Adverse effects of international cartels on developing countries: limits of domestic competition legislation Sao Paulo, April 23 2003 Dr. F.J.L. SOUTY.

Adverse effects of international cartels on developing countries: limits of domestic competition legislation

Sao Paulo, April 23 2003

Dr. F.J.L. SOUTYCounsel for Multilateral Affairs, Competition Council,

Paris

Professor, University of La Rochelle 25B

Three parts

Part one: on trade liberalization, competition and development

Part two: On Goals, Scope and Exemptions or Exceptions of competition law for development

Part three: On actual international anticompetitive practices and their harm to development

Part One

On trade liberalization, competition and development

On Trade Liberalization, competition and development

Trade liberalization is a necessary condition for the growth of developing economies, because it allows them to buy cheaper and to sell on larger markets

However, trade liberalization is insufficient to ensure that international trade will take place or that the expected benefits from trade will materialize

Indeed, private anticompetitive practices as well as domestic regulations can:

- defeat trade liberalization and

- deprive nations of the benefits of free trade

On the contribution of competition to development

Economic analysis suggests that market rivalry and competitive behaviors contribute to static and dynamic efficiencies

Promoting competition both in developed and developing economies may well contribute to:

- increasing the competitiveness of industries

-enhancing the real income of consumers

- allowing the exercise of freedom of entrepreneurship

Competition policy and development

Competition policy is necessary1) to prevent domestic monopolization, crony capitalism and anticompeitive

practices leading to inefficiencies

2) to allow economic agents to reap the benefits of economic freedom

Industrial policy and capacity building are also useful in the initial stages of economic development because of imperfect markets, scale economies and need of technology transfer

Developing countries (just as developed countries have done) need an «optimal amount» of competition (a blend between competition policy and industrial policy)

As markets progress in maturity (i.e. develop), compe-tition policy plays an increasingly important role

A particular case: small economies

Competition law should promote competition whenever competition is likely to promote efficiency

In small economies, market concentration tends to be higher than in larger economies (see «relevant market» definition perspectives); small economies are particularly vulnerable to abuses or misuses of market power

Small economies tend to be more open and more dependent on foreign trade than larger economies and more vulnerable to offshore anticompetitive practices (World Bank study)

There is no One-size-fits-all Competition law

The design of a Competition law must take into consideration:

- the legal environment (i.e. administrative fines vs criminal sanctions; public enforcement vs private enforcement, per se rules vs rules of reason)

- Economic circumstances (efficiency defense, exemptions, relationship with regulatory agencies

- Political and social choices (scope of the law, substantive standards such as public interest, consumer surplus, regional surplus etc...)

Part Two

On Goals, Scope and Exemptions or Exceptions of competition law for

development

What are the different goals of Competition Law ?

Efficiency (US and most other jurisdictions but often combined with other goals)

Fairness (Japan, France, Korea) Limiting Economic Power (Germany, Korea, Countries in transition) Promotion of competitiveness (Canada) Empowering disenfranchised segments of population (South Africa) Other socio-economic goals (i.e. promotion of employment)

Trade-off:Trade-off: A Competition Law cannot be a stand-alone law or ignore the cost of transition to a market economy; it can thus legitimately include socio-political goals. But there is a risk that the goals con-tradict each other resulting in legal uncertainty and unpredicta-bility

Scope & boundaries of Compet° Law

Anywhere Competition Law has limits: Other laws (i.e. labor laws, sector specific

regulations, public procurement law/code...) Legal and economic exemptions written

into the competition law (i.e. efficiency defence)

General Legal principles (i.e. export cartels)

Exemptions: Sectoral

Agriculture (EU, US, Japan) Baseball (US) Maritime conferences (many countries) Books, newspapers, CDs are partially exem-

pted in a number of countries in which RPM is not illegal

Banking and Insurance sectors (structural aspects)

Exemptions for certain practices

Crisis cartels (Germany, Japan, Korea) Government practices (State Action Doctrin in the

US) Public subsidies (exempted in the US but partly

covered in the EU) Export Cartels (mostly exempted following the

Effect Doctrin) Legal harassment (cannot be an anticompe-titive

practice in France)

Exemptions for certain economic actors

Some operators are exempted because of a.o. the nature of their activity for general social or political purposes

Professional organizations SMBs («de minimis» rule in the EU, equivalent in the US) Services of general interest performed by Enterprises

enjoying Exclusive or special rights (State owned enterpri-ses in certain countries, private enterprises in others)

Labor Unions Individuals

Exemptions/Exceptions

Trade-offs:

- exemptions and exceptions may facilitate the achievement of the politicial consensus necessary for the adoption a Compet° Law (particularly when thet concern sectors in which there is a risk of a massive transitional cost following the introduction of competition)

- E&E must be TRANSPARENT, should be reviewed regularly. They can weaken the effectiveness of the competition law and encourage political lobbying by professionnal groups

Part Three

On actual international anticompetitive practices and their harm to development

What are the transnational private anti-competitive practices ?

Horizontal cartels (Lysine, Vitamins, Cement)

Vertical arrangements (Kodak/Fuji case) Abuse of a Dominant Position (Microsoft) Mergers (Boeing-McDonnel Douglas,

GE/Honeywell, Coca-cola/Cadbury-Schweppes, Beer in L.A., Dairy industry in Africa, Cement industry anywhere)

Transnational A/C practices that affect Trade: a Typology

Two types:

1. Defeating trade liberalization (import cartels, domestic abuses of a dominant position and monopolization, vertical restraints, some international cartels)

2. Depriving Nations of the benefit of Trade (export cartels, domestic abuses of a dominant position A/C transnational Mergers, international cartels)

The cost of transnational A/C behaviors and practices

Contrary to frequently held misconceptions, transna-tional

A/C practices: inflict serious harm to consumers (i.e. in the graphite electrode case, the

cartel members increased their price by 60% resulting in an overcharge of nearly USD 1 billion a year; in the lysine cartel, prices were doubled)

are often stable over time (average duration of cartels for which there is publicly available information is 6 to 8 years but some cartels may last considerably longer (up to 40 years for the International Electrical equipment cartel)

affect a large number of sectors (i.e. steel, plastic diner ware, thermal fax paper, heavy electrical equipment, glass, graphite electodes,

vitamins, lysine, citric acid etc.)

International A/C practices and developing countries

A/C practices are often aimed at preventing the emergence of local industries in developing countries (i.e. use of dumping by heavy electrical equipment manufacturers and in the steel industry)

They are most harmful in countries which do not have strong antitrust laws (mainly developing countries now)

They hurt developing countries which are crucially dependent on imports (for access to basic industrial products not produced locally) or on exports (for their growth) and have weak industrial structures

In 1997, developing countries imported USD 81 billion of goods from industries which had been affected by price fixing conspiracies during the 1990s. These imports represented 6.7% of imports and 1.2% of the GDP of the developing countries (data

from World Bank)

International A/C practices and developing countries: costs and magnitude I

The order of magnitude of international aid to development is about USD 50 billion p.a.

Thus, at a minimum, the existence of A/C transnational cartels implies tranfers (in the form of overcharge) from developing countries to cartel members (often if not mostly firms from develo-ped countries) which represent at least half of the value of the development aid given by govern-ments of developed countries to developing countries

International A/C practices and developing countries: costs and magnitude II

A Feb 2003 UNCTAD study estimates the welfare impact of various hypothetical trade liberalization measures and states « a worldwide reduction of 50% in all agriculture tariffs brings about an aggregate welfare gain of USD 21.5 billion... The largest absolute gains are captured by Japan, North America, the NICs, North Africa and the Middle East, and Oceania. The estimate percentage gain for sub-saharan Africa and L.A. is lower than in other studies conducted under similar assumptions.... Since Africa and L.A. are among the major beneficiaries of preferential schemes, it sems likely that gains from liberalization for these countries in other studies could be overstated when full account is not taken of tariff preferences as has been done here». A further analysis using the UNCTAD figures shows that the net welfare benefit for developing countries from such an agreement would be equal to USD 13.4, down from the USD 21.5 billion in total.

International A/C practices and developing countries: costs and magnitude III

Following the Feb 2003 UNCTAD study*, the net annual welfare benefit for developing countries from a theoretical drastic multilateral reduction in agricultural tariffs (USD 13.4 billion) is about half the minimum estimate of the direct benefit they would get if a multilateral agreement on compeition enabled the elimination of international cartels and therefore the supra-competitive margin they have to pay to cartels members when they import goods (USD 20-25 billion)

* UNCTAD, «Back to Basics: Market Access Issues in the Doha Agenda, Chapter V, Estimated gains from multilateral trade liberalization», Geneva, United Nations Feb. 2003