WORLD TRADE
ORGANIZATIONWT/WGTCP/W/102
WT/WGTI/W/55
25 September 1998
(98-3724)
Working Group on the Interaction
between Trade and Competition Policy
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE UNITED STATES
The following communication, dated 24 September 1998, has been received from the
Permanent Mission of the United States with the request that it be circulated to Members.
_______________
RELATIONSHIP BETWEEN INVESTMENT AND COMPETITION POLICY
1. Introduction
The United States delegation presents this paper to both the WTO Working Group on the
Relationship between Trade and Investment and th e Working Group on the Interaction Between Trade
and Competition Policy.  This is the first time that the relationship between investment and
competition policy has been addressed by the United States in either of these Working Groups.  In this
paper, we will discuss several basic points of interaction between investment and competition,
including both economic connections and institutional ones.  It is the view of the United States that
the free flow of investment1 between countries has greatly benefited the general welfare of those
countries, has increased economic efficiency and has, as a consequence, stimulated competition and
aided consumers.  As will be discussed, we believe that there is very broad agreement with thesepropositions.  Similarly, modern, pro-consumer competition policies can enhance open investment
regimes, increasing the value of such regimes to  both investors and consumers.  The two sets of
policies thus can and should be mutually reinforcing, creating a virtuous circle of progress.  In
contrast, experience has shown that too heavy a use of investment regulation, including regulation
purporting to be competition-oriented, can  harm both investment and competition.
2. Economic Implications
Much recent work has confirmed the beneficial effects of investment for countries making
and countries receiving investment.  The OECD, the WTO, UNCTAD and other organizations
generally have converged on the view that open investment facilitates economic growth, technological
                                                     
1 "Investment" refers here to business investment, including the acquisition, sale and de novo
establishment of business enterprises, and not to "portfolio" investment nor to the activities of securitiesmarkets.  The protection and regulation of capital markets are, of course, topics of great importance, but are
outside the scope of this paper.  Thus, the focus here is on "foreign direct investment", or "FDI".WT/WGTCP/W/102
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innovation and diffusion, industrial competitivene ss and competitive consumer markets.  As the
OECD stated in its March 1998 communication to the WTO.2
Direct investment by [multinational enterprises (MNEs)] has the potential rapidly torestructure industries at a regional or global level and to transform host countries intoprodigious exporters of manufactured goods or services to the world market.  In so
doing, FDI can serve to integrate national markets into the world economy far more
effectively than could have been achieved by traditional trade flows alone.  As with
private sector investment more generally, the benefits from FDI are enhanced in an
environment characterized by an open trade and investment regime, an active
competition policy, macroeconomic stability and privatization and deregulation.  In
this environment, FDI can play a key role in improving the capacity of the host
country to respond to the opportunities offered by global economic integration,  a goal
increasingly recognized as one of the key aims of any development strategy.
Likewise, the WTO Secretariat recently noted:
Despite the difficulties associated with the measurement of the efficiency-enhancing
effects induced by FDI, let alone with the assessment of the specific channels by
which a transfer of technology affects local productivity, the empirical literature
offers some important conclusions.  First, there appears to be a wide consensus that
FDI is an important, perhaps even the most important, channel through which
advanced technology is transferred to developing countries.  Second, there also seemsto be a consensus that FDI leads to higher productivity in locally-owned firms,
particularly in the manufacturing sector.  Third, there is evidence that the amount of
technology transferred through FDI is infl uenced by various host industry and host
country characteristics.  More competitive conditions, higher levels of local
investment in fixed capital and education, and less restrictive conditions imposed onaffiliates appear to increase the extent of technology transfers.
3
And the 1997 UNCTAD World Investment Report stated:
[FDI] continues to be a driving force of the globalization process that characterizes
the modern world economy.  The current boom in FDI flows, which has been
accompanied by increasing flows of foreign portfolio equity investments, underscores
the increasingly important role played by transnational corporations (TNCs) in bothdeveloped and developing countries.  This role has been facilitated by the
liberalization of FDI policies that has taken place in many countries in recent years,
as part of an overall movement toward more open and market-friendly policies.
However, reaping the benefits of FDI liberalization requires not only that barriers to
FDI are reduced and standards of treatment established -- the focus of most FDIliberalization to date -- but also that competition in markets is maintained.
4
                                                     
2 "Foreign Direct Investment and Economic Development", communication from the OECD to the
WTO Working Group on the Relationship between Trade and Investment, WT/WGTI/W/26, 23 March 1998, at
4-5.
3 "Trade and Foreign Direct Investment", New Report by the WTO Secretariat, 9 October 1996, at 19.
4 "World Investment Report 1997, Transnational Corporations, Market Structure and Competition
Policy", at xv.WT/WGTCP/W/102
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Much of this analysis has focused on countries that are net recipients of investment, not
providers, but the economic benefits to provider nations are generally recognized as well.   They
include facilitation of international trade, specialization of production on a broader basis and the
stimulation of innovation.5  Some countries and regions are both very large recipients and very large
providers of FDI.  The United States and the member States of the European Union are good
examples of this situation.
Free flows of investment greatly increase the prospects for new entry -- and thus increased
competition -- in specific markets.  This is true not only for markets of national or international scope,
but also those markets that are by necessity more local in their geographic definition.  Many services
markets fall into the category of relatively local and immovable.  It is in part for this reason that the
"modes of supply" covered by the General Agreement on Trade in Services include "throughcommercial presence", a term that includes the use of branches, subsidiaries and other affiliates within
the territory of individual Members.  Investment can  not only supplement open international trade, but
it can also take hold where open trade has not yet reached.  In either case, new suppliers, actual and
potential, become available, and thus competition cl early is enhanced.  Real world examples from the
current moment include the commercial air transportation sector and the basic and enhanced telecomsectors.
6
There are numerous studies that support the conclusion that free flows of investment increase
competition.  For example, in its 1996 Report, the WTO Secretariat observed that:
[I]t is argued that MNCs are able to engage in a variety of restrictive business
practices in the host country which lead to higher profits, lower efficiency, barriers toentry and so forth.***
Alternatively, of course, the entry of an MNC might have the effect of breaking up a
comfortable domestic oligopolistic market structure and stimulating competition and
efficiency.  And, of course, account must be taken of the host country's domestic
antitrust policies, which are as applicable to MNCs as they are to domestic firms.  Inshort the effect of FDI on market structure, conduct and performance in host
countries is not easy to predict a priori.  The empirical evidence, however, points
strongly to pro-competitive effects.
7
As the OECD has explained, "Governments have become more attentive to the beneficial effects offoreign firms' presence on domestic competition and productivity, in addition to job creation and
technology transfer.
8
                                                     
5 See, e.g., the recent Note by the OECD Secretary General entitled "Open Markets Matter: the Benefits
of Trade and Investment Liberalization", prepared for the Council at Ministerial Level, April 1998, Chapter 3.See also  the WTO Secretariat Report, supra , at 13-14.
6 For further example, consider international telephone "accounting rates" between countries, which
have been decreasing toward actual calling costs as more and more countries allow competition for foreign calls,
both through resale of existing network capacity and the establishment of new facilities.  Average United States
rates have declined a cumulative 46.6 per cent in the past six years.  FCC News Report No. IN 98-45, "OneYear Anniversary of Benchmarks Order Marked by Rapid Decline in Accounting Rates" (6 August 1998).
7 "Trade and Direct Foreign Investment", supra , at 16.
8 "Open Markets Matter", supra , at 29 (Box 3.2).WT/WGTCP/W/102
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Liberal investment rules can mitigate or eliminate local distribution bottlenecks that may
frustrate trade in goods.  Under such rules, an exporter who cannot place his goods through
established wholesalers or retailers owned or controlled by one or more local producers can create
new distribution channels or, perhaps, acquire old ones, to the benefit of consumers.9
A modern, pro-consumer competition policy significantly augments an open investment
policy in several ways.  As has been suggested, soundly enforced antitrust laws often are part of the
general "framework" of business laws that foreign investors look to for a fair, predictable legal
environment in which to do business.10  Conversely, ineffective or discriminatory competition policy
enforcement could have the effect of discouraging market entry through investment (that often brings
new products, technologies, service and sales strategies, etc.).  More specifically, sound competition
laws or regulations can aid investors by preventing local cartels or monopolies from abusing newentrants or driving them out.  This is especially  true for network industries, such as telecom or
electricity, where an investor may need to rely upon local bottleneck transmission facilities to provide
a competitive service.  It was in recognition of this situation that the GATS Basic Telecom negotiators
chose the so-called "Reference Paper" as a solution - it requires national telecom regulators to be
established and to referee interconnection with former (or even existing) monopolies.  And, of course,competition laws can prevent new market entrants from themselves engaging in collusive or
monopolistic conduct.
Questions have occasionally arisen about the "sequencing" order of new investment and
competition rules, suggesting that choosing where to start is a very intricate proposition.  We do not
share that view:  governments can simply do both, and the sooner the better for both the investmentand competition climates in their countries.  Indeed, over 80 countries already have antitrust laws on
their books, and thus need not wait to introduce such laws before taking other actions.  Antitrust laws
have obvious value where local markets may only be supplied by local enterprises.  Antitrust law is an
obvious response to cartelization and monopolization problems, which are more likely to occur absent
the competitive pressures of free inward investment.  Also, an antitrust law accompanying investmentliberalization may be valuable in dealing with two possible harms to consumers:  anti-competitive
practices by local companies aimed at new investors, and such practices by investors in the local
market.
In past years, many countries have maintained international (or even internal) investment
screening regulations, using such regulations to force investors to make specific commitments on
various performance requirements, including technology transfer requirements, and/or to force the use
of local business partners or prevent the free repatriation of funds.  Fortunately, fewer and fewercountries now resort to such heavy-handed devices.  The adverse effects of these devices on
investment flows and economic grow th have now been recognized.
11  They are likely to deter, not
encourage, beneficial flows of capital and technolo gy, and hinder the stimulation of competition in
local markets.
                                                     
9 This approach to distribution problems would appear to apply to distribution barriers regardless of
those barriers' consistency with the WTO agreements.  Establishing new distribution channels may not be asdesirable in every instance as being able to utilize existing ones.
10 In addition to the reports already cited and the EU's paper to this Working Group, see APEC
Economic Committee, "Foreign Direct Investment and Market Framework Policies" (1996), and the1997 A nnual Report of the WTO, Volume I, Chapter IV.3.
11 This point is made, for example, in paragraph 12 of the EU's paper to this Working Group, and in
The OECD report "Foreign Direct Investment and Economic Development", supra , at 5.WT/WGTCP/W/102
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Sometimes these investment screening regimes have even been given a competition policy
rationale, one based on concern that efficient new market entrants could harm existing local
competitors and perhaps achieve a local monopoly.12  In our view, these concerns are largely
misplaced, especially if foreign entry is by way of "greenfield" investment rather than throughacquisition of a local competitor.  On the conceptual level, competition policies that attempt to protect
(established) competitors, rather than consumers, are inherently suspect;  after all, competition laws
should protect competition, not competitors.
13  While other rationales are sometimes asserted for
maintaining such protective policies, competition ra rely is enhanced by them.  Further, if a new
entrant does possess clear and sustained advantages over the older market players, the way to prevent
that new firm from enjoying monopoly power is to we lcome other new entrants too.  By definition, a
restrictive investment regulation that only allows one investor into the market at a time will tendtoward monopoly effects.  The cure ordinarily should be not more regulation, but less.
Finally, experience has also demonstrated that performance requirements on investment can
also reduce or negate the otherwise beneficial effects on competition.  For example, a requirement that
all production from an investment be exported yields little, if any, benefit to the domestic (host)
market in terms of increased competition.  Thus, performance requirements that have the effect ofpreventing the greater integration of the domestic market with international supply factors will not
only reduce the competitiveness and thus the attraction of investment activity, but will also sever the
"virtuous circle of progress" referred to above.  Even if the domestic market is not effectively
"insulated" from the foreign investment, operational constrains on foreign investment can reduce, and
even eliminate, the pro-competitive benefits associated with foreign direct investment.  Suchconstraints, e.g., limitations on the range of products produced or sales distribution requirements,
result in foreign investment having to operate and compare in a sub-optimal fashion.
In sum, open investment almost always enhances competition.  An enlightened competition
policy can and should enhance investment flows and ensure that consumer welfare is served.
Investment screening in the guise of competition policy will usually fail to stimulate either investmentor competition.
14
3. Institutional Aspects
As noted, there are very few institutional overlaps between international investment treaties
and international competition cooperation.  This is neither an accident nor a problem, given the
constructive parallels between the two.  The Wo rking Group on the Relationship between Trade and
Competition Policy need not be reminded here of the various international antitrust cooperation
efforts that are now going on15, but it may be useful to discuss some of the international investment
efforts.  Given the complexities that exist in some  of these investment initiatives, we will merely
describe them here, not offer detailed evaluations of  them or their likely outcomes.
                                                     
12 For a detailed discussion of this rationale, in the context of developing country control over FDI, see
the 1997 UNCTAD World Investment Report, supra .
13 Northern Pacific Ry. v. United States, 358 U.S. 1(1958).
14 As discussed in the paper on intellectual property rights and competition that the United States is
submitting to the Working Group, intellectual property rights also enhance competition, and laws, includingcompetition laws, that do not recognize this will fail to stimulate innovation.
15 See the November 24, 1997, Submission by the United States to this Working Group entitled "US
Experience with Antitrust Cooperation Agreements".WT/WGTCP/W/102
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A. WTO W ORKING GROUP ON THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
Like the WTO Working Group on the Interaction between Trade and Competition Policy, the
WTO Working Group on the Relationship between Trad e and Investment is a product of discussions
at the 1996 Singapore Ministerial.  The Trade and Investment Working Group's role is to provide aforum for the exchange of information and experien ces related to international investment, including
experiences with bilateral and multilateral investment agreements.  It does not have authorization to
begin negotiations on an investment agreement.  However, the foundations of bilateral and
multilateral agreements, and their implications for individual countries, have been a topic of great
interest in the Working Group.  Developing countries have been particularly eager to discuss the
relationship between economic development and openness to investment.
B. WTO A
GREEMENT ON TRADE -RELATED INVESTMENT MEASURES (TRIM S)
The WTO Agreement on Trade-Related Investment Measures prohibits the use of certain
performance requirements applied to investments, notably, requirements to use domestic rather than
imported products, and requirements to maintain a particular balance between imports and exports.
The operation of the agreement is scheduled to be reviewed in the year 2000.
C. THE MULTILATERAL AGREEMENT ON INVESTMENT ("MAI") AND OTHER INVESTMENT
DISCIPLINES
The sustained effort at the OECD to negotiate the MAI, a binding multinational investment
treaty, is continuing.  The United States will not attempt to summarize the open MAI issues here,
other than to note that antitrust issues are not among them.  However, we do wish to draw Members'
attention to the fact that the current MAI Consolid ated Text (a negotiating document with explanatory
footnotes) includes a section on the behaviour of official monopolies and perhaps also state
enterprises and official "concessions".16  The provisions regarding official monopolies (or
monopsonies) would require MAI signatories to prevent such entities, public or private, from
discriminating against customers (or suppliers) that were investments of foreign investors, and to
prevent such monopolies from abusing their monopoly rights to engage in anti-competitive practicesin other sectors to the harm of foreign investments operating in those sectors.
A number of participants in the MAI discussions on "Monopolies" language have opposed it
on the grounds that it intrudes on competition policy, and that competition policy is outside of the
MAI's competence.  Some proponents of having Monopolies language, including the United States,
have argued that it does not implicate competition policy in any general sense.  Rather, it is a
necessary safeguard, they argue, against governments  using official monopoly/monopsony franchises
to discriminate against or otherwise harm foreign investors whose enterprises rely on the officialmonopoly for essential inputs or outlets.  Governments are free, proponents of Monopolies language
note, to fulfill this obligation by direct administrative action, by use of regulatory mechanisms or, of
                                                     
16 MAI, Consolidated Text, DAFFE/MAI(98)7/REV1, at 31-45 (22 April 1998), and MAI Commentary
to the MAI Negotiating Text, at 17 (24 April 1998).  Proposed obligations regarding the behaviour of "stateenterprises" would be limited to ensuring that such enterprises do not buy or sell on the basis of nationalityrather than normal business considerations.  Some OECD members have urged that "concessions" - which
appear to be grants of exclusive rights to provide a public service for a certain territory for a certain time -
should also be covered in this section of the MAI.  The principal proponent of including "concessions" withinthe Monopolies topic has sought to require detailed, transparent and non-discriminatory rules for the granting ofconcessions, not special disciplines upon their behaviour.  The United States and other MAI delegations haveexpressed scepticism as to the need for any rules regarding "concessions".WT/WGTCP/W/102
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course, by use of competition policy instruments to the extent relevant.17  The issue has been
discussed extensively in a working group but has not been resolved at the negotiating level.
Similar language already can be found in Articles 1502 and 1503 of the NAFTA, where they
form part of the Competition Chapter.  Article VIII of the GATS, regarding "Monopolies andExclusive Service Providers", also lends obvious parallels.  The various Bilateral Investment Treaties
to which the United States is a party contain no competition provisions relating to antitrust.
Negotiations commenced this month on the Free Trade Area of the Americas ("FTAA"), and among
its nine negotiating groups are a Competition Policy group and an Investment group.  Obviously, it is
too early to say what these chapters in any agreement ultimately will contain.
D. T
HE OECD G UIDELINES FOR MULTINATIONAL ENTERPRISES
These voluntary guidelines for "MNEs" were first adopted in 1976, and have been modified
in one aspect or another in 1979, 1981, 1982 and 1991.  One of their provisions is guidance on MNE
adherence to competition laws and cooperation with competition authorities.18  The OECD Committee
on International Investment and Multinational Enterprises ("CIME") commenced work on a general
update of these guidelines in June of this year, and will hold a meeting on the subject in November.
The Guidelines also cover employment practices, environmental practices, taxation and corporatetransparency;  they constitute a voluntary code of good corporate conduct, not binding obligations on
governments.
E. R
ELEVANT UNCTAD W ORK
UNCTAD's World Investment Report19 for 1997 includes a lengthy discussion of the
relationship between increased FDI and competition policy.  The United States commends UNCTADfor assembling the extensive data presented in th is document, and for recognizing the importance of
increased FDI to the global economy.  In its chapter on competition policy, this report recognizes the
benefits that liberalized FDI can yield to host countr y markets, but also raises concerns that such FDI
could harm competition in some circumstances absent competent competition law enforcement.  The
United States agrees that the beneficial effects of liberal investment can and should be enhancedthrough maintenance of a sound legal environment, including competition enforcement.  We also
agree that the actual effects of any particular transaction - and especially horizontal mergers and
acquisitions - are very fact-specific and call for careful analysis.
We will not undertake a general discussion of UNCTAD's report here.  However, we would
like briefly to explain why we believe that the concerns it raises about possible anti-competitive
results from liberalized investment laws may be overstated.  The report posits that more efficient
multinational enterprises could enter a liberalized market and replace multiple local "competitors"with a more efficient monopoly or oligopoly provider(s), thereby losing market "contestability".
However, the previous closed market structure would almost certainly have been operating at
inefficient levels, and quite possibly without significant competition either, unless national antitrust
laws were already in operation.  Thus, generally speaking, allowing more efficient providers to enter a
market through FDI should benefit consumers even if providers ultimately are fewer in number.Moreover, absent some sort of "natural monopoly", there is little reason to believe that market
                                                     
17 While antitrust laws should be enforced in a non-discriminatory way, they normally are not
themselves instruments for resolving national treatment or MFN issues, although they may deal with
anti-competitive price discrimination.
18 The OECD Declaration on International Investment and Multinational Enterprises - Basic Texts
(Paris 1992).  For a brief background on the Guidelines see Waller, "Antitrust and American Business Abroad",
Vol. 2, at 18-9 to 18-14 (3rd Ed. 1997).
19 World Investment Report 1997, supra .WT/WGTCP/W/102
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liberalization will yield a single new entrant; many could well find the market attractive.  Finally,
foreign entry through de novo  creation of a local enterprise is very unlikely to create antitrust
problems compared to entry through merger with, or acquisition of, a major local competitor, which
could sometimes raise antitrust concerns.
F. REVIEW OF MERGERS UNDER NATIONAL ANTITRUST LAWS
Nearly all national and regional antitrust laws provide for review of proposed mergers and
acquisitions, and many of these laws also provide for compulsory or voluntary pre-merger notification
to antitrust authorities.20  Such antitrust review is not the same as investment "screening".  It does not
apply only to foreign investors or discriminate against them, and is (or should be) a transparent
process conducted according to established substantive and procedural rules.  The objectives of
antitrust review of mergers and acquisitions are limited to assuring antitrust authorities that proposedtransactions will not harm competition, such as by raising prices, reducing output or limiting
innovation.
4. Conclusion
Free flows of investment should almost always facilitate competition and thus complement
sound competition policy.  Competition policy can, in return, help maximize the benefits of liberalinvestment, not the least by making sure that any residual local monopolies do not nullify those
benefits.  Both investment liberalization and comp etition policy work should proceed apace, without
undue concern for the timing of each legislative event.  Investment liberalization has been and should
continue to gather speed through use of investment-specific international instruments.  In the same
way, governments should continue to create and enhance a culture of competition that allows the fullconsumer benefits of investment liberalization to be realized.
__________
                                                     
20 Many treaties and articles summarize and discus s substantive and procedural antitrust provisions
involving the review of mergers and acquisitions.  See, e.g. , 1 American Bar Association, Antitrust Law
Developments (Fourth) 307-386 (1997)(U.S. law); 2 G. Addy & W. Vanveen, Competition Law ServiceCA-285 - CA-311 (1996) (Canadian law);  Bellamy & Child, Common Market Law of Competition, §§6-001 -
6-164 (4
th ed. 1993, with 1996 Supplement)(EU law); W. Rowley & D. Baker, International Mergers: The
Antitrust Process (2nd ed. 1996, with 1998 Supplement)(merger laws of 29 countries and the European Union);
OECD, Merger Cases in the Real World - a Study of Merger Control Procedures (1994) (merger case studiesfrom OECD countries);  Pittman, Competition Law in Central and Ea stern Europe: Five Years Later ,
43 Antitrust Bull. 179 (1998) (merger laws of six Central and Eastern European countries).