Foreign Direct Investment and Competition Policy at the World Trade Organization

Although international trade, foreign direct investment, and competition policy converge at several points, their overarching theme is to increase world wealth by opening markets to foreign goods, services, and capital.1 These three policies can be mutually reinforcing when pursued with the common goal of encouraging cross-border competition. For example, a liberal trade policy has as its goal the elimination or lowering of barriers to trade in goods, opening foreign markets to goods from abroad, and bringing competition to bear on domestic producers. A liberal trade policy thus can have a significant impact on competition and on markets. To the extent trade liberalization reduces entry barriers to foreign markets, it gives domestic firms less ability to engage in anti-competitive behavior. Similarly, to the extent that domestic firms tie up channels of distribution in local markets and thereby block market access to imports, a liberal investment policy can eliminate such anti-competitive practices by permitting foreign firms to own distribution networks in the local market. In theory, then, trade, investment, and competition policies ought to work in harmony. Their shared goals and objectives suggest teaming rules against private anti-competitive behavior with rules on the elimination of government barriers to international trade and investment. This paper examines whether the mutually-reinforcing roles that international trade, foreign investment, and competition policy play in opening markets to foreign goods, services,.and capital should be integrated into the General Agreement on Tariffs and Trade-World Trade Organization (GATT-WTO) system through WTO multilateral agreements on investment and competition policy. The primary focus is on WTO agreement on competition policy. The reasons for this focus are fourfold: (1) overall, the issues facing negotiators are far more formidable with regard to a competition policy agreement than with regard to an investment agreement; (2) developing countries have a long-standing objection that they will not consider a multilateral investment agreement without a parallel agreement on competition policy; (3) the Organization for Economic Cooperation Development (OECD) has broken the trail for negotiations on a multilateral investment agreement with the culmination in 1998 of its work on the aborted Multilateral Agreement on Investment; and (4) the WTO's follow-on negotiations on trade in services, which will include market access through a physical presence of foreign services providers, will be a telltale for the prospects of a WTO investment agreement. Part I examines the trade and competition policy relationship. Part II reviews the investment and competition policy relationship. Part III addresses the wisdom of negotiating multilateral agreements on competition policy and investment under WTO auspices. Part IV argues that multilateralism is no panacea for resolving every cross-border issue that may arise between trading countries. Parts V and VI conclude that existing WTO agreements are adequate to resolve at least some competition policy disputes. I. THE TRADE AND COMPETITION PoLICY RELATIONSHIP Although nowhere explicitly stated in any WTO agreement, the guiding economic premise that underlies the entire GATT-WTO system is open or liberal trade.2 Why did open trade become the WTO's desideratum? The answer is short but compelling: by exploiting the law of comparative advantage, liberal trade policies permit the unrestricted cross-border flow of the best goods and services at the lowest prices, thereby increasing total world wealth. Under the law of comparative advantage, resources are allocated efficiently across and within industries in response to competitive pressures from imports. Both of these phenomena lead to product specialization and increased firm size that in turn lowers the unit cost of goods and services. The role that multilateral trade rules play in fostering liberal trade manifests itself in two important ways. …