EVALUATING INTERNATIONAL COMPETITION IN DEFINING ANTITRUST MARKETS: THE POLITICAL DIMENSION
OUTLINE OF ISSUES
DONALD I. BAKER
BAKER & MILLER PLLC
FEDERAL TRADE COMMISSION HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
Washington, D.C. October 19, 1995
NOTE: I have written several articles on this general subject. The most relevant are: "The Proper Role for Antitrust in a Not-Yet-Global Economy," 9 Cardozo L. Rev. 1135 (1988); and "Foreign Competition in a Market Power Inquiry", 60 Antitrust L.J. 944 (1992) (with David Balto), as well as "Antitrust Remedies Against Government-Inspired Boycotts, Shortages and Squeezes: Wandering on the Road to Mecca," 61 Cornell L. Rev. 911 (1976). The Cardozo Law Review article is attached, because it is directly on point.
I. GLOBAL COMPETITION IS VERY IMPORTANT IN SOME MARKETS
A. Big ticket, research-intensive, and risky manufacturing markets (e.g., jet planes, telephone switches, pharmaceuticals, and high-end computer chips).
B. Major commodity markets where transportation costs are not an insurmountable barrier (e.g., oil and aluminum).
C. High-value, time-sensitive financial service markets (e.g., currency, securities, and futures trading).
D. Experienced-centered service markets for large or risky projects (e.g., engineering design, reinsurance).
E. Global distribution markets (e.g., satellite communications).
F. Long distance communications and transportation.
II. ECONOMIC BARRIERS TO BROAD INTERNATIONAL COMPETITION
A. High transportation costs (in relation to value).
B. Product differentiation and differing consumer tastes.
C. Language (e.g., need to translate or rewrite entertainment and computer programs, train local employees, etc.).
D. Distribution/servicing needs for sophisticated products and services.
E. Exchange rate risks.
F. Historic national standards (e.g., left-hand drive).
III. GOVERNMENTAL BARRIERS TO BROAD INTERNATIONAL COMPETITION
A. Entry control: prior approval or product certification required (e.g., airline routes, health safety or environmental approvals).
B. "Buy domestic" policies or rules.
C. Foreign ownership restrictions (e.g., air carriers, telephone companies, etc.).
D. Domestic subsidies or tax reliefs designed to create disadvantages for domestic firms vis-a-vis foreign firms ("state aide" in the EU parlance).
E. Tariffs on imports (a declining issue).
F. Import quotas or embargoes (including "voluntary" import restraints).
G. Trade law remedies against imports of goods.
2. Countervailing duties;
3. Sec. 337 remedies against unfair competition; and
4. Sec. 301 (and Super Sec. 301) remedies, which may sweep in any particular product market.
IV. CONCLUSION: POLITICAL BARRIERS TO GLOBAL COMPETITION TEND TO BE MUCH MORE SIGNIFICANT THAN ECONOMIC ONES IN MANY MARKETS
A. The "constituency service" aspect of government goes back at least to the medieval guilds: protect home producers against outside challenges.
B. Producer/labor interest groups are almost always much more effective politically than diffused buyer and consumer groups.
C. As a consequence, economic success by outsiders (importers, foreign product creators, etc.) is likely to generate pressure for anti-import restraints, or rules -- and this reality has to be factored into the whole market definition process.
D. The United States has done better then most other important industrial countries in resisting home-producer protection, and our consumers have benefitted.
E. International trade negotiations (NAFTA, Uruguay Round, etc.) are important because they put pressure on politically-created barriers to global trade.
1. Increases the opportunity of successful producers to achieve scale (indeed world scale) effectiveness.
2. Makes the potential pay-off on successful innovation higher.
3. Keeps pressure on efficiency-retarding local regulatory and labor rules that penalize domestic competitors.
V. DEFINING GEOGRAPHIC MARKETS IN THE LIGHT OF GLOBAL POLITICAL REALITIES
A. It is not possible to deal with global competition without asking about political barriers -- past, present, or future. This is sometimes done in antitrust cases, see most notably U.S. v. Philadelphia National Bank, 374 U.S. 321 (1963) (using government-established entry barriers to define the geographic market).
B. Foreign subsidies may make foreign producers more competitive than they would otherwise be; but such subsidies may be impermanent or illegal under trade law (and hence ultimately subject to countervailing duties).
C. Where a market must be defined in a monopolization, attempted monopoly, or rule of reason restraint case, the finder of fact will generally be looking backward to see whether political action has prevented the flow of transactions and traffic or goods across political boundaries, and if so, to what extent.
D. In a merger case, the antitrust enforcer and finder of fact faces a much more daunting task: to ask whether political barriers exist or are likely to be created to prevent the flow of transactions, traffic, or goods across frontiers. This is, at best, an uncertain process, but it is not unreasonable to assume -- based on history -- that dramatic market success will lead to entry restraints or import curbs.
D. The price of being wrong in a merger decision is substantial:
1. If the market is assumed to be "global" because of its economic characteristics, but then is foreclosed by subsequent political action, the enforcement agency has created consumer losses for domestic consumers by allowing a substantial domestic merger to go forward based on a global market assumption.
2. But if the enforcement agency is too narrow in its prospective vision (not seeing what is likely to become a "global market") then it may block a merger between two domestic producers, and thereby cause losses of efficiencies and international business opportunities for the merging firms.
A. Market definition is a terribly difficult exercise -- and doubly so when it must be carried out under the intense time pressures of an HSR merger investigation. Section 1.43 of the 1992 Merger Guidelines ("Special Factors Affecting Foreign Firms") states the right issues, but does not answer the hard questions.
B. Most of the consideration of international markets and competition -- including my own prior Cardozo and Antitrust Law Journal articles -- occurred in the context of market for tangible goods, usually manufactured goods. In fact, as we move to the post-industrial age, the most important international market issues may involve intellectual property rights, access to networks and information, interface standards, and a variety of things that might be loosely labeled as "software". Here, the political barriers (to the extent that they can be created) may be even more important than the economic barriers -- or at least the transportation barriers -- found in the industrial world that most of us have analyzed.