CHAPTER 15:
COMPETITION POLICY AND LAW

[D]omestic competition laws, effectively enforced, complement trade liberalization ... by ensuring that private anti-competitive conduct does not diminish the benefits of trade arrangements. The inclusion of competition policy in these fora will help ensure that Canadian exporters and investors, when doing business abroad, enjoy the benefits of an objective and predictable competition policy regime that will protect them from anti-competitive practices in the local market. [Patricia Smith, 31:1600]

Trade Policy and Competition Policy Convergence

Competition (antitrust) policy and law has only recently appeared on the trade agenda now that significant progress at the multilateral level has been made on the more traditional issues. The time may indeed be right to open the trade portfolio to consider a broader range of social conduct relating to the contestability of markets. That is, the trade liberalization struggle could probably take a bigger step forward by beginning to address the possibility that, as trade barriers come down, entrenched domestic firms will raise market barriers in their place. While trade policy disciplines the behaviour of governments, competition policy disciplines individuals and firms within its jurisdiction by denying them certain conduct that is understood to be, or is likely to be, anti-competitive. Accordingly, a domestic competition authority could take preemptive actions to ensure the necessary pre-conditions for competition take hold, or maintain them when threatened, which in turn is believed to provide for greater consumer and social welfare. Competition policy and trade policy thus share the mutual goal of making markets "contestable," using the competition authority's terminology for market access (see Box 15.1).

The concept that free trade alone is sufficient to establish efficient markets in small economies within the hemisphere raises a number of concerns for the bureau. I would suggest that free trade policy should never be viewed as a substitute for competition policy. For example, a free trade policy alone would not address situations where firms with significant market power are engaging in anti-competitive activity such as collusion. [Patricia Smith, 31:1600]

There are, of course, other reasons why trade officials might want to concern themselves with competition policy and law. There is the rare occasion when a government would, by design or selective enforcement, divert from the original purpose of competition policy and employ it as a substitute commercial policy or industrial policy, effectively negating some of the important wealth gains already achieved by trade and investment liberalization. For example, an independent

competition authority could conceivably take actions against a foreign firm, for example, alleging predatory pricing, simply to harass it and create a bureaucratic barrier to market access. Either by design or by selective enforcement, competition policy could, in some circumstances, replace restrictive commercial policies that are prohibited under a liberal trade regime.

There are at least two additional reasons for internationalizing competition policy. First, competition policy can be used as contingent protection when subject to "unfair" pricing such as dumping, which, by definition, could be equivalent to predatory pricing or price discrimination, as the case may be. There are a couple of issues to explore here with regard to the efficacy of antitrust as a substitute for anti-dumping, namely the processes for determining injury and the intent of the party carrying out these actions, but essentially they are opposite (bureaucratic) sides of the same coin, and it is the objectives of the policy-makers which govern the choice. Finally, in an era of globalization, there are increasingly multi-market effects of anti-competitive conduct that are worth pursuing through better coordination and cooperation between competition authorities. Thus, a more effective competition policy is worthy in its own right, but greater consumer and social welfare would be the ultimate objective.

Trade-Related Competition Policy Concerns

There are obviously many legitimate reasons for including competition policy in the trade agenda, but are the above-noted explanations relevant in today's market, or are they just hypothetical? Consider competition policy as a substitute commercial policy designed to circumvent existing trade commitments. The Committee had before it officials from the Competition Bureau who, according to their experience and interaction with other competition authorities, were unaware of even one instance in the recent past when a competition authority in the Americas used its merger or other competition policy rules as a strategic weapon for restrictive trade purposes. The Committee accepts this testimony and, therefore, concludes that these strategic reasons for including competition policy in the trade agenda are not worth pursuing at this time and will instead focus its attention on incidences of multi-market anti-competitive conduct to guide it in its deliberations.

Two recent cases illustrating the boundary problems have been the merger of Boeing Co. with McDonnell Douglas Corp. and the Kodak-Fuji case. The European Commission threatened to block the aircraft company merger on the grounds that the two companies had exclusive deals to supply certain major airlines, which could harm the makers of the competing European-made Airbus. As the United States was uncertain as to whether these actions were taken to truly bolster the competitive process or rather to strategically advance Airbus's competitive position relative to the merged American aircraft company, it threatened to retaliate if the merger was blocked. Private anti-competitive practices in Japan regarding market entry were the basis for a 301 petition filed by Kodak leading to a submission to the World Trade Organization (WTO) regarding Kodak's attempt to sell film in the Japanese market. The problem arose because the actions taken by a vertically-integrated Japanese company limited the ability of Kodak to distribute films in Japan. The WTO eventually decided in Japan's favour, primarily because competition matters are not part of the General Agreement on Tariffs and Trade (GATT) and, thus, there was no violation of a trade obligation. Nevertheless, this case highlighted the inability of the WTO to acquire the pertinent information for resolving the dispute.

These cases are surely evidence of jurisdictional problems and, in part, justify the plea of the Commissioner of the Competition Bureau:

[C]ommerce increasingly ignores borders, and so does anti-competitive conduct. We have to ensure there is good cooperation between competition authorities. It's essential for smooth functioning, and it's also essential to make sure we don't have jurisdictional conflicts and we don't get into each other's way when we investigate some of these criminal conspiracies ... [Konrad von Finckenstein, 113:1120]

Beyond these cases of dispute and jurisdictional tug-o-wars, there is also an advocacy role for competition policy to play:

For example, with the reduction of border protection, both tariff and non-tariff barriers, there is growing concern that the progressive dismantling of domestic state monopolies will leave a void that can quickly be captured by private monopolies. In such an environment, a sound competition law and policy vigorously enforced can be a bulwark against this happening. In this respect, the importance of the advocacy role of a competition authority is significant in making sure that competition authority is involved at the very beginning of the regulatory process. [Patricia Smith, 31:1600]

This point, the Committee finds, is particularly relevant to the Americas.

Competition Policy and the FTAA

In consideration of a Free Trade Area of the Americas (FTAA) agreement, it would be a good starting point to take stock of those countries in the Americas that have a competition law and those that do not. The Committee understands that 12 of 34 countries contemplating the FTAA presently have a competition law on the books, with 8 other countries considering the adoption of such a law.1 The Committee is also aware that there are competition policy commitments included in the North American Free Trade Agreement (NAFTA), Canada-Chile Free Trade Agreement, and the Group-of-Three Treaty between Mexico, Colombia and Venezuela. The Andean Group (Decision 285) and the MERCOSUR Protocol for the Defense of Competition are competition provisions, but are still pending ratification.

The objectives and scope of these laws vary from country to country. In general, the objectives of competition law in the Americas include: promotion and defense of competition, promotion of economic efficiency and consumer welfare, freedom of initiative, open markets with fair and equal participation for small- and medium-sized enterprises, deconcentration of economic power and the prevention of monopolies and abuses of dominant position. The scope of application of these laws are wide, but there are exceptions for state monopolies, reserved sectors of strategic or national security interests, and intellectual property rights. Finally, the business conduct typically covered by these laws is displayed in Box 15.2.

Box 15.2 Competition Policy Provisions in the Western Hemisphere The conduct typically covered by competition laws and regulations includes: price fixing and market sharing cartels or agreements; export and import cartels; agreements by competitors to rig bids; group boycotts or refusal to supply; abuse of monopolistic or dominant position; exclusive distribution or supply arrangements; tied selling; resale price maintenance; price discrimination; horizontal, vertical, and conglomerate mergers; misleading advertising.

The Competition Bureau had the following comments on the general state of competition policy and enforcement in the Americas:

Among the 12 countries in the hemisphere that currently have competition laws, many have only recently developed them. And even among those countries that do have them, there is an imbalance in the level of effective enforcement. ... Technical assistance to countries with no or a relatively underdeveloped policy regime will be an essential ingredient for the conclusion of an FTAA framework on competition. Those providing technical assistance will need to understand the necessity for a gradualist strategy that begins with the development of an intellectual, political, and social consensus about the value of competition policy, and culminates in the adoption of sound competition laws and effective enforcement of those laws. [Patricia Smith, 31:1555]

The Committee, nevertheless, believes that the microeconomies of the CARICOM and Central America are a special case; there are likely to be significant resource constraints in developing and maintaining a national competition law. Indeed, without some resource help to improve the cost-benefit of introducing a formal competition policy framework, these countries might be better off relying on the only costless competition policy regime around, that being a policy of free trade.

I believe that further conceptual analysis needs to be undertaken to explore the workable options for very small economies, such as CARICOM members, where the resource constraints for establishing and operating a domestic competition institution are major considerations. However, where small economies share compatible views and objectives in terms of competition law and policy, the adoption of regional or sub-regional rules - possibly based on the model provisions - and institutions might be feasible for countries with little or no resources to establish their own regimes. Such an approach could provide for a more effective and rational allocation of resources. [Patricia Smith, 31:1600]

The Committee was provided with advice on how competition policy should be addressed multilaterally and in the FTAA.

Conceptually ... we need an agreement on the basis of the TRIPS - using the same concept as the trade-related intellectual property agreement, commonly known as TRIPS. This would mean a trade-related anti-competitive measures agreement, or TRAMS. ... What would a TRAMS agreement contain? In our view, number one, it would contain an obligation to adopt a sound competition law with appropriate scope and independence for investigation and adjudications. Key provisions would be: a provision against cartels and criminal conspiracy; a provision for merger review; a provision for abuse of dominant position; an advocacy role for the competition authority to make sure competition is considered in the various policy fora; a protection of confidential information, because you can't run a competition regime unless you have that; and finally, access to effective deterrents, be they monetary or criminal. There also has to be a commitment to transparency, national treatment, non-discrimination, and procedural fairness. You cannot run a competition system on less. If it doesn't respect national treatment and transparency, the point is lost totally. [Konrad von Finckenstein, 113:1120]

And

[C]ompetition policy and law is a highly complex area, as we all know. It is the Alliance's opinion that the focus should shift away from coming up with and trying to agree on substance of competition rules and remedies and look more toward the development of a clear set of principles and guidelines for the open and fair administration and enforcement of these rules. [Pamela Fehr, 112:925]

The Committee understands that these suggestions do not mean that they favour the harmonization of competition policy across the Americas. At this stage of the game, the Committee agrees that it is not necessary for the Americas to have a single set of competition rules. It would be best to leave such a decision for later, if at all.

The Committee now returns to the issue of the suitability of competition policy, specifically predatory pricing provisions, replacing anti-dumping policy. The Committee received a wide spectrum of views on this specific issue. Favourable comments were of the following sort:

[T]he anti-dumping rules and the competition provisions adopted by national legislative assemblies on unfair pricing practices are all pursuing a common objective, namely, maintaining the conditions for fair competition. This leads us to question the logic and pertinence of pursuing a public policy of maintaining two distinct legal systems, one which applies to foreign producers and which is based on the administration of anti-dumping duties, the other which polices the operators in the domestic market and which is designed to prevent predatory pricing policies. I feel that this dual system is artificial; I find it difficult to explain the logic behind it. Consequently, ... I think that Canada should, on the one hand, make an effort to promote the convergence of the anti-dumping system and, on the other hand, advocate competition rules with respect to unreasonably low pricing practices. [Vilaysoun Loungnarath, 110:1430]

Unfavourable comments were of the following genre:

[D]umping, as one type of unfair trade, is the situation where foreign exporters sell at prices that are lower than at home or are beneath cost, and … thereby hurt Canadian producers. Non-predatory price discrimination by a foreign exporter without market power in the market of import - namely, Canada - cannot be reached by traditional competition law. ... Well, the problem is, competition law traditionally has required that, for price discrimination or predatory pricing to be found and to be prohibited, there be predation. It requires that the person doing it means to hurt the competitor and has to have market power in order to do so, because what he's trying to do is cut prices, drive the competitor out, and then reap the benefits of monopoly pricing afterwards. ... If I were to drop the anti-dumping recourse and adopt the normal rules of price predation in competition law, I would, in effect, have given up my right to counteract dumping. ... [T]he trade-off of anti-dumping for competition law is not indeed a trade-off at all; it's a mere giveaway. [Michael Flavell, 99:925]

The Committee's understanding of the issue is that predatory pricing and anti-dumping were born out of different necessities and intentions. The former provisions were conceived to protect the interests of consumers, with the objective of securing a competitive process for the longer term. The latter provisions, on the other hand, were conceived to protect domestic producers from a specific foreign rival with special circumstances enabling it to discriminate between markets. Often these circumstances are protected domestic markets.

In the case of anti-dumping, the interests of consumers are being subordinated to those of domestic producers. When viewed in this light, the Committee is of the opinion that competition policy and its administrative authority should never be put in the position of subordinating the interests of consumers to those of producers. However, without the permanent disappearance of the ability to discriminate between domestic and foreign markets, there are indeed circumstances in which the interests of domestic producers should prevail over those of consumers; but not in all instances. Provided that proper administrative discretion is exercised in the application of anti-dumping provisions, the Committee concludes that there is no valid reason, or political appetite for that matter, for folding anti-dumping into antitrust. Competition and anti-dumping policies should, for the time being, remain separate.

Another issue of contention would be the relationship between competition policy and dispute settlement. The special trade committees struck to oversee how to fit competition policy into the trade regime have already concluded that the ability of a foreign government to contest the decisions of another country's competition authority would infringe excessively on national sovereignty. Trade and competition policy experts have instead focused their efforts on the adoption of a competition policy review mechanism and a council to oversee a competition authority's enforcement record in terms of its procedural fairness and transparency obligations.

It's a subject for negotiation whether dispute settlement procedures could be used to determine if member countries are respecting their obligations to implement and maintain competition laws pursuant to a competition framework. ... We believe that the effectiveness of an FTAA agreement on competition policy would also be enhanced with the establishment of a competition policy review mechanism, which we've stolen from the WTO trade policy review mechanism. A council would be tasked with the responsibility of preparing a periodic review on the substantive provisions of a country's competition law and the competition agency's enforcement record. Both the competition policy review mechanism and the council would promote transparency and establish a competition authority's track record of procedural fairness, and in our view could be an acceptable alternative to addressing the issue of compliance. [Patricia Smith, 31:1555]

The Committee understands that the proposed FTAA competition policy review mechanism and FTAA Competition Policy Advisory Committee would not be able to review or comment on individual decisions made by a competition authority. They, however, would be able to shed more light on the competition policy and enforcement regime of different countries of the hemisphere and make recommendations for modernizing their practices. Thus, in the absence of recourse to ex post case review, ex ante information will be disseminated as a caveat to would-be foreign traders and investors of the hemisphere. This approach would serve to clarify and provide more predictability on competition matters to foreign traders and investors. A peer review mechanism should also provide for the possibility of influencing reforms of these policies when needed, without encroaching on national sovereignty.

In consideration of all these factors, the Committee, therefore, recommends:

28. That the Government of Canada: (a) encourage the introduction of competition policy and law regimes with strong enforcement provisions of these laws by countries of the Americas that do not presently have them; (b) resist those parties to a Free Trade Area of the Americas agreement who would have anti-dumping provisions merged with predatory pricing provisions of competition policy and law; (c) consider the desirability of a competition policy review process that would, at a minimum, provide routine oversight and report on a member country's competition policy and its competition authority's enforcement record in matters of procedural fairness and transparency; and (d) provide for periodic review to have competition policies broadened and strengthened.

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1 The 12 countries with competition laws are Argentina (1919), Brazil (1962), Canada (1889), Colombia (1959), Costa Rica (1994), Chile (1959), Jamaica (1993), Mexico (1934), Panama (1996), Peru (1991), Venezuela (1991) and the United States (1890). The eight countries debating, designing or drafting competition laws are Bolivia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, and Trinidad and Tobago.