.RESTRICTED
WORLD TRADE WT/WGTCP/W/30
15September 1997
ORGANIZATION(97-3668)
Original: English Working Group ontheInteraction
between Trade andCompetition Policy
COMMUNICATION FROM NEW ZEALAND
Thefollowing communication, dated 10September 1997, hasbeenreceived fromthePermanent
Mission ofNewZealand withtherequest thatitbecirculated toMembers.
_______________
NEW ZEALAND PAPER ONAGENDA ITEM AOFTHE 16-17 SEPTEMBER 1997
MEETING OFTHE WTO WORKING GROUP ONTHE INTERACTION
BETWEEN TRADE AND COMPETITION POLICY
Relationship between theobjectives, principles, concepts, scope and
instruments oftrade andcompetition policy
Introduction
1. Theinternational economy isincreasingly characterized bytheglobalization ofproduction and
finance. Globalization means thatfirms areincreasingly looking tooperate across national borders
toservice theirbusinesses, source inputs, attract investment anddevelop markets inmany different
countries. Theprocess ofglobalization hasleadtofurther integration ofbothfactor andproduction
markets. Theincreased internationalization ofbusiness willshape governments 'policy frameworks
intothenextcentury andhascreated bothnewopportunities andnewchallenges fortheglobal trading
system.
2. Toshare inthebenefits thatflowfrom theglobal environment itisincreasingly recognized
thatgovernments must focus onthose issues which affect thecompetitiveness ofdomestic markets.
Sustained economic growth ismost likely tobeachieved byanopen andcompetitive environment.
Anopenandcompetitive environment creates profit making opportunities, provides consumers with
greater choice, andthusstrengthens theincentives forfirms toimprove continuously theirefficiency
andinnovation.
3. Competitiveness depends ontheability offirms bothdomestically andinternationally tocontest
particular economic activities. Inessence thelevel ofcontestability inamarket willdepend onthe
degree towhich barriers toentry exist. Hence afullycontestable market would beonewhere there
arenosubstantial barriers toentry, inother words asituation inwhich thecompetitive process is
unimpeded.
4. Itisnowrecognized thatevenwhen traditional border controls areremoved substantial barriers
toentry continue toexist. Barriers toentry created bygovernments orbarriers created by
anti-competitive andcollusive strategic actions ofprivate firms continue toposechallenges totheglobal
trading environment.WT/WGTCP/W/30
Page2
5. With theintegration ofbusiness interests throughout theworld, policy makers arefocusing
increasingly ontheinteraction between tradeandcompetition policy. Businesses nowhaveanincreasing
interest inthecompetition lawsandtheregulatory environment ofcountries, andareplacing pressure
ongovernmentstoprovideacompetitivetradeandinvestmentenvironmentwhichallowsthemtooperate
witheaseacross national borders. Competition policy andtrade issues arenowinextricably linked.
While traditionally focused ongovernment-imposed border controls, thescope oftradepolicy hasnow
extended toarange of"behind theborder" measures thataffect trade, asborder restrictions havebeen
reduced. Similarly, while competition policy hastraditionally beenfocused ondomestic markets,
globalization hasmeant thatcompetition policy-makers havebeentaking agreater interest inborder
measures andtheimpact thattheyhaveondomestic market performance. Theexpanding scope of
bothcompetition andtrade policy hasleadtoagreater levelofinteraction between thetwopolicies,
andgreater potential forbothconvergence andconflict.
6. Thepurpose ofthispaper istoexplore therelationship between theobjectives, principles,
concepts, scope andinstruments oftrade andcompetition policy.
Competition policy
7. Inthebroadest sense "competition policy" refers toallpolicies which aredirectly aimed at
enhancing thescope forcompetition between firms. Itisconcerned withbothgovernment interventions
thathaveimplications onthecompetitive environment andprivate sector anti-competitive practices.
Every country hassome form ofcompetition policy, although thepolicies donotalways gobythat
name. Competition policy isimportant because competition fosters economic efficiency, encourages
firms tooffer consumers good price/quality options andincreases theinternational competitiveness
ofdownstream users. Competition policy isnotrestricted tocompetition orantitrust laws. Deregulation
policies which reduce thebarriers tonewcompetitors emerging inindustries orreliance onincreased
competition rather thanprice controls tolimit price increases areforms ofcompetition policy.
Privatization ofstate-owned firms, particularly where firms areexposed tocompetitive forces, can
alsobeaform ofcompetition policy. Awide range ofother policies alsohavecompetition policy
effects.
8. Ingeneral terms, competition policy seeks topromote theefficient allocation ofresources by
means ofopen andcompetitive markets. Itisbased ontheprinciple thatgovernment orprivately
imposed barriers toentry orexitfrom markets should beminimized. Tominimize barriers created
bygovernments, competition policy-makers argue thatinterventions bygovernments should bemade
onlywhere welfare gainsareexplicitly identified. Further, where government intervention iswarranted,
regulatoryandadministrativepracticesshouldbetransparent,consistentlyapplied,basedontheprinciple
ofnon-discrimination, andshould involve minimum transaction andcompliance costs.
9. Some jurisdictions pursue various other objectives suchastheprotection ofsmall business
andthepromotion ofnational industrial policy. However, adifficulty withmany ofthese secondary
objectives isthattheyconflict withtheprimary objective. Theprotection ofsmall business isachieved
atthecostofeconomies ofscale andscope. Theprovision ofindustry subsidies isachieved atthe
costofthemore efficient useofthose resources inother sectors oftheeconomy.
Trade policy
10. Trade policy describes themeasures andpractices relating tocountries 'trading regimes. It
addresses twobroad andinterrelated issues. First, aliberal trade policy seeks tocreate trading
opportunities, thatis,itseeks toensure freertradebyremoving tariffs andnon-tariff barriers. Second,
itseeks toensure fairtradebyeliminating anti-competitive practices ininternational trade. Thissecond
concept offairtradeismore difficult todefine. Itshould imply thecreation ofamore equitable tradingWT/WGTCP/W/30
Page3
system where theconduct oftradeisbased onthecompetitive advantage ofmarket players rather than
theeconomic power andinfluence ofGovernment.
11. Trade policy covers arange ofgovernment measures thataddress thetwoobjectives offree
andfairtrade. However, asnoted earlier, aliberal trade policy isnolonger restricted toafocus on
thereduction oftraditional border restrictions suchastariffs andimport licensing, butalsocovers
non-tariff barriers including sanitary, phytosanitary measures andtechnical regulations which limit
cross border access. Inaddition, policies aimed atpromoting fairtrade attempt toaddress domestic
andexport subsidies, andother forms ofassistance which discriminate infavour ofdomestic producers.
12. Thepursuit offreetrade isconsistent withthepromotion ofglobal welfare andincreased
economic efficiency. However, trade policy measures which areaimed atensuring fairtrade canrun
countertotheprinciplesoftradeliberalizationifinappropriatelyapplied.Whileincertaincircumstances,
suchmeasures canbeaneffective toolagainst unfair trading practices andunjustifiable government
intervention andthusleadtoincreased efficiency inthelonger term, inother circumstances, when
usedasadisguised restriction totrade suchmeasures willresult inanetglobal welfare lossanda
reduction ofeconomic efficiency. Thispotential tension between theobjectives underlying tradepolicy
isdiscussed ingreater detail inthenextsection.
Theinteraction between trade andcompetition policies
13. Inbroad terms competition policy andtradeliberalization aretrying toachieve thesame thing
-economic efficiency. Competition policy seeks toachieve economic efficiency byliberalizing domestic
markets andbyhaving lawsthatprotect andpromote competition. Aliberal tradepolicy seeks toachieve
economic efficiency byliberalizing markets. Ithastraditionally done thisbyremoving barriers to
trade attheborder. Infactbothfreetrade andcompetitive behaviour arenecessary conditions for
efficiency.
14. While theprimary objectives ofcompetition policy andtradepolicy aresupported byeconomic
theory andarecompatible withoneanother, there remain some tensions between thetwopolicies.
Inparticular, there areconcerns onthepartoftrade policy experts thatanti-competitive behaviour
offirms isreducing access tomarkets. Ontheother hand, therearealsoconcerns fromacompetition
policy perspective about thepotential anti-competitive effects ofsome trade policy measures.
15. Theinteraction between thetrade andcompetition policies arebriefly discussed below.
Trade polices which affect competition
16. Generally, policies which reduce import andforeign investment restrictions willincrease the
contestability ofdomestic markets. Assuchliberal trade andinvestment policies tendtosupport the
aimsofcompetition policy.
17. Alternatively, trade policy measures canlimit access forimports andreduce thescope for
competition. Such measures, including bothtariffs andnon-tariff measures, areusedforanumber
ofreasons suchasthepromotion ofdomestic industry, revenue generation, national security andpublic
health andsafety requirements.
18. While traditional tariff barriers andvarious quantitative restrictions havebeenreduced over
thelast10-20 years, there remain concerns toensure thatthereisnoreintroduction ofso-called "grey
area" measures. Suchmeasures inthepastincluded thelikesofVoluntary Export Restraints, Orderly
Marketing Arrangements andvarious other voluntary arrangements which distorted international
competition.WT/WGTCP/W/30
Page4
19. Avarietyoftrademeasures,suchasdumping,arepurportedtocounter"unfair"practicesapplied
byother trading partners. Dumping isthepractice ofselling goods inanexport market ataprice
lower thanthenormal value intheeconomy oforigin. Under WTO rules Members areabletotake
anti-dumping measures where dumping takes place andcauses material injury todomestic producers.
20. Thecompetition policy concern withsuchlawsisthattheanalytical process provides onlyfor
apartial welfare analysis. Thefocus isonwhether there isinternational price discrimination and,if
so,whether domestic manufacturers arebeing harmed. Thisfocus upon theimpact upon domestic
manufacturers allows border protection tobeimposed without having toshow thattheoverseas firm's
pricingpoliciesarecausingdamagetothedomesticeconomyasawhole.Thiscontrastswithcompetition
policy analysis which alsoconsiders theeffects ofthepricing onother market participants (downstream
producers, users andconsumers). Inother words, anti-dumping analysis doesnotconsider thefull
impact ofdumping onaneconomy. Hence, anti-dumping duties canbeimposed against price
discrimination thatispro-competitive orisbeneficial totheimporting country interms ofimproving
overall welfare oftheeconomy.
Competition policies andtheireffect ontrade
21. Competition policy measures which reduce artificial barriers toentry tovarious markets are
likely toimprove access forimports aswellasdomestic competitors, thereby supporting theaimsof
aliberal tradepolicy. However, competition policy measures which donottakeintoaccount therealities
oftheglobal environment, orwhich areineffectively orinadequately enforced, mayleave inplace
barriers toentry andbelesssupportive offreetrade. These issues arediscussed below.
Regulation
22. Globalizationhasheightenedtheawarenessoftheeffectsofthedomesticregulatoryenvironment.
Thishasmeant thatthere isagrowing international interest inavariety ofissues thatwerepreviously
thedomain ofdomestic policy.
23. Regulation isdefined asthefullrange oflegalinstruments bywhich government institutions,
atalllevelsofgovernment,imposeobligationsorconstraintsonprivatesectorbehaviour.Theregulatory
environment hasadirect impact onbusiness growth. Theneedtocomply todifferent setsofregulations
throughout theworld canreduce incentives toinvest, andimpede theflowofgoods andservices between
firms bothdomestically andinternationally. Effectively theresult isthatthecosts ofdoing business
increases, andhence inthelongrunconsumers loseout.
24. Aprincipal focus oftrade policy hasbeenonensuring thatthecostofcomplying withan
economy 'sregulatory environment isnogreater forforeign firms thanforfirms inthedomestic market,
i.e.theprinciple ofnational treatment. Such unnecessary impediments totheentry offoreign firms
canoccur when:
aregulation isapplied exclusively toforeign firms;
aregulation isdesigned insuchawaythatalthough itisapplied equally tobothdomestic
andforeign firms, itcreates significant disadvantages tofirms which arenotlocated
inthecountry inwhich theregulation isimposed;
aregulation favours incumbents andprevents newentrants, e.g.network-based services
suchastelecommunications andutilities; andWT/WGTCP/W/30
Page5
domestic firms aremore informed about thechanging nature ofregulations. Often
compliance withregulations caninvolve significant sunkcosts. When domestic firms
haveagreater awareness ofthenature andforms ofnewregulations, theirability to
adapt andadjust tothechanging conditions atafaster rate,maycreate anadvantage
overforeign firms.
25. Suchregulatory barriers notonlyaffect thelevelofcompetition ingoods butalsoinservices.
Infact,discrimination against foreign competition ismost visibly evident intheservices sector.
Examples ofsuchregulatory impediments toforeign competition include restrictions onforeign direct
investment, theregulation ofoccupations, andaccess tonetworks anddiscrimination against foreign
ownership.
Anti-competitive behaviour ofdomestic firms abroad
26. Another concern ofpolicy makers withcompetition policies isthefactthatmany countries
donotaddress anti-competitive practices ofdomestic firms operating abroad. While collaboration
offirms canbeefficiency enhancing byallowing smaller firms totakeadvantage ofeconomies ofscale,
theory alsosuggests thatsuchcollaboration, ifitresults indominance ofamarket, canleadto
anti-competitive andhence welfare-reducing outcomes. Because ofthedomestic focus ofcompetition
laws, firms behaving inananti-competitive wayabroad maybeexempted from competition law
disciplines.
Competition policy exemptions
27. Many economies provide fortheauthorization orexemption ofcertain arrangements fromthe
legislationwheretheyfurtherdomesticwelfareobjectives,withoutregardtotheeffectsonglobalwelfare.
Such exemptions mayraisebarriers toentry andreduce competitive forces intherelevant markets,
leading tohigher prices andlower output.
Different approaches tocompetition lawandenforcement
28. There has,traditionally, beenawidevariety ofapproaches tocompetition lawandenforcement.
Inthepastthese differences weregenerally regarded asunimportant. However, globalization haslead
toagreater interest inthecompatibility ofcompetition lawsduetotheincreased internationalization
ofbusiness law,particularly inrelation totherapidincrease intransnational mergers, strategic alliances
andpractices.
29. There isnowageneral concern bytradepolicy makers thatweaklawsorinadequate enforcement
adversely affect international trade. Either canallow domestic firms toregulate markets tothedetriment
ofimports bysuchmeans asimport monopolies, boycotts andmarket foreclosure. Inaddition, there
areconcerns thatmany competition lawscontain exemptions allowing forspecific business arrangements
andpractices, suchashorizontal arrangements andvertical restraints. There isaneedforarobust
framework foreconomic analysis ofthese arrangements. Exemptions forsuchbusiness arrangements
asjointresearchanddevelopmentundertakingsandexclusivedealingarrangements,canalsosignificantly
reduce market access, eventhough theymayenhance efficiency within thedomestic economy.
Conclusion
30. Theprocess ofglobalization hascreated newchallenges andopportunities forgovernments.
Itisincreasingly recognized thatsustained economic growth cannot beachieved bytradeliberalization
alone, butinstead governments must focus onallissues which affect thecontestability ofdomestic
markets.WT/WGTCP/W/30
Page6
31. Itisnowrecognized thatevenwhen traditional border controls areremoved substantial barriers
toentry continue toexist. Barriers toentry created bytheGovernment orbarriers created by
anti-competitive andcollusive strategic actions ofprivate firms continue toposechallenges totheglobal
trading system.
32. Thishasalsocreated newchallenges forbothtrade andcompetition policy-makers. While
trade policy hasbecome more concerned with"behind theborder issues" which affect international
trade, competition policy makers arenowtaking agreater interest inborder measures andtheimpact
thattheyhaveondomestic market performance. Thishasleadtoanincreased interaction between
thetwopolicies.
33. Theprimary theoretical objectives ofbothcompetition policy andtradepolicy attempt toachieve
thesame outcome ofeconomic efficiency andcanbereinforcing. Competition policy canreinforce
tradepolicy bydealing withgovernment regulation andprivate conduct thatfrustrates theachievement
ofborder liberalization. Likewise, tradepolicy canreinforce competition policy byopening upmarkets
toimport competition torestrain themarket power ofdomestic industries.
34. However, there arecircumstances when thetwopolicies arenotreinforcing. Inparticular,
there areconcerns when thefulleffects oftrade policies oncompetition inthedomestic market are
nottaken intoaccount. Similarly, competition policies which aredomestically focused, ineffective or
inadequately enforced mayputinplace barriers toentry andbelesssupportive offreetrade.
35. Thechallenge fortradeandcompetition policy-makers istoagree oncompetition andregulatory
principles which provide acoherent approach toallaspects ofeconomic policy. Thiswillintheend
beachieved byensuring thatbothpolicies focus onthesingle primary objective ofefficient production
andconsumption intheeconomy. Over timeitislikely thatcompetition andtrade policies will
increasingly converge tothepointwhere itmaynotbelegitimate tomaintain separate policy paradigms.