European economic

integration
Lesson 7: EU trade policy
Recap

The last class lesson dealt with the CAP followed by 2 guest lectures on customs and on economic geography.
These guest lectures are uploaded and contain possible questions for the exam

Important takeaways:

• Why was the CAP good, why was the CAP bad? (import export, division of benefits, etc.)

• What were the results of a bad CAP? How did they attempt to reform it

• For the guest lectures, they clearly link to certain chapters of our syllabus. For customs there is a strong link
with chapter 5, trade barriers, chapter on trade itself; for economic geography think the chapter market
growth and integration.
“Keeping markets open to new entrants is a key factor for the promotion of innovation.
When monopolies and tight oligopolies are allowed to occupy a market, they tend to
resist change and often end up caring only about the preservation of their business
models. Contestable markets, instead, allow new players to experiment, and new ideas
to succeed. It is a major task of competition control to ensure that new generations of
businesses are given a fair chance.”

Joaquín Almunia, Vice President of the European

Commission responsible for Competition Policy, 2012
Competition and innovation

“Competitive markets make our companies more innovative, more productive and more cost effective, and at the
same time deliver lower prices, better quality, new products and greater choice for our citizens. Competitive markets
require a strong competition policy, rigorously enforced, and the EU’s state aid rules are an intrinsic part of this.”

Neelie Kroes, former Commissioner for Competition policy, Speech, 2008

2. Firms are
tempted to
collude to
1. bigger avoid
firms have restructuring
more market
control
Competition and regulation

“Today’s charges should send a message to companies who believe they don’t need to follow the rules,”

“If you violate the laws of this country, the FBI will investigate and put a stop to the threat you pose to our commercial
system. The integrity of our markets is a part of the foundation of a free society.”

U.S. Department of Justice on announcing 11 guilty pleas, $740 million fines in auto parts price-fixing cartel, 2013

Similar EU case: car safety equipment

In 2017, the European Commission fined five car safety equipment

suppliers €34 million after finding them guilty of running cartels for
seatbelts, airbags and steering wheels supplied to Japanese auto
manufacturers located in Europe.

http://ec.europa.eu/competition/cartels/cases/cases.html
Competition and the market

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a
conspiracy against the public, or in some contrivance to raise prices.”

Adam Smith

Maritime car carriers

The Commission's investigation revealed that, to

coordinate anticompetitive behaviour, the
carriers' sales managers met at each other's
offices, in bars, restaurants or other social
gatherings and were in contact over the phone
on a regular basis. In particular, they coordinated
prices, allocated customers and exchanged
commercially sensitive information about
elements of the price, such as charges and
surcharges added to prices to offset currency or
oil prices fluctuations.
In short

1. Competition is important 2. Competitive markets require a

strong competition policy...
EU’s role in competition policy
Competition among firms is the heart and soul of Europe’s social market economy.

• Founders of the EU understood:

• that pressures to collude and subsidize would arise in the course of economic integration;
• and anticipation of such unfair practices could reduce political support for economic integration in all
nations.

• Thus, the Treaty of Rome includes broad prohibitions on private and public policies that distort
competition.

• The European Commission has the sole power to regulate the EU’s competition policy (i.e., its decisions
are not subject to approval by the Council or the Parliament but they can be overturned by the EU Court).
EU competition policy
Competition among firms is the heart and soul of Europe’s social market economy.

• Treaty of Rome prohibited any action that prevents, restricts, or distorts competition in the common
market and it puts the Commission in charge of enforcing these strictures.

• The Commission has considerable powers in this area:

• the Commission has the right to make on-site inspections without prior warning;
• with a court order, the Commission can even inspect the homes of company personnel;
• the Commission has the right to impose fines on firms found guilty of anti-competitive conduct, with a
maximum of 10% of the firm’s worldwide turnover;
• when it comes to subsidies, the Commission has the power to force firms to repay subsidies it deems
to be illicit.
European Commission – DG COMP
This Commission department is responsible for EU policy on competition and for enforcing EU competition rules, in cooperation
with national competition authorities.
DG COMP strategy

• General objective 1: A European Green Deal

All instruments of EU competition policy – antitrust17, merger control and State aid control - can significantly contribute to
the European Green Deal by enabling a cost-effective, fair and green transition for companies, regions and people to a
climate-neutral EU by 2050. Likewise, all EU competition policy instruments will contribute to the circular economy.

• General objective 2: A Europe fit for the digital age

Digital markets move at an accelerating pace and unless the Commission keeps up with the developments, competition will
falter and the competitiveness of EU companies will suffer. Yet, the foundations of EU competition law remain as relevant for
digital industries as for industries, which are not yet digital.

• General objective 3: An economy that works for people

All branches of EU competition policy - antitrust as well merger and State aid control - ensure fair and competitive outcomes
for EU citizens and businesses as well as society and the economy as a whole. They contribute to a well-functioning internal
market where companies compete on their merits and efficiencies are passed on resulting in lower prices, better quality and
new products and services
National competition authorities
DG COMP works closely together with national authorities
Three pillars of competition controll
There are three typical forms of market distortion
EU competition controll
The EU tries to tackle these as follows

-to eliminate behaviours

that restrict competition -Treaty of Rome bans state
- to block mergers that
(e.g. price-fixing aid (broadly defined) that
would create firms that
arrangements and cartels); provides firms with an unfair
would dominate the market.
-to eliminate abusive advantage and thus distorts
behaviour by firms that competition. Several
have a dominant position. exceptions to this rule exist.
Pillar 1: antitrust
EU law on anti-competitive behaviour
Article 101 outright forbids practices that prevent, restrict or distort competition, unless the Commission grants an exemption

1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by
associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or
effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
a) directly or indirectly fix purchase or selling prices or any other trading conditions;
Prevents
b) limitallorforms
controlof horizontal
production, (liketechnical
markets, cartelsdevelopment,
and exclusive territories) or vertical (arrangements between firm
or investment;
c) share markets or sources of supply; and suppliers) anti-competitive agreements
d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive
disadvantage;
e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of such contracts.
2. Any agreements or decisions prohibitedAll
pursuant to this Article
agreements not shall be automatically
in line are totally void.
useless
3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
• any agreement or category of agreements between undertakings;
• any
Part onedecision
rulesoroutcategory of decisions
so much by associations(case
that exceptions of undertakings;
and block) exist when the benefits outweigh the anti-
• any concerted practice or categorycompetitive
of concerted practices,
effectswhich contributesand
(technology to improving
RnD) the production or distribution of goods or
to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
Horizontal agreements: collusion
Collusion is a practice as old as the market itself where similar companies either make agreements on quality or price

• Collusion fixes prices or creates planned

obsolescence.

• A cartel of lightbulb makers in the eighteen and

nineteen hundreds collaborated to sabotage the
lifespan of their lightbulbs, from two or three
thousand hours down to one thousand hours.

• This is not always the case when firms collude but

also for singular firms: the iPhone battery lawsuit
https://www.theverge.com/2020/11/18/21573710/
apple-battery-gate-throttle-iphones-settlement-
amount Why we cant have nice things veritaserum
https://www.youtube.com/watch?v=j5v8D-alAKE&t=924s
Art 101 : case
In October 2008, the European Commission found that three banana importers, Chiquita, Dole, and Weichert (which was controlled by
Del Monte at the relevant time) had participated in a price-fixing cartel for a total retail value of bananas sold around €2.5 billion.

Reduction % Reduction € Fine €

Chiquita 100 83 200 000 0
Dole 0 0 45 600 000
Del Monte/ 0 0 14 700 000
Weichert
Total 60 300 000
Art 101 : case
Scania and the other truck manufacturers in the cartel produced more than 9 out of every 10 medium and heavy trucks sold in
Europe

• coordinating prices at "gross list" level for medium and heavy trucks in the European Economic Area(EEA).

• the timing for the introduction of emission technologies for medium and heavy trucks to comply with the
increasingly strict European emissions standards (from Euro III through to the currently applicable Euro VI)

• the passing on to customers of the costs for the emissions technologies required to comply with the
increasingly strict European emissions standards (from Euro III through to the currently applicable Euro
VI).

Instead of colluding on pricing, the truck manufacturers should have

been competing against each other - also on environmental
improvements
Commissioner for Competition, Margrethe Vestager
Art 101 : case
Vertical collusion occurs when sellers and firms partake in deals restricting outside competition

Apple reseller controll - Apple app store - apple tied selling

High tech way of reseller controll

https://www.youtube.com/watch?v=8-FxNKEH_qc
The economics of anti-competitive behaviour
As EU’s Single Market becomes less fragmented, firms experience greater competition, which forces them to restructure in a way
that lowers their costs.

• Adjustments involve waves of mergers and acquisitions (M&As).

• An alternative to such M&As, however, is for the firms to collude in order to avoid or postpone industrial
restructuring.

• Collusion among firms results in high prices leading to lower demand and production: it is illegal under the
EU law and economically harmful for Europe as a whole.

• Perfect collusion in the BE-COMP diagram:

• firms co-ordinate prices and sales perfectly;
• maximum profit at monopoly price and split sales among firms;
• assume that firms all have equal market share.
Economics of cartels
Suppose price without cartel would be P=AC while the cartel raises price to P′:

Consumer Surplus = -a - b;
profit = a;
net welfare effect = -b.

Outcome:
• ‘rip-off’ effect (higher P);
• inefficiency effect (lower C).
Further cartel examples

• In 2011, the Commission fined Procter & Gamble and Unilever for operating a cartel with Henkel in the
market for household laundry powder detergents in 8 EU countries. Henkel was part of the cartel, but got
immunity for revealing the cartel to the Commission.

• The Commission convicted 4 brewers (Heineken group, Grolsch, Bavaria, and InBev group) of running a
cartel in the Netherlands. The cartel was discovered when a similar cartel in Belgium was uncovered (when
InBev gave evidence to the Commission in order to reduce its fine).

• In 2010, the Commission concluded that 10 DRAM producers (only one European) were running a cartel
between 1998 and 2002.

• In 2017, the European Commission wound up a long-running case against five companies who colluded in
the European market for trucks for 14 years starting in 1997 – five years after the completion of the Single
Market (see Box 11.3).
Abuse of dominant position
Dominance is an issue when firms are tempted to extract extra profits from suppliers or customers.

• Dominant position is not a problem per se: it may reflect superior products and/or efficiency.
• However, dominance may tempt firms to extract extra profits from suppliers or customers.
• The ‘abuse of dominant position’ is illegal under EU law.

Examples:
• Microsoft refused to supply information to Sun Microsystems for the communication with its operating
system. During the investigation, the Commission found evidence of additional illegal behaviour with the
most recent case in 2008 involving Office and Internet Explorer.

• Google was investigated for (1) displaying Google’s own specialized web search services more prominently
than those of competing companies; (2) using (without consent) other companies’ original content; (3)
obliging website publishers to obtain most of their online search advertisements from Google; and (4)
restricting the transferability of online search advertising campaigns to rival search advertising platforms. In
2014 Google guaranteed that the services of three rivals would be promoted along with its own specialized
search services.
EU law on anti-competitive behaviour
Article 102 deals with dominance and refusal to supply, unfair prices and conditions, predatory pricing, loyalty rebates, exclusive
dealing requirements and abuse of intellectual property rights.

• Any abuse by one or more undertakings of a dominant position within the common market or in a
substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect
trade between Member States.

• Such abuse Prohibits any formconsist

may, in particular, of misuse
in: of the market position obtained by a large market
share
• directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
• limiting production, markets or technical development to the prejudice of consumers;
• applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing
them at a competitive disadvantage;
• making the conclusion of contracts subject to acceptance by the other parties of supplementary
obligations which, by their nature or according to commercial usage, have no connection with the
subject of such contracts.
Art 102 : case
Pillar 2: merger controll
Merger controll
In many European industries, the number of firms is falling as they merge or buy one another out

• - Merger Regulation, introduced only in the late 1980s:

- anti-competitive behaviour addressed: ‘a concentration which would significantly impede effective
competition in the common market’;
- no more notification requirement and increased role of national competition authorities.
Merger controll
All aspects or a merger are taken into account
Merger controll
All aspects or a merger are taken into account
Economics of mergers
Initially P=AC. Merger of firms lowers AC to AC’ but raises price to P’

• Consumer surpluss= -a – b;
• Producer surpluss= a(profit) + c(cost);
• net welfare = -b + c.

With free entry, then eventually P is driven down

to AC’, boosting efficiency also for consumers. (so
net gain of CDE in long run)
Pillar 3: state aid
EU State aid policy
Integration and industrial restructuring presumes that profit-losing firms would eventually leave the industry which may involve
important job losses

• Long-run economics of such subsidies – called ‘state aid’ in EU jargon and are a tool to limit negative
externalities from trade integration - for instance, grants, interest relief, tax relief, state guarantee or holding,
or the provision by the state of goods and services on preferential terms

• Treaty of Rome bans state aid (broadly defined) that provides firms with an unfair advantage and thus
distorts competition.

• Commission has the power to force the repayment of illegal state aid, even though the Commission normally
has no say over members’ individual tax and spending policies.

• Exceptions relate to social policy; natural disaster aid; economic development aid to regions.
EU law on state aid
Article 107

• Article 107
• 1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to
distort competition by favouring
It is notcertain undertakings
allowed underor theANY
production
formof IF
certain goods shall,competition
it distorts in so far as it affects
ortrade between
affects Member States, be incompatible
trade
with the internal market.
• 2. The following shall be compatible with the internal market:
• (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the
products concerned;
• (b) aid to make good the damage caused by natural disasters or exceptional occurrences;
Unless there is a social character, natural disasters or exceptional circumstances
• (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in
order to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting
on a proposal from the Commission, may adopt a decision repealing this point.
• 3. The following may be considered to be compatible with the internal market:
• (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of
the regions referred to in Article 349, in view of their structural, economic and social situation;
• (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member
State;
And exceptions are possible if approved by the Commission
• (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions
to an extent contrary to the common interest;
• (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is
contrary to the common interest;
• (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.
State aid in the EU
Aid amount 2017: approx. EUR 116.2 billion, Approx. 0.76% EU GDP
Propensity to give aid – differences between MS states
Main objectives of State aid
State aid case
State aid as tax avoidance for firms across Europe doing “tax engineering” but also completely negating tax for companies of
“national value”

State aid: Commission requires Belgium and

France to put an end to tax exemptions for
ports

The European Commission has required Belgium

and France to abolish the corporate tax
exemptions granted to their ports, so as to align
their tax regime with EU state aid rules. Profits
by port operators must be taxed under normal
national corporate tax laws to avoid distortions
of competition.
State aid case
State aid as “free money”

• The global crisis that started in the USA in 2008 spread rapidly to Europe. EU policymakers responded by
providing massive state aid to banks to prevent the financial shock from creating a second Great Depression.
All these measures had to be approved by the Commission under its state aid policy. In the first five years of
the crisis, the Commission authorized more than 400 state-aid measures to the financial sector. Aid used for
recapitalization and asset relief measures amounted to almost 600 billion page 273euros or almost 5 per
cent of EU GDP, and aid for guarantees and other forms of liquidity support was almost twice as large. As the
crisis has calmed, much of the aid has been repaid.

• The Commission duly adopted six ‘Communications’ providing guidance for Member States regarding what
type of aid would be allowed and how it would be monitored. The goal was to allow Member States to
underpin financial stability while minimizing distortions of competition between banks and across nations.
Financial stability avoids major negative spillovers across EU banking systems and helps banks provide loans
to the real economy.

• When applying the rules to individual cases, the Commission looks beyond its usual industry-level criteria
and takes account of the macroeconomic environment. Key points for the Commission are the long-term
viability of the subsidized banks and whether the need for support arose from the crisis or bank-specific
risk-taking. This is an ongoing challenge as large parts of the EU financial sector must be restructured.
State aid case
State aid in COVID times

• On 19 March 2020, the Commission adopted its Communication “Temporary Framework for State aid
measures to support the economy in the current COVID-19 outbreak” to enable aid to accelerate research,
testing and production of COVID19 relevant products, to protect jobs and to further support the economy
during the current crisis.
• A targeted and proportionate application of EU State aid control ensures that national support measures
effectively help affected undertakings during the outbreak whilst limiting undue distortions to the Internal
Market, maintaining the integrity of the Internal Market and ensuring a level playing field.
• The Commission underlines that providing national public support in the form of equity and/or hybrid
capital instruments to undertakings facing financial difficulties due to the COVID-19 outbreak, as part of
schemes or in specific individual cases, should only be considered if no other appropriate solution can be
found and be subject to stringent conditions