WORLD TRADE
ORGANIZATIONWT/WGTCP/W/99
25 September 1998
(98-3720)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 15 September 1998, has been received from the
European Community and its member States with the request that it be circulated to Members.
_______________
On the relationship between the trade-related aspects of intellectual property rights
and competition policy, and between investment and competition policy
PART I:  THE RELATIONSHIP BETWEEN THE TRADE-RELATED ASPECTS OF
INTELLECTUAL PROPERTY RIGHTS AND COMPETITION POLICY
Introduction
1. The relationship between intellectual property rights and competition including competition
policy has been at the centre of policy debates for many years.  The trade dimension of this discussion
was at the heart of the negotiations in the Uruguay Round that led to the conclusion of the Agreementon the trade-related aspects of intellectual property rights (TRIPS).
2. It is generally recognized today that the  protection of intellectual property rights, which will
necessarily provide exclusivity, mostly time-limited, to their owners, will enhance expansion and
welfare of an economy.  Exclusive rights stimulate R&D and innovation and hence growth.  The core
rationale for their protection is that they tend to create a dynamic efficiency that is pro-competitiveand outweighs any short term allocative efficiency  gains that might exist in the absence of such
protection.
3. Like other areas, however, the exercise of intellectual property rights should be fully subject
to the respect of competition laws.  This is the case in the European Union where the competition
Articles 85 and 86 of the EC Treaty apply
1, as well as the EC's merger regulation which was adopted
                                                     
1 Article 85 EC Treaty
(1) The following shall be prohibited as incompatible with the common market:  all agreements
between undertakings, decisions by associations of undertakings and concerted practiceswhich may affect trade between Member States and which have as their object or effect theprevention, restriction or distortion of competition within the common market, and inparticular those which:(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;WT/WGTCP/W/99
Page 2
in 19892.  All the same, it is to be noted that an exclusive right allowing its holder to forbid
infringements will in itself not give rise to an abuse of market power, as this depends, like in other
cases, on the availability and market share of similar or substitutable products and on the behaviour of
the right holder.
4. Regarding the trade-related dimension, a number of countries have in the past sought to
regulate the presence of foreign companies on their markets through the adoption of special transfer of
technology or other requirements in their foreign investment laws or regulations.  The effect of such
laws and regulations could for example be to provide for the transfer of certain IP rights to a joint
venture, thus enabling a domestic partner to benefit from the technology contributed by the foreign
firm seeking to establish itself on the market.
5. Such ex ante  screening has become less widespread today.  This is in part because the laws
have been felt to have had a dissuasive effect on the attraction of foreign investment and technology.It is also because other instruments such as com pulsory licensing in the field of patents, although
infrequently used and subject to the respect of specif ic conditions, are available.  This is also the case
if a government or a third party authorized by the government seeks to use the subject matter of a
patent without authorization of the right holder.  Lastly, it is widely recognized today that competition
                                                                                                                                                                    
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage;(e) make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their natu re or according to commercial usage, have no
connection with the subject of such contracts.
(2) Any agreement or decisions prohibited pursuant to this Article shall be automatically void.(3) The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
- any agreement or category of agreements between undertakings;
- any decision or category of decisions  by associations of undertakings;
- any concerted practice or category of concerted practices;which contributes to improving the production or distribution of goods or to promotingtechnical or economic progress, while allowing consumers a fair share of the resulting benefit,and which does not:(a) impose on the undertaking concerned restrictions which are not indispensable to the
attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a
substantial part of the products in question.
       Article 86
Any abuse by one or more undertakings of a dominant position within the common market or
in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may
affect trade between Member States.
Such abuse may, in particular, consist in:(a) directly or indirectly imposing unfair purchase or selling prices or other unfair tradingconditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, therebyplacing them at a competitive disadvantage;(d) making the conclusion of contracts subject to acceptance by the other parties ofsupplementary obligations which, by their natu re or according to commercial usage, have no
connection with the subject of such contracts.
2 See Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations
between undertakings.WT/WGTCP/W/99
Page 3
law and policy, which generally operates ex post3, can be an effective and less costly and cumbersome
instrument, if a possible abuse of intellectual property rights needs to be addressed.
6. In general, the TRIPS Agreement would appear to enhance the case for countries seeking to
protect themselves against anticompetitive abuses of intellectual property rights, to enact a
competition law and establish an independent and effective competition authority.  Specifically, in thefield of anticompetitive practices in contractual licences the TRIPS Agreement provides that measures
may be adopted to prevent them, including for example exclusive grantback conditions, conditions
preventing challenges to validity and coercive package licensing.  The TRIPS Agreement, lastly,  also
encourages  Members to cooperate with each other to tackle anticompetitive practices, within the
limits set by their domestic laws and depending on the conclusion of mutually satisfactory bilateral
cooperation agreements.
7. More generally, it may be noted that the TRIPS Agreement does recognize that WTO
Members may limit the exclusive nature of an IP right for reasons unrelated to competition policy,
and this is in fact one of the central balancing factors in the overall agreement. In the field of
copyright, for example, domestic legislation may permit exceptions to the exclusive right of an owner,
e.g. for teaching purposes and private use
4.  Likewise in the field of patents, inter alia  surgical,
therapeutic or diagnostic methods for the treatment of humans or animals, may be excluded frompatentability.
5  Generally, a patented invention may be used for further research.  Members may also
provide for the use of a patent by a third party through compulsory licensing, i.e. without
authorization of the right holder, provided a number of conditions are fulfilled6.  Members may also
provide for limited exceptions to the rights conferred by a trademark.7
8. These different examples demonstrate that the exclusive nature of an IP right can be subject to
a number of limitations distinct from the competition objective of protecting IP rights and combatting
anticompetitive practices.
9. This part of the EC contribution is divided into two parts: first, a description is made of the
broad structure of the TRIPS Agreement.  This is followed by an overview of how competition law is
applied to the exercise of intellectual property rights in the EC.
I. THE INTERACTION BETWEEN TRADE-RELATED ASPECTS  OF
INTELLECTUAL PROPERTY RIGHTS AND COMPETITION POLICY IN THE
TRIPS AGREEMENT
10. The TRIPS Agreement  is one of the three pillar Agreements of the WTO.  By establishing
these rules WTO Members have agreed on the need both to promote effective and adequate protection
of intellectual property rights and to ensure that measures to enforce IP rights do not themselves
become barriers to legitimate trade8.  The TRIPS Agreement lays down minimum standards of
protection in the area of intellectual property, including the enforcement of such rights, for all WTO
Members.  It comprises copyright and related rights, trademarks including service marks,
geographical indications, industrial designs, patents (including the protection of new plant varieties)
and layout-designs of integrated circuits.  A key feature of these rights is that they are confined to a
territory and generally limited in time, and allow for limited exceptions to the rights conferred.
                                                     
3 In the field of mergers pre-merger notification is necessary to avoid the possibility of having to
reverse the concentration if it should be considered to have anticompetitive effects.
4 See Article 13 TRIPS.
5 Article 27 TRIPS.
6 See Article 31 TRIPS Agreement. While the legislations of nearly all WTO Members include such
public interest provisions, they have been rarely used.
7 Article 17 TRIPS.
8 See the Preamble to the TRIPS Agreement.WT/WGTCP/W/99
Page 4
11. The TRIPS Agreement also contains provisions with respect to the protection of undisclosed
information and the control of anti-competitive practices in contractual licences.  Finally, the
Agreement establishes the principles of national treatment and MFN.
Copyright and related rights
12. Copyright deals with the exclusive rights of creators with respect to all forms of creativity (for
the lifetime of the author plus 50 years9).  To be protected, a creator's work must be original.
Copyright is concerned with all forms and methods  of public communication, in writing or via sound
and television broadcasting, films or computerized systems.  It protects the creator against those who
copy his/her works without his/her consent.  Copyright law, however, protects only the form of
expression of ideas (books, paintings, drawings, musical works, motion pictures etc.), not the ideas
themselves.
13. "Related rights" deal with the protection of those who disseminate or communicate the
original works to the public, i.e. the rights of performing artists, of producers of sound-recordings
(both for 50 years) and of broadcasti ng organizations (for 20 years).
14. Certain uses are permitted without authorization of the right holder (see above under 7).
15. Trademarks, including service marks.  Any sign or any combination of signs, capable of
distinguishing the goods or services of one undertaking from those of other undertakings in the same
territory, shall be capable of constituting a trademark or service mark.  The rights conferred by a
trademark depend on its registration, i.e. only the owner of a registered trade/service mark has the
exclusive right (for at least 7 years, renewable) to prevent all third parties not having the owners
consent from using, in the course of trade, identical or similar signs for goods or services which are
similar or identical to those in respect of which the trademark is registered.  In addition, such use hasto result in a likelihood of confusion of the consumer.
10
Geographical indications
16. Geographical indications are indications which identify a good as originating in the territory
or region or locality in that territory, where a given quality, reputation or other characteristic of the
good is essentially attributable to its geographical origin.  They  are  protected against use whichwould mislead the public or constitute an act of unfair competition.  An exception from protection
exists e.g. in cases where a geographical indication has become a generic term.
Industrial designs
17. An industrial design is the ornamental or aesthetic aspect of a useful article which must be
reproducible by industrial means.  In order to be protectable, an independently-created industrial
design must be new or original.  Designs dictated essentially by technical or functional considerations
may be exempted from protection.
18. The owner of a protected design has the exclusive right (for at least ten years) to prevent third
parties from making, selling or importing articles bearing or embodying a design which is a copy of
the protected design when such acts are undertaken for commercial purposes.
                                                     
9  Countries may apply longer terms. A 70 year term applies in the EC.
10 An exception applies for famous marks.WT/WGTCP/W/99
Page 5
Patents
19. Patents shall be available for inventions in al l areas of technology a nd without discrimination,
provided they are new, involve an inventive step and are capable of industrial application.  A
significant possibility exists to exclude from patentability plants and animals other than micro-
organisms and for essentially biological processes for the production of plants and animals other thannon-biological and micro-bi ological processes.  Compulsory licensing and government use (without
the authorization of the inventor) are possible, but ma de subject to conditions to protect the interest of
the right holder.  The exclusive right is granted for 20 years.
Layout-designs of integrated circuits
20. These are neither industrial designs, because they do not determine the external appearance,
nor patentable inventions because their creation does not require an inventive step.  Therefore, aspecial kind of protection is required:  the TRIPS Agreement provides for the protection of
layout-designs for ten years.
Undisclosed information
21. The protection of undisclosed information takes care of the need to protect trade secrets and
know-how because of their commercial value.  A person lawfully in control of secret information with
a commercial value must have the possibility of preventing it from being disclosed to, acquired by, or
used by others without his/her consent in a manner contrary to honest commercial practices.
Furthermore, undisclosed test and other data which have to be submitted in the context of obtaining
marketing approval for pharmaceutical and agricultural chemical products, are protected againstunfair commercial use.
The control of anticompetitive practices in the TRIPS Agreement
22. Extensive discussions took place during the Uruguay Round concerning the relation between
the development of a framework of rules to protect IP rights on the one hand, and the option ofincorporating provisions to prevent holders possibly abusing their rights, on the other.  The TRIPS
Agreement in its final version does not include a set of precise obligations subjecting the exercise of
IP rights to the application of competition law principles.  However, the right of Members to enact
legislation to ensure that the exercise of IP rights is subject to competition law principles, is fully
recognized
11.  The TRIPS Agreement also includes, in the field of contractual licences, an obligation
on Members to cooperate with each other through consultations if a potentially illegal practice is
being investigated.  Such cooperation would of course take place within the limits set by the domesticlaw of countries and the conclusion of bilateral cooperation agreements that may allow, inter alia, for
the exchange of information between Members.  It should be added, nonetheless, that international
cooperation in specific cases has been relatively modest.  This is probably in part because only a few
countries have developed bilateral cooperation agreements.
Enforcement
23. The protection of intellectual property depends to a large degree on the ability to enforce such
rights.  The enforcement part of the TRIPS Agreement is therefore key to an effective system of
intellectual property protection.  It provides for domestic civil and administrative procedures and
remedies as well as border measures, the latter at least against imports of counterfeit trademark andpirated copyright goods.  If counterfeiting and piracy take place on a commercial scale, the TRIPS
Agreement provides that criminal procedures should also be available.
                                                     
11 See Articles 8 and 40 of the TRIPS Agreement.WT/WGTCP/W/99
Page 6
24. The TRIPS Agreement, like many other WTO Agreements in their respective fields, therefore
fully recognizes that competition law can be a valuable tool to support a proper and pro-competitive
exercise of intellectual property rights.
25. The protection of intellectual property rights and the application of competition law principles
are therefore ensured through similar, and often complementary, processes.  Both provide for civilprocedures for private complainants seeking redress against forbidden practices.  Equally, however,
both also require the support of administrative action to ensure that the domestic law is upheld in an
objective, non-discriminatory and transparent way and to enable that illicit practices can be
uncovered.
II. EC EXPERIENCE ON THE APPLICATION OF COMPETITION LAW  IN
RELATION TO THE EXERCISE OF INTELLECTUAL PROPERTY RIGHTS
26. Under Community law
12, a distinction is made between the existence and the exercise of an
intellectual property right (IPR).  The existence of an IPR is not prejudiced by the Treaty.  Article 222
states that the Treaty shall in no way prejudice the rules in Member States governing the system of
property ownership.  However, the exercise of such a right is subject to the competition rules (Articles
85 and 86 of the Treaty) and the rules on the free movement of goods (Articles 30 and 36) and
services (Article 59).  This paper will limit itse lf to examining the application of the competition
rules.
I. Rules relating to Horizontal and Vertical Agreements
27. Anticompetitive practices arising from the transfer or the granting of a licence are subject to
the competition law framework relating to horizontal or vertical agreements.  Licensing agreements
among competitors would be of particular concern if they result in a sharing of a market or alimitation of output or price fixing.  Vertical agreements may also, under certain circumstances, give
rise to competition law concerns.
(a) Transfer of intellectual property rights
28. The transfer of an IPR is not in itself a breach of competition law.  Such a breach can only be
found  if the transfer was the subject, the means or the consequence of an anti-competitive
arrangement13, e.g. if the transfer was intended to consolidate a market-sharing arrangement14.
(b) Granting a licence
29. The granting of a licence does not  infringe competition law.  It can even stimulate
competition as it allows the number of competitors to be increased.
30. In view of its market integration objectives, a specific concern under EC competition law has
been to avoid the exercise of intellectual prop erty rights resulting in the segmentation of the
Community market by preventing competition from parallel importers once a product has been
lawfully marketed, with the consent of the right holder, within the Community.  Article 85 applies
only to exclusive "closed" licences (where the parties "propose, as regards the products and the
territory in question, to eliminate all competition from third parties, such as parallel importers or
                                                     
12  For trademarks: Court of Justice judgements in Grundig v Consten  [1986] ECR 299; and in Sirena
[1971] ECR 69.  For patents: judgement in Parke Davis [1968] ECR 55.
13 Judgement in Sirena [1971] ECR 69, paragraph 9.
14 Judgement in  Ideal Standard  [1994] ECR I2789, paragraph 59.WT/WGTCP/W/99
Page 7
licensees for other territories"15) and not to "open" exclusive licences ("the exclusivity relates solely to
the contractual relationship between the owner of  the right and the licensee, whereby the owner
merely undertakes not to grant other licences in respect of the same territory and not to compete
himself with the licensee on that territory"16).  This position is aimed at encouraging licensees to
accept the risk linked with operating a licence invo lving a new technology by protecting them against
competition from other licensees or the owner in the licensed territory.  It was originally adopted for
new plant varieties17, then extended to other industrial property rights.
31. In accordance with the general ban on fixed minimum prices, the owner of an IPR cannot
impose certain prices or margins on licensees.
32. In principle, restrictions on exports outside the EC imposed on European patent, know-how or
trademark licensees will not normally have an appreciable effect on competition within the
Community and on trade between the Member States, and therefore fall outside the scope of
Community competition law.
33. The Community authorities consider that certain categories of technology transfer agreements
(terms which cover both patent and know-how lic ences) contribute to improving the production or
distribution of goods or to promoting technical or  economic progress.  Thus, under the competition
rules18, such agreements do not have to be notified, nor are they prohibited under Article 85(1) if they
comply with the conditions set out in the Regulation of 31 January 1996 on technology transfer
agreements.
Regulation of 31 January 1996 on technology transfer agreements
The Regulation on technology transfer agreements exempts from the ban in Article 85(1) a number of
restrictive clauses, for example, an obligation on a licensee:
• not to exploit the technology in territories reserved for the licensor;
• not to market the product in territories reserved for other licensees during five years after the
first marketing of the product;
• to limit production and sale of the product to what the licensee requires as input for his own
product.
The Regulation is not applicable to agreements containing a "black clause", for example:
• if a resale price has been imposed;
• if one or both of the parties are required, without any objectively justified reason, to make it
difficult for users or resellers to obtain the products from other resellers within the common market.
The Regulation is applicable to all agreements which have effects within the common market,
including agreements for non-member countries or for territories which extend beyond the frontiers of
the Community but have effects within the common market.
                                                     
15 Judgement in Nungesser (maize seed) [1982] ECR 2015, paragraph 53.
16 Judgement in Nungesser (maize seed) [1982] ECR 2015, paragraph 53.
17 Judgement in Nungesser (maize seed) [1982] ECR 2015, paragraph 57.
18 Such agreements must allow consumers a fair share of the resulting benefit and must not impose on
the undertakings concerned restrictions which are not indispensable, or afford such undertakings the possibility
of eliminating competition in respect of a substantial part of the products in question.WT/WGTCP/W/99
Page 8
II. Rules relating to Abuse of a Dominant Position
(a) The dominant position
34. The exclusive right conferred on the owner by an intellectual property right is not in itself
sufficient to determine the existence of a dominant position.  The Court of Justice considers that the
proprietor should also "have power to impede the maintenance of effective competition over a
considerable part of the relevant market, having regard in particular to the existence and position of
any producers or distributors who may be marketing similar goods or goods which may be substituted
for them"19.  However, an exclusive right is one of several factors contributing to a dominant position.
(b) The abuse
35. The Court of Justice considers that the exercise of an intellectual property right is not contrary
to Article 86 solely because it is held by an undertaking with a dominant position20.  On the other
hand, Article 86 will be applicable if the right is used to abuse a dominant position21.  For example:
Abnormally high prices
36. The price of goods is not necessarily an indication of abuse22, as an owner may legitimately
claim remuneration for the expenditure incurred in acquiring the right23.  In general, abnormally high
prices originate from an impediment, either strategic or of a regulatory nature, to enter the market.  Insuch circumstances the problem can usually best be addressed by intervening against possibly
unjustified barriers to entry.  Only in exceptional circumstances should abnormally high prices be
considered as an abuse in themselves.
Discrimination
37. The Court of Justice has held that a national copyright management society holding a
dominant position in a substantial part of the common market imposed unfair trading conditions
where the royalties which it charged to discotheques were , without objective justification,  appreciably
higher than those charged in other Member States , the rates being compared on a consistent basis24.
38. The Commission has also considered that a dominant position had been abused where a
royalty was charged for imports into Germany of a certain product from other Member States
although a royalty had already been paid on this product.  In other words, when this product was
imported or re-imported into Germany by retailers it was subject to two royalty payments, whereas
when  it was distributed direct in Germany by the manufacturers it was  liable only once to payment
of the royalty25.
                                                     
19 For trademarks: judgement in Sirena [1971] ECR 69.
20 For trademarks: judgement in Hoffmann La Roche [1978] ECR 1139, paragraph 16; judgement in
EMI  [1987] ECR 811, paragraph 21.
for copyright: judgement in Basset v Sacem [1987] ECR 1747.
21 Judgement in Hoffmann La Roche [1978] ECR 1139.
22 For patents: judgement in Parke Davis [1968] ECR 55.  For trademarks: judgement in Sirena [1971]
ECR 69.  For copyright: judgement in Deutsche Grammophon [1971] ECR 487, paragraph 19.
23 For patents: judgement in Renault [1988] ECR 6039.
24 Judgement in Sacem [1989] ECR 2521.
25 Commission Decision of 2 June 1971, OJ No L 134, 20.6.1971.WT/WGTCP/W/99
Page 9
Refusal to grant a licence
39. A refusal to grant third parties, even in return for a reasonable royalty, a licence to supply
products incorporating a protected design, does not in itself constitute an abuse of a dominant
position.  Additional elements are required, such as: the fact that the holder is neither working thepatent itself, nor allowing others to do so (under licence), thus withholding important technical
progress from the public against the public interest; unfair sales prices, discriminatory sales
conditions
26.
The Volvo / Veng case:
Volvo, the proprietor in the United Kingdom of a registered design for the front wings of Volvo series
200 cars, instituted proceedings against Veng before a national Court for infringement of its sole and
exclusive rights: Veng imported the same body panels, manufactured without authority from Volvo,
and marketed them in the United Kingdom.
Asked for a preliminary ruling, the European Court of Justice decided that the refusal by the
proprietor of a registered design in respect of body panels to grant to third parties, even in return for
reasonable royalties, a licence for the supply of parts incorporating the design cannot in itself be
regarded as an abuse of a dominant position within the meaning of Article 86.
However, the Court also stated that the exercise of an exclusive right by the proprietor of a registered
design may be prohibited by Article 86 if it in volves, on the part of an undertaking holding a
dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to
independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to
produce spare parts for a particular model even though many cars of that model are still in circulation,
provided that such conduct is liable to affect trade between Member States.
40. In Magill,  the Court of Justice acknowledged that the exercise of an exclusive right by its
proprietor could, "in exceptional circumstances", constitute abuse of a dominant position27.
The Magill Case :
In Irish law, television broadcasters held the copyright to the schedules of the programmes they
broadcast.  They therefore considered they were entitled to prohibit an independent publishing
company from reproducing their weekly programmes in a guide listing all television broadcasts
received in Ireland28.
The Court, however, considered that the refusa l constituted an abuse of a dominant position:
– Each broadcasting company held a dominant position on both the market represented by its
weekly programmes and the market for the magazines in which they were published;
– The refusal constituted an abuse as it prevented the marketing of a new product for which
there was a potential demand on the part of consumers, thus eliminating all competition for
the sole purpose of maintaining the monopoly of the broadcasting companies.
                                                     
26 Judgements in Renault [1988] ECR 6039 and Volvo  v Veng [1988]  ECR 6211.
27 Judgement in Magill [1995] ECR 808.
28 The refusal could also, a priori , have been based on Article 36 of the Treaty: national import
restrictions, prohibited in principle by Article 30, may be justified under Article 36 on grounds of the protection
of industrial property.WT/WGTCP/W/99
Page 10
III. Rules relating to Mergers
41. Under the Council regulation No. 4064/8929 of 21 December 1989 on the control of
concentrations between undertakings, a concentration is deemed to arise, inter alia, when one or more
persons acquire direct or indirect control of one or more undertakings.  This control can beconstituted, inter alia , by intellectual property rights, if they confer the possibility of exercising
decisive influence on an undertaking.
42. Intellectual property rights can also play a role in analysis of mergers, for instance in the
Glaxo/Welcome case, where the merger was authorized after the parties committed themselves to
grant an exclusive licence to a third party to accomplish the development and distribution of the
product.
                                                     
29 OJ L 395, 30.12.89, corrected in OJ L 257, 21.09.90.WT/WGTCP/W/99
Page 11
PART II: THE RELATION BETWEEN INVESTMENT AND
COMPETITION POLICY
Introduction
1. Foreign investment30 has become an important source for governments seeking to create
employment, attract technology and enhance the competitive base of the domestic economy.  Foreign
investment has grown very rapidly in the last years, driven by companies adopting international
production methods or wanting to serve different markets.
2. This part of the EC submission will examine the interaction between the adoption of liberal
trade and investment policies and the putting in place of domestic competition structures.  This
submission will highlight the basic complementarity of these two policies, as witnessed by the fact
that so many countries have recently changed their investment regimes and have enacted or are
considering to enact competition laws.  Special attention will be devoted to policy choices fordeveloping countries.
3. It should be noted, by way of background, that UNCTAD's 1997 World Investment Report
31
is devoted specifically to the relationship between  foreign investment liberalization and competition
policy, and that this relationship has also been covered in the WTO Secretariat's 1997 AnnualReport
32.
Background
4. International flows of foreign investment have in recent years grown at a much faster rate
than cross-border trade of goods.  The growing consensus that the effects of foreign investment on a
domestic economy are generally positive, coupled with the adoption of more liberal trade policies and
deregulation worldwide, have triggered a very rapi d increase of FDI flows.  Both developed and
developing countries have benefited from this trend, and developing countries are now host to about
40% of incoming investment, while their share of outflows is around 15%.  Overall the liberalization
of investment opportunities, whether its origin is foreign or domestic, is seen as central to the increase
of competition and growth of economies.
5. It is generally recognized today that regulatory policy, trade policy, FDI policy and
competition policy are at the centre of choices of governments seeking to enhance national growth
and welfare by improving the allocation of resources and contestability of markets.  It is also
increasingly confirmed that consistency and coherence between these policies is important, all themore so in view of the fact that in many count ries trade liberalization, FDI liberalization, domestic
deregulation and the introduction or reinforcement of competition policies are taking place
simultaneously.
                                                     
30 Foreign investment in this submission is understood to be foreign direct investment characterized by
a longer term investment horizon including a degree of management control. This is distinct from foreignportfolio equity investment, which can also be an important source of incoming capital, but generally has a morevolatile character.
 
31 See notably pp. 183- 233.
 32 See pp. 70-72.WT/WGTCP/W/99
Page 12
Domestic competition structures are complementary to liberal trade and investment policies
6. A key question for many countries applying more liberal trade and investment policies, or in
the process of deregulation, is to what extent these policies need to be supported by the adoption of
competition policy structures.  This question is notably poignant for developing countries, sincecompetition policy may require additional resources to set up new administrative capacity and
structures.
7. The main arguments that are put forward to support the establishment of domestic
competition structures can be  summed up as follows:
8. Firstly, there are sectors in the economy of every country that may remain, to a degree,
unaffected by trade and investment liberalization, such as for example services that are not traded
internationally and may depend on national qualifications.  For these sectors competition policy can
be a good instrument at hand to guarantee effective competition so that benefits of policy reforms
accrue to consumers.
9. Secondly, the deregulation and privatization policies that are being pursued in many countries
are often far-reaching, ranging from telecommunications, energy and postal services to airlines and
other forms of transport.  The success of these policies, as well as their acceptance by the public at
large, will depend on the ability of governments to inject and uphold sound competition once the
market has been liberalized, including through the application of competition law and pro-competitiveregulatory regimes.
10. It is interesting to note that the European Community's Member States have also strengthened
their competition policies individually.  An example among many is the Netherlands, which has a
relatively small domestic market compared to the EU as a whole and a great openness to foreign tradeand investment, yet  has in the last few years chosen to change its basic competition law and to
strengthen the independence, administrative capacity and instruments of the competition law
enforcer
33.
11. Thirdly, a legal and administrative framework to guarantee sound competition can help set
proper conditions for a successful implementation of liberal trade and investment policies.  A key
element in the overall policy debate is that fore ign companies, when considering investment options
in different markets, will place a high premium on the country that has the most developed legal
system in terms of allowing access and protection of the investment, reducing administrative burdens
and addressing distortions of the competitive proce ss.  A stable framework of competition rules will
attract foreign investment by strengthening the regulatory fabric of the economy and confidence in the
stability of policy.
12. The change in the investment regimes of many countries has been driven by the recognition
that an ex ante  screening of foreign investment through centralized application procedures, often
including onerous pre-establishment requirements or targeted priority sectors, may in fact lead to
significant welfare costs, deter the transfer of technology and discourage foreign investmentgenerally.  Nowadays in many different countries, governments may even seek to encourage
investment through policies such as the grant of tailor-made fiscal or other benefits, or through the
application of trade restrictions such as higher ta riffs, to shield the new investor from competition
through imports.
                                                     
33 Of course EC competition law applies to all pratices in the Community as soon as trade between
Member States may be affected.WT/WGTCP/W/99
Page 13
13. While the above bears witness to the policy changes that have been adopted more or less
widely, many countries, including developing ones, may remain concerned that investment
liberalization could lead to unfair competition or monopolization by capital-intensive foreign
companies seeking to enter the market.  In all such  cases antitrust agencies can perform an important
task to protect consumers and competitors against anticompetitive practices.
14. It should be noted that no clear correlation has been found to exist between a liberalization of
foreign investment by developing countries and an increase of concentration in their markets.
Moreover, as the object of competition laws is to benefit consumers and uphold the competitive
process of a national economy irrespective of the origin of a producer or service provider, their
application may of course also work the other way.  It could, for example, affect incumbent firms if
these should seek to form a cartel or resort to other anticompetitive behaviour to keep out a foreign
entrant.  It is therefore essential that competit ion laws are neutral in their application, so that
anticompetitive practices can be addressed regardless of whether they are undertaken by domestic or
foreign companies.  Procedural aspects of competition laws, such as the provisions relating to access
to national courts, the imposition of remedies, appeal procedures, transparency and motivation
requirements, should also in general be neutral an d not in any way differentiate between domestic or
foreign producers.
15. Fourthly, competition policy can be an essential complement to investment liberalization in
other respects too. Investment, both foreign and domestic, can take a number of forms, such as
through a greenfield investment or through a merger or acquisition.  The effect on competition may bedifferent in each case: while a greenfield investment will generally increase the number of
competitors, in case of a merger or acquisition efficiency advantages may have to be weighed against
a reduction in the number of suppliers or the strengthening of a dominant position.  Here again the
advantages of case by case supervision by a well-functioning competition authority, and of the ex ante
control provided by merger pre-notification legislation, may be invaluable to support healthycompetition in the economy.
16. Overall, when liberal investment and trade policies are combined with an effective
competition policy and are pursued together, this is likely to increase the positive effects of
investment including foreign investment, and to lead  to improved levels of competitiveness both in
the domestic market and in the ability of companies to compete on international markets.
Costs and benefits of competition laws
17. The application of competition policy requires a complex assessment of business practices in
dynamic markets, as well as the use of investigative powers, and therefore necessitates a qualified
staff and a proper administrative and judicial capacity.  Yet despite these costs, over seventy countrieshave adopted competition laws, many of which have also been strengthened in the past decade in
terms of stricter and broader rules and higher penalties.  Many other countries are also in the process
of elaborating such laws or considering their adoption.  It is therefore fair to say that it is increasingly
accepted that a well-functioning competition agency is the appropriate vehicle to replace heavy ex
ante administrative procedures to vet foreign investment and other establishment requirements
34,
while it also confers related advantages such as facilitating further deregulation of the economy.
Moreover, because competition policy takes a case-by-case and an almost surgical approach to protect
                                                     
34 Many countries have started streamlining their foreign investment laws and phasing out pre-
establishment requirements such as those relating to the product range or production capacity of a potentialinvestment, to minimum local content, export performance, foreign exchange balancing and technology transferrequirements, as well as to maximise foreign equity caps in specific sectors.  It should be noted that effective
screening procedures also require cons iderable administrative resources, which would be freed by this stream-
lining process.WT/WGTCP/W/99
Page 14
the competitive process, it is likely to turn out to be an efficient and cost-effective instrument. In
general, it may also enable a decrease of bureaucracy in the government as a whole.  Lastly, much
enforcement of competition laws is also realised by private parties before civil courts, and would not
require the involvement of governmental agencies.
The international dimension of investment and competition policies
18. It is interesting to note that as the GATT has evolved into the WTO, the trading system now
includes an increasing number of rules on either investment or competition protection.  The most
important mode of delivery in services trade, for example, is generally foreign investment through
commercial presence.  An access commitment negotiated in a services negotiation thereby creates a
right to invest through establishment in that country.  Moreover, the GATS Agreement35 on trade in
services provides that WTO Members shall ensure in all sectors where commitments are taken,
including on investment through commercial presence, that a supplier in that sector does not abuse its
monopoly position or act in a manner inconsistent with those commitments.  Furthermore, during the
recent telecommunications negotiations, it was recognized that commercial presence commitments
needed to be strengthened by competitive safeguard provisions to protect competition betweenproviders and to ensure competitive and non-discri minatory access to fixed networks.  More than 55
countries agreed to guarantee such procompetitive regulatory principles through adoption of the so-
called reference paper.
19. As a response to the growth of FDI more and more countries have come to conclude bilateral
investment protection agreements.  There are today about 1,600 bilateral investment protection
agreements, where there were about 600 in the early nineties.
20. Similarly, the last few years have seen an increase in the number of bilateral and regional
agreements containing provisions on cooperation in the field of competition policy.  It is true that thelatter can differ in scope and depth, dependi ng on the development of domestic competition
structures.  An increasing number of countries, however, have come to recognize the benefits of
closer international cooperation.
Summary and Conclusions
1. This submission, which should be seen together  with previous submissions by the EC and its
Member States, draws particular attention to the following issues:
2. There is a basic complementarity between the liberalization of trade and investment regimes,
the protection of intellectual property rights and an active policy of competition law enforcement.
Many WTO Members, including in particular developing countries, have undertaken economicreforms in all these areas, as a means of promoting growth and efficiency and enhancing the capacity
of domestic firms to compete in international markets.  These reforms have also implied moving away
from administratively burdensome and inefficient methods of ex-ante screening of foreign investment.
A stable, non-discriminatory and transparent legal framework for business, of which competition law
is an essential component, is increasingly seen as essential for attracting investment, ensuring thebenefits of trade liberalization, as well as to address anticompetitive practices.
3. The protection of intellectual property rights contributes to dynamic efficiency and is
therefore pro-competitive.  At the same time, the exerci se of such rights should be subject to the basic
competition law framework relating to the control of anticompetitive practices in contractual licencesand possible abuses of a dominant position.  The TRIPS Agreement underscores the interest for WTO
members of developing a competition law framework as the best means to address concerns about
                                                     
35 Article VIII GATS.WT/WGTCP/W/99
Page 15
potential abuses arising from the exercise of intellectual property rights.  Competition law provides
objective standards to counter such abuses without, in any way, detracting from the level of protection
to which right holders are entitled.
4. The TRIPS Agreement recognizes the importance of consultations and cooperation on issues
arising from the enforcement of competition law in connection with anticompetitive practices in
contractual licences.  It is clear, however, that cooperation would be facilitated if WTO Members
have developed a competition law framework.  An im portant subject for consideration in discussing a
multilateral framework of competition rules, based on common principles, would be to consider what
role the WTO can play in support of cooperation among competition authorities.  Developing
countries can be expected to derive significant benefits from multilateral cooperation in terms of
sharing of experiences, capacity building and cooperation in enforcement activities.  This shouldtherefore be an important focus of future work.
5. Another important feature of the TRIPS Agreement is the establishment of detailed rules
concerning enforcement, including the procedures and remedies that should be available under
domestic law.  These provisions are of course specific to the enforcement of intellectual propertyrights, which in most cases relies on action by private parties.  By way of contrast, competition law
enforcement relies both on action by the competition authorities and private enforcement before the
courts.  An issue that would require considerati on, in connection with a multilateral framework of
competition rules, is the interest in developing provisions on enforcement which are tailored to the
specificities of competition law.  Such provisions could set out the rights to be recognized underdomestic law to private parties in enforcement proceedings.  It would be useful to consider such rights
both in relation to administrative proceedings by competition authorities and enforcement action
before the courts.  Issues relating to transparency and non-discrimination should also be considered in
this context.
6. The benefits for growth and development of liberalization of foreign investment regimes are
generally recognized.  Many WTO members, including in particular developing countries, have seen
the advantages of proceeding in parallel with a liberalization of rules concerning foreign investment
and a reinforcement of competition law structures.  A transparent and non-discriminatory competition
law framework provides the means to address anticompetitive practices, regardless of whether these
are undertaken by domestic or foreign firms.  This function can be best exercised by a competition
authority with sufficient powers of investigatio n and enforcement in relation to anticompetitive
agreements or abuses of a dominant position, as well as through the ex-ante  control provided by
merger pre-notification legislation.  As already noted, in setting out such an authority and enhancing
their enforcement capacity, developing countries would require international assistance and
cooperation.
7. These trends underscore that investment and competition policies, while distinct and separate,
have an increasing international dimension and would both benefit from enhanced multilateral
cooperation.  Open investment policies and active competition policy enforcement complement each
other and contribute to enhanced efficiency, growth and development.
8. The WTO Singapore Declaration established two Working Groups to examine the
relationship between trade and investment and the interaction between trade and competition policy.
The EC and its Member States believe that there is a case to consider the development of a
multilateral framework in each of these areas.  In our view, multilateral rules would contribute
towards enhanced coherence, predictability and c onvergence, as well as reinforce the multilateral
trading system.
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