Economic Development Institute of the World Bank First International Training Program Competition Policy
* The views expressed here are those of the author, and not necessarily of the Federal Trade Commission or any Commissioner.
CHANGES IN COMPETITION POLICY AND LAW AT THE GLOBAL LEVEL
We know that cross-border trade is increasing rapidly; that foreign direct investment is growing even more exponentially; that trade and investment barriers are falling and that at least some markets are globalizing. This does not mean that all markets are global -- the market for restaurants or dry cleaning services in Washington DC is never likely to be very broad. But we are increasingly seeing business transactions and activities that simultaneously affect consumers in your country and mine.
We also know that the promotion of free and competitive markets has become a central focus in virtually all countries -- whether developing, developed or those in transition. The reason is fairly straightforward: history and economic analysis have taught us that, whether at the national or international level, free and open markets, and the pressure they place on economic agents to perform as efficiently as possible, are a necessary tool to achieve economic development and growth. Competitive markets are also central to making individual economic freedom -- by which I mean the freedom of consumers to choose what they deem most valuable and the freedom of entrepreneurs to choose where they want to invest -- both meaningful and compatible with global economic welfare. As an American I should also note that in this sense competitive and open markets are related to the pursuit of democratic values. And I will suggest that the difficulties and dislocations that we currently are seeing in Asian, Russian and other markets are not the result of too much competition but of not enough.
This is not to say that the forces of globalization and free markets are entirely benign. Globalization places relentless pressure on firms to cut costs to be more competitive, and that often translates into lost jobs. Large businesses may also place pressure on states or localities to grant them tax breaks in exchange for locating there, a trade that may not always work out best for small local rivals or consumers.
One lesson of humility we need to retain if we want to best promote competitive markets is that competition policy is not and cannot be the answer to every social and economic problem. Unemployment insurance, worker retraining and other welfare supports will be needed to provide an acceptable degree of social cohesion and to ensure a domestic consensus in support of open markets. What this also suggests to me is that one has to choose between various social, political and economic goals in developing and applying antitrust laws.
Now, I will be the first to confess that the US antitrust laws, when initially adopted, were designed to serve a plethora of goals -- protecting consumers, protecting small businesses, preventing trusts from gaining political power in addition to their economic heft, promoting efficiency and even protecting workers. But advances in economic thinking, experience in applying the law, and increasing competition -- foreign and domestic -- have forced us to do some pruning of these goals. After some Supreme Court cases in the 1960s, for example, it became obvious that not all increases in concentration from mergers were inimical to competition and consumers; indeed, a policy that seeks primarily to protect small businesses may unwisely and unfairly sacrifice consumer interests in low prices. It also became clear that some efficiencies gleaned from firms' consolidation benefit not just the merged firm's productivity and profits but consumers as well. So now we focus not on size or market share alone, but on keeping markets competitive and on disciplining, when necessary, exercises of market power that reduce output or increase prices.
Having insisted that you cannot do everything with competition law and policy, I am now going to urge you to do more than you possibly can. This is because privatization, deregulation, the elimination of unjustifiable trade barriers and the promotion of competition law and policies are all complementary means of achieving our shared objective of open and competitive markets. Government officials have to maintain a common thread through all of these policies and that daunting task falls largely to you.
I would hope that virtually all of us can agree on the benefits of adopting and enforcing a transparent and nondiscriminatory competition law. First, at the domestic level, the enforcement of competition rules prevents monopolization, as well as collusive and exclusionary practices that enable firms with market power to unfairly confiscate the benefits of economic activity that should accrue to consumers and competitors.
Second, at the international level, history demonstrates that cross border cartels tend to operate in countries without competition laws to enhance their immunity from prosecution; they likewise tend to avoid countries that have actively enforced competition laws. I also doubt that other anticompetitive actors have any qualms about foisting the costs of their conduct on consumers in countries that lack a competition law. Adopting a competition law is thus an important means for protecting one's own consumers from the cross-border anticompetitive practices of firms.
Third, competition authorities can be agents of market-opening change in their countries through their role as competition advocates. Several competition authorities in Latin and South America have recently contributed greatly to eliminating restrictive regulations in sectors that were previously not open to competition, through advocacy on behalf of privatization or deregulation. We too continue to advocate aggressively on behalf of competition principles with the federal electricity regulator, the various state public utility commissions, the federal communications agency and entities that help to shape intellectual property policy.
But promoting competition in any country is a challenge, precisely because the benefits of competition are long term and are distributed broadly among all consumers, whereas the benefits of protection are immediate and concentrated on a few recipients. Thus, powerful and well organized lobbies tend to be quite effective in preventing the emergence of competition. Yet just where these lobbies may be most powerful -- in smaller, developing markets with narrow economic bases and concentrated industrial sectors -- is where anticompetitive practices are most likely to flourish and where the need is greatest to promote competition through privatization, deregulation and the adoption of a competition law.
Having described our challenge, what should we do and where are we going?
My instinct is that increasingly shared ways of economic thinking are leading most countries to adopt relatively similar competition laws. Nevertheless, I believe that competition laws must to some extent be tailored to the economic, legal and political needs of the countries for which they are designed. The needs of a small country with few resources, a concentrated industrial base, and a historically and still large public sector will not necessarily be the same as the needs of a fully developed economy with a tradition of free enterprise. Without tailoring one's law to reflect these realities, and perhaps initially, to alleviate the pain of adjustment if one is transitioning from a system relatively immune from competition, a political base for competition law and policy will never develop. So although I believe that a national competition law should address cartels and restrictive horizontal agreements, abuse of dominance, exclusionary vertical practices and mergers, I will not tell you to adopt a law identical to ours. I will only ask you to learn from our experience.
I also believe that there is little need or wisdom in trying to negotiate common competition rules for all countries. Undoubtedly, as markets and firms globalize, we competition officials will be interacting more often and our activities will increasingly impact each other's. The fact that industries are becoming more networked -- think of telecommunications, electricity, financial services and commerce on the Internet -- will only make our encounters on how to resolve potentially anticompetitive conduct of mutual interest more frequent. But this does not dictate the conclusion that we should all adopt identical laws and forget what works best for our respective countries. Interestingly, conflicts between nations or antitrust officials in the past are not largely attributable to differences in our substantive competition rules. Rather, we tend to become concerned when we think that a particular country is simply not enforcing its competition law (or doing so completely ineffectually), when we perceive a country as being too aggressive in enforcing its law outside its borders, or when a country purports to be applying its competition law but in fact is promoting nationalistic or protectionist goals.
If our laws need not be identical twins, how do we best address competition matters both within our borders as well as those that spill over borders? First is to continue to share our insights and experience with each other. Perhaps equally important is to begin to think about whether there are certain basic principles and procedures -- not detailed rules -- to which we can all subscribe. I urge this in part to prevent the proliferation of competition laws around the world -- which should be a good, procompetitive event -- from turning into a tangle of inconsistent, overlapping and over regulatory systems. But these common principles are designed to operate at a level of sufficient generality that any free market-based and well-intended competition law, if neutrally enforced, would pass muster.
What would these principles be? First, nations should have and enforce a competition law, and should have an adequately staffed and funded competition agency that is capable of some meaningful level of enforcement.
Second, nations' competition laws should be nondiscriminatory, both on their face and as enforced.
Third, nations' competition laws should be transparent. Exceptions from the law, such as sectoral ones, and the application of noncompetition criteria, whether protecting national security or maintaining employment, should be made clear.
Fourth, competition authorities must provide a reasoned explanation for their enforcement actions. Whether they should be required to explain non-action is a more difficult issue, and may turn on whether private actors have independent resort to the courts or administrative tribunals.
Fifth, injured parties should have the right to petition the competition authority to act and to be informed about what was done, or to bring an administrative or judicial action themselves.
Sixth, nations should acknowledge that each country has subject matter jurisdiction over potentially anticompetitive transactions that threaten harm to its citizens.
Seventh, nations should not assert jurisdiction over matters that do not meet some minimal threshold of impact on their consumers. (Nations should not collect fees from mergers that have no discernable impact on their markets.)
Eighth, nations should commit to observe principles of comity in enforcing their competition laws and to enter positive comity agreements when appropriate.
Finally, nations' competition authorities should establish protocols for cooperating in enforcement and evidence gathering, with appropriate safeguards to maintain the confidentiality of that evidence.
I think it is no accident that thinking is being done about principles like these at the OECD, within NAFTA, the FTAA and APEC.