The Interface between Trade Policy and Competition Policy

Kim Them Do

Looking at both the objective and strategy of trade policy and competition policy, at first glance it may be said that there are some basic differences. One of the most significant of these is that trade policy primarily pertains to the actions of governments, while competition policy looks at market power and the conduct of firms. Each policy follows its respective strategy with its own respective laws.

International trade policy promotes trade liberalization (free trade). Trade liberalization offers the opportunity for firms to go global in order to reach potential consumers beyond their borders. In entering in the global market, firms benefit from economies of scale and greater scope than the national market in which to operate. In this light, international trade law would serve as an instrument to remove discriminatory impediments to cross-border trade. It would bind governments to their multilateral tariff commitments, induce them to comply and prevent them from avoiding their commitments by utilizing various types of non-tariff barriers to trade. In this way trade liberalization would increase firms’ export opportunities and competition. It would promote investment, innovation and economic growth, and arguably most importantly, it could bring overall benefits for countries.

Contrary to the goals and benefits of international trade policy, basic reasoning in competition policy, whether national or international, is based on the idea of the free market. Some governmental interference is desirable only on the condition that it would be necessary to maintain competitive pressure and promote competition and efficiency in the market. From this point of view, competition law would allow firms to take advantage of business opportunities and ensure that market processes would always be as intensively competitive as possible. Workable competition would promote dynamic economic efficiency in the sense of both productive and allocative efficiency. In order to reach this objective, competition law seeks to reduce the scope for anti-competitive conducts, particularly creating limits to the market power of big firms. Restraints, cartels, monopolies, price fixing and price discrimination are, in this light, not permissible business practices. Therefore international competition policy principally promotes market deregulation and behavioral regulation (fair competition).

On closer consideration of its crucial differences, it may be said that the ultimate goals and benefits of both have fundamental similarities: both have the inherent objectives of promoting efficiency and consumer welfare in making the market more competitive, and both focus on national and global welfare. Realistically, neither policy nor law can provide a perfect solution, and they may generate a mixture of governmental and private restraints. In considering an alternative policy approach it is necessary to take a broader focus rather than to be limited purely by the goals of fair competition or trade liberalization. The view proposed above is just one aspect of its complex problem. Conceptually, the theory of complementarity is quite a different thing and theorists on international competition policy may justify it to support the WTO solution.

Theory of complementarity

According to the theory of complementarity, the possible benefits of trade liberalization could not be achieved if anti-competitive practices by firms are prevalent in the market. For this reason, researchers focused on some reciprocal effects of both policies and typically illustrate them as follows:

Effects of trade policy on the development of fair competition

The complementary nature of trade liberalization and fair competition can be seen in the effects of tariffs. The raising of tariffs measure is primarily aimed at preventing foreign firms with cheaper imports from competing in the domestic market. In pursuing this objective the trade policymaker permits domestic firms to raise their prices above the level set in conditions of global competition. The ability of firms to sustain prices above the competitive level is termed ‘market power’ in competition law terminology. Market power, even though it has been artificially created by trade policy measures, has a negative effect on consumer welfare. Due to the rising of prices and reduction in quantity of commodities on the competitive market, consumers should have been considerably injured.

Effects of anti-competitive practices on trade development.

When a monopolist exercises its market power in an international market, the consumer welfare of all the markets concerned is harmed. Not only the market power, but also market sharing and bid-rigging by global players generates negative effects on consumer welfare. Anti-competitive conduct by dominant firms forces the exclusion of other firms operating in the market. Worst of all, newcomers may be discouraged from investing in the market; there would be no incentive to engage in such unfavorable environment.

The most cited example of this practice affecting the foreign market is where merged firms attempt to monopolise another market. A merger of two or more firms in a domestic market may create a market power not only in that domestic market but also in the foreign market. With its new strength and resources, the merged firm eliminates competitors by pur-suing a predatory pricing policy. In the short run, the consumer could benefit from this strategy by enjoying the cheaper products. Once the competitors were forced out of the market, however, the predator would increase the price to secure its profits in the long run. This would injure both consumers and competitors in the foreign market. The affected authority has non-appropriate remedy because the merged firm is located outside the market and the area of jurisdiction concerned. Finally, market structure and trade development can be negatively affected.

Not only policymakers can introduce barriers to trade as discussed above, but also economically powerful firms can indirectly block access to the domestic market through anti-competitive practices. If a group of domestic firms with market power agree to boycott foreign products, this horizontal cartel agreement can keep foreign competitive firms out of the market. Vertical restraints or control by powerful groups of firms in the domestic market have the same effect. A domestic manufacturer could threaten to cut off the supply to his domestic distributor unless the latter undertakes not to handle foreign, competitive products. These types of controls in vertical integration are various, but their final effect closes the market to the would-be foreign entrant. The consequences are similar to those of import tariffs, which international trade policy is trying to gradually eliminate.

Importantly, competing foreign firms cannot rely on government action where they operate. They cannot expect the government to remove restraints and open access to markets at their request. Due to various political reasons, governments may encourage, tolerate or support anti-competitive practices by domestic firms. Consequently, these effects of market foreclosure still exist and the difficulties in problem-solving continue.

However, the theory of complementarity is controversial. Re-examining its explanatory power in full would go beyond the scope of this discussion. In practice, two policies are mutually supportive to a certain extent; they are not fully complementary as expected, leaving scope for conflict. Not all competition problems are trade problems. The question is whether or not the conduct of certain firms would be considered anti-competitive and disallowed; this would vary from country to country and from one domes-tic competition law to another. Its legislation has his own view of the effects of competition pressure and consumer welfare. The practice of merger review does not only have impact on trade policy; but also falls within the scope of other policies. The co-operation of competition authorities in dealing with multi-jurisdictional merger reviews is not relevant to trade policy.

Arguably most importantly, international trade policy and competition policy are so closely related that the WTO cannot escape regulating inter-national competition policy by arguing that it serves only to promote trade liberalization, ignoring the benefits of fair competition.

Although these arguments might have some merit, such complementary evidence could not help us adopt this vision without tackling more penetrating question: How we can support the WTO solution while the overlap of these policies still exists? How we can reconcile these issues?  These questions have been a source of concern of most policy makers and economists. Some of them have suggested that the theory of contestable markets could be useful starting point to consider the degree of such possible conciliation.

The theory of contestable markets

A full analysis of the theory of contestable markets with positive effects on the cooperative issues is beyond the scope of this section. Nevertheless, it is important to deal -albeit briefly-with the idea that such theory is positively associated with the perspectives of international cooperation in competition policy and law. The basic concept here is that it is impossible for policy makers to promote a perfect competition in the market.

Practically, it may be possible for them to perform a perfect contestable market where there would have no or low barriers to market entry and exit. Its fundamental features are: it is quite easy for firms to enter the market without incurring sunk cost and to leave without loss; the mere threat of market entry of a potential rivals is decisive factor to protect consumer welfare; and importantly, a highly concentrated or monopoly market does not mean that the firms are harming consumers by earning supernormal profit. In a perfect contestable market an economically efficient outcome can be achieved where there are only few competitors.

Realistically, policy makers can never finalize a perfectly contestable market successfully, but this central idea of the ease of market entry is particularly significant to discuss the aspect market power of firms. Market power refers to the ability of a firm to raise price above some competitive level and a monopolist may enjoy his highest market power in the market. The theory of contestable markets restates the idea that a firm is unlikely to exercise such market power if it faces potential competitors that could quickly enter the market.

Consequently, the threat of market entry may reduce or constraint on market power of dominant firm and this view may have implications for designing competition policy. It helps policy makers to identify the barriers of the market by answering the following questions: Are the barriers a natural part of market structure or a product of government regulations? At least, this theory could be applicable in the domestic market.

These arguments may help us tackle more other questions: How crucial is this insight for the reconciliation of the interfacing issues? How theorist can carry over the concept of contestable markets at the domestic market to international context?

In broad terms, the international contestability of markets would be a new objective to reconcile international trade policy and international competition policy. A market may seem internationally contestable one when conditions of global competition allow unimpaired market access for potential rivals. The ease of market entry cannot only promote maximum market access by removing the governmental and private barriers to market access but also maximum potential competition by allowing competitors to enter a market quickly and to quit the market painlessly.

This theory hat important implication for designing of competition policy by suggesting that policy makers should concentrate on removing certain types of regulating restrictions, ranging from those on competition policy, etc. Competition and trade are complementary means of international contestable market, too. From the view of global market performance, contestability theory would have implication on examining the mutual interdependence of international competition policy and international trade policy and could be used as a prominent policy tool, in particular in support of the WTO solution.     

In summary, according to the theory of complementarity and theory of contestable markets the WTO could offer an institutional framework for international competition co-operation in competition policy.