RESTRICTED
WORLD TRADE WT/WGTCP/W/26
10September 1997
ORGANIZATION(97-3621)
Original: English Working Group ontheInteraction
between Trade andCompetition Policy
COMMUNICATION FROM HONG KONG, CHINA
Thefollowing communication, dated 9September 1997, hasbeenreceived fromtheHong Kong
Economic andTrade Office withtherequest thatitbecirculated toMembers.
_______________
I. INTRODUCTION
1. Members agreed atthemeeting heldon7-8July1997thatthisWorking Group should discuss,
interalia,therelationship between theobjectives, principles, concepts, scope andinstruments oftrade
andcompetition policy, andtheirrelationship todevelopment andeconomic growth. Thissubmission
aimsatenhancing theconceptual understanding ontrade andcompetition policies, soastofacilitate
thestudy ofissues relating totheinteraction between themasmandated bytheMinisters inSingapore.
II. OBJECTIVES, PRINCIPLES, CONCEPTS, SCOPE AND INSTRUMENTS OFTRADE
POLICY
2. Trade policy canbesubdivided intotwobroad categories: trade liberalization policies and
trade protection policies.
(a) Trade liberalization aimsatamore efficient useofscarce resources intheimporting
country (e.g.byreplacing lessefficient domestic production byimports) aswellas
intheexporting country (e.g.bypromoting more productive export industries rather
thanlessefficient import-substitution). Non-discriminatory trade liberalization tends
toenhance microeconomic "technical efficiency" (useoffewer inputs fortheproduction
ofthesame levelofoutput atthefirmlevel), macroeconomic "allocative efficiency"
(useofnational resources inthemostproductive andleastcostly manner atthecountry
level) andconsumer welfare (maximization ofconsumers 'surplus).
(b) Trade protection tendstorestrict ordistort international tradeforthebenefit ofdomestic
import-competing producers orexport industries. Typically, suchpolicies enable them
tocharge higher prices andproduce larger quantities thanmight beeconomically
justifiable inopenmarkets without thetrade restrictions anddistortions. Therefore,
trade protection tends todistort theefficient allocation ofresources between markets
andwithin markets, reduce thepotential national economic welfare (e.g.interms of
realincome andconsumer welfare), andredistribute income forthebenefit ofthe
protected producers attheexpense ofconsumers andtaxpayers.
3. GATT/WTO lawprovides worldwide legaldisciplines fortheuseofalternative trade policy
instruments (such astariffs, non-tariff trade barriers, trade discrimination, andsubsidies). The
GATT/WTOlawrankstheseinstrumentsaccordingtotheireconomicefficiency:thelesstrade-distortingWT/WGTCP/W/26
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apolicy instrument is(e.g.border taxadjustments, production subsidies, non-discriminatory tariffs),
thefewer legalrestraints thelawimposes onitsuse.Theunderlying objective is,asstated intheGATT
andWTO Preambles, toenhance economic welfare andinternational trade through reciprocal trade
liberalization. TheGATT/WTO lawdoesnotprescribe specific policy objectives: WTO Members
remain freetodecide onwhatpolicy objectives theywanttopursue. Forinstance, theymaymaintain
tariffs, adopt safeguard measures against "injurious imports", anddecide freely ontheirdomestic,
economic, environmental, social andother lawsandpolicies aslongasthemeasures introduced are
within theconfines oftheGATT/WTO law.Under thedispute settlement mechanism, Members may
alsochallenge any"nullification orimpairment" ofbenefits under theWTO Agreement. Nonetheless,
theGATT/WTO alsosanctions certain measures which canbetrade restrictive anddistortive.
Anti-dumping isacaseinpoint.
III. OBJECTIVES, PRINCIPLES, CONCEPTS, SCOPE AND INSTRUMENTS OF
COMPETITION POLICY
4. Theprimary objective ofcompetition policy istomake themarket ascompetitive asmarket
forces, including technology, permit. Many argue thatefficiency should ultimately bemeasured in
terms ofconsumer welfare. Similar totrade policy, competition policy canbesubdivided intotwo
broad areas: competition-enhancing andcompetition-regulating policies.
(a) Competition-enhancingpolicies,liketradeliberalization,aimatpromotingopenmarkets
andrivalry among firms soastoenhance "productive X-efficiencies", "allocative and
dynamic efficiencies" and"distributive efficiencies" throughout theeconomy. This
isachieved bypromoting competitive business conduct (e.g.bymeans ofderegulation
initiatives toallow moreopencompetition between firms; andprohibitions ofcollusion
byprivate firms, abuse ofprivate market power, discrimination bypublic enterprises)
aswellascompetitive market structures (e.g. byenhancement ofaneconomy 's
contestability bymaintaining aliberal trade regime, controls ofmarket concentration
andprohibition ofstateaids). While trade policy rules areprimarily addressed at
governments intheirroleasregulator ofthenational economy, competition policy
rules areprimarily targeted atprivate economic operators.
(b) Competition-regulating policies areoften adopted incircumstances where freeor
unrestrained competition maynotbepracticable andacontrolled monopoly oroligopoly
canbejustified. These arecommon insectors where averyhighlevelofinvestment
isrequired, where there isaneedforprudential supervision orwhere there isaneed
toprotect thelong-term interest ofconsumers. Under these circumstances, theremay
beacasefortheuseofdifferent control instruments toregulate oreven restrain
competitiontomakesurethatconsumerwelfarewillnotbecompromised.Forexample,
suchpolicies maypermit collaboration among firms onR&D soastoenable economies
ofscalewhose beneficial effects mayoutweigh thedisadvantages fromlesscompetition.
However, some competition-restrictive policies, liketrade protection policies, aimat
improving thenational terms oftrade (e.g.support fortrade monopolies andimport
orexport cartels inanattempt at"rent-shifting" forthebenefit ofdomestic firms);
protecting regulated industries andinternational cartel arrangements among public firms
inspiteofeconomic inefficiencies (e.g.intheairline, maritime, communications and
electricity sectors). Asaresult, consumer welfare willbeimpaired.
5. IncontrasttotheworldwideGATT/WTOlegaldisciplinesandcomprehensivetradepolicies/laws
inallWTO Member economies, there arenoworldwide legal disciplines oncompetition policy.
Economies tendtotaketheirdomestic conditions, e.g.history, market structure andstateofeconomicWT/WGTCP/W/26
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development intoaccount when formulating domestic competition policies. Inthisregard, theWorking
Group isaware thatthereisnointernational consensus oncorecompetition principles fortheformulation
ofcompetition policies.
IV. COMPLEMENTARY FUNCTIONS OFTRADE AND COMPETITION POLICIES
6. Trade liberalization andcompetition policies serve complementary functions inmany respects.
Forinstance:
- Both aimatamore efficient allocation ofeconomic resources andaremutually
interdependent. Aliberal trade policy maybethemosteffective means ofenhancing
competition between firms inthedomestic economy. Ontheother hand, aneffective
competition policy inanexporting economy canhelptoprevent firms fromtheeconomy
togainandabuse theirdominant market positions indomestic economy. Competition
policies aimed atliberalizing private market access barriers andcorrecting market
distortions cantherefore beseenasalogical continuum oftrade policies aimed at
liberalizing governmental market access barriers anddistortions.
- Trade liberalization andcompetition policies serve general interests ofalldomestic
consumers (e.g.bypromoting lower prices andbetter quality ofgoods andservices).
Competition policy cancontribute toreforming trade protection policies, which often
restrict competition andpromote protectionist group interests attheexpense ofother
citizens. Forinstance, inorder topromote competition andeconomic welfare,
anti-dumping andother safeguard measures should focus on"injury tocompetition"
rather than"injury todomestic industry".
V. INCONSISTENCIES BETWEEN TRADE AND COMPETITION POLICIES
7. There aredifferences between trade andcompetition policies which attimes bring about
inconsistencies, hence distorting theefficient allocation ofresources. Forinstance:
- Competition policy instruments arenotsubject toworldwide international legal
disciplines andinternational dispute settlement mechanism astradepolicy instruments.
Means maynotbeavailable toredress private anti-competitive practices, suchasimport
anddistribution monopolies, which mayimpede international tradeandeffective market
access offoreign suppliers.
- GATT/WTO lawreflects aworldwide economic consensus ontheoptimal ranking of
trade policy instruments according totheireconomic efficiency. There seems tobe
farlesseconomicconsensusontheoptimalcompetitionpolicies,forinstancewithregard
tonon-price vertical restraints andthetaking intoaccount ofcostsavings forproducers
(totalwelfare approach) inaddition toconsumer surplus (theconsumer surplus approach
gives noweight tocostsavings forproducers thatarenotpassed ontoconsumers).
- Trade policy instruments (such assafeguard clauses) tendtofocus more onproducer
interests andarepolitically convenient forassisting domestic groups. Hence theyare
more often used fornon-economic policy objectives (such asforeign policy,
environmental andhealth policies, social adjustment andincome redistribution policies)
thancompetition policy instruments which focus more ongeneral consumer interests
andeconomic efficiency. This"protection bias" ofsome trade lawsisreinforced by
thefactthattheyprovide formore private rights toprotection, andforlessprivate
rights toliberal trade, thancompetition policies/laws.WT/WGTCP/W/26
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- Bothtradeandcompetition policies areoftendecided andadministered inafragmented
mannerwithouteffectivecoordinationamongtradebureaucraciesandcompetitionpolicy
institutions. Forinstance, tradepolicy-making processes concerning anti-dumping and
other safeguard measures focus on"injury todomestic industry" without requiring an
examination bythecompetition policy institutions oftheanti-competitive effects of
import restrictions ondomestic competition. Similarly, competition policy institutions
often decide (e.g.ontheexemption ofexport andimport cartels) without adequate
regard toanti-competitive effects inforeign markets andwithout examination ofthe
anti-competitive effects ofother domestic policies. Competition officials maybe
concernedthatthetakingintoaccountofnon-competitionpolicyobjectivesmightrender
itmore difficult forthem togivepriority toconsumers 'interests.
VI. RELATIONSHIP OFTRADE AND COMPETITION POLICIES WITH DEVELOPMENT
AND ECONOMIC GROWTH
8. Modern economic research onthecompetitive advantage ofnations suggests thatopenmarkets,
liberal legalframework rules andasound competition policy playakeyroleinfostering economic
growth, innovation andcontinuous upgrading ofproductivity andproduct quality. Inthisregard,
trade-liberalization andcompetition policies foster development andeconomic growth bylimiting
protectionist abuses ofbothgovernment andprivate market power. They reinforce oneanother and
result inamore efficient useofresources.
9. Tohelpdeveloping economies share intheeconomic growth generated through theinteraction
oftradeliberalization andglobal competition, wesupport adedicated study ontherelationship between
competition anddevelopment. Such astudy should cover, interalia,anti-competitive government
andbusiness measures andpractices which maydistort notonlycompetition indeveloping economies,
butalsothecompetitive conditions ofproducts originating from these economies; andexamine the
possible roleofcompetition disciplines topromote tradeandeconomic growth. Thestudy should aim
tocontribute towards redressing thedisadvantages totrade anddevelopment resulting from the
anti-competitive behaviours, andtohelpmaximize benefits tointernational trade anddevelopment of
developing economies.
10. Over thepast50years, international trade rules rightly gave priority tothereciprocal
liberalizationofgovernmentalmarketaccessbarriers.However,eventoday,someofthesetradebarriers
(such asanti-dumping measures against imports evenifthelatter donotimpair competition inthe
importing country) appear tobemore harmful thanprivate restraints ofinternational trade. WTO
Members should therefore continue togivepriority totheliberalization ofgovernmental market access
barriers. Topromote development andeconomic growth, national competition policies/laws canbe
nosubstitute fortradeliberalization; norcantheybeeffective without international tradeliberalization
andtransnational competition.
VII. CONCLUSION
11. ThemandateoftheWorkingGrouponTradeandCompetitionPolicyfocusesonthe"interaction"
between tradeandcompetition policy. Thismeans, asstated byourChairman, "...theWorking Group
istostudy neither competition policy persenorTrade Policy perse,buttheinteraction between the
two".1Wepropose thatfurther work should examine ingreater detail areas ofinconsistencies between
trade andcompetition policies, aswellastheirmutual complementarities, withaviewtoidentifying
areas forfurther consideration intheWTO framework.
1F.Jenny, Competition Policy inaGlobal Economy, New Delhi, March 1997, manuscript p.20