WORLD TRADE
ORGANIZATIONWT/WGTCP/W/92
21 September 1998
(98-3586)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 27 July 1998, has been received from the Permanent
Mission of Japan with the request that it be circulated to Members.
_______________
The Impact of Trade Policy on Competition
I. INTRODUCTION
Both trade law, which regulates trade policy, and competition law, which regulates
competition policy, have, despite some different perspectives, a common core objective:  to maximize
economic welfare by improving the efficiency with which resources are allocated.  However, as we
have pointed out in previous meetings, we notice that these two laws have complementary effects, as
well as contradictory effects.  As long as this Working Group deals with the interaction between trade
and competition policy, it should address the contradictory effects of trade and competition policy,
especially the anti-competitive effects caused by trade measures on market competition.  The
objective should be to introduce a pro-competitive view into trade measures.  We would, therefore,like to explain the contradictory effects of trade measures more concretely, and then discuss the anti-
competitive view of anti-dumping.
Some trade laws such as the Anti-dumping Agreement and the Safeguards Agreement of the
WTO justify government measures to protect domestic firms from allegedly unfair pricing and a sharpincrease in imports.  Since trade-restrictive border measures are generally prohibited, these trade
measures are recognized as temporary exceptions from the principles of free trade.  Since these laws
are not concerned with effect on competition, they are often used as justification for imposing
economically inefficient trade measures, and their inadequate (e.g., prolonged and/or frequent)
application results in the protection of an inefficient domestic industry.  We discuss below some casesin which either a national competition authority or  a party recognized that in applying (or even
considering) trade measures, especially anti-dumping measures, the resulting measures were anti-
competitive.
Dynamic Random Access Memory Semiconductors (DRAMS) of 256 Kilobits and Above from Japan
(1986)
The US Department of Commerce (DOC) self-initi ated this anti-dumping investigation.  The
US Federal Trade Commission (FTC) submitted a report to the DOC stating that the home market of
Japan was competitive and not susceptible to predatory practices.  It further stated that prices charged
by Japanese producers would permit the recovery of all costs within a reasonable period of time in theWT/WGTCP/W/92
Page 2
normal course of trade.  These points were not accepted by trade authorities, however, and the
investigation was concluded with price undertakings.
Truck Trailer Axle and Brake Assemblies and Parts from Hungary (1982)
The US Department of Justice (DOJ) submitted a statement to the US International Trade
Commission asserting that the US market was highly concentrated, with a single company in a
dominant position.  The DOJ contended that competition in the domestic market would deteriorate if
anti-dumping duties were imposed, eliminating imports.  Finally, in exchange for certain promises
made by the exporter, the dumping investigation was halted.
Glycine from Japan (1985)
A major European Community user and the two Japanese producers argued that an anti-
dumping duty on glycine from Japan would enable the largest Community producer either to raise its
prices of glycine unreasonably in a market with essentially only three suppliers or to undercut
Japanese prices so severely that the Japanese product would disappear from the market.  This concern
did not deter imposition of anti-dumping measures.
When a firm or small group of firms possesses "market power" in a domestic market, anti-
dumping measures can be used by the firm or firms (and its government) as a strategic tool to restrain
or eliminate competition in the market.  Two examples of such anti-competitive behaviour have been
provided:  one is to use anti-dumping measures as a tool to facilitate cooperative price setting bydomestic and foreign firms;  the other is to use anti-dumping measures in order to exclude competitors
and monopolize the domestic market.
II. ANTI-DUMPING LAW AND COMPETITION LAW
(1) Objective of Anti-Dumping Law and Competition Law
Both competition law and anti-dumping law are concerned with predatory pricing.  While
competition law seeks to eliminate predatory pricin g in domestic trade, anti-dumping law addresses
such pricing in international trade.
1  However, despite the identical objective of these two laws, they
protect different objects, with anti-dumping law protecting competitors while competition law
protects competition.  Consequently, they are implemented in significantly different ways, leading to
unnecessarily stronger protection for companies against foreign competitors than against domestic
competitors.
(2) Differences in Predatory Pricing between the US Competition Law and the US
Anti-Dumping Law
Predatory Pricing under the US Competition Law
Section 2 of the Sherman Act regulates predatory pricing in the US.  Under the US
Competition Law, illegal predatory pricing is defined as pricing below the costs appropriatelymeasured and with intention to eliminate competitors, or with the "specific intent" to monopolize.
2  A
landmark US Supreme Court decision on predatory pricing was made in Zenith vs. Matsushita.  The
                                                     
1 Robert A. Lipstein (1997). "Using Antitrust Principles to Reform Antidumping Law".  In Global
Competition Policy,  ed. by Edward M. Graham and J. David Richardson. Washington: Institute for International
Economics.
2 Eleanor M. Fox (1997). "US and EU Competition Law: A Comparison".  In Global Competition
Policy . Washington: IIE.WT/WGTCP/W/92
Page 3
Court concluded that a low price alone is not enough to support a finding of predatory pricing, but that
a low price is only illegal if it can be shown that there is a dangerous probability that such pricing
would permit the elimination of competitors thereby allowing the predator to raise prices later and
recoup the original losses from low pricing.3
Predatory Pricing under the US Anti-Dumping Law
The 1916 US Anti-Dumping Law states that "dumping", which is importing and selling the
goods within the US at a price substantially less th an normal price or value in the principal markets of
the producing country, is unlawful if this dumping is done with the intent of destroying or injuring an
industry in the US, or of preventing the establishment of an industry in the US, or of restraining or
monopolizing any part of trade and commerce in the US.  Under the 1916 law, anti-dumpingmeasures would only be applied in the case where dumping is done with the predatory intent
(equivalent to the "monopolistic intent" in section 2 of the Sherman Act which regulates domestic
competition). However, since it was found to be virtually impossible to prove this "predatory intent",
the new law, the Anti-Dumping Law of 1921, required only international price discrimination and
"injury" to a domestic industry for the imposition of anti-dumping measures.
4  Anti-dumping rules of
the WTO basically have the same framework as the 1921 law.
Inconsistency between Competition Law and Anti-Dumping Law
10. Consequently, though both competition law and anti-dumping law were supposed to deal with
predatory pricing, the result of enforcing these tw o laws differs significantly.  Under competition law,
which regulates predatory pricing in domestic trade, low price sales are basically illegal in the case of
pricing below marginal costs and with predatory inte nt.  It must be shown that there is a probability
that, through predatory pricing, competition will be eliminated and the predator will subsequently be
able to realize monopoly prices and profits.  In contrast, anti-dumping law requires only the existenceof a difference between prices in the domestic market and those in the exporting country, and injury to
a domestic industry.  "Predatory intent" and "probability for monopolistic profits" are not required to
be proved.
5  This difference in standard is significant in that positive finding regarding the existence
of predatory pricing is exceptional under the US Competition Law but the norm under the US Anti-
Dumping Law.  The US has a different standard for predatory pricing:  a very rigorous standard for
domestic competitors and a very relaxed standard for foreign exporters.  In addition, it should be
noted that the unilateral procedure under anti-dumping law, where anti-dumping authorities fulfill theroles of both a prosecutor and a judge, makes it easy for domestic industries to obtain protection from
foreign competitors.  Instead, domestic competition law is implemented through judicial or semi-
judicial procedures.
Problem in Measuring Costs
Measuring costs to determine the existence of predatory pricing also gives rise to serious
problems. Average "variable cost" is normally the standard for determining whether a price is
                                                     
3 Tadatoshi Homma (1994). "Ur uguay Round changed the international trade" Tokyo: Chuo Keizai
Sha.
4 Kazumasa Iwata (1997). "Competition Policy and Unfair Trade Measures".  In Trade and Tariffs.
Tokyo:  Japan Tariff Association.
5 The Congressional Budget Office of the US said in its report of "Antidumping Action in the United
States and Around the World: An Analysis of International Data, 1998" that "(t)he vast majority of cases inwhich antidumping duties are imposed do not involve pred atory pricing" and that "(i)n cases where predatory
pricing is not an issue, however, imports priced below co st or their foreign price are generally beneficial to the
economy".WT/WGTCP/W/92
Page 4
predatory and to prove the existence of predatory intent under the US Competition Law6 (while
marginal cost is theoretically a more appropriate standard, the difficulty in measuring marginal cost
forces average variable cost to be used7).  Under anti-dumping law, sales price in the market of the
exporting country, export price to the third country, or constructed value based on fully allocated costs
(i.e., variable cost, fixed cost and profits) is used to determine dumping.  Therefore, internationalpredatory pricing or dumping can be found in inst ances where there would be no support for a claim
of predatory pricing under domestic competition.  Fully distributed costs are always higher, and
usually substantially higher than variable costs.  In addition, constructed value involves the danger of
creating or enlarging dumping margins intentionally since the investigating agency has a significant
margin of discretion in calculating the constructed value. (See Annex 1)
(3) Justification for the Broad Application of Anti-Dumping Law
Price Discrimination
Though anti-dumping law seeks to prohibit predatory pricing and uses price discrimination as
well as injury to a domestic industry as the criterion for the imposition of anti-dumping measures,price discrimination itself is not generally unlawful from the perspective of competition policy.
8
Indeed, it is not irrational for prices in one market to be below prices in the another market.  Forexample, in a case where the brand name is less popular on one market than on another, sales prices in
the latter market would be expected to be lower than in the former as sellers try to increase
competitiveness by offering more attractive prices to offset a weak brand image.  Another examplewould be the price difference resulting from the exis tence of active competitors.  Sellers may offer
lower prices in one market to match prices of their competitors, while setting higher prices in another
less competitive market.
Price Discrimination Under the US Competition Law
Price discrimination is regulated under the Robinson-Patman Act in the US.  Section 2 of this
law states that price discrimination is unlawful if it has a distorting effect on competition. Specifically,
price discrimination has been found to have a distorting effect on competition only if  "the effect of
such discrimination may be substantially to lessen competition or tend to create a monopoly, in any
line of commerce, or to injure, destroy, or preven t competition".  The most important thing to note is
that this law concerns not price discrimination itself, but the distortion of market competition causedby price discrimination.  In fact, the US Supreme C ourt said that the distortion of market competition
by price discrimination, which is illegal under competition law, should be judged by the existence of
predatory intent in section 2 of the Sherma n Act (Brook Group Ltd. vs. Brown & Williamson
Tobacco Corp, 1993).  Therefore, price discrimination itself is not unlawful in the US.  Similarly, EU
considers that price discrimination can be caused naturally by such factors as the difference of
                                                     
6 There is some difference in the decisions by the US courts regarding the requirements of marginal
cost and predatory intent. For example, some decisions st ate that sales below marginal cost mean the existence
of predatory intent while other decisions maintain that prices can be below marginal cost even without predatoryintent.
7 Eleanor M. Fox and Robert Pitofsky (1997). "United States" In Global Competition Policy .
Washington: IIE.
8 According to the economi c theory, price discrimination for each customer enables the transfer of
consumer surplus to producer surplus and causes a decrease in consumer surplus (first-degree price
discrimination). In this case, price discrimination does not cause any loss in economic efficiency since netsurplus in a whole economy remains the same as before, with an increase in producer surplus offsetting a
decrease in consumer surplus. Therefore, competition law is not concerned with price discrimination itself
because its objective is the protection of  economic welfare in an entire economy.WT/WGTCP/W/92
Page 5
demand elasticity and geographic conditions and that prices are naturally different in each market.
Therefore, price discrimination itself is generally not against competition law in the EU.9
Injury to Domestic Industries
Another criterion for imposing anti-dumping duties is injury to domestic industries caused by
price discrimination.  However, it should be noted that normal price discrimination which is not
predatory pricing can cause a significant reduction in sales, or injury, as a result of domestic
competition between companies, and that competition law does not regard such competition as illegal.
Thus, anti-dumping measures in such cases merely protect domestic industries from normal foreign
competition, resulting in a restriction in competition in the importing country.10  It goes without
saying that the protection of domestic industries should be achieved basically by tariffs, and thattemporary protection should be provided by safeguard measures, which are the only measures allowed
under the WTO for the protection of domestic industri es.  In fact, anti-dumping measures can exclude
low price sales from the importing country, even when exporters do not have the possibility of
acquiring monopoly power and of raising the prices of their products above competitive prices later.
11
Anti-Dumping Measures Based on the Protected Home Market in the Exporting Country
Attempts are often made to justify anti-dumping measures on the grounds that the exporter
enjoys a protected home market.  However, it is clear that anti-dumping measures do not solve the
problem of market protection.  Economics indicate that it is irrational for private companies to selltheir products below cost in foreign markets without the prospect for future predation profits,
regardless of the existence of monopoly profits in their closed domestic market.  When companies
make monopoly profits in their home market, they will normally prefer keeping them rather than
merely losing them in the export market through below-cost sales.
12
(4) Introduction of A Competition Promoting Perspective into Anti-Dumping Law
Since there is significant doubt about the econom ic validity of the criteria for imposing anti-
dumping measures, the possible action of reforms that will theoretically come out of the above
discussion would be to improve the criteria by introducing the perspective of competition policy.
More specifically, first, the price standard for imposing anti-dumping measures would need to
be average variable costs as in the case of predatory pricing under competition law.  That is to say, the
standard would be whether the export price is below average variable cost.13
                                                     
9 Under the Japanese competition law, price discrimination is illegal if an entrepreneur unfairly
discriminates between regions or trade partners through offering different prices. "Unfair" means pricing with
intent to distort market competition by eliminating competitors aggressively or forcing competitors into asignificantly disadvantageous position and then distorting market competition. ( Joji Atsuya (1997). "Primer ofAct Concerning Prohibition of Private Monopoly and Maintenance of Fair Trade".  Tokyo: Nihon KeizaiShimbunsha.)
10 The CBO's report pointed out that anti-dumping measures are substitutes for other trade barriers to
protect domestic industries.
11 Eleanor M. Fox and Robert Pitofsky (1997). "United States".  In Global Competition Policy.
Washington: IIE.
12 This is consistent with the Chicago's school view.
13 Even an high ex-official of the US government admitted that marginal cost is desirable to use in
assessing exports for anti-dumping measures. (Kenneth Flamm (1996). "Mismanaged Trade: Strategic Policy
and the Semiconductor Industry".  Washington: Brookings Institution.)WT/WGTCP/W/92
Page 6
Second, before imposition of anti-dumping measures, the authorities would need to be
required to prove the existence of predatory intention and the probability of future success in
predation as is required under the US domestic competition laws.
These two requirements will certainly prevent the anti-dumping measures from being abused
and from causing anti-competitive results.
III. CONCLUSION
Anti-dumping law, which, like competition law, was originally intended to prevent predatory
pricing, have now been utilized much more frequently than competition law, with the effect of
protecting domestic industries and restricting competition.  A number of economists also point outthat some trade measures such as anti-dumping and countervailing duties, which are legitimate under
the current trade law, have anti-competitive effects.  Therefore, this Working Group, as well as any
future working group or negotiation group that might develop from it, should cover the effects of
trade law on competition, as well as those of competition law on trade, in order to address these
problems.
Finally, we would like to suggest some issues  for further study.  Although our explanation
above has clearly demonstrated a need for the reform in anti-dumping law from the perspective of
competition law, study on the following issues woul d further clarify the problems and give a better
indication of necessary changes to the current anti-dumping law:
(a) study on anti-dumping cases from the perspective of competition law;(b) case study of competition and anti-dumping rules in regional agreements;
(c) further analysis of the key vocabulary and concepts in trade and competition law.WT/WGTCP/W/92
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ANNEX 1
Difference in Price Comparison Between Anti-Dumping Law and Competition Law
∙ Price discrimination itself is not against the US Competition Law.  Competition Law concerns the distorting effects on market
competition caused by price discrimination.  (More concretely, predation by price discrimination.)
    In proving predatory pricing, the criterion is whether sales price is lower than average variable cost, which is a substitute f or marginal
cost.
∙ Under anti-dumping law, anti-dumping measures will be applied if the export price is lower than the market price in the home c ountry.
(Case 1:  Export price is higher than average variable cost.)
∙ Competition Law:  this case is hardly to be proved as predatory pricing because export price is higher than average variable co st.
∙ Anti-Dumping Law:  if a domestic industry is injured, anti-dumping measures are applied in this case because of the difference  between
export price and domestic price.
(Case 2:  Export price is lower than average variable cost.)
∙ Competition Law:  though export price is lower than average variable cost, the probability for future predation is necessary to  be proved
for predatory pricing.
∙ Anti-Dumping Law:  if domestic industries are injured, anti-dumping measures will be applied.
(Case 3:  Domestic price is lower than export price, but constructed value is higher than export price.  All of these are highe r than average
variable cost.)
         export price ↕
∙ Competition Law:  this case is not predatory pricing because export price is higher than average variable cost.
∙ Anti-Dumping Law:  if domestic industries are injured, anti-dumping measures will be applied because of the difference between  export
price and domestic price (constructed value).
__________average variable cost
average variable cost
average variable costmarket value in
home countryexport price
market value i n
home country export price
market value inhome countryconstructed value
artificial dumping margin