WORLD TRADE
ORGANIZATIONWT/WGTCP/W/87
22 September 1998
(98-3634)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  Spanish
COMMUNICATION FROM VENEZUELA
The following communication, dated 23 July 1998, has been received from the Permanent
Mission of Venezuela with the request that it be circulated to Members.
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Report on the Interaction between Trade and Competition Policy
I. INTRODUCTION
There is a growing consensus regarding the benefits of free trade, both within the context of a
particular economy and in transactions involving agents  based in different countries.  This is evident,
on the one hand, in the now widespread application of competition policies in national markets and,on the other, in the harmonization of regulations governing trade among States, chiefly pursuant to
multilateral agreements.
Free trade cannot function in an institutional vacuum.  It requires a legal framework that will
render it effective by eliminating any public or private barriers that could jeopardize its full force.  In
particular, it is viewed as essential to prevent governmental trade restrictions dismantled in the
liberalization process from being reintroduced through the actions of private agents taking advantageof institutional imperfections to channel a portion of social rents for their own benefit.
Some have added, from a more principled perspective, that in addition to making the social
system more efficient, eliminating trade barriers also responds to ethical considerations having to do
with the exercise of the right to individual economic freedoms.  Thus, trade restrictions not onlyprevent resources in an economy from being allocat ed efficiently, but also make it difficult for
economic rights to be exercised by their legitimate holders in order to take part in economic activity.
A large number of initiatives have therefore arisen, both to reform trade policy and to
implement competition policies in countries where protectionism once held sway.  In this context,more open trade policies and competition policies have come to replace the import substitution
policies and sectoral industrial policies that generally accompanied the State interventionism that
prevailed for decades in the developing countries.
The progressive adoption of policies to liberalize trade, both domestic and international, has
come to reveal inconsistencies between the two that reflect conceptual limitations in public policy-
setting in the economic transition toward more ope n markets.  Those inconsistencies, however, have
not always been detected in a timely manner, partly as a result of current confusion about the ultimate
aim of trade and competition policies.WT/WGTCP/W/87
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Such inconsistencies are based on an erroneous belief that public policies are ends in
themselves rather than means or instruments to achieve pre-established aims.  The discussion of the
relationship between competition and trade policies has therefore placed a spurious and somewhat
superficial emphasis on the supposed contradicti on between the two, rather than examining whether
the institutions entailed by each kind of policy favour or stand in the way of the aims they are meantto achieve.
This paper presents an analysis of trade policy and competition policy in the context of the
economic transition under way in developing countries, as well as the effects of their interaction on
the workings of the market, depending on the final objectives to be achieved.
II. THE RELATIONSHIP BETWEEN THE OBJECTIVES OF COMPETITION POLICY
AND TRADE POLICY
The conception of public policy that prevailed until the 1980s, especially in the developing
countries, held that trade policy and competition policy had opposing objectives.  This was
attributable in part to a perception of competition as an “anti-value” that need not be protected if it led
to “undesirable” resource allocation.  It was widely recognized that competition policy could promotean allocation that ran counter to the aims of public policy perceived as “necessary”, such as protecting
domestic production in politically sensitive sectors and others associated with developing “self-
sufficient” national production capacity.  The import substitution approach to trade policy had been
seen as an effective strategic tool for accomplishing those aims, especially in protecting “emerging
industries” from foreign competition.
The restrictive trade policies applied in developing countries as an expression of the import
substitution model were therefore not accompanied by policies promoting competition, but rather by
policies supporting sectors of national industry considered strategic.  The exceptional occasions when
flexible models of international trade were applied reflected an interest, not in promoting a morecompetitive domestic industry, but rather in making use of a foreign source of supply in sectors where
national industry was incapable of meeting demand.
Similarly, competition policy was guided largely by an interest in protecting competitors
rather than market competition.  Prior to the opening, and despite its market orientation, it was clear
that where such policies were being used as a regulatory instrument they were being patterned around
a clearly protectionist model - if not to protect domestic industry from international competition, atleast to protect small competitors from major corporate interests.  Until the 1980s, competition policy
showed a marked orientation toward protecting competitors.  As a result of the opening, the trend
toward promoting free trade as a way of organizing economic activity also had an influence on  anti-
trust policy.
The 1980s saw a paradigm shift in the role assigned to trade policy in the developing
countries.  The idea took hold that more open trade was essential to promote the development of
national industry as a source of consumer well-being, and that the indiscriminate trade protectionism
of the past had in fact inhibited such industrial development.
The import substitution policies and overvalued exchange rates employed in the less
developed countries gave rise to highly concentrated market structures, particularly in markets for
goods and distribution channels.  In a context where competition was beginning to be appreciated as
an essential social virtue for economic development, the existence of dirigiste industrial policies
began to be questioned as they affected competition in domestic markets, particularly in creatingentitlements and entrenching concentrated markets that did not lend themselves to business rivalry.
Under the influence of this ideological shift, trade and competition policies were no longer
perceived as mutually exclusive or incompatible and began to be viewed as complementaryWT/WGTCP/W/87
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instruments for achieving a common objective, i.e. promoting competition and thereby boosting
efficiency as the basis of economic growth.  In fact, more open international trade very early on
involved exposing local agents to competition from the outside;  hence the perceived risk that local
agents positioned in the domestic market might take advantage of market imperfections known to
them.
In this way, competition policy began to be seen as a way of preventing the benefits of free
trade from being captured by private agents wielding market power.  Competition policy also
underwent changes with the advent of economic opening as an economic development objective in
the developing countries.
Accordingly, it is important to understand that the objectives of trade and competition  policy
have evolved as the economic opening has persuaded public policy makers that it is an objective
capable of generating greater efficiency in economic development in those societies having practised
it than economic autarky and trade protectionism.  But since these changes are not exclusive to trade
policy, the relationship between the aims or objectives of trade policy and those of competition policy
has evolved as well.
It may be inferred from the foregoing that competition and trade policies have no objectives in
themselves .  Public policies enable institutions to be created to achieve certain ends;  they are not ends
in themselves.  The fact that policy objectives are opposing or aligned is therefore not an inherent
problem;  rather that the aims being pursued with their application are or are not coherent.  It istherefore advisable to examine these two branches of policy not as separate entities but in relation to
policy objectives.  In other words, a series of policy objectives must be defined so as to later design
trade or competition policies appropriate to those ends.
To phrase this differently, the problem is not whether (anti-trust) competition policies or
(anti-dumping) trade policies are in themselves compatible or incompatible with a more open
economy.  The dilemma is rather the contrary:  do the existing institutional instruments imposed by
such regulations favour free trade and competition?  The analysis must establish whether the
institutional structure entailed by anti-dumping or anti-trust policies promote free trade or,
alternatively, distort it despite stated objectives.
The discussion is not an academic one, since it is increasingly said that anti-trust policies
should replace anti-dumping policies as regulatory initiatives of international trade, given the latter’s
protectionist nature as contrasted with the former’s stated objective of promoting competition.  This
paper holds that in order to conclude that it is advisable to substitute anti-trust for anti-dumping
regulations a prior determination is required of the effects of both types of policy on the rule of law,
since it is the latter’s stability that ultimately backs investments, ergo the intensity of competition in
an open economy.
No conclusion ought to be drawn on the basis of a superficial reading of formally stated
objectives of anti-trust policy rather than its essential content or its practical effects on individual
economic rights.
III. FREE TRADE AND COMPETITION AS PUBLIC POLICY OBJECTIVES IN AN
OPEN ECONOMY
It is well known that a prerequisite for proper market functioning is the existence of a stable
institutional framework that upholds individual property rights, as a guarantee of more efficientresource allocation and, above all, productive efficiency in markets.  The objectives of these two
public policies ought to be linked to the stability offered by a sound rule of law, for it is this stability
that underwrites productive investments, favours busin ess entry, and stimulates market competition.WT/WGTCP/W/87
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It must be established whether the structure of incentives to economic agents currently
provided by laws on competition and unfair practices in international trade favours a stable allocation
of rights as a public policy objective.  It would then be possible to establish whether it is advisable to
maintain anti-dumping policy as a way of regulating unfair international trade practices, whether it
should be replaced by anti-trust policy, or wh ether a competition policy should be conceived in
completely different terms.
However, given the traditional separation betw een the two approaches taken by trade and
competition policy, a series of inconsistencies have arisen and grown more acute with the advance of
market liberalization, ultimately placing constraints on the very object of promotion.  Inconsistencies
between competition and trade policy come about fo r two reasons.  Firstly, these policies may fail
owing to an inadequate conceptual framework that se es competition in static terms, in the context of
markets that are conceived structurally .  Under this approach, competition is viewed as a by-product
of certain market structures that can be established objectively, regardless of the inner intentions of
the actors taking part in the market.  Secondly, friction can arise between them at a level that is much
more basic – that of the application of mechanisms to enforce them in the context of public policy
making the transition from protected markets to open markets.
At present the predominant view is that competition and free trade must be promoted to
favour economic efficiency and consumer well-being as a matter of public interest.   Systems to protect
competition have been put in place in the form of   both anti-trust agencies chiefly overseeing the
domestic market and anti-dumping agencies overseeing international trade.
The introduction of anti-trust and anti-dumping legislation evidences the growing interest of
public policy makers in promoting a market economy in areas previously dominated by State
intervention, through less discretional protection mechanisms subject to more effective accountability.
What was once understood as a group of policies with opposing objectives is now viewed as a series
of complementary mechanisms.  This also reflects a concern with avoiding trade restrictions andpromoting increasingly free trade.
Clearly, the dominant trend is not exactly to suppress market regulation but rather to
substitute policies promoting efficiency in production and allocation for sector policies with
redistributional effects, as the best means of generating economic growth.  Under this vision which
prevails today, the market system - and competition as its expression in the organization of economic
activity - must be promoted.  However, it is recognized that market imperfections exist and ought tobe prevented and corrected through regulatory intervention.
Legislation against unfair practices in international trade can be seen as a by-product of the
normative implications of an analysis carried out under anti-trust regulations.  An emphasis on
protecting national competitors from cut-rate pricin g is an application to international trade of the
concept of exclusion by market predation, a familiar concept in anti-trust literature.  In both cases, the
logic imposed by the notion of market imperfection justifies the intervention.  In the face of a practice
caused by the monopolistic power of the predatory en terprise, some type of intervention mechanism is
needed to prevent the “unfair” practice from achieving its aim.
Despite the clear trend toward putting market systems in place, a series of inconsistencies
have arisen in prevailing provisions protecting international competition which run counter to the
spirit of such initiatives.  In particular, the protectionist application of anti-dumping provisions would
seem to indicate the existence of fundamental problems in the conception of this body of regulations,
which have led in practice to a new non-tariff barrier to international trade.
The question then arises whether, in view of this situation, it would be advisable to eliminate
such provisions so as to eliminate a source of trade protectionism.  A further question is how practices
that run counter to competition in international trade should be handled.  Some hold that theWT/WGTCP/W/87
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administrative discretionality favoured by anti-dumping provisions could be held in check or
diminished through the use of a more meticulous, detailed, and rigorous economic analysis as
provided for under anti-trust policy.  Moreover, anti-trust provisions make it possible to tackle other
supposed market imperfections in addition to market predation which are now regulated by anti-
dumping provisions.  This approach therefore advocates gradually substituting anti-trust provisionsapplicable to international trade for anti-dumping provisions.
Before rushing to conclusions as to the kind of public policy that ought to prevail in order to
regulate imperfections in international competition, however, we must first carefully define the
phenomenon subject to regulation.  Needed first of all is an adequate definition of the concept of
competition , so as to specify unequivocally the object of regulatory protection.  Secondly, it is
essential to design trade policy and competition mechanisms consistent with that definition and assesswhether existing mechanisms in fact achieve that end.   Finally, in connection with the need to achieve
international regulation it must be recognized as an inevitable fact that such criteria must be flexible
and take into account that public policy needs differ among countries.
IV. COMPETITION IN BEHAVIOUR BY ENTERPRISES IN THE MARKET:  FROM A
STATIC VISION TO A DYNAMIC VISION OF COMPETITION AS A MARKET
PHENOMENON
There is no single definition of economic competition in economic theory, but there is a more
or less standard vernacular notion of what it im plies:  innovation, rivalry, ability to overcome
obstacles, and the possibility of reducing costs associated with producing or marketing a good orservice.
That vernacular notion of the competition phenomenon, however, is not consistent with that
of conventional economic theory, which has built up a vision of competition dominated by what could
be called a structural bias.  Under this paradigm, markets are perceived as more or less concentratedstructures which dictate the terms whereby participating actors are to behave, including naturally their
ability to compete.
In anti-trust theory this vision has been captured in the so-called “structure-behaviour-
performance paradigm”.  It must be borne in mind that this paradigm does not exist in a single or
exclusive form;  on the contrary, cumulative empirical evidence has moulded successive versions of
the paradigm from the initial rigid structural positions - where market structure was seen as anabsolute determinant of  competitive enterprise behaviour - toward more flexible structural versions
where the ability to compete is increasingly brought back, in dynamic terms, to strategic behaviours of
enterprises rather than the structure of the markets where they interact.
Expressed differently, and to avoid semantic confusion, dynamic assessments of markets and
competition viewed under the structure-behaviour-performance paradigm - although they introduce a
concern with making competition models more dynamic in order to capture the workings of strategic
elements of business decision-making, and therefore represent a major step forward from the more
rigid versions initially put forward - present a certain conceptual continuity that makes them part of
the same paradigm as the structural models.  That continuity is expressed, in the various versions ofthe paradigm, in the idea that market participants  have all the information that determines the
behaviour of others (perfect or full information) or, even if they do not, that it can be included in
business calculations as one more production cost (information asymmetry) that could be eliminated
by designing the proper incentive models for strategic behaviour by agents.  Thus, in both structural
models and dynamic models of competition the picture painted by conventional economic theory is astatic one, in the sense that it anticipates the behaviours of all agents and does not visualize their
business behaviour in the market as an evolving process in constant flux, as it actually presents in
reality.WT/WGTCP/W/87
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Conventional economic theory therefore takes bus iness competition some distance away from
an economic analysis of markets in its vernacular manifestation , i.e. as an effort by agents to describe
new and hitherto unknown information that will enable agents to take market share from other agents
through innovation, cost reduction, new techniques, and so on.  In assuming full (perfect or
symmetrical) knowledge of agents in the market, economic theory has prevented the analysis frombeing centred around the competition process which causes enterprises to undertake a search for new
information.  It has been replaced in conventional economic theory by models that take information
for granted, either in models of “perfect competition” (based on full information) or models of
“imperfect competition” where agents’ information may be asymmetrical but is assumed equally.
The neoclassical approach that prevails in economic theory therefore can only capture
competition in a static sense, and fails to apprehend the evolving process whereby new businessopportunities are created and tapped.  That is precisely the essence of competition as it is known to all
beyond the structure-behaviour-performance paradigm of neoclassical economic theory.  It is
precisely this feature of markets in the real world that is the source of economic progress attributed to
markets.  Accordingly, the policy implications derived from both the anti-trust approach and the
traditional anti-dumping approach could collude w ith promotion of the market system and business
activity.
The public policy paradigm whereby the market mechanism presents imperfections that  must
be corrected through public intervention that will subsequently serve as a basis for anti-trust and anti-
dumping legislation, needs to be complemented - both in theory and in practice - in order to lay thegroundwork for regulation with any likelihood of success.
V. FROM CONCEPTUAL EVALUATION TO THE DESIGN OF POLICIES TO
PROMOTE INTERNATIONAL COMPETITION
In their current manifestations, both approach es to regulation, being inspired by a similar
conceptual paradigm, have major failings that could jeopardize efficient market performance by
punishing the wrong parties, thereby favouring government intervention with adverse effects on the
market.  The theory underlying conventional market analysis assumes that the economic analyst
possesses all relevant information and the means to correct market imperfections.  In practice, it is not
always possible to understand the true workings of a market;  thus the information constraints faced
by governmental agents must be taken into account in designing regulations to promote competition.
When adopting policy measures to promote free markets, it is essential to avoid the fallacy thatadministrative entities are always capable of correcting market failings.
In other words, the analysis underlying such legislation, despite allowing for market
imperfections, would appear to neglect the government failings that may colour State intervention.  In
terms of competence, such failings in State interven tion can be expressed in a simple idea:  the greater
the administrative discretionality, the greater the disincentive for competence.  The principles of
traditional analysis therefore give rise to concepts that can only be determined vaguely and equip
administrative entities with an undesirable amount of discretionality.  Accordingly, a policy
promoting business competence in both domestic and international markets, must above all eliminate
such administrative discretionality or subject it to effective control.
In institutional structures favoured by anti-dumping and anti-trust policies, exactly the
opposite occurs:  a “prisoner’s dilemma” type of behaviour prevails among trading States whereby
national governments have an incentive to use such discretionary principles as a kind of veiled
protection for national enterprises.
Calculations of cost-price  margins pursuant to anti-dumping and anti-trust regulations can
easily be interpreted arbitrarily by an authority.  In the case of anti-dumping regulations, this analysis
gives the national administrative authority discretionality in judging costs at whim to “find” aWT/WGTCP/W/87
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dumping margin that justifies taking corrective steps.  But such an analysis, under anti-trust
regulations, will also give the anti-trust authority discretionality to “find” restrictions on competition
among international enterprises, which often appear in a dominant position vis-à-vis  their local
competition.  In both cases, the authority will have every incentive to protect national industry without
its behaviour being subject to effective control by a third party representing consumer interests.Replacing these regulations with anti-trust regulatio ns does not solve the problem of discretionality in
“finding” an unfair or restrictive practice, as applicable, since the economic determination that gives
rise to assigning legal liability for such behavi our is always exclusively the judgment of the
administrative authority.  This is a serious problem in safeguarding the public interest.  On the one
hand, the trade or anti-trust authority will tend to be guided by its own interests and political
commitments, which may or may not coincide with safeguarding the public interest.  On the other, it
will lack instruments to determine legal liability  with precision, given that it is impossible to
anticipate information to be generated by the market through competition (whereby it would be
possible to determine that a particular behaviour, by preventing this, is unfair).
Methodologies used to enforce these regulations must therefore include not only the effects of
anti-competitive practices but also the predictable consequences of actions by organizations with amandate to prevent them.  In this sense, any anti-trust and anti-dumping analysis should be performed
under the principle of comparative institutional analysis, seeking out institutions that provide greater
transparency and legal assurances and ruling out those that favour unexpected behaviours that affect
market agents, their investments, and therefore their ability to compete.  This prevention presupposes,
on the one hand, ensuring that governmental agents do not exercise indiscriminate administrativediscretionality, and on the other, preventing private agents from breaking promises concerning market
exchanges on which other economic agents may base legitimate expectations.
A policy promoting international competition should therefore consider coordinates other
than those which inspired administrative intervention stimulated by anti-dumping and anti-trustpolicies.
The problem of information constraints must therefore be considered as a whole, i.e. both
from the perspective of public officials who cannot possess all the information to undertake “optimal”
regulation, and from the perspective of market partic ipants who inevitably face uncertainty in carrying
out their economic activities.  Building a framework for analysis of anti-competitive practices based
on models assuming full information on the part of all agents can result not only in a failure topromote competition but also in effects that counteract it.
Competition must be understood as a continuing process of business innovation.  Innovation
should not, however, be understood in the restricted sense of scientific inventions.  An alert
entrepreneur can detect a business opportunity simply by discovering a hitherto unperceived pricedifferential.  Such restrictions on information held by agents lie at the heart of the market process and
entrepreneurial activity.
A policy that assumes perfect information will entail regulations to “correct” these gaps in
information.  By so doing, sanctioning agents exploiting information asymmetries, it generatesdisincentives to entrepreneurial activity.  On the other hand, a policy that assumes that information is
always insufficient should be directed toward seeking out mechanisms that ensure it in favour of those
who have discovered it and are able to create an environment to create new information not yet
discovered.
This rationale can be extended to problems considered by an anti-trust policy.  Parallel
behaviour, horizontal agreements, or agreements apportioning markets can be a response to market
uncertainty.  These agreements are not in themselves necessarily the result of a monopolistic intent,
which can be inferred only if markets are seen as static structural compartments where rivalry depends
on the number of agents acting independently.  On the contrary, in markets subject to constant changeWT/WGTCP/W/87
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the essential point in establishing the existence of competition is whether any agent is prevented from
or limited in exploiting opportunities provided by gaps in information that cannot be exploited by
others.  This may eventually lead to collaboration from other competitors, and it would therefore be
absurd to read a monopolistic intent into such collaboration.
The foregoing does not mean that any State intervention is intrinsically at variance with
promoting business competition.  On the contrary, markets and competition can only function
efficiently within a system of clearly defined property rights.  The public authorities’ main
responsibility is therefore to define them properly.
We have endeavoured to show here, grosso modo, why agencies protecting against “unfair
competition”, by safeguarding the public interest  or social efficiency  in markets, can give rise to a
series of restrictions on competition that are in compatible with promoting the market system and,
paradoxically, the benefits that consumers can expect to reap from the system.  In fact, such
inconsistencies may sometimes give rise to phenomena that have the opposite effect to objectives
pursued by competition regulations.
Thus, the frictions generated by the current pro-competition systems may cause shortcomings
of various kinds.  A system therefore needs to be established which takes account of the
entrepreneurial view of competition and enables it to be carried into practice.
The best yardstick for establishing whether institutional frameworks are in conflict with the
idea of market is whether they favour a situation that encroaches upon individual economic rights or
rather reinforces them and makes them more predictable.  Needed, then, is a precise definition of State
mandates and the reach of public action within the individual economic sphere.
VI. THE DIFFICULTY WITH HARMONIZING INTERNATIONAL REGULATIONS
PROMOTING COMPETITION
To forestall such frictions, a number of proposals have been put forward that attempt to
harmonize free trade regulations.  The problem is, however, that policy objectives are in many
respects determined by the situation faced by each country.  Rather than undertaking a full
harmonization of regulations to protect free competition, it is advisable to design a chapter to interpret
inconsistencies among regulatory systems.  Their design should be based on a definition of
competition that is consistent with the features of innovation in business competition.
As a prerequisite for any multilateral system of regulations to protect free competition, the
definition of practices restricting competition must include actions by the State generating targeted
advantages which normally do not respect the principle of equal treatment.  This includes designing
sanctions to be imposed on public agencies when they generate rights leading to the exclusion ofcompetitors, either through business subsidies or through the actions of State monopolies.
In view of the foregoing, it is easy to understand why, beyond negotiating merely procedural
matters, it is so difficult to harmonize standards promoting competition.  A substantive determination
of what is to be understood as “unfair”, “restricting competition”, or “anti-competitive”, cannot beperformed satisfactorily for all parties concerned.
The harmonization of regulations, given the inevitable differences in policy objectives, should
in addition to the interpretative chapter mentio ned, be limited to standardizing administrative
procedure.  This covers time frames provided for, procedural guidelines and, in particular, assurancesof the right to defence for those administered.
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