalgovernment refused toissuetaxilicences todrivers thatdidnotbelong tothemaintradeunion.
4. International activities oftheFCC
TheFCCactively participates intheWorking Group onTrade andCompetition under NAFTA
Article 1504.12ThisWorking Group, which meets twice ayear, isrequired toreport totheNAFTA
Commission onissues concerning therelationship between competition lawandpolicy andtrade in
North America nolaterthanDecember 1998, andtomake recommendations onfurther work as
appropriate. TheWorking Group hasundertaken itsmandate viathegeneration ofseveral papers which
address trade andcompetition issues interms of:(i)thecomparison ofcompetition laws; and
(ii)specific issues relevant totrade andcompetition. Thestudies undertaken sofartrace themost
outstanding similarities anddifferences between thecompetition lawsandpolicies ofthethreeNAFTA
countries, among others.
Asimilar Committee onCompetition exists forthefreetrade agreement between Mexico,
Colombia andVenezuela. TheFCC further participates ininternational foraforcompetition issues
inthecontext oftheOrganization forEconomic Cooperation andDevelopment (OECD), theWorld
Trade Organization, theFreeTrade Area fortheAmericas andAPEC.
Mexico hasnotcelebrated anyofficial cooperation agreement withothercompetition authorities.
However, asamember oftheOECD itissubject totheRevised Recommendation oftheOECD Council
ConcerningCooperationBetweenMemberCountriesonAnticompetitivePracticesAffectingInternational
Trade.13
InpracticetheFCChasamplecontactandconsultationonabilaterallevelwithothercompetition
authorities, especially theCanadian Bureau ofCompetition andtheUnited States Department ofJustice
(DOJ) andFederal Trade Commission (FTC), butalsowiththeEuropean Commission andLatin
American agencies. These consultations refertotechnical andprocedural aspects ofcompetition law
enforcement, aswellastospecific investigations. Onseveral occasions theFCChasconsulted other
agencies onhowtheywould evaluate certain alleged anti-competitive conduct. Consultations have
alsoconcerned practices thathadanti-competitive effects indifferent countries. Forexample, theFCC
11These trade unions, orsyndicates, areassociations ofotherwise independent professional service providers,
such asnewspaper vendors andtaxidrivers.
12NAFTA Chapter 15further determines, among other things, thateachParty: (i)shall adopt ormaintain
competition rules; (ii)recognizes theimportance ofcooperation andcoordination among their authorities;
and(iii)maydesignate amonopoly andmaintain orestablish stateenterprises, butindoing soitwillendeavour,
through regulatory control, administrative supervision, etc.,tominimize itsnegative effects oncompetition and
onthebenefits oftheAgreement.
13OECD Document No.C(95)130/Final, 27July1995WT/WGTCP/W/54
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cooperated withtheDOJandtheFTContherecent international price-fixing caseintheworld lysine
andcitric acidmarkets, andontheinternational merger between Kimberly Clark andScott Paper.
5. Interaction between trade andcompetition policy
Theinteraction between trade andcompetition policy isofutmost importance inaworld of
liberalized trade. Forone,aftertheelimination ofofficial import barriers, market access maybe
frustrated byprivate anti-competitive behaviour. Inthiscase,domestic competition authorities should
stepin.Ontheother hand, business practices ormergers inonecountry mayaffect competition in
other countries. Inthiscase, thecompetition authorities intheaffected countries generally lackthe
jurisdiction todeter thepractice originated abroad. Finally, trade policies, especially anti-dumping,
mayhavedistorting effects, notonlyonforeign firms butalsooncompetition inthemarkets ofthe
importing countries.
5.1 Market access problems
TheFCChasdemonstratedthatitiswillingtoimpedemonopolisticpracticesindomesticmarkets
thatinhibit theaccess offoreign companies. Forexample, in1995, itfined twomanufacturers of
domestic appliances forinducing retailers nottoselldomestic appliances produced outside theNAFTA
area, thusespecially affecting twoKorean exporters.
Inturn, theFCC received acomplaint byaMexican firmthataUnited States competitor
dominating theUnited States market engaged inloyalty programmes withretailers, thusnegatively
affecting theMexican firm'sexports. After consultation, theDOJexplained thattheMexican producer
could fileacomplaint intheUnited States, either byhimself orthrough hisUnited States subsidiary.
TheDOJmade itclear thatacomplaint byaforeigner would notbetreated differently inanyway
from acomplaint byaUnited States firm.
These vertical restraints could clearly beaddressed bythecountries where theyoccurred.
Competition policy generally doesnotdistinguish between national andforeign firms -contrary to
trade policy -andwillintervene whenever competition indomestic markets ishindered. Inprinciple,
these market access problems mayberesolved withpositive comity. Insuchcases, thecompetition
authorities mustbeready toactagainst allanti-competitive practices, evenattheexpense ofdomestic
producers infavour offoreign competitors.
5.2 Anti-dumping rules
TheFCChasrecently beenscrutinizing Mexican anti-dumping policy asapplied bytheMinistry
ofTrade andIndustry. TheFCCisamember oftheinterministerial Foreign Trade Commission, which
reviews anti-dumping measures before theycanbeapplied. Although thepower oftheFCCtoinfluence
anti-dumping measures inthiswayislimited, itkeeps aclose eyeupon thepossible anti-competitive
effects ofanti-dumping actions inMexico.
Atanother level, theFCC hasparticipated ininternational discussions onthedesirability to
replace anti-dumping lawsbycompetition rules. Inthiscontext, ithasstudied theexperiences ofthe
European Union, Australia andNewZealand and,more recently, Canada andChile.
6. Transparency
TheFCCconsiders thetransparency ofcompetition policy enforcement ofutmost importance.
Toenhance transparency ithasundertaken several actions among which thefollowing arethemost
outstanding ones.WT/WGTCP/W/54
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Inthefirstplace, onceayeartheFCCpublishes anannual report ofitsactivities. These reports
summarize themostimportant ormostillustrative cases resolved bytheCommission, explaining the
economicandjudicialcriteriaappliedintheanalysis.Theannualreportsfurthermentionotheractivities,
suchastheparticipation ininternational fora, aswellasstatistics onthenumber andtypes ofcases
resolved, among others.
Inthesecond place, theFCC organized aseminar on17July1997, fortheoccasion ofits
fourth anniversary. During thisseminar, theCommission 'smainexperiences wereevaluated andthe
criteria itusually applies wereexplained. Animportant interaction tookplace between officials from
theFCC andthepublic ingeneral.
Finally, theFCChasahomepage ontheInternet, which, asofSeptember 1997, summarizes
almost allcases resolved, leaving outconfidential information. Thehomepage, which isbilingual
(Spanish andEnglish), further contains thecriteria thatareofficially adopted bytheFCC, aswellas
theintegral textoftheFLEC, annual reports andother relevant documents.
Thehomepage oftheFCC canbeaccessed through theaddress http://cfc.gob.mx.