Trade Policy and Competition Policy: February 1997

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Trade Policy and Competition Policy
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TRADE POLICY AND COMPETITION POLICY

Author(s): Massimo Motta and Fabrizio Onida
Source: Giornale degli Economisti e Annali di Economia, Nuova Serie, Vol. 56 (Anno 110),
No. 1/2 (Giugno 1997), pp. 67-97
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Giornale degli Economisti e Annali di Economia
Volume 56 - N. 1-2 (Giugno 1997) pp. 67-97
TRADE POLICY AND COMPETITION POLICY
by Massimo Motta and Fabrizio Onida*
Received: October 1996; accepted: February 1997
Despite the reduction in trade barriere which has followed successi

GATT agreements, national governments stili affect trade flows b
using instruments such as quantitative restrictions to imports, an
dumping actions, state subsidies, preferential procurement policie
and definitions of standards. The use of these instruments for pro
tionist purposes is also in conflict with competition policy objectives in
the home markets, since a decrease in the competitive pressure of
ports enhances market power of the domestic firms.
Governments should avoid the temptation to resort to such instr
ments for protectionist purposes. In particular, a reform of anti-dump
ing laws, to which governments have increasingly resorted over the
cent years, is necessaiy. Besides unilateral reforms, more internatio
cooperation should be fostered to control that the use of the aforem
tioned instruments does not degenerate in protectionist spirals wh
would result in welfare losses for ali the countries involved.
We also point out that different domestic competition laws might in
turn have an effect on trade. However, the danger that governments
might use competition policy as a "strategie trade" device to help the
national industry should probably not be emphasised, since in many
cases lax rules would be as detrimental to national as to foreign welfare.
Harmonisation of competition policies is probably not necessary, but
in any case would be a veiy difficult objective to reach. This is because
there often exists little consensus on the policies which should be fol
lowed, since countries genuinely differ in their evaluations about such
policies.
* Massimo Motta, Universitat Pompeu Fabra, Barcelona; Fabrizio Onida, Università

Bocconi, Milan. We are grateful to Pedro P. Barros, a referee, and the Associate Editor
Michele Polo for their useful comments. Massimo Motta also wishes to thank the hospi
tality of DEEP-HEC, Université de Lausanne.
68 MASSIMO MOTTA - FABRIZIO ONIDA
However, the defìnition of a clear set of rules w

signment of competition policy cases to a parti
avoiding costly duplications and increasing the c
should receive priority in the international agenda.
JEL Classifìcation: F13, K21, K32, L40

Keywords: Antitrust, European union, trade policy
Introduction
After World War II, the degree of internationalisation of most Wester

economies has increased in an impressive way. The agreements reached
the member countries of the General Agreement on Tariffs and Trade
(GATT, now World Trade Organisation, WTO) have had the effect of co
stantly increasing trade flows among the most industrialised countries
well as among newly industrialised countries. At the same time, the incre
ing flow of foreign direct investments has made multinational firms increas
ingly important actors in each economy. Because of these changes, many
liticai institutions and policies which were thought for domestic marke
have revealed themselves inadequate to deal with an economie environmen
which is largely overlooking the politicai borders.
The objective of this paper is to show how trade policies and compet
tion policies interact with each other and how the internationalisation of the
economies obliges us to rethink of competition (or antitrust) policy issues.
We shall discuss here how in open economies the trade policies imple
mented by a country have a significant impact on the degree of competiti
in national sectors and therefore on domestic economie efficiency. In par
cular, commercial policies which protect national firms tend to be in co
flict with competition policy measures, since they allow domestic firms
have higher market power and confer them bigger incentives for collusi
behaviour. For these reasons, it has often been claimed that the best com
tition policy is free trade, since foreign competitors would discipline the
mestic market.
Nevertheless, even in an (imaginaiy) world where trade were perfectly
free, not only would the scope for competition policies remain undiminished
but also new issues would appear and new institutions would be called for.
When economies are open, mergers do not occur only between domestic
firms, collusion might involve firms from different countries, abuse of domi
nant positions might regard foreign as well as domestic actors. This implies
that different national institutions might be involved in the same cases, thus
creating inefficient duplication of work and conflicts of jurisdiction (differ
TRADE POLICY AND COMPETITION POLICY 69
ent national authorities might be opening investigations, and different

Courts might be concerned with the case). At the same time firms might en
gagé in arbitrage activities between different domestic legislations, trying to
avoid the jurisdiction of countries which implement stricter competition
rules in favour of those which have laxer rules.
The paper is organised in the following way. In Section 2, we shall
briefly review the impact of trade policy instruments on the degree of com
petition of the industry involved. We also point out that such instruments
are not only represented by usuai protectionist policies such as tariffs, quo
tas and voluntary export arrangements but they might also consist of anti
dumping actions, government subsidies, preferential public procurements
and technical standards. We shall also emphasise that protectionist moves
(however implemented) are likely to lead to a welfare loss, and argue that
a component of this loss is given by a decrease in the competitive pres
sures in the domestic markets whose industries are protected. The last ef
fect can be equivalently restated by saying that trade policies interfere with
competition policies - whose main objective is to enhance economie effi
ciency by ensuring that market forces do not behave in an anti-competitive
fashion1.
In Section 3, we shall deal with specific competition policy issues, and
with their effects on world trade. The way in which countries set and im
plement their competition laws might have a significant effect on trade. In
the limit, competition policy could also be used as a trade policy, that is as
an instrument to affect trade and investment flows. For instance, laxer reg
ulation on (vertical or horizontal) mergers might allow the formation of
stronger domestic groups, and therefore serve industriai and trade policy
purposes. In other words, when economies are closely interrelated, govern
ments might be tempted to help domestic firms by relaxing some of the
competition constraints that would normally be desirable in a domestic
market, with the aim of supporting them in the international marketplace.
We believe that fears that competition policies might be used for strategie
trade purposes should not be overstated. Nevertheless, more coordination
among countries should be fostered to avoid that domestic authorities en
gagé in a race toward laxer competition rules to help national firms.
Further, international agreements about the rules of jurisdiction are neces
sary.
1 On conflicts between these policies, see also Bourgeois - Demaret (1994), Gual
(1994) and Holmes - Smith (1994).
1. TRADE POLICIES AND THEIR EFFECT ON COMPETITION
Economists have long favoured the view that the best commercial policy
is free trade2. The free movement of goods ensures that countries and firms
specialise in what they can do best, thus enhancing economie efficiency and
welfare of the countries involved in a trade liberalisation process. Neverthe
less, trade reforms have often met formidable resistance, and countries have
often resorted to commercial instruments to favour domestic firms. Trade
might have an adverse impact, at least initially, on some groups of the econ
omy. Firms (and the workers they employ) which are operating in a sector
which is likely to suffer from the import of goods from abroad have a clear
interest in opposing to processes of trade liberalisation. Very often, these
firms are ready to engage in costly lobbying activities to persuade national
governments to abandon trade reforms.
Another reason why countries might depart from free trade is that they
often try to resort to trade instruments to help the national industry. Meas
ures of protection can be invoked to protect an infant industry before it has
reached a level which allows it to compete on an equal basis with foreign
competitors or to correct for externalities or market failures. Tariffs might
also be used by governments in the attempt to affect terms of trade to their
own advantage. In each case, however, the use of such instruments can be
criticised: temporary protection to national industry tends to self-perpetuate,
since firms sheltered from competition do not have the incentive to improve
and they are therefore never ready to face more efficient foreign firms; tar
iffs and subsidies are not the best way to deal with externalities which have
little to do with trade; retaliation eliminates ali the benefits of policies which
aim at manipulating the terms of trade and would make countries worse off
than in the pre-intervention situation.
More recently, international trade economists have devoted considerable
attention to the so-called strategie trade policies3. The basic idea behind these
policies is that trade instruments can be used to strategically affect the out
come of international competition. For instance, a government might decide
to give a subsidy to output or exports of a national firm to make it more
"aggressive" in the marketplace and therefore help it to increase its market
2 For a good presentation of trade policies and their effects, the reader can refer to
a standard textbook such as Markusen et al. (1995).
3 Brander - Spencer (1981) is probably the paper which has paved the way for the
literature on strategie trade policies. For reviews of the main papers dealing with this
issue, see for instance the introductory chapter of Grossman (1992), chapter 17 of Mar
kusen et al. (1995), or the contributions in Onida (1996).
share and enjoy larger economies of scale, to the detriment of foreign rivals.
Even in this case, however, the fallacies of such strategies are well-known.
For such policies to be welfare improving, governments must have a perfect
knowledge of markets, technologies and the firms involved which is impossi
ble for them to have4, or must have perfect foresight concerning which sec
tors are going to be more important in the future. Since a government can
not subsidise eveiy sector, resources which are given to an industry are to
be withdrawn from other industries in the longer run. Who guarantees that
the government is able to pick up the sectors worth of support?5
Even more important, economists have shown that retaliation makes
these policies not only ineffective but also detrimental, and that strategie pol
icy games are "non-zero sum games". Even though there exists a consensus
that countries are better off under free trade than under autarky, each govern
ment might have the temptation to raise a tariff (or non-tariff) barrier to im
port, to help its firms to produce more and have larger economies of scale, and
in turn higher profits. With imports hindered and exports stili free, this policy
is not necessarily a good one because national consumers do not have access
to more goods and because the reduction of competition increases prices. But
the final scenario is likely to be much worse than one where consumers are
the only losers. Other governments will probably react to the initial deviation
from free trade by using the same kind of "strategie trade policies" to support
in turn their locai companies. Because of this spirai of protectionist moves the
likely final result is one where each country will find itself back to an autarky
like situation, governments will have wasted resources, and each country will
be worse off than before the protectionist measure had been taken.
This outeome is often known under the name, borrowed from game the
oiy, of "prisoners' dilemma". The general feature of such type of game is
that each player has a temptation to deviate from an initial situation, at
4 The type of strategie policy that a government should use is extremely sensitive to
market structure and the toughness of market competition. For instance, it has been
proved that with a large number of firms operating in the domestic market, a tax rather
than an export subsidy should be imposed on the domestic producers (Horstmann - Mar
kusen, 1986). Likewise, with few firms which compete on prices rather than quantities,
the best optimal trade policy is again an export tax instead of an export subsidy (Eaton -
Grossman, 1985). For a brief review of the results obtained in this literature, see for in
stance the introductory chapter of Grossman (1992).
5 Indeed, protection and aid to specific sectors are probably explained more by the
power of sectoral lobbies than by visions on industriai policy. For an analysis of the po
liticai economy of trade protection, a topic which has recently known impressive ad
vances, see for instance Hillman ( 1989) or the contributions by Grossman and Helpman,
among others Grossman - Helpman (1996).
tracted by higher payoffs. But since every player does the same, the
outcome is one which is Pareto-inferior, that is, one where each play
ceives a lower payoff than the one attained not having deviated. It is
tant to notice that there are many situations which can have the sam
tures, not only trade protectionism. Think for instance of the lowering o
vironmental or social standards (on which more below). If every govern
scrapped environmental or social regulation in the attempt of reducin
costs of domestic firms, at the end of the process relative market sha
the industry would be unaffected, but everybody would be losing since en
onmental or social conditions have been negatively affected.
Coordination among different governments and their policies sh
therefore be highlighted. Since each country might have the temptati
establish barriers to trade (or to impose less than satisfactory standards) i
important to have institutions which try to avoid such moves which
lead to an inferior outcome for every country involved. As far as in
tional trade is concerned, such an institution is the World Trade Org
tion (previously GATT), which has managed to implement a significa
duction of barriers to trade through multilateral agreements in succe
rounds of negotiations. We shall argue below that not only trade polici
also competition policies might present similar features to the non-zer
game briefly explained above, and that therefore more coordination
agreement in those policies might be needed to avoid the inferior out
which might arise from it.
In the remaining paragraphs of this section, we shall argue that de
the success of the multilateral trade agreements in lowering trade bar
much work is stili to be done. In particular, we shall point out that (a)
are stili many ways in which countries can protect their national ind
without resorting to traditional trade policy instruments and that (b)
countries pursue interventionist policies to affect trade flows, this usually
sults in a lower degree of market competition, and can therefore unde
the objectives of competition policy.
1.1. Quotas and VERs
Within GATT, the view has always been maintained that quantitativ
strictions such as import quotas or import licences should be avoi
6 They are allowed only in specific situations, such as when serious balance of
ments problems exist, or when trade brings about a serious injuiy to domestic pr
ers (they then take the form of a safeguard provision).
Should any restriction on cross-border trade be imposed, the GATT prefers

it to be under the form of tariffs. Non-tariff barriere being less transparent,
it is easier to make negotiations on the basis of tariffs.
Nevertheless, many countries have resorted to quantitative restrictions.
Examples of them are the Orderly Marketing Agreements (OMAs) in indus
tries such as steel and automobiles, the Multi-Fibre Arrangement (MFA) con
cerning the sectors of clothing and textiles, and the Voluntary Export Re
straints (VERs). The latter are (usually) bilateral agreements concerning a
particular sector, whereby a country agrees that its firms limit to a certain
number of units their exports. Probably the most familiar examples of VERs
concern the automobile sector. In particular, well-known are both the VERs
which concerned the Japanese producers in the US market for the first time
in the Seventies, and the agreement between the European Union and the
Japanese government reached in 19917.
There is little economie rationale for explaining the frequent resort to
VERs as a form to restrain exports. By using a tariff or a quota a national
government might increase its revenue (under the quota, by auctioning the
rights to import into the country), whereas with the VERs any rent created
by the artificial restriction of the supply goes to the direct benefit of the for
eign firms (or governments) which export. The main reason why VERs are
used is probably politicai, since the bilateral agreement which gives way to a
VER arrangement avoids the international disputes and frictions that a uni
lateral quota or tariff would raise.
As for their impact on domestic markets {i.e., on the importing coun
tries), it has been shown that VERs (or quotas) tend to have a more adverse
effect on market price than an equivalent tariff8. In general, a tariff has the
effect of making foreign goods more expensive. Less efficient producers can
then afford charging higher prices than without the tariff. Market price is
higher and the market power enjoyed by the national firms as well. How
ever, national firms cannot set prices too high, since the threat of imports
from abroad remains. When a VER which restricts imports in an equivalent
manner to the tariff is agreed, instead, the degree of market power enjoyed
by the domestic firms increases. Imagine for instance that there exists a sin
gle domestic firm. If this firm knows that foreign firms are entitled to sell
only a certain amount of goods, then it will behave as a monopolist on the
residuai demand (that is the market demand less the amount satisfied by the
imports). The absence of potential competition makes it free from any
7 See Holmes - Smith (1994), p. 28 and following.

8 See Bhagwati (1965).
threats from competitors on the residuai demand, and the result w

higher prices than under the tariff.
Further, since the VER eliminates any competitive threat from abr
it might also be easier for the domestic fìrms to reach a collusive agre
than under a tariff. It has been shown that a collusive agreement is t
ier the lower the number of firms in the industry9. As a result, it might
easier for the domestic firms to implement a collusive outcome whe
number of firms which are effectively competing in the market is artifi
reduced. The fact that the VERs act as a "facilitating device", that is
they are an instrument which helps firms to reach a collusive outcom
been formally proved by Harris (1985) and Krishna (1989).
Empirical work on the subject tends to confirm the theoretical re
that quotas and VERs are more detrimental to welfare and competition
tariffs. Indeed, calculations performed by Smith - Venables (1991) o
welfare effect of French VER in the car sector showed not only that this
icy has caused a huge welfare loss (the large decrease in consumer w
and the foregone tax revenue dwarf the profit gains obtained by the nati
firms) but also that the hypothetical replacement of the VER by a t
would have had a less dramatic effect on welfare.
In the same way, Winters (1992) and Brenton - Winters (1993) showed
that the quantitative restrictions on footwear in Europe led to a reduction in
the competitive pressure on domestic producers, increasing market power
enjoyed by European firms and increasing market prices, with an impressive
negative loss for consumers.
1.2. Anti-Dumping Measures
WTO rules recognise the right of member countries to take unilateral

actions to protect themselves when the domestic industry is injured by un
fair trade practices. Such practices are usually identified with situations
where foreign firms "dump" (i.e., sell at an exceedingly low price) their prod
ucts abroad or where they are more competitive thanks to governmental
subsidies which confer them artificial advantages. In such cases anti-dump
ing duties or countervailing duties can be imposed to the exporters. Anti
dumping laws have been adopted by many countries (USA, Australia, Cana
da and EU are the main users of such laws, whereas less developed coun
9 See Tirole (1988), p. 247-248.
tries are usually defendants), and anti-dumping actions have been taken
with increasing frequency over the last years10.
Art. 6 of the GATT establishes that anti-dumping actions are legitimate
when two conditions are verified. The first is that export prices are below
their normal value; the second, that exports cause or threaten material injury
to the domestic industry of the importing country (or retard the develop
ment of such an industry). The GATT provisions on anti-dumping are quite
general and ambiguous, and indeed have been applied in quite different
ways in the countries which have adopted anti-dumping legislation. This
was perceived as a problem even during the Uruguay Round of negotiations,
but the final agreement has not significantly improved the situation.
The ambiguity of the provisions leaves space to quite different notions
of dumping. Dumping should be calculated as the difference between the
normal price of the goods in question and the export prices, but there exist
various ways to establish the normal price. One such a way is to look at the
price in the exporters' home market. By using this method, however, the EC
Commission excludes from such a calculation ali the sales which occur at
"less than a fully allocated cost", as well as those which do no not occur
"under the ordinary course of business".
In most cases, however, the normal value is found by using the "con
structed cost method" which consists in adding up ali the average costs of
production, average fixed costs, general expenses, and a "reasonable" profit
margin (which can vary across industries and which is not specified once
and-for-all). Without entering into details, we would nevertheless point out
that there exists a substantial margin of discretion and arbitrariness in the
calculation of the "normal value". The exclusion of transactions in which a
price is lower than costs because "not in the ordinary course of trade"
clearly inflates the normal value, by rendering the finding of dumping more
likely. Likewise, the inclusion of ali sorts of fixed costs and of a profit mar
gin in the calculation of the normal price lacks economie rationale, and
tends to find dumping more frequently than it should. The EC Commission
has been in particular criticised for the procedure used which clearly biases
the results of the investigation towards the outcome of dumping11.
As for the determination of the injury created by dumping (however one
would measure the latter), no clear rules have been set in the EU. In particu
lar, Tharakan - Waelbroeck (1994) have suggested that more attention
should be devoted to reform the proof of injury, since it appears to have
been too open to politicai influences.
10 See Trebilcock - Howse (1995).

11 See for instance Hindley (1988) and Trebilcock - Howse (1995).
For the way in which anti-dumping regulations are implemented in both

the EU and in other countries, it seems that more than an instrument to
avoid unfair practices this is an instrument of trade protection in disguise.
As such, it should not come as a surprise that its relevance has increased
over the years, seemingly caused by a reduction of more traditional instru
ments of protection no longer available for the domestic industry.
The effect of anti-dumping practices has been ali the more negative
from the point of view of collective welfare if one considers that apart from
the direct effect on consumer surplus via a price increase, at least two other
indirect effects which are welfare detrimental have been identified. The first
one is that anti-dumping investigations have often been prompted by domes
tic firms which were scarcely competitive and which have used them to pre
serve market power. Messerlin (1990), for instance, finds that anti-dumping
actions have been cruciai for the survival of collusive agreements among
European firms. The second one is that by raising the prices charged in a gi
ven domestic market, not only consumers but also other firms which use the
good as an input in their productive process might be penalised by the anti
dumping actions. This implies that a measure which is supposed to help the
national industry might instead have a negative effect on it.
One case which illustrates the two aforementioned points, and more
generally the conflict that anti-dumping laws have with economie efficiency,
is the case of the soda-ash industry. This industry shows a very high index of
concentration (Solvay had 70% of the market share in Continental Europe
in 1990, while ICI had a quasi-monopoly-in the UK market) and the two
main EC producers have been investigated by the EC and received heavy
fines for collusive agreements12 and for abuse of dominant position13. It is
then very surprising to discover that the same producers have been repeat
edly protected from the foreign competition by anti-dumping actions. Less
surprisingly, the Commission found that «one of the major preoccupations
of Solvay's commercial policy in the soda sector is to ensure the continua
tion of the anti-dumping measures established both against US producers of
dense soda and Eastern European producers of light soda»14.
Apparently, the lobbying pressures of the EU soda-ash producers have
been successful (after a revision in 1990 which did not impose anti-dumping
duties since injuiy had not been proved), since the Commission has recently
decided to confimi new duties on US imports of soda-ash because the EU
12 See Officiai Journal, June 15th, 1991, p. 1 onwards.

13 See Officiai Journal, June 15th, 1991, p. 21 onwards.
14 Officiai Journal, June 15th, 1991, p. 23, our translation from French.
producers' share of the European market fell from 96% in 1990 to 88% in
199315. Obviously, «the decision infuriated EU glass manufacturers, the big
gest customers for soda ash in the EU», which had «mounted a campaign to
persuade the Commission to lift the anti-dumping duties because the indus
try was suffering a shortage of key raw material»16. There is little doubt that
the EU glass industry together with other users operating in the steel, chemi
cal, detergent, paper and pulp sectors are the big losers in such a decision.
A final concern with anti-dumping legislation is that it can be used by
the EU firms to protect themselves against other EU firms which have estab
lished production abroad and re-import to the European market. The recent
case of the Dutch firm Philips which opened a complaint against Thomson,
a French producer which imported video recorders from its Singapore plant,
is an illustration of this danger, which might jeopardise the foreign invest
ment strategies of European firms17. Another paradoxical situation occurs
again in the soda-ash case, where Solvay Minerals, a US affiliate of Solvay,
the main EU producer, appears in the list of firms which are imposed duties
on.
Of course, the European anti-dumping laws are not the only

can be criticised. The US anti-dumping measures, for instance,
tracted a lot of criticisms18. Empirical analyses have shown the ant
tive effect of anti-dumping. Further, they have confirmed the the
picion that anti-dumping laws have a negative effect even when
result in final duties. The mere threat of anti-dumping sanction
ough to induce foreign competitors to be less aggressive, and ve
vestigations end up with a suspension decision, in exchange for
of the foreign firms to stop "dumping" their goods19.
If anti-dumping duties do not certainly find their rationale in f
economie efficiency, the only explanation for their existence is tha
at punishing an unfair business practice. However, independentl
cific ways in which anti-dumping is calculated by the different na
and regulations, it should be emphasised that there is little econ
ale for considering the difference between the home price and
price as an "unfair practice".
Price discrimination between different markets is perfectly
with the simple objective of profit maximisation and does not n
15 Financial Times, October llth, 1995.

16 Financial Times, October llth, 1995.
17 Financial Times, October 19th, 1995, p. 7.
18 See among the others Trebilcock - Howse (1995).
19 See Staiger - Wolak (1994).
tail the intention of forcing a rivai out of its market. Examples of price
crimination strategies which are both legai and socially accepted include d
ferent fares charged to customers by the same airline and for the sam
flight, different prices of scientific reviews to private and institutional s
scribers, different tariffs set by physicians according to whether patients ar
covered by health insurance or not, and so on. In ali these cases, prices a
set in such a way that the lower the elasticity of demand to price (or t
higher the willingness to pay) for a good, the higher the price.
In international trade, price discrimination takes naturally the form o
different prices in different markets. Normally, since firms tend to hav
larger market share and a more faithful demand on their domestic mark
this implies that the domestic price is higher at home than abroad. A we
known model where each firm sets a lower (FOB) price abroad than in th
domestic market is given by Brander (1981) where reciprocai dumping
curs although the firms have simple (Cournot) conjectures and do not try
engage in any unfair practice. Weinstein (1992) has generalised this resul
and shown that bilateral intra-industry trade tends to be associated wit
dumping. Further, this author has shown that dumping does not necessar
occur when exporters enjoy a monopoly in their home market. Even whe
large number of producers exist, can dumping arise!
From an economist's point of view, dumping should probably be forbi
den only when it entails predatory pricing (that is, when firms charge prices
below their own costs in the attempt of hurting rivals and making them exit
the industiy, or of persuading potential entrants not to operate in the ind
try). Accordingly, dumping should not be considered as belonging to the
main of trade policy, but rather to that of competition policy. If one f
lowed this approach, the burden of the proof should not be on the def
dants (as it is now the case with anti-dumping) but on the complainant
and a necessary condition for predatoiy pricing should be clear evidence t
prices are below average costs for a significant span of time, and that th
is intention of pushing locai firms out of the industiy20.
However, within the existing legai framework where dumping is not
competition policy issue (in the EU, for instance, it is not the DG-IV, wh
is the competition authority, but rather the DG-I which has responsibility on
anti-dumping actions), there stili exists room for improving the way i
which anti-dumping decisions are taken. In particular, were we asked to
make a recommendation, we would suggest that: (1) anti-dumping dutie
should not be imposed in industries which have a high degree of concent
20 See Areeda - Turner (1975) and Joskow - Klevorick (1979).
tion; (2) the interests of consumers and of producers of industries which

make use of the products should be taken into due consideration; (3) the
way in which the existence of "dumping" is established should be modified
in such a way that it does not so blatantly distort foreign firms; (4) the EU
firms which present an anti-dumping complaint should prove that the "in
jury" to the industry is really due to dumping (this would somehow reverse
the burden of the proof with respect to the current situation).
1.3. State Subsidies, Public Procurements and National Standards
Apart from more traditional tools of trade policy and anti-dumping ac

tions, there are a number of ways through which a government can protect
the national industry or help it in the international markets. Some of these
instruments are usually described as instruments of industriai policy, which
in turn can be defined as any kind of government intervention devoted to en
sure the competitiveness of a national (or supra-national) industry21. How
ever, the distinction between industriai policy and trade policy might be very
subtle, as noted also by Krugman (1984) among others. Since our purpose is
to review government instruments which can be used to affect trade, their
classification makes little importance.
A first example of these instruments is given by state subsidies. These
distort the normal game of competition since they create an artificial advan
tage to the firms which benefit from the subsidy. Recognising this, WTO
rules require countries which grant or maintain any subsidies which in
crease exports or decrease imports to notify such subsidies, and in case of
injury the subsidies should be terminated. Unilateral action is also per
mitted, under the form of countervailing duties.
In many cases, however, it is not easy to distinguish between "general"
subsidies (or even investments in specific projects of infrastructure) and sub
sidies which affect trade. For instance, the European Commission tends to
be lenient towards state aids to R&D22. However, they could be clearly inter
preted as subsidies which distort the normal flow of competition in the long
run.
Another situation where governments can affect trade is give

public procurement policies, which normally discriminate in fa
21 See Bourgeois - Demaret (1994) and Gual (1994) for a good discussion
ments and purposes of industriai policy in the EU, and their relationships
and competition policies.
22 See Gual (1994), p. 42.
mestic producers even when they are submitting proposals under far l
convenient terms than foreign firms. Very often, strategie reasons have bee
invoked to justify such behaviour (especially in the defense and military
tor). Domestic preferences can also be due to the desire to protect locai e
ployment or to support the domestic high-technology industries. Whatev
the reason for giving preference to national firms, there exists little dou
that this amounts to protecting the national industry against foreign compet
itore.
The GATT tried to deal with public procurement both in the Tokyo an
the Uruguay Rounds, with the purpose of limiting the discrimination against
foreign firms. The new GATT agreement on procurement has been in for
since January lst, 1996, and it is therefore too early for an assessment. H
ever, it does not cover a broad range and it seems legitimate to have doub
that many changes will occur in the procurement policies of governmen
On the other hand, this seems to be a hard question to tackle even with
the EU, where the coordination directives have not gone very far in givi
firms of different EU countries equal chances in government contracts23.
This is an area where much more effort should be made and where solu
tions are not easy to find. A first step could consist in giving priority to
agree on an explicit set of rules where discrimination, if it exists, should be
made clearly visible. Accordingly, government procurement agencies should
clearly defìne the rules of the game ex ante, for instance by indicating ex
plicitly which price differential preference is accorded to locai producers, or
which content of locai production is necessary. They should also agree to
ban disguised forms of preference, like obscure procedures to apply for con
tracts, or lack of publicity of tender solicitations. This might help in two
ways. First, foreign suppliers would know what to expect from the agencies
and unfair results can be diminished. Second, and more important, the visi
bility of the rule would allow a clearer basis for future rounds of negotia
tions, in much the same way as tariffs are preferred to non-tariff restrictions
to trade.
Finally, governments can affect the course of international competition

by setting technical, safety and environmental standards which discriminate
against foreign suppliers. An example is given by South Korean regulations
on car imports. Foreign cars should pass 38 safety and performance tests be
fore being granted permission for sale in the locai market. This "labyrinthine
testing regime", together with excise taxes on big cars (South Korean manu
23 For a review of rules on govemment procurements, see Trebilcock - Howse

(1995).
facturers are specialised in small cars), and lengthy customs procedures ex

plain the tiny percentage of imports in the South Korean market24.
Another famous case is that of the "Tuna-dolphin" dispute which op
posed the US and Mexico. In that case, the US government decided to ban
imports of tuna fish from Mexico because the Mexican fishermen were
using methods of fishing that trapped and killed dolphins as well, illegal
methods under US laws on the protection of the environment. In this case,
trade is clearly in conflict with environmental preoccupations, and the GATT
ruling on the subject has not pleased "green" groups25.
Apart from standards, other environmental laws can affect trade among
countries. Take for instance the case in which a government imposes laxer
environmental controls on producers than foreign ones (for instance, it al
lows the use of cheaper but more polluting materials). As a consequence, na
tional firms might have an unfair advantage over foreign rivals and be more
competitive in the international markets26.
More generally, there might be the danger of a "race to the bottom",
where each country relaxes environmental and social regulations to favour
domestic producers or attract investments by foreign firms27. If this were
the case, we would fall back to a situation similar to the one described
above dealing with trade wars.
However, it is our impression that the dangers of environmental or so
cial dumping (that is situations where countries adopt lax environmental,
labour or social policies to diminish the burden of domestic firms) are
probably exaggerated and are sometimes used to justify protectionist de
mands. As for environmental dumping, for instance, there exists scarce evi
dence that "green policies" have a serious effect on trade28. Nor does it
seem likely that firms would relocate to countries with lower standards to
enjoy lower costs. Firms tend now to use the same technologies even in
countries which have laxer rules, since they ciré afraid to displease consu
mers who have an increasing awareness of the environmental impact of
24 The Economist, October 21st, 1995, pp. 84-86 and September 30th, 1995, pp.
105-106.
25 See Trebilcock - Howse (1995), pp. 344-348.
26 See Motta - Thisse (1994) for a formalised treatment of such a situation.
27 See also The Economist, October 7th, 1995, p. 114.
28 See Jaffe et al. (1995) which surveys the empirical evidence to find little evidence
of a negative impact of environmental regulations on competitiveness. See also the
OECD Report by Burniaux et al. (1992) and the references and discussions in Motta -
Thisse (1994).
goods and processes29. Further, Motta - Thisse (1993) have suggested

stricter environmental standards might also be beneficiai to the dom
industry, by stimulating innovations which are environment-friendly. Fi
which adopt "green" technologies earlier are likely to be more compet
in countries where there are consumers sensitive to environmental issues,
and where similar green policies are imposed with delay30.
From the point of view of "social dumping", suspicions of it might arise
whenever a country has different work conditions and labour laws than
others. For instance, the more flexible labour market rules in the United
Kingdom have often been criticised by other EU member countries arguing
that this gives the UK an unfair advantage and the possibility to attract in
vestments from firms located elsewhere. On a different scale, child labour
and poor working conditions in certain less developed countries have been
severely criticised by industrialised economies31. This issue was also raised
in the recent WTO Ministerial Meeting in Singapore in December 1996.
If specific national standards might jeopardise free trade, there also ex
ists the danger that unilateral measures of retaliation are taken as a retalia
tory move. This would be conceptually similar to anti-dumping actions or
countervailing duties, and would lead to the adverse effects discussed above.
The harmonisation of environmental, labour or social laws would be a fair
solution to this problem too. In the more industrialised countries, these laws
have been adopted as the result of particular economie, social and historical
conditions which are simply inexistent in today's less developed economies,
for instance. More generally, countries tend to have different positions on
such matters, and care should be taken that respect of national laws be con
sistent with the flow of free trade.
It seems to us that any action on these issues should occur within the
framework of the WTO, since it is already endowed with some rules about
how to counter these issues. For instance, the Tokyo Round Agreement on
Technical Barriers to Trade establishes an important rule, and the GATT jur
isprudence contains useful principles, like the one which establishes that the
least trade-restrictive means to pursue a given objective should be found.
The WTO is probably the most appropriate forum to settle disputes32.
29 On these issues, see Motta - Thisse (1994) and references cited in that paper.
30 See also Porter - vander Linde (1995) for a similar view, but Palmer et al. (1995)
for a criticism of this argument.
31 On some theoretical aspects of social dumping see Cordella - Grilo (1995).
32 For some comments and criticisms on decisions taken by the dispute settlement
Panel of the WTO, see e.g. Trebilcock - Howse (1995), eh. 13.
TRADE POLICY AND competition POLICY 83
Recently, it has been given more role than its predecessor - the GATT - to
deal with trade disputes which involve standards33, but it is stili too early to
say if these changes have had an effective impact on the way disputes are
settled.
3. The effect of competition policies on trade
Despite the decrease in artificial barriere to trade caused by the imple

mentation of multilateral agreements, we do not believe that the role of com
petition policy is reduced. If there are reasons to believe that market failures
justify the adoption of competition policy, then this argument is at least a
valid when dealing with an autarkic economy as it is when dealing with an
imaginary integrated economy where trade is completely free34.
Theoretical as well as empirical work suggests that trade liberalisation
acts as a discipline device and decreases the market power of the domestic
firms35, but Fung (1992) has also shown that trade by itself does not automa
tically provide competitive discipline in the markets concerned. Hence, com
petition policy stili needs to be strictly enforced even when markets are open.
Further, the existence of multi-market contacts might facilitate collusion
between multinational firms, as shown by Bernheim - Whinston (1990). Th
intuition for this result is that when the same firms are selling in different
markets, they are afraid that a price decrease in one of the markets might be
followed by retaliatory price cuts in other markets, thus inducing a genera
price war. Again, this implies that in international markets the need for com
petition policy does not decrease36.
We also believe that the increased internationalisation calls for more co
ordination of competition policies, at least in the sense that common rules
should be defined as to the relevant jurisdictions to which a given case
should be assigned. When firms' activities bypass the national borders, the
danger is that the same operation is judged by different national competi
tion laws. This would entail costly duplications, both on the side of the firms
and of the institutions, as well as uncertainty as to the legality of the opera
tion if competition rules are different. This necessary preamble made, we
33 See for instance The Economist, September 30th, 1995, pp. 105-106.
34 Compare Neven - Seabright (1994), who argue that trade liberalisation is likely to
raise more concerns on some competition policy issues than on others.
35 See e.g. Jacquemin - Sapir (1991).
36 The fact that multi-market contacts help firms charge higher prices has found
empirical evidence in works by Parker - Roller (1994) and Evans - Kessides (1994).
can now define the object of the present section.

In this section, we shall briefly review a few specific competition p
issues and indicate how different treatment of such issues by different c
tries might affect trade flows. We deal with three broad themes: (1) c
and other horizontal agreements; (2) mergers; (3) vertical restraints37.
Our conclusion will be that different treatments might indeed aff
trade, but the possibility that competition policies are used as an instr
for pursuing industriai or trade policy objectives should not be exaggerate
3.1. Cartels and Other Horizontal Agreements

The most obvious form in which cartels can affect international trade is
represented by export cartels, where domestic firms agree on prices, on trad
ing conditions, or on the allocation of exports in foreign markets. In some
countries, these cartels are permitted by the law. This is the case of the US,
the UK, Germany and Japan, even though they might be subject to certain
conditions (e.g., notification and approvai) and their treatments have been
toughened over recent years38.
The main rationale for allowing domestic firms to coordinate their ac
tions abroad (either by fixing prices or by dividing export markets into dif
ferent spheres of interest) is that they can increase their export prices and
therefore their profits. Imagine for instance that firms from the same coun
try competed toughly for market shares abroad. This would reduce their sale
prices, to the benefit of foreign consumers and to the detriment of national
profits. By allowing firms to reach an agreement, such danger is avoided
and national welfare increased. Other forms of horizontal agreements might
also be favoured to allow national firms to pool their resources, to save mar
keting and distribution costs, or to spread their risks in the foreign markets.
Although they were of considerable importance in many countries in the
past, governments nowadays tend to be less lenient towards export cartels.
This is because horizontal agreements of this kind (especially price-fixing or
market-sharing cartels) tend to affect the domestic markets as well. Man
agers of different firms who sit together to decide common strategies on the
export markets are unlikely to be tough competitors in their home markets.
Firms have a naturai interest in tiying to reach a collusive outcome, and the
37 Most of the cases of abuse of dominant position consist of vertical arrangements

cases. The other major category is represented by predatory behaviour, an example of
which has been briefly discussed above in the section devoted to anti-dumping.
38 See Goyder (1993), pp. 469-474, and Scherer (1994).
best policy against cartels is not to look for (ex post) evidence that written
agreements or concerted practices exist, but rather to avoid ali the instru
ments which might help the firms to coordinate their actions and implement
a collusive outcome. For these reasons, most facilitating practices (Le., busi
ness practices which favour high prices) should be forbidden39, the role of
trade associations should be reviewed and exchange of information among
competitors limited, and most certainly the formation of export cartels
banned.
The possibility that an export cartel would end up with affecting the
home market justifies the tough stance that both the Commission and the
European Court of Justice have adopted towards agreements which in prin
ciple concerned only export (non-EC) markets, as well as the jurisprudence
of the US antitrust authorities40.
Another type of agreements which has similar effects on trade is given
by the import cartels. They consist of agreements between domestic firms
which coordinate their actions to buy raw materials and intermediate goods
abroad, and their main objective is to increase bargaining power to reduce
prices. Since they are symmetric to export cartels, the same criticisms apply
to these agreements as well. However, it is worth noting that the EC authori
ties have had a somewhat more lenient approach toward import cartels,
especially when they benefited small and medium sized firms whose access
to cruciai inputs would have otherwise been restricted41.
The argument behind this more favourable treatment lies on the possibi
lity that the cartel would act as a countervailing force if the bargaining
power was ali on the side of the seller. In turn, this would have a procompe
titive effect in the international marketplace. The same argument would also
hold for export cartels if the bargaining power was on the buyer's side.
Nevertheless, it would be unwise to justify the existence of import or export
cartels for this reason. A strong imbalance of power would suggest that the
foreign side of the market is either heavily concentrated or with colluding
39 See Kuhn et al. (1992) for references.

40 See Goyder (1993) pp. 469-471 on European competition law, and Scherer
(1994) p. 49 on the US law. A referee suggested that there is an another possible me
chanism through which export cartels influence domestic conditions. This happens
when the cartel sells abroad an input or an intermediate good which is processed by
foreign firms and then reimported into the home country. In this case, higher prices
commanded by the export cartel would indirectly cause higher prices paid by home
consumers of the final good.
41 See e.g. the National Sulphuric Acid Association case, discussed in Goyder
(1993), pp. 161-162.
firms. Rather than unilateral import or export cartels, the avenue to foll
should be the one of legai action against the foreign firms. For this to
possible, however, similar competition law rules should exist.
Besides the desire to manipulate terms of trade to the benefit of dom
tic firms, governments might also accept or even encourage horizon
agreements from a perspective of industriai policy, that is, with the view of
enhancing the profits of the national industry42. This is the case for instanc
when domestic firms are allowed to rationalise their production, to incre
their specialisation, to share know-how and jointly exploit patents, or to
operate in research and development ventures. In the EU, such agreemen
are exempted from art. 85, provided that certain conditions are fulfilled.
However, the justification for such cooperative agreements is usuall
not given in terms of strategie trade (or industriai) policy, even though they
might have such an effect. Indeed, these are agreements which might be
the domestic interest independently of their consequences on other markets,
since by favouring a more efficient allocation of resources or countering
ternalities (it is the case of R&D, where market failures tend to limit R&D
investments) they might have a positive effect on domestic welfare.
In particular, this is the case of R&D cooperative agreements, which
are subject to a group exemption from 85 of the Treaty of Rome in the EC
and are also allowed by antitrust regulation in the US, in both cases pro
vided that certain conditions are satisfied43. The main idea behind allowing
firms to cooperate in their research activities is that in the presence of
technological spillovers (i.e., when innovations created by a firm become
involuntarily available to other firms) and other externalities, they are un
able to appropriate the benefits of their R&D investments, and will there
fore invest less in such projeets. By permitting cooperation in R&D, free
riding problems are eliminated (or reduced). Duplications are avoided,
costs and risks shared. As a result, R&D efforts, and output, should in
crease44. Also, Motta (1992) has shown that since R&D investments can be
shared, a larger number of firms can afford the new projeets and the in
42 According to Sapir et al. (1993), arguments of international competitiveness in

the manufacturing sector might have played a role in certain EC decisions on exemp
tions from art. 85.
43 See Jacquemin (1988) or Goyder (1993) on the EU case, and Katz - Ordover (1990)
on the US. In the EU, the group exemption applies to partners whose joint market share
does not exceed 20%. However, fiims holding larger market shares might stili he ex
empted from art. 85 via individuai exemptions.
44 See D'Aspremont - Jacquemin (1988). See also Geroski (1993) for a survey of the
literature on R&D agreements.
dustry might be less concentrateci.

There is a clear trade-off here between the positive effect of internalis
ing the R&D externality, and the possible negative effect due to a reduction
in the competitive pressures in the market. In principle, cooperation should
concern only the pre-competitive stages of R&D, without affecting market
competition. However, the EC also exempts joint exploitation of the results
of common R&D. Further, there always exists the danger - as recalled above
- that by providing the firms with the opportunity to agree with each other
in one domain, the agreement spills over to more commercial domains.
To conclude this sub-section, different antitrust treatment of horizontal
agreements might have an impact on trade flows but there is no serious rea
son to believe that they can be used as a strategie trade policy. A lax policy
towards cartels and other agreements usually leads to a welfare loss at home
and is therefore unlikely to be used as a trade instrument by governments,
as witnessed by the historical decrease of export cartels in the western
economies. As for other horizontal agreements such as R&D cooperative
ventures, similar considerations on domestic welfare desirability suggest that
an abuse of such agreements would probably not be tolerated by competi
tion policy authorities. Furthermore, there exists no evidence that the Eur
opean Commission is using R&D cooperation as a "strategie trade policy"
which would help European firms in the world markets. Indeed, R&D joint
ventures between European and non-European firms have been looked at fa
vourably, as a means for EU firms to acquire know-how otherwise not avail
able45.
3.2. Mergers
Merger policy is an area where industriai policy and "strategie" consid

erations might play a big role in the way competition policy is designed. In
general, a horizontal merger has two effeets of different signs on (domestic)
welfare. On the one hand, it reduces the degree of competition in the market
and increases market power, which in turn tends to raise prices and dimin
ish consumer surplus. On the other hand, however, a merger might allow
firms to reap economies of scale or of scope, and more generally to enhance
the efficiency of production. Through this mechanism, firms might reduce
costs and, to the extent that cost reduction passes on to consumers, prices
45 Motta (1996) formally analyses the possibility that a government uses R&D co
operative agreements as a way to strategically help national firms.
might even tend to decrease. The latter argument is known as the "efficie
defence" of mergers, and it has been explicitly invoked by antitrust a
ties of some countries to justify mergers which create or strengthen mar
power and which should otherwise be prohibited46.
It is behind the "efficiency defence" arguments that lies the dang
using mergers as a strategie trade instrument. In industries where s
economies are important, or where large profits are necessary to su
high investments in advertising or R&D, there exists the temptation to al
the creation of large domestic firms which would be more competit
the international markets, in the same spirit as the strategie trade po
described in the previous section. Accordingly, in countries where go
ments have traditionally been more sensitive to this idea, and have fav
the policy of building "national champions" to better counter foreign firm
merger policy has been laxer (this is the case of France, for instance).
In the EC, the opposite views held by different member countries
ably explain the delay on a merger policy and the difficulty of reach
compromise on how to deal with mergers47. Eventually, the EC Merge
ulation 4064/89 does not explicitly allow for an efficiency defence, an
might seem enough to claim that industriai policy considerations an
mestic countries' interests do not play a role in the decision of wheth
48
approve mergers or not .
However, it is not clear that considerations other than those belonging
to the domain of competition are not taken into account by the EC merger
task force and the Council. First of ali, art. 2(1) of the Regulation enumer
ates different factors which can be used to decide that a merger is compati
ble with the Common Market, and one of them is the «development of tech
nical and economie progress provided that it is to consumers' advantage and
does not form an obstacle to competition». There is no jurisprudence of the
European Court of Justice yet to be able to see how this condition is inter
preted. Second, Neven et al. (1993) have analysed ali the merger decisions ta
ken until 1992 in depth and have argued that efficiency criteria have been
implicitly used in the merger decisions at different stages of the procedure.
Third, the EC authorities have not been veiy strict in implementing the Mer
ger Regulation, in our opinion. It is difficult to support this claim without
46 See for instance the US Merger Guidelines released by the US Department of

Justice.
47 See Goyder (1993), eh. 20.
48 See e.g. Jacquemin (1994), p. 102.
entering into details of single cases49. However, Neven et al. (1993) have
noted that probably many mergers allowed by the EC would not have been
cleared under the US merger guidelines.
Independently of whether or not countries pursue strategie reasons
when dealing with mergers, it is evident that when economies are open and
mergers involve firms and markets of different countries, domestic authori
ties might have different views on the suitability of proposed mergers.
Broadly speaking, national antitrust authorities will decide on the approvai
of mergers taking into account their impact on domestic variables (such as
for instance consumer surplus and domestic profits) only. However, a mer
ger that span across borders also affeets foreign variables, and not necessa
rily in the same direction as domestic ones. As a result, a favourable verdict
by domestic authorities might coincide with a refusai of approvai by foreign
authorities, or vice versa50.
It has been suggested that a supra-national institution should examine
mergers, since a domestic authority cannot take into account the external ef
feets on other countries, and some economists, Barros - Cabrai (1994)
among others, have also tried to make some steps toward the identification
of rules for accepting international mergers. However, work on the appropri
ate design of institutions indicate that a centralised institution is likely to be
the more desirable the greater the externalities among different countries
and the greater the consensus on the basic rules to follow, as Neven - Siotis
(1993, pp. 87-91) have pointed out. According to this principle, therefore,
there is little point in having a centralised institution among countries which
have little trade or investment interpenetration or which differ widely as to
the objectives of competition policy. For the same reasons, it makes sense
that there exists an European Merger Task Force which reviews mergers of
European dimension51.
More generally, even in cases where a centrai institution is probably not
49 Among the most recent cases which would deserve a discussion, we could men
tion the approvai (with conditions) of the ABB/Daimler-Benz merger in the rail technol
ogy sector which has been criticised by the German Bundeskartellamt. On the other
hand, the DG-IV has certainly adopted a tough stance in the media and telecommuni
cations sectors, where many concentrations have rightly been prohibited.
50 For examples where this has happened see Neven - Siotis (1993), pp. 85-86.
51 Noti ce that only the mergers which concern fìrms of a very substantial size and
whose effects extend beyond an individuai member country are subject to approvai by
the EC institutions, the remaining merger proposals stili being under the jurisdiction of
national authorities. EU countries stili have different rules (and different degrees of en
forcement) on mergers, although the process of harmonisation of competition policies
has been veiy relevant.
necessary, a common set of rules which establish exactly which jurisd

should be in charge of the merger approvai are indispensable to reduc
certainty of the final outcome of the merger proposals and to avoid d
tion of legai and bureaucratic costs. There exist many mergers which
est more than one institution (for instance, mergers which should b
sessed by EU and US authorities) and this issue has sofar been address
reciprocai notifications of the opening of procedures and by establis
close contacts between the institutions concerned. Formai and informai col
laboration between competition authorities mainly involves exchange of in
formation, periodical meetings and consultations. Usually based on bilateral
agreements, it has been quite successful in many cases but the possibility of
conflict stili exists52 and there certainly exists room for improvement53.
3.3. Vertical Restraints
Vertical restraints are ali those practices, contracts and agreements

which rule the relationships between upstream and downstream firms (for
instance, between a manufacturer and a retailer, or between a producer of
inputs and the manufacturer of a final good). There are a number of such
practices. Among the most commonly used, there are the following. Resale
price maintenance, through which a procedure imposes the retail price to
the retailers of the product. Quantity forcing, which determines a minimum
number of units to be sold by the retailer. Franchise fees, royalties and other
pricing schemes which establish the price a retailer should pay the manufac
turer for the units of the good. Exclusive territories which grant to a retailer
the exclusive right to sell a product in a certain area. Exclusive dealing,
which entails that a given retailer cannot sell goods produced by competing
manufactures.
There is very little agreement among economists about the right policies
which should be pursued when dealing with vertical arrangements between
manufacturers and distributors, or manufacturers at different stages of the
52 One recent case to be examined by both EU and US authorities which might give
rise to conflicts is the merger between Boeing and McDonnell. See «Aerospace merger
tests US-EU harmony», Financial Times, December 23rd, 1996.
53 On the status of existing collaboration between EU's DG-IV and other competi
tion authorities see European Commissione XXV Report on Competition Pólicy (1995). Re
commendations for further cooperation have been suggested by a group of experts ap
pointed by the EU Commissioner and are summarised in the EU Competition Policy
Newsletter, voi. 1, no. 6, Autumn/Winter 1995.
production processes. Accordingly, approaches towards vertical restraints

differ widely across the different countries54.
In the European Union the treatment of vertical restraints is mostly af
fected by the principle that parallel imports should not be hindered and that
price discrimination across national markets is to be avoided. This reflects
the primary concern of the Treaty of Rome that a truly common and inte
grated market should be created among the member countries. As a result,
contractual arrangements between manufacturers and distributors which
have as an effect the attempt of maintaining different resale prices in differ
ent countries will be prohibited. This a priori prohibition contrasts with the
oretical works which suggest that under certain conditions vertical arrange
ments such as exclusive territories and resale price maintenance can be
more efficient and improve welfare55.
To understand why vertical restraints can be welfare improving consider
a situation where there exists an upstream monopolist (say, a producer) and
a downstream monopolist (say, a retailer). The producer will choose the
wholesale price above its marginai cost of production which maximises its
profits, and the retailer in turn will choose the retail price over the whole
sale price which maximises its own profits. Hence, the final price will be in
flated by the existence of doublé profìt margins, and it is higher than what
would be optimal for the joint profit maximisation of the seller and the pro
ducer. If the two firms were able to integrate vertically, or if the monopolist
could impose a resale price maintenance contract to the retailer (i.e., if it
was able to fix the final price), then the final price would be lower and con
sumption would expand. Hence, consumers would gain and industry's prof
its would be higher. The welfare effect of the vertical arrangement would be
unambiguously positive56.
The existence of exclusive territories can also be efficient, since it en
sures that a retailer engages in service activities (such as advertising, promo
tional services and ex post assistance) which it would not have incentives to
provide if other retailers could free-ride on its effort. Imagine for instance
54 Scherer (1994), pp. 70-78, suggests for instance that the US authorities have a
more lenient approach towards vertical restraints than the EU authorities. A referee
pointed out that the difference might be more formai than substantial, given that many
vertical agreements are automatically exempted by group exemptions in the EU.
55 See e.g. Kuhn et al. (1992), Section 6, and the more recent and detailed analysis
by Seabright (1996).
56 See Tirole (1988), eh. 4, for a brief discussion of vertical arrangements and the
externalities they can solve, and OECD (1994) for an extensive survey of vertical re
straints.
that two neighbouring shops sold the same branded product. One of t
might think of advertising the product but this would determine a
tional cost which in turn would cali for higher retail prices. By doin
however, it would provide the competing shop with an externality, an
tomers would prefer to buy the same brand in the shop which does n
vertise but sells at a lower price. A seller is therefore not able to benefit
the additional effort,. and no services would be provided. The existen
such a public good argument explains why granting exclusive rights o
posing a minimum retail price might be efficient. Likewise, exclusive deal
agreements might also increase efficiency, since a manufacturer migh
engage in promotional activities in favour of sellers if they are also to
fit competing producers.
However, some vertical restraints might also have negative welfar
fects. For instance, exclusive dealing might represent a barrier to entr
certain sector, since a new firm would have difficulties in finding ret
which could sell its products. Resale price maintenance has also po
counter-indications since it might be used by retailers as a facilitati
vice. Indeed, by making sure that each product is sold at the same pr
any retailers, the producers endow themselves with a device which allo
better monitor the prices charged by the firms in the industry, which in
discourages price undercutting since a deviation would be more easil
tected and punished.
Since many vertical restraints have in principle different effects and
not easy to establish a priori which forms should be allowed, a rule o
son approach seems the most appropriate for competition policy in
area. A policy of per se prohibition of prevention of parallel imports, like
one de facto adopted by the EU, does not find any support from econ
analysis. Likewise, there would be no reason to give automatic exempti
vertical restraints such as retail price maintenance, whose net welfare eff
can be different in different situations.
Whether or not particular types of vertical arrangements are desirable, it
is widely accepted that they can have an impact on trade flows. Scherer
(1994, pp. 75-76), for instance, has argued that the strict US rules on
exclusive dealing arrangements, prohibited when the manufacturers have
large market shares and when they make the entry of newcomers difficult or
hurt small firms, have favoured the entry of Japanese car producers in the
American market. At the other extreme, the lax antitrust rules in Japan have
permitted the existence of strong (but not necessarily contractual) ties be
tween manufacturers, distributors and retailers which are often denounced
as one of the main causes of the difficult penetration of imports in the Japa
nese market.
The difference in the treatment of vertical arrangements might well be a

strong element of distortion of trade flows, but it seems to be a difficult is
sue to tackle (apart from extreme cases among which there might be the
Japanese one) since (a) there is little consensus among economists about the
rules which should be followed to deal with vertical contracts; (b) national
legislations reserve different treatments to such vertical arrangements. With
out such an initial consensus, it is difficult to devise a set of common rules
which should be internationally accepted.
CONCLUSIONS
It has sometimes been argued that free trade is the best competition pol
icy, since imports (or the simple threat of imports) might discipline domes
tic producers endowed with market power and restore competitive pres
sures57. This might suggest that the reduction in trade barriere which has
followed the GATT agreements diminishes the scope for competition poli
cies. In this paper, we have reacted to this claim with two main arguments.
Firstly, we have suggested that there are a number of ways in which na
tional governments can and stili do intervene to affect trade in a way which
is detrimental to competition. Quantitative restrictions to imports, anti
dumping actions, state subsidies, preferential procurement policies, defini
tions of standards are among such policy instruments. We have argued that
governments should avoid the temptation to resort to these instruments for
protectionist purposes, and we have in particular emphasised that a reform
of the anti-dumping measures in the EU (as well as in other countries) is
necessary. Apart from unilateral reforms, we have also suggested that more
international cooperation should be fostered to control that such devices do
not degenerate into protectionist spirals which would result in a welfare loss
for ali the countries involved.
Secondly, we have argued that trade liberalisation, which has indeed in
creased in a considerable way, is not enough to relax enforcement of compe
tition policy. We have also examined if different competition laws might in
turn have an effect on trade, and it does seem to be the case. However, the
danger that competition policy be used as a "strategie trade" device to help
the national industry should probably not be emphasised, since in many
cases lax rules would probably be as detrimental to national welfare as to
foreign welfare. As for international cooperation on competition policies, it
57 See for instance Bhagwati (1965).
is probably made difficult by little consensus about which policies sho

followed, since countries genuinely differ in their evaluations. Howeve
definition of a clear set of rules which establish the assignment of co
tion policy cases to a particular jurisdiction, by avoiding costly duplica
and increasing the certainty of the rules, is certainly indispensable.
important steps have already been taken in the right direction, since
formai and informai collaboration among competition authorities in d
ent countries exists. However, this cooperation has mainly taken the form
exchange of information and consultation and it needs further streng
ing.
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Trade Policy and Competition Policy

Article · February 1997

Massimo Motta Fabrizio Onida

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TRADE POLICY AND COMPETITION POLICY

TRADE POLICY AND COMPETITION POLICY

by Massimo Motta and Fabrizio Onida*

Received: October 1996; accepted: February 1997

Despite the reduction in trade barriere which has followed successi

* Massimo Motta, Universitat Pompeu Fabra, Barcelona; Fabrizio Onida, Università

However, the defìnition of a clear set of rules w

JEL Classifìcation: F13, K21, K32, L40

After World War II, the degree of internationalisation of most Wester

ent national authorities might be opening investigations, and different

1. TRADE POLICIES AND THEIR EFFECT ON COMPETITION

1.1. Quotas and VERs

Should any restriction on cross-border trade be imposed, the GATT prefers

7 See Holmes - Smith (1994), p. 28 and following.

threats from competitors on the residuai demand, and the result w

1.2. Anti-Dumping Measures

WTO rules recognise the right of member countries to take unilateral

9 See Tirole (1988), p. 247-248.

10 See Trebilcock - Howse (1995).

For the way in which anti-dumping regulations are implemented in both

12 See Officiai Journal, June 15th, 1991, p. 1 onwards.

Of course, the European anti-dumping laws are not the only

15 Financial Times, October llth, 1995.

20 See Areeda - Turner (1975) and Joskow - Klevorick (1979).

tion; (2) the interests of consumers and of producers of industries which

1.3. State Subsidies, Public Procurements and National Standards

Apart from more traditional tools of trade policy and anti-dumping ac

Another situation where governments can affect trade is give

Finally, governments can affect the course of international competition

23 For a review of rules on govemment procurements, see Trebilcock - Howse

facturers are specialised in small cars), and lengthy customs procedures ex

goods and processes29. Further, Motta - Thisse (1993) have suggested

3. The effect of competition policies on trade

Despite the decrease in artificial barriere to trade caused by the imple

can now define the object of the present section.

3.1. Cartels and Other Horizontal Agreements

37 Most of the cases of abuse of dominant position consist of vertical arrangements

39 See Kuhn et al. (1992) for references.

42 According to Sapir et al. (1993), arguments of international competitiveness in

dustry might be less concentrateci.

Merger policy is an area where industriai policy and "strategie" consid

46 See for instance the US Merger Guidelines released by the US Department of

necessary, a common set of rules which establish exactly which jurisd

3.3. Vertical Restraints

Vertical restraints are ali those practices, contracts and agreements

production processes. Accordingly, approaches towards vertical restraints

The difference in the treatment of vertical arrangements might well be a

57 See for instance Bhagwati (1965).

is probably made difficult by little consensus about which policies sho

Areeda P. - Turner D. (1975), «Predatoiy pricing and related practices under

Kuhn K.U. - Seabright P. - Smith A. (1992), «Competition

Sapir A. - Buigues P. - Jacquemin A. (1993), «European competition policy in manu

market», in International Trade and International Policy, ed. b

Tharakan P.K.M. - Waelbroeck J. (1994), «Antidumping and countervailing duty deci

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