metadata: authors: 0: author: Hoekman, Bernard M.
1: author: Mavroidis, Petros C.
2: author: DEC
docna: 0: docna: Linking competition and trade policies in
            Central and Eastern European countries
docty: Policy Research Working Paper
subtopic: Social Policy,Legal Products,Judicial System Reform,Trade Policy,International Trade and Trade Rules,Rules of Origin,Competition Policy,Legal Reform,Legislation,Regulatory Regimes,Competitiveness and Competition Policy,Trade and Multilateral Issues
teratopic: Information and Communication Technologies
abstracts: cdata!: The authors explore options for Central
            and Eastern Europe (CEE) governments to make competition law
            enforcement more sensitive to trade and investment policy,
            thereby supporting liberal trade policy. The competition
            laws of these countries tend to resemble European Union (EU)
            competition disciplines (Article 85 - 86 of the Treaty of
            Rome), but give competition authorities great scope for
            discretion in interpreting the relevant statutes. Much can
            be done through appropriate wording of criteria and
            implementation guidelines within the framework of existing
            legislation to subject trade policy to competition policy
            scrutiny. A liberal trade policy and active enforcement of
            competition laws will be crucial not only for national
            welfare, but also for eliminating the threat of contingent
            protection by EU firms. When CEE countries face antidumping
            threats or action from EU countries, the authors suggest
            that they seek a link between competition law enforcement
            and antidumping investigation in the context of the
            association agreements with the European Union. That is, the
            European Commission could be asked to apply competition
            policy criteria in antidumping investigations against
            products originating in CEE countries, ensuring that there
            is a threat to competition, not just a threat to a European
            Union competitor. This treatment could be sought informally
            during the transitional period. Generally, since the CEE
            countries have adopted competition legislation comparable to
            that of the European Union, it seems safe to assume that if
            they enforce their competition laws vigorously, EU
            consistent minimum standards will be respected. Until the
            association agreements are fully implemented, it is
            important to reduce to a minimum the risk of being treated
            as an "unfair trader." Safeguard actions will
            remain possible until EU membership has been attained. But
            safeguard protection is more difficult to seek and obtain if
            there is only a weak case for arguing that Central and
            Easter European firms are benefiting from trade barriers,
            state aids, or various government maintained entry barriers.
repnme: repnme: Linking competition and trade policies in
            Central and Eastern European countries
display_title: Linking competition and trade
            policies in Central and Eastern European countries
listing_relative_url: /research/1994/08/698091/linking-competition-trade-policies-central-eastern-european-countries
topicv3: Trade m1326924 698,Competition Policy m1326982 406,Trade Policy and Integration m1327407 775,Competition Law m1327469 1031,Trade Policy m1327640 776
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Information and Communication Technologies
origu: Development Economics and Chief Economist
no_of_pages: 50
model_extractions: POLICY RESEARCH WORKING PAPER 1346

# Summary findings

Hoekman and Mavroidis explore options for Central and Eastern European (CEE) governments to make competition law enforcement more sensitive to trade and investment policy, thereby supporting liberal trade policy.

The competition laws of these countries tend to resemble European Union (EU) competition disciplines (Articles 85-86 of the Treaty of Rome), but give competition authorities great scope for discrction in interpreting the relevant statutes. Much can be donc through appropriate wording of criteria and implementation guidelines within the framework of existing legislation to subject trade policy to competitionpolicy scrutiny.

A liberal trade policy and active enforcement of competition laws will be crucial not only for national welfare, but also for eliminating the threat of contingent protection by EU firms. When CEE countries face antidumping threats or actions from EU countries, Hoekman and Mavroidis suggest that they seek a link between competition law enforcement and antidumping investigations in the context of the association agreements with the European Union. That is, the European Commission could be asked to apply competition policy criteria in antidumping investigations against products originating in CEE countries, ensuring that there is a threat to competition, not just a threat to a Europen Union competitor. This treatment could be sought informally during the transitional period. Generally, since the CEE countries have adopted competition legislation comparable to that of the European Union, it seems safe to assume that if they enforce their competition laws vigorously, EU-consistent minimum standards will be respected.

Until the association agreements are fully implemented, it is important to reduce to a minimum the risk of being treated as an 'unfair trader." Safeguard actions will remain possible until EU membership has been attained. But safeguard protection is more difficult to scek and obtain if there is only a weak casc for arguing that Central and Eastern European firms are benefiting from trade barriers, state aids, or various govemmentmaintained entry barriers.

- This paper a product of the Europe and Central Asia, Middle East and Norrh Africa Regions Technical Department, Private Sector and Finance Team - is part of a larger effort to monitor and analyze developments in regional and global trade policy of relevance to the Europe and Central Asia and the Middle East and North Africa regions. Copies of the paper are available free from the World Bank, 1818 H Strect NW, Washington, DC 20433. Please contact Faten Hatab, room H8-087, extension _35835_ (43 pages). August 1994.

_The Poly Resarch Work*ng Paper Seris dissemnas h findings of work vt progress_ **_to_** _encoamge th ecbange of ies about development isue. An objective of the sefies istoget dhe finds outpd qukWy, cven if the presentations are kss than fuly polished. Thc papers canly the names of the authors and should he used and cited accordigly, The fidings interpretafions, and conclusionsare the authors' own and should not be attributed to the World Bank its Excutive Board of Directors, or ry of its nmebercowmic_ Produced by the Policy Research Dissemination Center
Linking Competition and Trade Policies in Central and Eastern European Countries' Bernard M. Hoeknan The World Bank and CEPR Petros C. Mavroidis GAIT Secretariat Keywords: Competition policy, trade policy, regional trade agreements, Central and Eastern Europe.

JEL classification: F13, F14, K21.

This paper is part of a CEPR project, "Trade Laws and Institutions for Emerging Market Economies," funded by the Commission of the European Communities. The views expressed are personal and should not be attributed to the World Bank or the GAIT Secretarat. We are gratefil to Kathryn Cusack for excellent secretarial assistance, and David Audretsch, Milan Banas, Alexis Jacquemin, Andras Lakatos, Jan Michalek, Serban Modoran, Peter Palecka, Janusz Piotrowsld, Richard Portes, Peter Stefanov. and Alan Winters for helpful discussions and suggestions and for providing us with materials. Correspondence addresses: B. Hoekman, EMTPS, The World Bank, 1818 H St. N.W. Washington D.C. 20433; Tel: (1) 202 473 1185. P. Mavroidis: GATT, 154 Rue de Lausanne, CH-1211 Geneva, Switzerland; Tel: (41) 22 739 5143.
# Summary

Six Central and Eastern European (CEE) countries-Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic-have negotiated far-reaching Association Agreements with the European Union (EU), so-called Europe Agreements. These Agreements will result in free trade in goods, and include commitments by the CEE countries to adopt many of the disciplines of the Treaty of Rome. Tis paper focuses on one aspect of the Europe Agreemnents: competition policy, and does so from the perspective of the trade policy stance of the CEE countries. It explores possible institutional mechanisms that could be implemented by CEE govermnents with a view to increasing the sensitivity of competition law enforcemen **t** o trade and investment policy.

The objective of competition policy in most jurisdictions tends to be efficient resource allocation, and thereby the maximization of national welfare. Governments pursue trade policies for a variety of reasons, of which efficiency is usually not one. An active trade policy redistributes income between segments of the population by protecting specific industries and the factors of production employed there, and usually does so in an inefficient manner. Trade policy is consequently often inconsistent with the objectives underlying competition policy. The way this inconsistency is frequently put is that competition law aims at protecting _competition_ (and thus economic efficiency), while trade policy aims at protecting _competitors (or_ factors of production). The issue facing governments is to ensure that competion prevails. This requires the design of institutional mechanisms that allow governments to explicitly consider the competition implications of particular trade or investment policies.

lhe Europe Agreements require that the CEE counties adopt the basic competition mles of the EU for practices that affect trade between the EU and each Central and East European country. These rules relate to agreements between fms restricting compettion, abuse of dominant position, the behavior of public undertalkngs (state-owned firms) and competition-distorting state aids (Articles 85, 86, 90 and 92 of the EEC Treaty respectively). Thus, competition policy is defined widely to include the behavior of govermnents as well as of firms. Almost all the CEE countries have passed competition legislation and allocated the responsibility for enforcing their competition rules. There are inconsistencies with EU language and implementation criteriatguidelines, some of them substantial, but the thrust of existing provisions is certainly pro-competitive.

Competition authorities in the CEE countries have been given a relatively broad mandate to idetify the costs of government policies and actions that restrict competition. Trade policy is an obvious area that should be given priority in this connection. Competition offices have two ways of 'internalizing' trade policy. The first is to oppose-trade policies that excessively harm competition on the domestic market; the second is to countervail the anticompetitiv **e** ffect of trade policy on an expost basis. The first, 'direct' approach has been actively pursued by a mimber of the CEE competition offices. In this they coripare well to competition offices in OECD counL!ies. By commenting on or opposing suggested or existing trade policies, the competition offices en.-ire that the economy-wide implications of sectoral policies/lobbying are recognized and discussed. The main power of competition offices is, however, of an _ex post_ nature. Active enforcement, wih guidelines that clearly specify that trade policy will be an important consideration- in the implerienting competition laws, will help bolster the effectiveness of ex ante opposition to policy proposals that restrict access to markets.

A number of actions are identified through which competition law enforcement might be strengthened and be made even more sensitive to trade policy. The legislative possibility for anitrust agencies in the CEE countries to act _ea offico_ does not appear to have been fully exploited, although this may largely be the result of the process of the asition towards private ownership and a market
economy. The development of detailed guidelines would help both reduce uncertainty regarding the priorities given by the competition authorities to types of competition-reducing practices, and clarify what practices will not be pursued. One connon denominator in the legislation of all CEE countries is the wide discretion that the agencies entrusted with the enforcement of competition laws enjoy. This can have a negative side, in the sense that a number of desirableper _se_ prohibitions simply do not exist. An offsetting, positive counterpart is that if discrotion is exercised in a pro-competition way, the "jurisprudence" created in this field could further promote the goals of the competition laws. Incorporation of the trade policy stance pertaining to an industry should explicitly be taken into account when defining the relevant market in the enforcement of antitrust. Guidelines to-this effect should also be published. Whenever market shares are defined as a threshold (i.e in the definition of dominant positions) they should be linked to market contestability considerations-i.e., explicit public recognition that what matters is market power. It would prove very useful for the evolution of the competition philosophy in the CEE countries, and at the same tine enhance transparency, if competent agencies were to publish the reasoning underlying their decisions.

Despite their agreement to adopt EU-compatible competition disciplines, and despite the fact that free trade and freedom of investment will be achieved within ten years, there is no provision in the Europe Agireements specifying that antidumping will be phased out. Continued threats of contingent protection on the part of the EU implies that CEEC firms will face different standards than their EU competitors. EU firms will be permitted to engage in price discrimination or sell below cost on the EU market, whereas CEE firms wll be constrained in pursuing such a strategy by the existence of EU antidumping procedures. A review of experience that has been obuined with attempts to abolish antidumping in the context of regional integration agreements suggests that there are at least three necessary conditions for the abolition of contingent protection: (1) free trade and freedom of investment; (2) disciplines on the ability of governments to assist firms and industries located on their territory; and (3) the existence and enforcement of competition (antitrust) legislation. Although these conditions will to a very great extent be satisfied for intra EU-CEE flows, the antidumping option was retained.

An avenue that could be further explored during the transition phase towards full implementation of the Europe Agreements is to establish a link between antidumping and antitrust in instances where CEE countries are facing antidumping threats or actions on the part of the EU. The EC Commission could be asked to apply comnetition policy criteria in antidunping investigations against products originating in CEE countries, ensuring that there is a threat to competition, not just a threat to an EU competitor. This could be sought on an informal basis during the transitional period. Clearly, the first best strategy for CEE countries is to seek the elimination of antidumping once the Europe Agreement have been fully implemented. If it proves to be impossible to obtain agreement to phase out antidumping, a second-best policy could be to formalize the link between competition law enforcement and antidumping investigations. More generally, since the CEE countries have adopted legislation comparable to that of the EU in the competition field. one can assume that if they enforce their competition laws vigorously, EU-consistent minimum standards will be respected. This may effectively raise the threshold for EU import-competing industries seeking antidumping relief. Vigorous enforcement of competition disciplines in service industries, especially distribution-related, may further help reduce the potential for EU firms to seek contingent protection.
# L Introduction

Six Central and Eastern European (CEE) countries-Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic-have negotiated far-reaching Association Agreements with the European Union (EU), so-called Europe Agreements. These Agreements will result in free trade in goods, and include commitments by the CEE countries to adopt many of the disciplines of the Treaty of Rome. This paper focuses on one aspect of the Europe Agreements: competition policy. It does so from the perspective of international trade policy, and from the perspective of the CEE countries. iThe primary goal of the paper is to explore possible institutional mechanisms that could be implemented by CEE governments with a view to increasing the sensitivity of conpetiti6n law enforcement to trade and investment policy.

The plan of the paper is as follows. We start in Section II with a brief general discussion of the linkages between trade and competition policies. This is followed by a short review of the curent stam of knowledge regarding 'best practices' in the area of competition policy and the experience of market economies in implementing such policies. Section III summarizes the of the Europe Agreements in the area of coihpetition policy. Section IV provides an overview of existing competition fegislation and instimttions in the six CEE countries, drawing upon a more detailed country-by-country summary of current laws contained in,Appendix 2. Almost all the CEE- cbuntries bave passed -competion legislation and allocated the responsibility for enforcing their competition rules. Theiy have ieeived substantial technical assistance from OECD members in tiis connection) Section V discusses a number of institutonal options that would allow competition aspects of trade policy decisions to be taken mto consideration by administering authories and goverments. Three situations are distinguished: (1) the transitional period before the entry into force of the Europe Agreement;, (2) the period during which the Europe Agreement applies; and (3)'eventual accession to the EU. Section VI concludes.

II. Trade and Comeition Policies: Basic Issues.

National competition policy cnm be defined as the set of rules and disciplines maintained by governments relating either to agreements between frms that restrict competition- or to the abuse of a dominant position (including attempts to create a dominant position through merger). The underlying objective of competition policy in most jurisdictiois tends to be efficient resource allocation, and thereby 'For example, the Antitrust Division of the United States Justice Department and the Federal Trade Commission received a $7.2 million grant from USAID to provide tecnical assistance to the six CEECs in 1991 (BNA, Antitrust and Trade Regulation Report, May 30, 1991, no. 1518, p. 761). Contacts betwe the CEE counties and the EC Commisson (DG-IV), EU Member State enforcement agencies nd the OECD Secetariat have been intense.

1
the maximization of national welfare.2 Most competition laws attempt to attain this objective by prohibiting the abuse of dominant positions (either through prohibition or through regulation), and forbidding various kinds of competition-restricting agreements between competitors. The focus of competition laws is on competition, reflecting the belief-which is extensively supported by empirical evidence-that vigorous competition is frequently the best way to foster economic efficiency. Many jurisdictions recognize that specific agreements between firms that may reduce competition could be efficiency enhancing, and make allowance for such agreements. However, the burden of proof in such instances is usually upon the participants in such arrangements.

The objectives underlying trade policy contrast starkly with those of competition laws. Governments pursue trade policies for a variety of reasons, including as a means to raise revenue, to protect specific industries (whether 'infant', 'senile' or other), to shift the terms of trade, to attain certain foreign policy or security goals, or simply to restrict the consumption of specific goods. Whatever the underlying objective, an active trade policy redistributes income between segments of the population by protecting specific industries and the factors of production employed there, and usually does so in an inefficient manner. Trade policy is consequently often inconsistent with the objectives underlying competition policy. The way this inconsistency is frequently put is that competition law aims at protecting _compeation_ (and thus economic efficiency), while trade policy aims at protecting _competitors_ (or factors of production). The issue facing govemments is to ensure that competition prevails. This requires the design of institutional mechanisms that allow governments to explicitly consider the competition implications of particular trade or investment policies.

The more restrictive the trade/investmenr regime, the more important competition policy becomes to reduce the inevitable negative welfare consequences of the reduction in competition that results from restricting the contestability of markets. From an economic (efficiency) perspective, using competition policy to attempt to offset the competitive distortions created by an active trade policy is of course an exercise in the second best, and may not be welfare enhancing. A preferable policy is to minimize the extent to which trade policy reduces the contestability of markets in the first plae. Thus, a liberal external policy stance is a cheap and effective cowmpetition policy. Competition from imports is a very important source of discipline upon the behavior of firms operating in a market.3 This iS the 2 However, other objecives may also be pursued. Thus, for examle, the competition law of the United iCngdom contains a broadly defined public intmest objecive that, among other things, allows for 'm g avd promoting the baanced distribution of industry and employment' (Hay, 1993, p.3).

3 This is one of the basic principles of international trade theory, one that applies to both the traditional setting of competitive markets and in the more recent literature that allows for imerfect ompetition. For empirical studies confirming the role of import competition as a soure of marikt discipline in imperfecy competitive markets (reducig price-cost magins), see Levinsobn (1993) and Jacquemin and Sapir (1988).

2
case in particular for the CEE countries, given the highly concentrated industrial structures inherited from the past. However, while a free trade stance greatly reduces the scope of the task facing competition authorities, it does not imply that the need for competition rules disappear. Many products are nontradable (e.g., many services), or, even if tradable, competition may be limited to local markets for other reasons.4 Free tade must therefore be complemented by the freedom of entry, including the possibility to contest markets through foreign direct investment. Even then, certain products may be produced by (natural) monopolies, by firms with global market power, or by firms where natural or 'unnatural' (governent-made) barriers to entry restrict contestability. And, the more open are markets to foreign products, the greater the potential vulnerability to anti-competitive practices of foreign monopolists or cartels. In all such cases competition rules should apply.

In instances where sovereign states have concluded economic integration agreements, the reach of competition policy may be extended to include the behavior of governments as well as firms. Thus, in the case of the EU, competition policy disciplines also pertain to public monopolies and stateowned enterprises, and governments are restricted in their ability to subsidize firms located in their territory insofar as this affects trade between Member States. It is important to realize that in the EU cont-extwhere the ultimate goal is the realization of a common market-competition disciplines are intended not only to enhance efficiency, but also serve as another instument through which to attain the integration objective. The goal is to ensure that the removal of trade barriers is not nullified by actions on the part of firms or governments to maintain or recreae market segmentation. The 'trade effect' criterion included in the Treaty of Rome's competition policy disciplines inplies that in the EU conxt competition rules are a _complememt_ to the internal trade policy of the EU, i.e., free trade.<sup>5</sup> The CEE countries have signed far-reaching association agreements with the EU that imply a free tade, free foreign direct investnent stance vis-a-vis the EU will exist once the various transitional periods have ended. Trade agreements have also been negotated with the EFTA countries, and between the CEE countries themselves (the Centrl European Free Trade Association). While the associated trade llberalization reduces the need for an active competition policy stance, it by no means makes competition law enforcement redundant. For one, there is the transition period during which trade or inrvestment barriers remain high for some sectors. More importantly, account needs to be taken of the policy stance vis-a-vis the rest of the world, of the various saftguard mechanims -Duilt into the EAs that allow for 4Retail distributio is an often mentioned example in this connection.

5 See, e.g., Ehlermann (1992) or Wheatheril and Beaumont (1993). In the case of the EU, competition policy acts as a discipline on firms that operate in an environment of free trade. Thus, in principle no conflict arises between competition and trade policy in the EU context, dtere no longer being a trade policy affecting intra-area tansactions.

3
possible intervention to support domestic industries, of the fact that some markets are difficult to contest by foreign fums, and of the actions of other parts of the governmen **t** hat may restrain competition.

# _Implementing Institutions, Cnteria and Procedures_

The presumption underlying competitioLI policies is generally that vigorous competition between firms in an industry will foster efficiency. However, competition _per se_ will not necessarily ensure efficient outcomes. Much depends on the kind of competition that finns engage in, or alternatively, on the objectives uiderlying agreements between firms in an industry that reduce competition between them. Certain type of agreements between finns E iy be welfare enhancing for the nation as a whole. Thus, agreements to form an export cartel may allow a domestic industry to raise prices on export markets and improve the country's terms of trade and welfare. Cooperation between firns may also lead to dynanic benefits, e.g., research joint ventures or agreements on the development/use of commnon standards allowing positive network externalities to be realized. Most competition laws recognize that some agreements between competitors that appear to be competitionreducing may in fact not reduce competition, or, even if limiting competition, may be welfare increasing. As a result a disction is generally made betweenperse rules and _condonalprohibitions._ The former unconditionally prohibit certain forms of behavior (agrements). The latter prohibit certain types of cooperation (collusion) in principle, but may permit their existence if the firm(s) involved can convince the competition authonties that the agreement is welfare enhancing.6 Space constraints prohibit any detailed discussion of competition law dteory and principlesY What follows is limited to a number of issues that are of particular significance for the CEE countries.

A first issue is to determine what types of agreements/behavior should be subject to _per se_ rules. There are only a limited number of competition-reducing agreements between frms that can be rejected on an _a priori_ basis (assuming the objective is efficiency), of which price fixing and agreements with similar effects are the most important.<sup>8</sup> Theory suggests these types of arrangements should be subject to _per se_ prohibition, and in most jurisdictions they are. A strong political economy argument 6 In practice, two approaches can be followed in this regard, of which the mle of reason (pursued in the U.S.) is one. The rule of reason is based on a case-by-case analysis of the efects of specific situaions. The other approach (followed by the EU) is to exempt either specific agreements (along U.S. lines) or _generic ypes_ of cooperatve venres.

'T he literae on competition policy, both economic and legal, is huge. See Hay (1993) for a survey of cunTm conomic thinking; Boner and Krueger (1991) for a summary of the practices of ten coUnties as well as the EU.

'Emples of the latter include production (output) sharig, market allocation, exclusionary practices and the excnge of information between compedtors on variables such as cost and output.

4
can be made for a restrictive approach to _per se_ rules in the CEE context. Firms need to have the maximum amount of flexibility to compete in whatever way they see appropriate to their situation. Insofar as there is some uncertainty regarding the legal and institutional environment in an economy in transition, firms may need to be 'creative' in terms of their contractual arrangements.

The majority of countries with active antitrust enforcement identify three types of practices that _may_ be prohibited: competition-reducing practices or arrangements between firms; the abuse of a dominant position; and the establishment of a dominant position. Important in this context are not so much the specific legislated rules, but the criteria that apply when implementing the law. For example, in the context of an investigation into abuse of a dominant position, the criteria include those for defining the product and geographical scope of the market, the threshold of necessary market power, and the methods used to determine the feasibility of entry. Experience reveals that the effect and operation of competition laws very much depends on the implementing rules that are applied.

A final issue relates to the design of the institutional mechanisms for enforcing competition rules. This includes the allocation of responsibility for enforcing competition law to an entity, its relationship to the govermnent and legislature, its powers of investigation and sanction, its financing and staffing, and the mechanisms to ensure transparency and consistency, including the availability of an oversight or appeals body (the courts or a tribunal).

The approaches taken by OECD countries towards competition law and policy are quite diverse, reflecting in part differences in economic philosophy, and in part differences in size and openness. A number of lessons can be drawn from both economic theory and experience:9

**S** The focus of the rules and enforcement efforts should be on all sectors, including services, and should center on the _effects_ of agreements between firms, not on their form. The basis for intervening should be market power, not dominance (as measured, e.g., by market shares). A key criterion in investigating whether an arrangement between firms or an action of a firm violates competition nrles should be the ease of entry into, and exit from, the industry. Contestability is what matters.

* The mnumber of _per se_ prohibitions should be small and focus on horizontal, pricefixing arrangeme. Disciplines on vertical restraints should be subject to a well-defined contestability constraint, i.e., a necessary condition for pursuing vertical restraints is significant entry barriers. 9 Again, what follows draws upon a large literature. For recent, much more comprehensive discussions of competition rules and experience, see Boner and Krueger (1991), Hay (1993), Neven et al (1993), and the annual reports of the OECD Committee on Competition Law and Policy.

_5_
* Competition rules should provide _ex post_ disciplines on trade policy-created or supported abuse of market power, ideally including a mandate for competition authorities to recommend the removal/reduction of trade barriers and to be consulted in the trade policy formation process. * The criteria that are used in investigation **s** hould be spelled out clearly in guidelines. _De minimis_ rules should be included. Firms should face as little uncertainty regarding potential liability as is possible. Detailed reports of investigation **s** hould be published. Procedures should be transparent. * Civil parties should be able to sue persons (natural and legal) deemed to engage in behavior violating the competition rules. Enforcement authorities should have the power to levy substantial fines and award damages.

* Both investigating procedures and substantive reasoning should be subject to review by an appeals body that is independent of the enforcement authority. _*_ An independcnt body should exist with the mandate to analyze and publicize the costs and benefits to the economy of government created or maintained barriers to entry in individual industries.

III. **The** Europe Agreements' Competition Rules The Europe Agreements (EAs) foresee in the application of the basic competition rules of the EU by the associated countries to practices that affect trade between the EU and each Central and East European country. The rules relate to agreements between firms restricting competition, abuse of dominant position, the behavior of public undertaldngs (state-awned firns) and competition-distorting state aids (Articles 85, 86, 90 and 92 of the EEC Treaty respectively). Thus, competition policy is defined widely to include the behavior of governments as well as of firms. Implementng rules are to be adopted by the Association Council on a consensus basis within three years of the entry into force of the Agreements. "' Each Europe Agreement must be ratified by 13 national parliaments plus the European Parliament-because the agreements include issues on which the Commission does not have exclusive competence. So as to accelerate the implementation of the trade and trade-related provisions of the EAs, interim agreement were signed that entered into force on March 1, 1992 for the so-called Visegrad four (Hungary, Poland, and the Czech and Slovak Republics), May 1, 1993 for Romania and Decmber 31, 0 For a general review of reions between the EU and the CEECs, see Kennedy and Webb (1993). Pohl and Sorsa (1993) provide a summary of the EAs, and Mastopasqua and Rolli (1994) analyze the economic impact of the trade components of the agrement.

6
1993 for Bulgaria. They will remain in force until the EAs are ratified." As competition policy is a EU competence, it is covered by the interim agreements. The interim agreements revise the language of the EAs as regards the detennination of implementing rules by requiring that these be adopLed by decision within three years of the entry into force of the interim agreements by the Joint Conunittee (established under the earlier Cooperation Agrements that had been negotiated with Hungary, Poland and the Czech and Slovak Republics). Sub-committees for competition have been established under auspices of the Joint Committees. It has been agreed that cooperation between the EU and CEE antitrust authorities is to follow the 1986 OECD Council Recommendation dealing with cooperation on restrictive business practices affecting international trade, and Article V of the agreement between the EU and the U.S. regarding the application of their competition laws ('positive comity').'<sup>2</sup> The notion of 'positive comity' appears alongside 'traditional' comity in the September 1991 cooperation agreement in antitrust between the EU and the U.S.1<sup>3</sup> According to the traditional comity principle, sovereign states will consider important interests of other states when exercising their own jurisdiction (Art.VI of the agreement).'4 'Positive comity' shifts the initiative to the state whose interests are affected, which is given the legal option of requesting another state to initiate appropriate enforcement proceedings if this could address the complaining country's concerns (Art.V of the agreement). While it clcarly goes beyond the traditional principle that is embodied in the OECD Recommendations, the ultimate decision renains at the discretion of the state asked to act. As discussed further below, the ntion of positive comity could be exploited further in the trade-competition policy context.?s "As of end-1993 only the agreements with Poland and Hungary had been ratified. The respective Association Councils met in early March 1994 for the first time.

12 OECD (1994, pp. 14-15). During 1993 several meetings took place between CEEC officials and the EC Commission wherc issues relating to the implementation of competition policy were discssed. These meetings should facilitate agreement on formal implementation rules by the Joint Committees. Presumably these will simply be adopted by the Association Council once the relevant EAs have been ratified. DG-IV of the Commission has interacted with the CEECs with a view to harnonizing antitrust policies (not laws).

# "See, e.g., Ham (1993) for a discussion.

> 14 The 1986 OECD Recommendation, which replaced the 1979 Re daion and purports to strengthen intemnational cooperation in this field, encourages OECD members to give effect to the principle of tradidonal comity.

" France has challenged the Commission's competence to conclude this agreement, which has been characteized as administrative by the Commission and thus falling within its sphere of competence. The outcome of the case is still pending, although the Advocate General has already pronounced in favor of France's arguments. See Case C-327/91, French Republic vs. Commission. Even if France wins its case before the European Court of Justice, the 'positive comity' prnciple can still apply in the EA context as these have been legally concluded by the competent EC organs.

7
Appendix 1 reproduces the relevant Articles pertaining to competition policy from the EA with Hungary. The other EAs contain virually identical language." As far as disciplines on enterprise behavior are concerned, the basic rules of the Treaty of Rome have been included. That is, practices that restrict or distort competition and abuses of domiinant positions (in either the EU or the relevant CEE country); insofar as they affect trade, are to be assessed on the basis of criteria arising from the application of Articles 85 and 86 EEC. This wording implies that the case law that has been built up in the last 45 years in the EU applies. Art.85 EEC prohibits agreements and concerted practices-both tacit and explicit, whether enforceable or not-that restrict or distort competition in the common. market and may affect trade between EU member states. Both horizontal and vertical'restraints are covered. The EU applies a version of the 'effects' doctrine: the focus is on distortions of competition within the commaunity, independent of the national origin of the firms involved. Implementation -of the conduct withiix the EU is necessary to assert jurisdiction.'<sup>7</sup> Effects on trade may be potential; indirect as well as direct, and involve stimulating as well as restricting trade (e.g., through the use of cross-subsidization). A de **_1mimi1s_** rule has been established by the EC Commission under which finns with relevant market shares below 5 percent and aggregate annual turnover of less than ECU 200 million are exempted from 'the reach of competition disciplines. Art. 85:3 EEC offers the possibility of exemptions from the general prhibition on competition distorting agreements if it can be shown that the agreement is in the public interest."8 Certain types of agreements have bcen granted 'block' exemptions, including those relating to standardization and R&D cooperation, exclusive distribution (as long -as pirallel imports remain feasible),.exclusive purchasing and automobile distribution and servicing. The Commission can selfinitiate investigations or respond to complaints and has the power to -demand information and levy fines for noi-compliance.

Article 86 EEC prohibits abuse of a dominant position. Dominance is determLined on the basis of the relevant product and geographic markets. Dominance rnay relatd to the common market as a whole or 'a substantial part thereof." No quantitative criteria are mentioned in.Art. 86 regarding the interpretation of substantial, or the market share (or other indicators) requpired for dominance. Abuse is also left undefined. Art.86 contains an illustrative list of abuses, including unfair trading, price discrimnation, tieins or bundling, and restricting output or access to ma4ets.

_6_ The agreements do have minor differn as they were negotiated independenly.

_'7_ The 'pure' effects doctrine is therefore not accepted. See van Gerven (1989).

'Necessary conditions are: (1) that the agreement contributes to improving the production or distribution of goods or to promoting technological or economic progress, while allowing consumers a fair share of the resulting benefit; (2) the agreement is indispensable to achieve this benefit; and (3) it does eliminate competition in respect of a substantial part of the industry involved.

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There are sorne key differences between the rules that apply under the EAs and those that apply to EU or EEA Member States. First, the EAs do not reproduce Art.85:3 EEC and thus do not make any allowance tor the granting of exemptions. Presumably this will be one of the matters to be addressed by the Association Councii/Joint Committee in developing implementation rules. Until then, exemptions granted by national CEE competition offices do not have to be recognized by the EU (see also Bourgeois, 1993). Second, the EAs do not contain disciplines relating to mergers, and the Commission will presumably apply the relevant regulation unilaterally.9 Third, they do not spell out what bodies are responsible for enforcement of EA disciplines, tlh criteria for allocating responsibility, and the options for appeal. These are matters that are left for the Association Council/Joint Conmmittee to determine.

Public undertakings and undertakings to which special or exclusive rights have been granted (e.g., monopolies), are to be subject to the principles of Article 90 EEC within three years of the entry into force of the association agreement. Art. 90 requires nondiscrimination on the basis of nationality and behavior consistent with the other competition principles and rules of the EU, including Articles 8586 and 92, insofar as the application of these rules do not impede the realization of the tasks assigned to the public undertaing. State monopolies of a commercial character are to be adjusted within five years to ensure nondiscriminaiion regarding the conditions under which goods are procured and marketed between EU and CEE country nationals (this is analogous to Article 37 EEC).

Turning to disciplines on state aids, until implemendng rules are adopted, GATT rles with respect to countervailing of subsidies wil apply. State-aid, compatible with EU rules for disadvantaged regions (Article 92.3(a) Treaty of Rome), can be applied to the entire territories of the associated states during the first five years. Such regional aid may be given by EU governments to regions in their countries with per capita incomes that are substantially below average, or to areas where there is significant unemployment. The low level of per capita incomes in the Central and East European countries in comparison to those of EU states should ensure that non-industry-specific ste aids will be unconstrained in the medium term. The agreements also provide for enhanced transparency of state aids. The adequacy of these provisions are to be determined by the Association Council. State aids to agriculture and fishenes are excluded from competition policy disciplines, and separate rules are to be implemented bY the Association Council within three years for the steel sector. The latter are to be based "The 1989 merger regulon gives the Commission the right to vet mergers with a Communnity dimension for tbeir impact on competition. Mergers affected are those where the firms involved have a global turnover of at least ECU 5 bilon, the aggregate Commirzry trver of at least two of the firms is above ECU 250 million each, and at least two firms have less than two-thirds of their tumover in the same EU member state.

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upon Articles _65-66_ of the Treaty of Paris (European Coal and Steel Community, ECSC), and make allowance for state aids permiitted under ECSC auspices.

# IV. Competition Laws and Institutions in the CEE countries

Five of the six CEE countries currently have competition legislation in force: Bulgaria, the Czech Republic, Hungary, Poland and the Slovak Republic.' To a greater or lesser extent CEE laws are modeled on the EU's approach to competition policy, distinguishing between collusive arrangements (Anticle 85), abuse of dominant positions (Article 86), and rules for mergers. All the Laws apply to goods and service markets (although some services are excluded in some jurisdictions), all appear to follow an 'effects doctrine' approach, and all are based on the conditional prohibition model. While many types of collusive arrangements appear to be prohibited on a _per se_ basis, in most cases exemptions are possible. Although superficially similar, there are substantial differences between the various law!. The discussion that follows draws upon the more detailed overview in Appidix 2.2 After the breakup of the Czech and Slovauk Federal Republic, the 1991 Federal competition law continued to be enforced in both countries. The Czech Republic adopted an amendment to the 1991 Federal law in November 1993, and a revised law is expected to be submitted to the Slovak Parliament in mid-1994. Until the Slovak Parliament adopts the draft legislation the Slovak Antimoopoly Office will apply the 1991 Czech and Slovak Federal law.

# _Substive discplines_

All the CEE laws prohibit cetain types of anti-conpetitive practices on a conditional basis. The Czech and Slovak law is the only one to contain an unconditional _per se_ prohibition on arrangements that violate legal norms of ethical behavior and on contracts that obstruct 'in a substantial way economic competition in a market." It provides an illustrative list of agreements that are prohibited (void) unless an exemption is granted by the competition authorities. Exemptions are automatic for an exhaustive list of tys of prohibited agreements if the authority makes no objection within two monhs of the receipt DIn Romamia work is ongoing on the drafting of an anttrust law. At the ime of writing the only laws to address some competition-related. issues are the 1991 Law on Unfair Compettion and the 1990 Law No. _15_ conceming rescauring of state economic units. The former incuds some prnrciples of free competition; the latter prohibits (on a _per se_ basis) certain practices, including price fixing (Chapter V, Association and Free Competition).

2 1Gray (1993) and Mastalir (1993) provide comp summaes of the anttrust legislation in the CEECs.

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of the request for an exemption.? For other types of agreements explicit exemptions must be granted, the criterion being that this is in the public interest, in turn defined as supporting technological or economic development. The November 1993 Czech amendmen **t** o the Federal law gives the Ministry of Economic Competition the right to grant block exemptions along EEC 85:3 lines. The Hungarian law contains a much shorter illustrative list of prohibited practices, relying instead on a general rule: agreements are not to result in a restriction of rnonomic competition. Exemptions can be granted if an agreement is aimed at stopping the "abuse of economic superiority," or is "of minor significance (defined as the firms involved having less than 10 percent of the relevant market), or if the restriccdon does not exceed what is required to achieve "economically justifiable comnon goals" _and_ the resulting economic benefits outweigh the costs. The Office of Economic Competition may present an appeal to the Constitutional Court to express criticism of effective laws and regulations. To date, this option has not been exercised (OECD, 1993c).

The Polish law has an exhauive rather than illustrative list of prohibited 'monopolistic practices'. Exemptions may be grrited if the agreements do not significantly restrain competition and are "necessary to conduct an economic activity." The Bulgarian law does not list specific collusive arrangements, simply contaning a sweeping prohibition on contracts that restrict the choice of a party to the agreement or consumers, unless these are not injurious to consumers. Exemptions can be All the laws follow the EU approach of prohibiting the abuse of dominant positions. In contrast to Article 86 EEC, the CEE countries have specified quantitative criteria defining when a position of daminance exists. The Czech criterion is a market share of 30 percent or more; in Poland it is 40 percent; in Hungary 30 percent (or 50 percent for the largest 3 firms); and in Bulgaria it is 35 percent. Firms meeting the criterion are required to notify this to the antitrust authorities. The Czech and Slovak, Hungarian and Polish laws contain illustrative lists of abuses of dominant positions, while the Bulgarian one has an exhaustive list.

Turning to merger disciplines, all the laws require firms to notify mergers that result in a market share exceeding a target level. These levels are those that comprise dominance, i.e., a market share of at least 30, 40, 30, and 35 percent, respectively, for the Czech and Slovak Republics, Poland, Hungary and Bulgaria. However, Hungary also requires all mergers where the joint turnover is at least 10 billion forint (some $100 million) to be notified, even if the market share threshold is not exceeded. More generally, both the Czech and Slovak and Hungarian laws allow mergers that exceed the threshold 2 The agments concemned are uniform application of oconditons of trade; rationalization of economic activity, including sealizaton agreements; nondiscriminatory rebates; and ail instances where the market share of the fims is below 30 prcent of the relevant market.

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to be approved if the resulting economic benefits offset the costs. However, how these ten-as are defined remains unclear, and usually itrwill be up to the firm(s) involved to present a case.23 The Polish and Bulgarian laws do not mention any criteria at all for approving mergers that exceed the market share threshold. In the Czech and Slovak case mergers are automatically approved if no objection is made within three months of notification. In Poland and Hungary this period is two months, and in Bulgaria only one month. Extensions of these time limits arc possible.

It is noteworthy that the Czech and Slovak law gives the competition authorities the right to conmnent on privatization proposals. The law requires the govermmen **t** o analyze the market conditions that are likely to result from a privatization proposal, and ensure that privatization will either result in the abolition of a monopoly if one exists, or not result in a monopoly if one does not exist. The Polish law contins a similar provision that has been actively applied. Over 1.900 'structural decisions' (relating to privatization and transformation of firms) were made in the 1990-92 period by the Polish Antimonopoly Office, of which 89 percent were approved (OECD, 1993a, p. 18). Hungary and Bulgaria do not give their competition offices similar (transitional) powers.

# _Procedural and institutional provisions_

In all cases a separate enforcement agency has been established. The powers of the agency vary substantially across CEE countries. The Bulgarian Connmission for Protection of Competition is the - weakest. All its members are appointed by the National Assembly for a 5 year period and can presumably be fired by the same. It cannot impose fines in instances where it fids the law to be violated, having to go through the civil courts to do so. Its main remedy is the right to suggest to the *Council of Ministers that it impose mandatory mmiimum or maximum prices for entities with a dominant position. The head of the Czech competition office is a member of the Goveriment (with the tide of Minister of Economic Competition). The Czech antitrust office has the power to levy fines up to 10 percent of the firm's net turnover or equal to the profits garnered as a result of violating the law. In practice, however, some competition policy decisions are apparently taken in cabinet meetings- In Poland, two competition bodies were created: an office in charge of investigations, and a court in which decisions may be appealed. The head of the Polish Antimonopoly Office is appointed by the Prime Minister. Fines may be inqmosed by the office up to 15 percent of after-tax earnings of the firms.

3 Arguments hat have been used in the Czech context _by foreign firs_ that merged with or acquired Czech enterprises to demonstrate that net benefits were positive to the economy include: (i) provision of investment necessary for reconstnuction/marmization of plants; (ii) enhancing eors; (iii) improving product quaity and competitivene; (iv) preserving employment; (v) introducing moder managemen **t** echniques; and (vi) facilitating _transfers_ of technology.

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Altematively, firms may be required to reduce prices and firms with a dominant position may be required to divest parts of their operations.

The head of the Hungarian Office of Economic Competition is appointed by the President for 6 years on the recommendation of the Prime Minister, and can only be fired 'if unfit for office on a lasting basis." The office is funded from dLe State budget, and is answerable to the Hungarian Parliament. It can impose fines ranging between 30 and 200 percent of the profits resulting from the violation of the law. The office has three parts: a Board of Experts responsible for investigations, a Competition Council which acts as an arbitration (administrative) court, and a Department of Competition Policy that is responsible for research and policy advice to ParliamentL The Council does not have competence to judge violations of 'unfair competition' (Chapter 1 of the Act), instead having to file suit in civil court. The Slovak Antimonopoly Office is a central government body. Its Chairman is appointed and recalled by the Govermnent. Decisions of the Office can be appealed before the Supreme Court.

The antitrust agencies in the CEE countries are all required to publish decisions. The Czech, Hungarian and Bulgarian laws allow for hearings to be held, but do not require it. The Hungarian enforcement agency is subject to the strictest time limits for investigations?25 Decisions by antitrust offices can be appealed in all the jurisdictions. In Poland appeals go to the special court created for this purpose; in the other three countries appeals go through the civil courts.

The number of cases brought in the Czech Republic, Hungary, Poland and the Slovak Republic have been quite significant. In 1992, 255 cases were handled by the Hungarian Office of Economic Competition; in the Czech Republic out of 1,200 complaints filed in 1992, the Czech Office opened some 100 investigations. In Poland, 113 anti-monopoly investigations were launched in 1992, the total for 1990-1992 being some 300 (OECD, 1994). The Slovak Antimonopoly office investigated 158 and 164 cases in 1991 and 1992, respectively, and saw its case load rise to 274 cases in 1993.3

# _Ealuion_

A commonality of the CEE laws is that imple authorities are given a great deal of discretion as far as interpretation of terms is concerned. Much will depend on the case law that emerges from experience and the guidelines that are developed by the competiion offices. Although the leeway

## 24 Pogacsas and Stadler (1993).

5 Cartel, merger and aU other investigations mnst be concluded within _45,_ 90 and 60 days, respectively. Maximum extensions allowed for each category are _45,_ 180, and 60 days (Pogacsas and Stadler. 1993).

Fmancial Times Businmess Infornation, _Busuiss Law Brief,_ DIALOG database, October 1992, and private corrspondence with M. Banas.

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given to administering authorities is substantial, this also provides an opportunity to adopt implementing regulations that increase their ability to influence trade/FDI policy stances (see below). As it stands, however, firms operating in the CEE countries will face a substantial amount of uncertainty regarding the precise nature of the rules. Only the Czech and Hungarian laws explicitly make use of _de minimis_ provisions (5 and 10 percent share of the relevant market, respectively). Greater use of the concepts of horizontal and vertical restraints would help increase transparency and certainty. Only the Hungarian law makes a clear distincdon along these lines, only prohibiting those vertical restraints that involve firms with a dominant position.' The reliance on explicit market share thresholds as the main criterion for dominance distinguishes the CEE laws from Article 86 EEC. While apparendy a straightforward indicator that should reduce uncertainty for firms, it may be difficult to monitor for firms. Market share is also not a sufficient indicator of dominance. Much will depend on the definition of the relevant antitrust market and the extent to which entry barriers are found to exist, issues that is generally left open in the various laws. Here the trade policy stance of each country will be important.

The Hungarian office has the greatest independence from the political system, followed by the Polish and Czech offices. In general, it appears that greater emphasis could be put upon procedurl requirements and transarency. Hearings are neither mandatory nor necessarily public. Decisions _and_ argunents/reasoning/analysis should be subject to a publication requirement. There is a strong political economy argument to be made for maximizing transparency, as this both increases certainty/knowledge of firms regarding what is allowed and what is not, and reduces the incentive to engage in rent-seeking.

V. Competiton Rules and Trade **Policy:** Issues and Options In the context of the EAs, four dist time periods can be distinguished for each of the CEE countries that are relevant in terms of the implementation of competition rules: (1) the period up to the entry into force of the competition articles of the Interim Agreement; (2) the period until the entry into force of the EA; (3) the phase during which the EA applies; and (4) the phase during which the country has become a member of the EU.

# **The** pre-Europe **Agreement** phase

Each CEE country in principle has only three years after the implementaion of the Interim Agrememe in which it is unconstrained regarding its competition policies. Despite EA obligations, substatial discretion remains for national authorities regarding the implemenion and enforcement of D Poland and the Slovak Republic have drafts of new legislation that makes this distincton, whilc the November 1993 Czech law does not. However, in applying the law, the Czech Ministy of Economic Competiton does differentiate between vertical and horizontal agreements.

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its competition policy. In this section EA obligations are assumed away. The question of EA compatibility is addressed in the next sub-section (and in Appendix 2). Taking into account die fact that the majority of the CEE countries have competition laws and enforcement bodies, policy issues that arise include: (1) whether the competition rules in force are adequate or appropriate; (2) at the level of implementation, what should be given priority by enforcement authorities, given the substantial amount of discretion implied by the wording of their respective laws; and (3) whether the enforcement agracies have sufficient resources, power, and political independence to do theirjob. In this Section the focus will be primarily on the second question. We only have limited information and knowledge on the last question. We simply assume, perhaps heroically, that there are no major problems in this connection. [f there are, they should be given priority.2U As to the first question, many of the CEECs are in the process of amending their laws (see Appendix 2), in part with a view to meeting the EA obligations. This is not the place for a ailed discussion of the specific changes to each of the laws that might be considered by the respective governments. Given the wide scope for discretion that is inherent in the emforcement of competition law, decisions that are inter-al to the implementing bureaucracy will to a great extent determine the effective impact of the laws. What is of key importance then is to enhance the transparency of the process, and minimize to the greatest extent possible any uncertainty market participants might have regarding the criteria that are employed by the competition authorities.

What might be done in addition to what is already being done by competition offices with a view to reducing the scope for protection-seeking? First, and foremost, it appears useful to clarify the potential scope of anttmst for local firms by defining terms and criteria used in investigations. Given the great latitude that enforcement agencies have in the CEE countries as regards interpretation of the law and the application of criteria, very much can be done in this. manner to reduce uncertainty and focus the attenion of the agency in particular directions. Efforts should be made to specify clearly what practices are _defacao_ prohibited on _aperse_ basis, thereby publicly announcing what restraints (and those economic effects or results) that are considered to be most pernicious. Drawing upon the experience of OECD countries, one procedure could be to distinguish vertical from horizontal restraints, and indicate that specific horizontal agreements will be viewed very critically if requests for exemptions are received, while vertical restains wilE be regarded as being much less likely to infrige upon competition principles (Willig, 1992). Those jurisdictions that do not have legislated _de minimis_ criteria should adopt and publish relatively high thresholds in their implementing procedures. The EU approach of defining block

> 2 Howeer, the Czech compedtion office has been held to be undestaffed by a Deputy Minister for Competition. BNA, _Amnmvst and Trade Reguluion Report,_ December 24, 1992, no. _1596._ p. 787.

* ~~~15
exemptions can be emulated.<sup>3</sup> This again does not necessarily require formal legislation. As competition offices are responsible for granting exemptions, they can determine the categories of agreements that do not have to be notified. Flassig (1993) has noted that during the transition, firms and consumers that are negatively affected by restrictive business practices may be unwilling to bring cases given their dependence on existing relationships. It is therefore also important that the competition authorities take a lead role, and exploit their mandate to self-initiate.' Finally, transparency can be further improved by publishing not only decisions but also the underlying analysis and reasoning.

Competition authorities can act as the 'conscience' of the government, recognizing and publicizing the costs to consumers of government policies and actions that restrict competition. Trade policy is one obvious area that should be given priority in this connection, the service sector another. cbmpetition policy offices could consider actively applying antitrust law in the light of maintained trade policies (e.g., accounting for the effect of protection on market structure, concentration, etc.). Much can be done in this connection through appropriate wording of criteria and implementation guidelines within the framework of currently existing legislation. For example, trade policy considerations can be linked to the definition of the relevant antrst market.<sup>3</sup> " In principle, the more an industry is protected, the narrower could be the definition of the relevant market, thereby reducing the expected profitability of seeldng protection, and thus the incentive to lobby for it. In a similar vein, GATT ilIegal or 'grey-area' measures such as voluntay export restraint and import expansion agreements should be publicly stated to be unenforceable, and subject to competition policy enforcement.32 _De nmirumis_ provisions can also be .relatea to the trade policy stance that affects an industry. The more liberal are market access conditions for foreign firms/products, the higher can be the threshold that is applied.

29As was done by the Czech Republic in November 1993, and is also envisaged in the draft Slovak law.

30 Polish and Slovak statistics suggest that complaints account for two-thirds of total investigations (OECID, 1994). Hln Hungary, the majority of the pxocedures in 1992 started on the basis of applications (236 cases), the Office of Economic Competition using its right to initiate proceedings _er offico_ in only 17 cases (OECD, 1993b). In part this may reflect the wording of the laws and the tanstion proces. As noted by Fomnalczyk (1993), the Polish Anuimonopoly office was obliged to initiate investigations whenever a complaint was' received, and we required to review applications for all mergersfuasformationi. Resource constraints then "crowded out" a _ofici6_ actions.

> **"** Aahorities have substanti latitude in this connection, as the relevant market is not clearly defined in any of the laws. ln most jurisdictions the concept is defined through case law and administrative practice.

'2 It can be noted in passing that GATT obligations and disciplines have little impact on the pursuit of domestic competition law, even though in principle the linkages betwecn GATT's trade policy disciplines and domestic competition policies are greatr than is commonly thought. See Hockman and Mavroidis (1994).

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Active scrutiny of petitions for contingent protection should also be pursued by competition authorities. Hungary and Poland already have antidumping legislation, while the Czech and Slovak Republics intend to adopt the necessary statutes. Ample experience in the EU and the U.S. has demonstrated that such measures may be very costly to the economy. Antidumping in particular can be used as a tool to substantially reduce competition and enforce collusion. Ideally, no contingent protection should be granted by a governnent if this would have a substantially negative impact on competition (e.g., strengthen market power or dominance). The decision by the Polish government to give the Antimonopoly Office the responsibility of implementing antidumping investigations is particularly noteworthy. This is laudatory, as it should ensure that competition policy criteria are applied to the firms (industry) applying for protection. Rather than being limited to an _ex post_ role, the competition authorities in Poland have an _ex_ ante responsibility. Of course, it is important that competition policy criteria are indeed applied, and that _ex post_ monitoring remain possible. It is not necessary that competition offices be given the task of applying antidumping actions; what matters is that they are able to vet such actions before they are taken. Poland is unique in this regard. However, the draft Czech amntidumping statute also gives a role to the comnpetition authorities. While not given a formal responsibility, the draft stute proposes that the decision to apply an antidumping action be taken by the Govermnent, and not by those administering the statute.33 As the head of th.e competition office has Ministerial rank, this at least allows competition concerns to be raised.

The political situation in the CEE countries may be somewhat special in this regard as there may be a perceived conflict between vigorous enforcement of competition law and the transition to a market economy. For example, to attract inward FDI a govermment may be willing to provide 'guaranteed' markets to inward investors, and do so in a way that conflicts with competition policy principles. As noted by Imrich Flassig, "Foreign companies participating in mergers often demand conditions for the establishment of joint ventures that they would never dare to expect in their home countries. They took for certain concessions for the protection of their desired markets, such as customs privileges. The foreign partners in joint ventures seem surprised by the reaction of the [Federal Czechoslovak Antitrust] office and by the rights that it has, although in their home countries they would not behave in this way... **.** A]s a new insitution ... we find it quite difficult to devise proper measures for the necessary ... strict adherence to the law. But if we demand too severe terms, we may discourage many foreign investors; that would restrict the creation of a competitive environment, affecng particularly the fuxre relaxation of

> _13 East-west,_ No. _558,_ October 28, 1993, p. 3.

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protectionist measures in relation with the EC (Flassig, 1993, pp. 73-74; see also Fomnalczyk, 1993).?

Notwithstanding active participation in the policy formation process, CEE antitrust offices have had only limited influence in opposing competition-reducing policies, be they restructuring/privatization-related or trade-related. Thus, in the case of Poland, despite attempts by the Antimonopoly Office to prevent excessive concentration in privatized industries, often industrial or social policy considerations dominated competition concerns (OECD, 1994, p. 13). Indeed, the Polish Antimonopoly Office supported substantial reductions in import tariffs for industries that were highly concentrated (monopolized). The resulting adjustment pressures and deterioration of the current account were such that tariffs were subsequently raised in August 1991 (the average tariff rising from 8 to 17 percent) (Fornalczyk, 1993). The Czech government guaranteed Volkswagen (which acquired a large stake in Skoda) that import tariffs on cars would remain at 19 percent (15 percent for vehicles of EU origin) for at least 4 years.35 However, an active stance does have some effect. For exnample, the Czechoslovak antitrust office was "absolutely opposed" to the imposition of a high import tariff on cars, and succeeded in lowering the tariff that came to be applied (Flassig, 1993).

The main point to be emphasized is that competition offices have two ways of 'internalizing' trade policy. The first is to oppose trade policies that excessively harm competition on the domestic market; the second is to countervail the anticompettive effect of trade policy on an _expost_ basis. The fist, 'direct' approach has been actively pursued by a number of the CEE competition offices. In this they compare very well to competition offices in OECD countries, who are much less visible. By commenting on or opposing suggested or existig tade policies, the competition offices ensure that the economy-wide implications of sectoral policiesllobbying are recognized and discussed. The main power of competition offices is, however, of an _expost_ nature. Active enforcement, with guidelines that clearly specify that trade policy wili be an important consideration in the implementing competition laws, will help bolster the effectiveness of ea _ate_ opposition to policy proposals that restrict access to markets.

Another possibility that could be pursued is to use competition law enforcement as an instument to reduce the probability of facing contingent protection in export markets. This is an issue that applies during both the pre-EA and the EA phase, given the continued availability of antidumping 3 'The last smtement is arguably untrue, as what is being cmeated are rents. Investors may require some inducements, but guareed markets should not be one of them. Indeed, a case cm be made that atacing foregn direct investment might be given priority over the braking up of monopolies, but that an overriding concern should be that the govenment dbes not maintain barriers to entry_35 East-we3r,c_ No. 555, September 2, 1993, p. 6.

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to EU import-competing firms under the EAs. The existence of threats of antidumping and safeguard actidns on export markets increases the incentive to control state trading, subsidization, and abuse of dominant positions. By enforcing antitrust law and allowing entry, the feasibility for import-competing finns in export markets to argue that unfair trade is taking place is reduced. There are various avenues that can be pursued here. The first is simply an informal 'lobbying' effort on the part of the CEE government involved, under which it is argued that competition law is being actively enforced, that trade barriers are low and that there is therefore no justification for aaddumping. This may have some beneficial impact, depending on the importance of the EU industry concemed. A second, complimentary, approach could be to exploit the 'positive comity' principle (see above). The Connission could be formally requested to examine each antidumping petition brought by an EU firm/industry in light of the active enforcement of EU-based competition laws in the CEE home market of the exporter.' A third is to ensure that the country is trea as a market economy by importing nations implementing antidumping actions. Active competition law enforcement will help bolster the case for this.' The service sector may be of particular relevance in this connection, as perceived restrictions on access to distribution channels and related services is sometimes held to be one justification for the imposition of antidunping measures. More generally, whatever the impact on contingent protection actions in export markets, it is very important that antitrust authorities actively pursue a strategy of fostering the contestability of service markets. Services are especially important in the process of economic development in their role of inputs into the production process generally. Services increasingly comprise the largest share of value added to a manufactured good. Design, the organization of production, inventory and production management, packaging, distibution, marketing and after sales interaction with clients (guarantees, maintenance) are all service activities.

The nature of services are such that markets are often characterized by proximity requirements (prohibiting trade and implying that competition is local), asymmetric information and imperfect competition38 Reputation is often crucial in signalling quality to consumers, and as reputation is difficult to establish (being a sunk cost), service markets may be difficult to contest. Pervasive product 3" A statement by Sir Leon Brittan on February 5, 1994 during an iaformal meeting of EU Trade Ministers and the EC Commission bolsters the importace of establishing that CEE markets are open and that compettion laws are enforced: 'if the countries of Central and Eastern Europe want EU industry to be satisfied to the point that EU markets are further opened, the best assurance they could have is that the same competition laws **exist** in Central and Eastem Europe' (Europe fnformation Service, _European Report,_ No. 1924, February 9, 1994).

' This is no longer an issue in the EU context. As of the entry into force of the Interim Agreements, the CEECs are regarded as market economies by the European Commission.

> t -See Sapir, Buiges and Jaquemin (1993) for a discussion.

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differentiation may further enhance the market power of incurnbent firms. While it may be the case that for certain regulated services it is necessary to ensure that quality standards are satisfied, the competition authorities should attempt to ensure that 'consumer safety justifications' do not act to bolster the market power of incumbent firms by having a protectionist effect.

One lesson that can be drawn from the past decade's experience with privatization of service industries in both developed and developing countries is that many services that were (are) provided by the public sector can also be provided by the private sector, often at much lower cost. Of course, this does not necessarily imply transfer of ownership of assets, or the absence of regulatory oversight. What it does imply is the adoption of institutional forms making such markets contestable. Foreign investors can make a significant contribution to the improvement of the efficiency of 'public' infrastructure services. Development of an efficient economy requires that domestic residents-both final consumers and businesses-have access to high quality services for the lowest possible price. Foreign firms will often offer services that are not provided by domestic incumbents, but for which demand exists. Moreover, because many tnsnational service fims have an international reputation which they need to maintain, the average quality of the services provided is likely to be both higher and more constant than what is available from domestic firms. Many of the service products that will be offered in host country markets are likely to have been developed and tested elsewhere, further reducing quality uncertainty. However, prices charged will be competitive only as long as care is taken that foreign service corporations do not establish a dominant position and exploit their market power. It is therefore important that efforts are made to ensure dtat markets remain contestable. In practice this implies that no restrctions should be placed on the number of foreign firms that are alowed to offer specific services. Entry should be free, subject to prudential supervision as deemed necessary, as the most effective source of competition for many foreign service affiliates is likely to be (the threat of entry by) other foreign or local service corporations.

As many service firms possess certain intangible assets that cannot be patented or similarly protected, care must be taken at arrangements that involve the transfer of such assets and that may appear restrictive at first sight are not automatically deemed to violate the competition rles. Great care must be taken in determining whether such practices are anti-competitive, and if so, are detrimental to efficiency. In many cases they may simply reflect the need of a fizm to safeguard its reputation for quality. What matters is the impact on the contestability of the markets concerned. Free entry can be expected to ensure that markets remain competitive-so that the variety and quality of services is maximized and prices are minimized. -Even service industries that have natural monopoly characteristics, so that only one or two firms are able to exist, can be made contestable via the periodic auctioning of 20
operating licenses by the govermnent. The main focus of the competition authorities in this regard should be on the regulatory regime that affects services industries.<sup>3</sup> 9

# The Europe Agreement phase

This phase has two parts: one transitional, the other the period during which the EA is fully implemented and EU memnbership is not yet achieved. The transitional period is especially important because competition authorities will have to help ensure that EA-envisaged market access liberalization is realized, and is not offset by private/public actions. Once the EAs are in force, national implementation and enforcement of competition rules must be consistent with the relevant EU principles and the implementation rules agreed to by the Association Councils or Joint Committees.

There are two dimensions to EA competition policy disciplines, one pertaining to firms, the other to governments. As far as the latter is concerned, although far-reaching, EA obligations will only bite gradually. The complete territory of the CEE countries will be regarded as a disadvantaged EU 'region' for five years after the entry into force of the EAs. The primary substantive requirement in this period is transparency related: each CEE government must establish an agency or body responsible for the collection of data on state aids and subsidies more generally. Governments niight consider going beyond this EA obligation by establishing (or supporting the creation of) an institution that not only collects data on subsidies/state aids, but analyzes such data and combines them into industry-specific measures of effective support. The Industries Assistance Comniission in Australia is an often mentioned example that could be emulated (Spriggs, 1991).

Tuning to the classic domain of competition policy, two issues arise: (1) the compatibility of existing laws and procedures with the EAs; and (2) the policy options facing CEE authorities once the EAs apply. The first question is addressed in Appendix 2. In principle the CEE competition laws are modelled on Art.85-86 EEC. However, there are inconsistencies with EU language and implementation criteria/guidelines, some of them substantial. An example is the scope for ptesenting an 'efficiency defense' in merger cases in the Czech and Hungarian laws. This is not possible under the EU Merger 39 Many of the CEE competition offices are sensitive to these issues. For example, the draft Slovak oompetition law requires the penodic auctionng of operating licenses. The Czech Ministry of Economic Competition has been particularly active in its atempts to erhance competition in the service sector. The Minister opposed a decision by an inter-ministerial commissioi **n** the context of the privatization of SPT Telecom to protect it from competition for four years, and supported the idea that foreign entities be able to have 100 percent control of local telecommunications networks. The Ministry has also challenged the 20-year monopoly that was granted to Eurotel, the provider of cellular phones, and supports imports of electricity (Financial Times Business Information, _Finance East Europe,_ March 4, 1994).

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Regulation.' Another example is the provision in the Hungarian law permitting anticompettive agreements that are aimed at offsetting 'economic superiority', something that clearly is not possible under the EU rules. In general, there is greater leeway in the CEE laws for 'public interest' defenses. Another example is the possible exemption of cartel agreement on this basis in the Czech and Slovak law. Space constraints prevent a detailed analysis of the various 'incompatibilities' of CEE laws and EU rules and practice (see e.g., de la Lauencie, 1993). Many of the differences will have to be addressed in the coming years.

Tuuming to policy, an important question is whether the entry into force of the EAs should lead to a change in the relative weight/attention that is granted to different types of competition iaw violations. For one, free trade/free establishment for EU firms should be enough to ensure that many markes become contestable. Moreover, once an EA is in force, CEE countries may be able to rely in part on enforcement by the EC Commission. This will depend to what extent an anticomnpetitive practice in a CEE country may have (potential) effects on trade between that country and the EU and therefore be subject to EU enforcement. An implication is that less attention may be necessary with respect to potential abuse of domnant positions, as the contestability of markets will presumably increase substantially. Greater priority might consequently be given to nontradable industries in general, and to those tradeable sectors where liberalization occurs most gradually, or not at all. Taken into account Commission resource constan and the limited significance of CEE markets in most products, CEE govemments cannot realistically rely on the Commission for :he enforcement of EA competition disciplines. Vigorous national enforcement will remain crucial in the EA phase.<sup>4</sup> ' EA obligations in the area of trade liberalization are much more far-reaching than-those of the GATr, but are of course preftential in nature. Thus, there is sdll a need for concern about the trade policy stn vis-a-vis the rest of the world. Although freedom of trade and establishment is to be achieved within ten years of the entry into force of the EAs, tariff elimination is gradual, and QRs have been maintained for certain activities during the transition5 The binding nature of the EAs should

# - See Jaquemin (1990) ad Neven et al. (199).

41 For exmple, it is unikely thmany megers involving EU and CEE firns will satisfy the EU's criteria for turnover and maket sbare. In practice, EU anforcem can be expected to aply largely in inces where the merger involves a dtird-coumtry firm.

42 Quotas were to be abolished by the CEECs upon entry into force of the agreements, with a few exceptions for 'sensitive' industrie **s** uch as automobiles. Poland committed itself to eliminate tariffs on about 30% of its imports from the EU in 1992, and to abolish the remainder over a seven year tramsition period, with duty reductions taing place during the last four years. Hungary will liberalize 12-13% of its imports over a dtrce year period in anmual steps of one-third, another 20% between 1995 and 1997, agaim in steps of one-third and the rest (twotirds) between 1995 and 2001, in steps of one-sixth per year. The Czech and Slovak Republics 22
ensure that protection is indeed transitional, and domestic protected industries will presumably realize that they have only a limited period of timne to prepare for competition from EU firms. A potential problem that arises is that protection creates vested interests, and these can be expected to lobby the govemment for continued assistance. One way this might be done within the confines of the EAs is to argue for 'safeguard' actions once liberalization starts to bite. The primary safeguard mechanism embodied in the EAs allows actions to be taken if imports from the trading partner "cause or threaten serious injury to producers of like products or serious disturbance in any sector of the economy or difficulties which could bring about serious deterioration in the economic situation of a region' (Article 30 of the Hungarian EA). This is very broad language. The concepts (criteria) are also not defined, nor is reference made to the GAfT or other treaties for guidance. There are no explicit sunset provisions or time limits.4 Competition offices should take into account the antitrust implications of safeguard actions, and actively enforce the law in instances where safeguard actions result in violations. Similar issues may arise as far as establishment- is concerned. The CEE countries will grant free entry and national treatment to EU firms, subject to negotiated phase-in periods for certain sectors or activities. The modalities and content of these exceptions again differ across CEE countries." There is also a need to consider other will dismantle over a sevna year period. A preferential tariff quota was established by Poland for motor vehicle imports from EC producers (25,000 units, to increase by 5% a year, and to be abolished within 10 years), and a list of 144 items remain subject to import licensing in Hungauy. This includes passeng cars (subject w a preferential quota of 50,000 uiits, to increase by 7% per year), aircraft, telecommunications equipment, chemicals, pharma s, plastics, wood and leather products, and footwear. Between Janay 1, 1995 and end-1997, Hungary is to eliminate quantitative restricdons on EC exports of these goods up to an amount of 40 peren of such imports. All QRs are to be eliminated by end-2000, and are to be increased by 10 percent per year during the transition period.

43 Te foregoing refers to the EAs geneal safeguard clauses: e.g., Articles 29 and 30 of the Hungarian EA. The EAs also contain a safeguard clause allowing temporay entry restrictions andlor trade barriers to be introduced by CEECs during the first stage of the tramsition period to support industri and comercial sectors undergoing restrucuing pmgrams, of an 'infant industry' natue, or facing elimination or a drastic reduction in total market share. Tariffs, if used, are not to exceed 25%, EU producers are to be given a ma of preference, quotas if used are not to exceed 15% of the total indusial imports from the EU, and actions may only be taken within three years of liealization of market access and are not to last moe tha five yeaus.

Two A Es are rxepnive. Poland granted immediate freedom of establishent ad nationa treatment for construction and most mm g acvities, with the exception of mining, praceing of precious stones and metas, explosives, ammunition and weaponry, phamacuticals, alcohol, high voltage power lnee and pipelie transportation. AR but the last two acivities are to be liberalized by the end of the first stage of the transition period (5 years), at which time most service sects will also be libralized (financial, legal and real state services excepted). By the end of the transitional period (ten years) acquisition of state owned assets under privadzation; owneship, use, sale and rent of real property; real estate agency services; legal services; high voltage power lines; and pipeline transportation will be libealized. Th Czechoslovak agreement liberadiz all sectors immediately except for defence industry, steel, miwnng, acquisition of sat-owned assets under privatizadon, ownship, use, sale and ren of real property, and real estate service activities, and the financial 23
options through which firms may seek to continue to benefit from govenunent support. As noted earlier, Poland has given EU car producers preferential access to its market, by imposing a tariff quota on imports, and defining criteria for the allocation of this quota that strongly favor European firns that have invested in Poland (Messerlin, 1994). Tarffs on cars are currently high, standing at some 35 percent. The provisions of a recent joint venture agreement between FSO, the Polish state-owned car company, and General Motors illustrates the pressures that may arise to maintain such the benefits of arrangements. The Polish government provided assurances in the contract establishing the joint venture that it "will compensate GM for losses resulting from future changes in tariff and tax conditions."" That is, GM will apparently be able to demand compensation from the govermmen **t** o offset the reduction in the tariff from 40 percent to zero that is required under the EA over a ten year period. The signal to potential competitors is clear: the costs of contesting the Polish market will be higher. Careful scrutiny should be given to such arrangements so as to ensure that no abuse of a dominant position results, and that markets remain contestable.

An implication of the foregoing is that competition offices need to continue to keep a wary eye on trade policy. The entry into force of the EA should imply that somewhat less emphasis can be given to the behavior of firms with a dominant position that produce tradables, and that greater priority be given to nontradables (services) and industries where the transition to free trade and/or freedom of establishment is long or delayed. As already noted, access to many service markets will only be liberalized gradually, on a national treatment basis, with establishment being necessary. The contestaoility of these markets will largely be determined by the attitude taken by the antitrust authorities. The EAs do not require liberalization of cross-border trade in services, this presumably being kept off the agenda to prohibit regulatory competition. As a result, it remains important that the competition authorities continue to closely monitor the contestability of service markets.

A special complication arises from the continued existence of antidumping and safeguard threats under the EAs. This may be an inducement for CEE firms to collude, if not explicitly then tacitly, with each other and with EU competitors. Continued threats of contigent protection on the part of the EU implies that CEE firms will face different standards than their EU competitors. EU firms will be permitted to engage in price discriminaton or sell below cost on the EU market, whereas CEE firms will be constrained in pursuing such a strategy by the existence of EU antiduiping procedures. On EU service industry. These activities ae to be liberalized by the end of the ten year tansition period. Both countries pemanenty exclude ownership of natural resources and agricultual land/forests.

u -GM and Polish cmaker reach assembly deal,' _Funacial_ **_flirt,_** November 14 1993, p. 5. It was GM Europe doat originally asked the Polish govemmen **t** o introduce this high tariff rate, apparenty making this a precndition for its joint ventme with FSO (Messerlin, 1994, p. 9).

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markets, price discrimination by CEE finns in the sense of selling products at prices below those charged at home may lead to antidumping petitions if this injures EU firms. Such dumping is unlikely to be the result of concerted practices or abuse of dominant positions, as these will be difficult to attain by CE2 finns. Nor can it be argued that CEE firms are unfairly benefitting from a protected home market. Once the EAs are implemented, all tariffs, QRs, and restrictions on FDI will have been abolished.

As antidumping remains a threat under the EAs, the focus should arguably still be on reducing the likelihood of contingent protection being invoked by the EU. Strict enforcement of antitrust may help convince the EC Commission and Member States to be hesitant to pursue complaints of dumping. Advocates of antiddnping policies often argue it is a justifiable attempt by importing country govermments to offset the market access restrictions existing in an exporting firm's home country that underlie the ability of such firms to dump. Such restrictions may consist of import barriers preventing arbitrage, but may also reflect the non-existence or non-enforcement of competition law by the exporting country.' Antidumping is then defended as an inferior instrument to offset such 'government-made' competitive differences, the optimal solution being held to be elimination of the differences.

The experience that has been obtained with attempts to abolish antidumping in the context of regional integration agreements suggests that there are at least three necessary conditions for the abolition of contingent protection: (1) free trade and freedom of investment; (2) disciplines on the ability of.governments to assist firms and industries located on their territory; and (3) the existence and enforcement of competition (antitrust) legislation (Hoelknan and Mavroidis, 1994). All three elements can be regardedcas forming an implicit market access 'guarantee', the objective being to safeguard the conditions of competition on regional markets, As far as the CEE countries are concerned it seems that, although these conditions will to a very great extent be satisfied, the EU felt the need to take out insurance. Clearlj, the first best strategy for CEE countries is to seek the elimination of antidumping once the EAs have-been fllMy implemented. This is an issue that could be taken up by the Association Councils.

A second best, possibly transitional, strategy could consist of attempts to secure agreement that antidumping becomes the mechanism of last resort. One pcssibility in this connection is to seek agreemen **t** hat.allegations of dumping are first investigated by the EU's competition authorities (DG-IV). The objective of this investigation would be to determine whether the exporting fhm or industry engages in anti-competitive practices or benefits from government-created or supported entry barriers that violate Thuis, the U.S. hai claimed tha lax Japanese antitrust enforcement permits Japanese firms to collude, raise prices, and use parnof the resulting rens to cross-subsidize (dump) products sold on foreign markets. See Gartn (l94) for a detailed defense of antidumping that emphasizes entry burse in the exporter's home market.

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the EAs. If anti-competitive behavior is found to exist, 'standard' remedies would be applied (i.e., cease and desist orders, fines, etc.). Initiation of an antidumping investigation should only be possible if the investigation by the conmetition authorities has revealed the existence of barriers to entry in the CEE market that do not violate the EA.

Third-best, in the absence of a formal agreement on the matter, is to continue to vocally oppose antidumping, especially once the EAs are fuilly implemented. Given that EU-consistent competition rules will have been implemented, a CEE goverunent has strong arguments on which to base opposition to EU antidumping actions. Continued action against state aids will also help to reduce the scope for contingent protection. The fact that the Commission has somewhat greater discretion on antidumping than do administering authorities in certain other jurisdictions further increases the incentives for the CEE countries to 'make a case.' Whatever tums out to be feasible with regard to antidunping, it should be remembered that safeguard actions remain a possibility. The elimination of this option should also be on the agenda, a necessary condidon again being that the EAs have been fully implemented, and the resulting adjustment has occurred. The main issue in the short run is to reduce as much as possible the scope for EU firms **to** argue that CEEC firms are trading 'unfairly'. Undercutting the basis for the rhetoric of allegations of unfair trade is important, as protection is then much more easily recognized for what it is.

The Third Phase: Membership of the European **Union** It is unclear how long it will take each CEE country to achieve membership of the EU. What matters from the aitrust perspective is not when accession will occur, but what changes will be reqied in competion policy enforcement. The specifics of the competition legislation and the procedures and criteria that are applied are largely unconstained by EA membership. However, the scope of membership is much more fkr-reaching than the EAs. The EAs are ambiguous regarding the exent to which access to service markets will be liberalized. Disciplines in areas such as the regulation of utilities, and telecoms will expand. As a result the reach of EU competition disciplines is liely to exand. National regulations that may restrict entry into certain industries and that would not be covered by the EAs may become impossible to maintain once a member. Another change is that the reat of contigent protection disappears. Intra EU-CEE antidumping, CVD and safeguard actions will become impossible, if not immediately then after a transition period as was the case under the Treaty of Rome (Art. 91 EEC). Consequently there will be less pressure on national competition authorities to monitor the effects of threals of contingent protection. More importantly, the government essentially loses control of its trade policy, this being an EU competence. External tariffs will therefore have to be adjusted **to** the EU's common tariff. The EU (Commission) will also become much more of a factor in enforcing 26.
Articles 90 and 92. In short, life becomes much simpler from the perspective of the antitrust authorities. Their main task will be to prevent the exploitation of power on local markets.

# VL Concluding Remarks

The comparative analysis of the competition laws of the CEE countries illustrates that the majority of them have moved towards an, in principle, satisfactory legal framework to promote competition in a relatively short period of time. Although initially under the influence of both the US and the EU competition laws, the CEE countries have chosen by and large to adopt legislation that is similar to that of the EU. At this stage the successful protection of competition in the CEE countries depends almost entirely on national policies, of which enforcement of competition laws is one important element. But even under the EAs, national enforcement will remain important, both because of the relative insignificance of national CEE-markets, but also because of resource limitations on the part of the Commission.

In a number of areas the CEE competition laws and enforcement agencies compare very well with those of OECD countries. The 'trade policy awareness' of the authorities is quite high, indeed, much higher than appears to be the case in many OECD comparators. In part this reflects the political importance or weight that is granted to the competition authorities in many of the CEE countries (e.g., the Czech decision to give the head of the competition office Ministerial rank) and their willmgness to attack trade policy decisions that substantiaUy reduce competitive forces on domestic markets. Although the emphasis that is placed on competition policy in the CEECs is in part a reflection of the need to establish a market economy, OECD goverments could enhance competition on their markets by emulating some aspects of CEE. competiton law enforcement. Examples are the mandate to scrutinize and comment on the competition implications of government policies generally, and giving the head of the compeion office the opportnity to participate in cabinet meetings.

A mnmber of actions have been identified through which competition law enforcement might be strengthened and be made even more sensitive to trade policy. The legislative possibility for antitrust agencies in the CEE countries to act _ea offico_ does not appear to have been fully exploited, although this may largely be the result of the process of the transition towards private ownership and a market economy. The development of detailed guidelines would help both reduce uncetinty regarding the priorities given by the competition authorities to types of compedtion-reducing practices, and clari what practices wil not be pursued. One common denominator in the legislation of all CEE countries is the wide discretion that the agencies entrusted with the enforcement of competition laws enjoy. This can 27
have a negative side, in the sense that a number of desirable _per se_ prohibitions simply do not exist. An offsetting, positive counterpart is that if discretion is exercised in a pro-competition way, the 'jurisprudence" created in this field could further promote the goals of the competition laws. Incorporation of the trade policy stance pertaining to an industry should explicitly be taken into account when defining the relevant market in the enforcement of antitrust. Guidelines to this effect should also be published. Whenever market shares are defined as a threshold (i.e in the definition of dominant positions) they should be linked to market contestability considerations-i.e., explicit public recognition that what matters is market power. It would prove very useful for the evolution of the competition philosophy in the CEE countries, and at the same time enhance transparency, if competent agencies were to publish the reasoning underlying their decisions.

One avenue that could be further explored during the transition phase (i.e., until full implementation of th-e EAs) is the exploitation of the principle of "positive comity". This could provide a link between antidumping and antitrust in instances where CEE countries are facing antidumping threats or actions on the part of the EU. That is, the EC Commission could be asked to apply competition policy cnteria in antidumping investigations against products originating in CEE countries, ensuring that there is a threat to competition, not just a threat to an EU competitor. This could be sought on an informal basis during the transitional period. If it proves to be impossible to obtain agreement to phase out antidumping once the EAs are fillly implemented, a second-best policy could be to formalize the link between competition law enforcement and antidumping investigations. More generally, since the CEE countries have adopted legislation comparable to that of the EU in the competition field, one can assume that if they enforce their competition laws vigorously, EU-onsistent minim standards will be respected. This may effectively raise the threshold for EU import-ompeting industries seekig antidumping relief. Vigorous enforcement of competition disciplines in service industries, especially distribution-related, may further help reduce the potential for EU firns to seek contingent protection. In any event, enhancing the contestability of service markets will be very important in the development of a competitive environment. In general it would be desirable to create an independent and objective body that is given the mandate to evaluate government policies from a competition policy perspective. In the absence of such an entity, competition offices should devote resources to building a capacity and reputation for high-quality, objective analysis of the effects of government policies that affect the contestability of markets.

Until the EAs are fully implemented it is important to reduce as much as possible the risk of being treated as an "unfair trader." Safeguard actions will always remain possible as long as membership of the EU has not been attained. But safeguard protection is more difficult to seek and obtain if the case for arguing that CEE firms are benefitting from trade barriers, state aids, or various 28
types of government maintained entry barriers is weak. From this<sup>perspective active competition law</sup> enforcement will be of particular importance to the CEE countries<sup>in the immediate future.</sup> 29