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Competition Policy and WTO: A Developing country Perspective

Sukumar Nandi
Indian Institute of Management Lucknow

Abstract

A competition policy which should be country-specific has to be developed


by the member country that should develop and sustain a competitive environment in the
industrial sector so that the consumers are protected against the negative externalities of
the monopoly. Different ministerial declarations under WTO have expressed the need for
the formulation of the competition policy though the consensus remains elusive regarding
the common approach to the policy or, whether the developing country should have a
separate approach.

Key concepts: Competition, Intellectual Property Rights, Legal Framework, Optimum


Resource Allocation, employment, WTO Dispute settlement System, Anti- dumping
laws, Beneficial Agreement, Transparency System

JEL Classification Number : F - 13

1. Introduction
Standard theorems in microeconomics and welfare economics prove that the
existence of perfect competition in the market guarantees both the optimality of
consumers’ welfare and efficient allocation of resources in production that ensures
maximum returns on investment. Such a situation leads to a bliss point that the society
can reach1. This is the attraction of competition and when economists argue in its favour,
they use the mainstream economic theories as mentioned. Since discussions under the
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It refers to the social equilibrium in any economy what is known as Pareto Optimality at the national
level. Technically, it is a point at which the aggregate production possibility curve is tangent to the social
indifference curve. It implies that resources in the economy are efficiently employed and that is
conformable to the preference pattern of the citizens of the country.
purview of World Trade Organization (WTO) are meant for safeguarding the interests of
the citizens of the member countries in general and the consumers in particular, the
emphasis was placed on the existence of competition that guarantees a win-win situation
for both the groups -- consumers and producers of commodities. In this perspective the
formulation of a competition policy by the member countries becomes important.

The fact is that competition policy means an environment of business. It covers


a broad spectrum of government policies and actions that affect the conditions under
which firms compete in a particular market. Therefore, trade policy, investment
regulations, intellectual property rights (IPRs), regulations on service providers and
product distributors, bankruptcy laws, subsidies and other state aids, and procurement
practices are all components of competition policy. The concept of competition law
refers to legislation, judicial decisions, and regulations specifically aimed at avoiding the
concentration and abuse of market power on the part of private firms, which could use
that power to exclude potential competitors. However, many regulations provide
exclusive rights to favored firms or stipulate exemptions from competition disciplines for
purposes of achieving various social goals.

Competition policy can be defined as a body of laws, administrative rules and case law
which are designed to deter restrictive business practices so as to maintain fair
competition. Competition policy does also include rules and regulations governing
mergers and acquisitions. The declaration of the WTO Ministerial Conference held at
Singapore in December 1996 stated in paragraph 20 as:

“…….. we also agree to:


……… establish a working group to study issues raised by Members relating to the
interaction between trade and competition policy, including anti-competitive practices, in
order to identify any areas that may merit further consideration in the WTO framework.
In the conduct of the work of the working group(s), we encourage cooperation ….to
make the best use of available resources and to ensure that the development dimension is
taken fully into account. …… It is clearly understood that future negotiations, if any,

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regarding multilateral discipline in these areas, will take place only after an explicit
consensus is taken among WTO Members regarding such negotiations”.

The General Council of the WTO established a Working Group in April 1997 on
the Interaction between Trade and Competition Policy with Professor Frederic Jenny, a
French expert, as Chairman. The Working Group's mandate until the Fifth Ministerial is
to focus work on "the clarification of core principles, including transparency, non-
discrimination and procedural fairness, and provisions for hardcore cartels; modalities for
voluntary cooperation; and support for progressive reinforcements for competition in
developing countries through capacity building" Also the same things were discussed in
many other forums including UNCTAD. The process continues and it is expected that a
final version will be reached before the next Ministerial meeting.

Why Competition is necessary _ Employment and Efficiency angle

The forces leading to the common interest of the multilateral forums in


competition and trade issues come from mainly two angles__ (i) Competition ensures
efficient configuration of resources that optimizes the employment of available resources
including labour, and (ii) Competition ensures optimum price of the product payable by
the consumer, and this optimizes welfare of the economy. Let us take the first one, i.e.,
the employment question.
The standard theorem of microeconomics regarding perfect competition is that it ensures
maximum output so that production is possible at the point of minimum average cost.
Compared to that a monopolist maximizes profit by equating marginal cost with the price
of the product and this gives a sub-optimum situation in the sense that output is less and
so is employment. The adoption of competition policy at the WTO level addresses this
question faced by the developing countries.
The second issue, i.e., the optimum price of the commodity produced and sold under
perfect competition maximizes the welfare of the society. Thus a country by adopting the
Competition policy as prescribed by the WTO not only increases the employment
potential of the economy, but it maximizes the welfare of the citizens also.

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With the above perspective we proceed in the rest of the paper as follows. In section 2 we
take up the issue of competition policy at the inter- country perspective, i. e., how the
effects of the lack of competition becomes a trans-border one and that gives the need for
the competition policy. The approaches to Competition Policy at Doha Ministerial
Conference, 2001 ia take up in section 3. Again, section 4 explains the required legal
infrastructure for the success of the policy. Section 5 describes the different agreements
under WTO regarding competition policy and the last section comes in the form of a
conclusion.

2. Competition Policy at Inter- State perspective

As different levels of negotiations goes on at the initiative of WTO, more and


more governments recognize that competition occurs across national borders in an
increasing way. More and more markets for goods and services are becoming part of
international markets as a result of liberalization and globalization of international trade.
In the process domestic economy is being integrated to the global economic system. This
implies that the policies of one nation will have spill over effects on other nation. One
important aspect is that the monopoly behavior by businesses in one country will have
negative impact on the buyers and suppliers of another country. The type of trade
integration contemplated under WTO will lead to the spill-over of negative externalities
of monopoly behaviour in one country to other countries.

It is clear from the concerns as stated in above paragraph that the competition
policy (CP) has been interpreted in a broad sense. CP comprises all government policies
that are aimed directly at increasing competition in markets like deregulation,
privatization, international trade, intellectual property and foreign direct investment.
These policies can be regarded as policies that promote competition and reduce the scope
of monopoly behaviour. But national competition laws (anti-trust laws) are meant for
combating any business conduct that is not accepted in competition terms. Thus

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competition laws are a sub-set of competition promoting policies and these acts as a
safeguard for promoting competitive environment. It is to be seen that these two sets of
laws are not contrary to each other.

2.1. Internationally Contestable Markets


The analysis of competition promoting policies is often couched in terms of the
contestability of international markets. An internationally contestable market (ICM) is a
multi-country market in which firms can freely enter or exit. This concept explains the
relation between trade and competition. Cross-border access is not sufficient for the full
function of an ICM regarding all sources of competition. An ICM requires both freedom
of international trade and freedom of movement for foreign direct investment and also
national treatment of foreign investors in the host country. A full understanding of this
issue will help in the appreciation of the differences between the trade policy and the
competition policy.
Viewed from the above perspective, CP includes all policy instruments that
influence market entry conditions and competition in trans-national markets. The
distortions in the competition process are seen as emerging from the government
regulations, apart from the operation of some natural monopoly. While the latter should
be minimized, the former should go. An ICM is one that is neutral between all modes and
sources of supply, and there should be no policy that discriminates in favour of any
particular economic agents. This is the principle of competitive neutrality or non-
discrimination. This only should guide the policy makers.

3. Approach to Competition Policy : Doha Ministerial Conference, 2001

The formulation of a suitable competition policy was felt in the Fourth


Ministerial Conference at Doha, 2001 and it had been desired that negotiation would take
place after the Fifth session in Cancun , Mexico in September, 2003. It was stated that
further work in the Working Group on the Interaction between Trade and Competition
Policy would focus on the clarification of the following parameters: core principles,
including transparency, non-discrimination and procedural fairness, and provisions on

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hardcore cartel; also modalities for voluntary cooperation and support for reinforcement
of competition institutions in developing countries through capacity building. It was also
decided that the special needs of the developing countries would be addressed.
Theories apart the member countries are to formulate their CP according to their
unique conditions and structure. This is to create a favourable environment of
competition and also to insulate the domestic economy from the negative externalities of
CP as practiced by the trade partner. Here we try to delineate a sequence of measures that
should be the ingredients of a suitable CP of a developing country like India.
The description of a stylized approach will be useful if we delineate an inventory
of possible means available and the sequences to be followed by the country. Though the
structure of the countries varies as they may be at different stages of development, some
common programmes are to be taken up by all. To build and expand a market that enables
the system to sustain competition so that efficient allocation of resources makes the
welfare of the consumer maximum, a country is to take the following measures in
conformity of a sequence of its own. The measures are:
(i) privatization of state enterprises
(ii) shifting from public supply to private supply of private goods
(iii) establishing a system for intellectual property rights
(iv) trade and investment liberalization to increase sources of supply
and demand
(v) building legal and institutional infrastructure to facilitate the
organization of private economic activities
(vi) structural reforms of particular industries to create a market
structure that allows more competition, and
(vii) Corporatizing business activities of both private and government
sector.

The above measures will institute a proper competitive market. A proper


functioning of the latter will require a set of policies that are to be followed by the
government of the country. The policies are:

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(a) Price control is to be dismantled and government intervention in the supply of
goods is to be reduced.
(b) A competition element into sector- specific regulatory regime is to be
introduced.
(c) There are some unfair business practices that are inimical to perfect
competition and these are deceptive conduct, false advertising, commercial
disparagement and counterfeiting. A legal regime is to be instituted to deal
with these cases.
(d) Primacy to competition in all economic policy is to be ensured. This can be
done by giving judicial status to competition law enforcing agencies that will
protect them from political interferences.
(e) Transparency in government practices regarding award of contracts and
procurements should be established.

The set of policies as described above requires sequencing and the debate continues on
this issue. In case of a transition economy like India and China, the creation of an
efficient private market is time consuming and the adequacy of size is also important.
Once such a market is established with all the norms of efficiency, the regulation issues
will then be important. In this case the studies of the World Bank regarding the
sequencing of the reforms and optimum time frame are important. We have examples
about two giant socialist economies – Russia and People’s Republic of China (PRC) –
experimenting with the market economy in their transition phase. While Russia has been
facing troubles in its transition to a market economy, PRC has been largely successful in
the transition process. The lesson for the developing countries is that they are to
formulate their own CP according to their needs and the structural characteristics. The
latter are important for the effectiveness of policy implementation.
In a developed country proper education and culture have made responsible
citizens who understand the compatibility of personal interest with the social interest.
They follow rules not even prescribed by laws, and the same are to be enforced by
legislations in a developing country often with inadequate success.

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4. Legal Infrastructure
In a developing country like India the legal structure as evolved during the last
five decades had been meant for creating an industrial structure in an economic
framework that did not emphasize the growth of markets. This aspect is important as the
shift of paradigm and the consequent emphasis on the growth and development of market
mechanism requires a set of rules and regulations that are to be enacted by the
appropriate authority. Simultaneously, many existing rules are to be scrapped or
modified. Along with the framing of rules a proper institution of legal framework is to be
built that can earn the confidence of the citizens as a whole. This establishes the
credibility of the system and induces the citizens to behave within the broad legal frame.
A small sample of the requirements of legal infrastructure is shown in the Table 1 below.

Table 1
------------------------------------------------------------------------------------------------------
Policy Measures Legal Measures
------------------------------------------------------------------------------------------------------
Building of market through: * Government intervention through
-Corporatization of private sector and regulation
government sector *Establishment of legal infrastructure
-Intellectual property rights
------------------------------------------------------------------------------------------------------
Expansion of markets through * Reduction in interventionist
-private participation legislation
-trade liberalization * Comprehensive control on unfair
-structural reforms trade practices
-removal of entry barriers *Consumer protection law
*Competition based sectoral
regulatory regime
------------------------------------------------------------------------------------------------------

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A proper legal framework is an important block of the overall infrastructure
required for rapid economic growth in a market-driven economy. The table above is a
very small sample, but it shows the tasks ahead for the developing countries as they
aspire to develop the market mechanism with a view to place the economy in a higher
trajectory of economic growth. Since the consumer gets the importance as being the
principal agent who will allocate the expenditure in conformity with the norms of the
Pareto optimum resource allocation in welfare economics, rules and regulations
protecting the consumers’ interest become crucial.

4.1. The Interface between Competition Policy and Intellectual Property Rights

Intellectual property rights and competition regulation are intimately related.2


The former provide exclusive rights within a designated market to produce and sell a
product, service or technology that result from some form of intellectual creation and
meeting specific requirements. These inventions may be protected by patents (for novel
and non-obvious products and technologies with industrial applicability), copyrights (for
artistic and literary expression), trademarks (for identifying names and marks conveying
some guarantee of quality), trade secrets (for confidential business information), or sui
generis forms of protection (for new plant varieties, integrated circuits and other
technologies). Many products and technologies are awarded multiple patents and are
protected by a combination of devices. Thus, IPRs designate boundaries, sometimes
complex, within which competitors may exercise their rights. They exist to solve the
fundamental appropriability problem arising from investment in information, which is a
non-rival and often non-excludable public good. Failing some exclusive rights to exploit
the information, inventors might not earn enough to justify the investment in research and
product development.
Thus, IPRs create market power by limiting static competition in order to promote
investments in dynamic competition. In competitive product and innovation markets the
awarding of IPRs rarely results in sufficient market power to generate significant
2
We provide here an analytical overview. For an full and excellent discussion of the economics and law of
this interrelationship, see Gallini and Trebilcock (1998). See also Maskus (1999).

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monopoly behavior. Typically there are substitute goods available and competitors may
invent around a patent, invest resources to learn trade secrets fairly (through reverse
engineering, for example), and develop competing trademarks. However, in some
circumstances a portfolio of patents and trademarks may generate considerable market
power through patent-pooling agreements among horizontal competitors. In countries
that do not have a strong tradition of competition and innovation, strengthening IPRs
could markedly raise market power and invite its exercise.3
For its part, competition regulation aims at curbing the unwarranted exercise of
market power, which may be defined here as attempts to extend exploitation of an
intellectual asset beyond the boundaries provided by IPRs. Thus, there is an inherent
tension between competition laws and IPRs, particularly if competition laws emphasize
static market access and IPRs emphasize incentives for dynamic competition. Structured
properly, however, the two regulatory systems complement each other in striking an
appropriate balance between needs for innovation, technology transfer, and information
dissemination.
In this context, an important reason for developing countries to consider
implementation and reform of competition regulations is that the TRIPS Agreement
envisions a clear link between strengthening protection of IPRs and the need for control
of anticompetitive abuses in the use of IPRs. Countries must adopt minimum standards
of protection for IPRs that are, in many dimensions, markedly stronger than those
prevalent in many developing economies. Chief among these are the provision of
pharmaceutical product patents, reversal of burden of proof in process patent cases,
limitations on the issuance of compulsory licenses, designation of a protection system for
plant varieties, recognition of copyrights for computer programs, protection of well-
known trademarks, security of trade secrets and confidential information from unfair
revelation by competitors and governments, and a comprehensive system of
enforcement.4
In response to concerns that such protection would invite unwarranted
exploitation of market power, Article 40 of TRIPS provides considerable discretion to

3
Smith (1999) provides indirect evidence of this possibility through an examination of trade data. See also
Maskus (1999) and UNCTAD (1996).
4
See UNCTAD (1996), Maskus (1999), Watal (1999), and Primo Braga (1996).

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WTO member states in specifying “…licensing practices or conditions that may in
particular cases constitute an abuse of intellectual property rights having an adverse effect
on competition in the relevant market.” The Article goes on to specify three examples of
potentially abusive licensing practices (exclusive grant back conditions, conditions
preventing challenges to validity, and coercive package licensing) but this list is not
exhaustive. Read broadly, the Article could cover any potential abuse of IPRs, including
monopoly pricing, refusals to license, effectuating horizontal cartels through patent
pooling, and exclusive vertical arrangements that forestall competition.
IPRS Standards as Competition Regulation
In an important sense IPRs and competition laws overlap in that the scope of
exclusive rights granted by the former determines the degree of potential market power.
An immediate opportunity arises for many developing countries to define and implement
minimum standards for IPRs, consistent with TRIPS requirements that are dynamically
procompetitive.5 Economic development is a dynamic process and IPRs may be used
fruitfully to push it forward. The dynamic shortcoming of weak IPRs is that economies
are liable to remain technologically isolated and to lag behind the information frontier.
Such economies emphasize free-riding on the technical advances of others, a strategy that
bears short-run competitive advantages but suffers from inadequate access to new
technology and a growing inability to imitate more sophisticated formulations. The task
is to select standards that help convert “free riders” into “fair followers” in Reichman’s
(1993) appropriate phrase.

5. Arguments for a WTO Agreement


With this background, consider the justifications that may be put forward for
reaching an agreement on competition issues in the WTO. First, it is clear that some
public and private restraints on competition have cross-border anticompetitive effects and
distort trade. Direct examples include export and import cartels and government
mandates on exclusive distributorships. Indirect examples include horizontal cartels,
state aids, exclusive monopolies, and certain types of vertical agreements among
5
See UNCTAD (1996) and Maskus (1999) for further analysis.

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enterprises. Second, mergers that take place across borders involve multiple reviews of
potential impacts on competition, while even mergers among firms domiciled within a
single country may have effects on competition abroad. Third, antidumping laws are
decidedly anticompetitive in their execution, having the effect of limiting the
contestability of markets in which they are used. Finally, countries may engage in
opportunistic or strategic use of competition policy in order to extract rents from foreign
firms or consumers. If many countries do this, each may be made worse off. Thus, there
may be a policy coordination failure in competition regulation that could be eased by
multilateral agreement.

5.1. The Form of a Beneficial Agreement


A variety of proposals exist for fashioning a WTO Agreement on competition,
called TRAMS. Graham and Richardson (1996) advocate a phased, gradualist approach,
which they term “cooperative unilateralism”. In essence it involves a national treatment
obligation, enlarged WTO consultation in competition cases, international notification of
mergers and acquisitions with potential spillover impacts on competition, and an
international agreement to ban most cartels. The last provision would be modified by a
“TRAMS safeguards” mechanism, in which countries would be allowed to designate and
notify rationalization cartels.
Fox (1995) sets out a broader conceptual approach, which she terms a “minimal
but unitary” system. Here, contracting nations would negotiate shared competition
principles for the trading system, including a rule outlawing cartels (with transparent
exceptions for valid social reasons) and an agreement to make markets accessible and
free of artificial restraints on competition. Enforcement would involve national treatment
in that competition authorities would consider harm to foreign interests with the same
gravity as harm to domestic competition. Governments would forego taking or
sanctioning anticompetitive actions that substantively harm foreign interests. Members
would make their antidumping enforcement more consistent with competition principles.
Finally, nations would agree on principles under which to recognize some market
arrangements among competitors potentially to enhance efficiency, such as research joint
ventures, production networks, and vertical arrangements. Members believing they have

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experienced damages from actions of another member could petition for enforcement in
that nation and, failing satisfactory resolution, initiate enforcement action in its own
jurisdiction if feasible. A dispute resolution system would be set up along the lines of the
WTO procedures. A strong emphasis would be placed on cooperation and transparency.
Some economists have expressed doubt about the realization of the type of broad
agreement as discussed in previous paragraph ( Hoekman and Holmes ,1999). The
authors note that such negotiations are potentially subject to political capture that could
produce anticompetitive rules in the name of competition maintenance, analogous to the
situation with antidumping. They see little likelihood that expanded use of non-violation
complaints aimed at weak competition enforcement would be satisfactory for
complainants. Further, they find little reason to believe that an agreement to restrain
antidumping with competition principles would be feasibly negotiated. They are also
skeptical about the chances for a multilateral agreement to ban trade cartels. They find
merit in expanding the WTO’s transparency role in the competition area, which would
produce information about government policy and help establish competition advocacy
within countries. Finally, they see a positive role for the establishment of notification and
transparency requirements, procedural cooperation and technical assistance, and adoption
of positive comity as a guiding principle in enforcement. Thus, they envision an
agreement limited to procedural cooperation and transparency requirements as the
maximum that may reasonably be envisioned.
The minimalist approach that Hoekman and Holmes ( 1999) set out may well be
all that is politically feasible but it is not the best agreement that could be formulated for
developing countries. Transparency mechanisms and cooperation are desirable in any
case and may not require a multilateral approach. For the WTO to be involved
meaningfully a mixture of the suggestions put forward by Graham and Richardson seems
sensible as a basis for the next round of negotiations. In particular, agreement on broad
principles of market contestability, a national treatment obligation, a commitment to
phase out export cartels and horizontal arrangements (with transparent and justifiable
exceptions), and consultation and dispute resolution are beneficial and potentially
feasible in the context of a multilateral trade negotiation. Moreover, as discussed above,
it may be possible to overcome the substantial opposition to antidumping reform through

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a competition agreement, though such a change almost surely would require additional
concessions elsewhere in the negotiation.
None of these commentators placed intellectual property rights in their equations.
The oversight is surprising in light of the close linkages between them. Indeed, if TRIPS
is to be revisited in the next round of negotiations, its broad limitations on IPRs
exploitation in the name of competition could come up for review. Developing countries
should consider carefully the extent to which they wish to retain these limitations.
Moreover, at this time it seems advisable to oppose proposals to ban parallel imports.

6. Conclusion
In this paper we have not gone to the country specific cases. This is confined to
the broad theoretical issues. We see that the attempt to the decoupling of the economics of
development from the economic growth process in the so-called development economics
literature with the philosophy of the uniqueness of the problems of the third world
countries has failed and again economics has acquired the centre stage of academic
discussion. It is now recognized that economic problems are to be addressed with the
policies that emanate from the core principles of economics.
We now briefly state the theoretical position. In the initial market the dominant
goal of both CP and the trade policy is to overcome the restriction that would separate
national markets of the world from one another. Once the policies are in place, it will help
to overcome the distortion and restraints in the internal domestic markets that arise as a
result of different regulatory approaches among the individual countries.
The effective development of CP, as well as the hybrid measures associated with
the regulatory regimes, demands a much more elaborate apparatus among the countries
than what exists in the international regimes in the trade policy field as of now. The
systems once established will help in the increasing scope of employment that has been a
crucial issue in the developing countries. The fact that fair employment of manpower is
connected to the issue of achieving efficiency in the choice of inputs is sometimes not
revealed explicitly in the literature, though it is true always.

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Again, we are to understand that the judgments made in the competition cases are far
more delicate than the trade cases. The bodies rendering judgments are vulnerable to
challenges on the merits of their decision. This fact is to be recognized and suitable
actions are to be taken at the international level. Only then trade policy can be effectively
replaced by competition policy.

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