WORLD TRADE
ORGANIZATIONWT/WGTCP/W/183
19 April 2002
(02-2236)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM CANADA
The following communication, dated 18 April 2002, has been received from the Permanent
Mission of Canada with the request that it be circulated to Members.
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Two Principles for Technical Assistance with regard to Competition Policy
Globalization and liberalization of world markets has fostered a growing international interest
in competition policies.  This reflects, in part, the increased market orientation of governments world-
wide and the growing recognition of the key role that competition can play in efficient markets.  Inparallel, there is a recognition that competition policy can help structural adjustment and can assist an
economy in withstanding and adapting to international economic changes and pressures.  The
promotion of competition law is not an end in itself; it is pursued because rivalry in the economy
promotes the best use of scarce resources.  In this light, this paper sees an aspect of technical
assistance as being a policy process for coming to grips with the core economic underpinnings of
competition policy and adapting this thinking in the design of new competition systems suitable to a
given economy.
This note sets out two broad economic concepts that are important to any sound competition
law and enforcement program regardless of the specific statutory structure under which it operates,
namely:
- the concept of economic efficiency, and
- the protection of competition and the competitive process, not competitors.These two principles should ideally underpin the early policy choices with regard to
competition policy and its development. From a broad policy perspective, the primary objective of
technical assistance is to encourage the elaboration and adoption of welfare-enhancing, economy-
wide competition rules that will promote a solid basis for growth and development.  Flexibility and
adaptability, underpinned by sound competition law and policy, are essential characteristics of a
successful economy capable of generating sustained economic and social development.  Competitionpolicy has an important social component: it fosters a society based on achievement and merit.  It
ensures that human resources and capital are put to their most efficient use.  Competition law
enhances economic and social developmental goals, opens the way for investment, including
investment in human skills, and provides positive incentives for generating growth and sustained
development.WT/WGTCP/W/183
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Although competition policy is taking root in different socio-economic environments and thus
includes many viewpoints on specific issues, recognition is also growing that the design of an
effective competition policy system needs to be underpinned by core principles.  In selecting two such
principles for this note, we seek to avoid focussing on the specific differences that may exist among
various competition regimes.  The goal is to present a short introduction to two concepts which areimportant for any competition law and enforcement pr ogram regardless of its maturity or the specific
statutory, legal environment or institutional considerations under which it operates.
Protect Mutually-Advantageous Transactions :  Central Role of Economic Efficiency
Competition forces firms to become efficient and to offer a greater choice of products and
services at competitive prices.  In a competitive market economy, price and profit signals tend to berelatively free of distortions and this creates incentives for firms to redeploy resources from lower-to-
higher valued uses in line with consumer preferences.  The objective of competition policy is to
promote competition by eliminating or preventing those private restraints that adversely interfere with
the competitive process.
In almost every country with an antitrust law and an enforcement institution, competition
policy must reflect on the potential benefits of reducing the wasteful use of human, capital and
physical resources.  The concept of economic efficiency has a fairly clear economic meaning.  It
refers to the ideal of ensuring resources are put to their most productive uses, producing those goods
and services that society values the most.  Efficiency gains are often determined for a giventransaction with regard to price, quality, outpu t, innovation and ultimately, consumer welfare.
The concept of economic efficiency supports developmental objectives: it encourages each
jurisdiction to put its resources to their most socially-desirable uses.  The focus of economic
efficiency yields the best allocation of resources based on prices that adequately reflect costs.
There is a recognition that markets will shape the distribution of income and that under
competitive conditions, the result in part will be based on individual productivity.  Free markets
promote sustained economic growth by facilitating efficient allocation of human skills and
investment.  Growth lifts economic and social prospects for all participants.  Nonetheless, the
resulting jockeying between winners and losers from competition leads to a consideration of other
objectives for competition law, which are broadly grouped in the literature as fairness considerations,for example the protection of small retailers, consumers or particular occupational groups.  If
competition policy is, in part, to address fairness concerns in any jurisdiction, then a consensus will
need to be fashioned as to what constitutes the public interest, i.e. a formula for the balancing of
economic efficiency and fairness considerations.
At one end of this debate is the view that the sole purpose of competition policy is to
maximize total wealth and growth.  Under this view there is a limited justification for socio-political
criteria such as fairness and equity.  The opposite view, of course, is that competition policy should
also be based on certain equity considerations reflecting a variety of social preferences, which its
proponents hold should not be ignored.  Within the spectrum, there are a range of views on therelative weight to be attached to different factors.
Attempts to take into account multiple objectives in the administration of competition policy
may give rise to conflicts and inconsistent results.  For example, protecting small business and
maintaining employment in certain circumstances could conflict with attaining economic efficiency.Competitors rather than competition may be protected.  These multiple objectives cannot be easily
quantified and are usually the subject of a compromise.WT/WGTCP/W/183
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At the same time, caution must be exercised so that the fairness/equity concept not be used, or
more accurately misused, in favour of ensuring an equality of outcomes in the marketplace or for
buttressing protectionism.  For this reason, the examination of efficiencies always remains at the heart
of competition evaluations.
Protect Competition not Competitors:  Industrial Policy and Market Rivalry
Industrial policy refers to actions that a country may take to affect the mix of its industrial
activities.  Countries embrace industrial policies because they have collective preferences about the
composition of their industrial sectors.
When markets work, all participants are better off.  Industrial policy is called into service
when markets are perceived to have failed.  The natural tasks of industrial policy then become
apparent, according to Caves, Frankel and Jones in World Trade and Payments:   "Fix any defects in
factor markets that keep the returns of a factor from being equalized among industries, and fix any
defect in a product market that causes it to empl oy too few factors (such as a monopoly) or too many
(restricted outward mobility)."
Industrial policy proponents often advance a sectoral allocation of resources motivated by a
blend of factors:  attempts to correct for market failures, belief that a country requires a presence in a
sector or to reward a variety of vested interests.  Thus, in the broadest sense, industrial policy refers to
the full range of measures that governments employ to promote an efficient industrial structure.  In anarrower sense, industrial policy describes a subset of economic measures designed to provide special
advantages or assistance to particular industries or firms.
If one focuses on the broader concept, competition policy itself constitutes a key element of
an effective industrial policy.  It strengthens incentives for continual innovation and the systemicupgrading of products and production processes.  On  the other hand, some applications of industrial
policy in the narrow sense, for example tariffs or the creation of monopolies through regulation, can
be antithetical to economic efficiency objectives.  Indeed, economic literature suggests that, in many
cases, the effect of such policies is to frustrate the operation of competitive forces, thereby advancing
the interests of specific groups within society.
Economists have traditionally been skeptical about the practical effects of picking national
champions and their contribution to sustained economic performance.  One reason for such skepticism
has to do with the concept of "rent seeking".  This concept recognizes that, in practice, government
support for specific industries is influenced by pressures from interest groups.  As a result, legitimate
objectives related to economic efficiency may be supplanted by protectionism and the unwarranted
preservation of inefficient industries.
Competition policy has a dual role to play in relation to industrial policy.  On the one hand, it
contributes directly to an effective industrial policy through the maintenance of inter-firm rivalry.
Specific aspects of competition law, such as the treatment of efficiency gains and R&D joint ventures,
can also contribute to efficient structural adjustment.  On the other hand, a key role of competitionpolicy in a modern economy is to challenge industrial policy interventions that restrict competition
without a sound efficiency-related basis.
In general terms, antitrust law and enforcem ent should not become enmeshed in picking
winners or buttressing the prospects of national champion firms.  The competition policy focus needsto be on maintaining the competitive process rather  than ensuring a privileged position for incumbents
or dividing the market among a fixed number of players.  It is, of course, recognized that this principle
will undergo adaptation and refinement in responding to particular challenges and circumstances.WT/WGTCP/W/183
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All economies will face issues related to market fail ure.  In such circumstances, competition policy
has an even more critical, stepped up role to play, namely, encouraging an informed debate about the
relative merits and costs of the industrial policy responses selected to address the perceived market
failures.
Implications for Technical Assistance
The central role of economic efficiency and the protection of the competitive process are two
broad principles underpinning competition policy and its enforcement.  These two principles form
part of the economic foundation for competition policy.  In practical terms, these principles provide
competition policy-makers with a degree of flexib ility to respond and to adapt to changing socio-
economic circumstances.  As countries build a framework for competition policy analysis, law and itsenforcement, these principles will need to be addressed and tailored to specific circumstances.  The
possibilities for success in preparing new legislation or designing new enforcement institutions are
likely to increase if such initiatives are informed by the core economic principles underpinning
competition policy and are based on careful study as to how these principles can be best adapted to a
country’s socio-economic context.
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