Competition Policy and Free Trade: Antitrust Provisions in PTAs

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot

Author(s)

Anu Bradford and Tim Buthe

Source

Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements (1st. ed.), Andreas Dür and Manfred Elsig, eds., Cambridge University Press, pp. 246-274, 2015

Summary

Why do preferential trade agreements (PTAs) include terms concerning antitrust or competition policy? Some argue that governments use competition policy to protect local firms against foreign competition. A better theory is that trade makes it hard for national authorities to enforce competition policy.

Policy Relevance

Many PTAs include terms promoting cooperation between nations in enforcing competition policy. Such terms are intended to enhance enforcement efforts.

Main Points

  • World Trade Organization commitments limit barriers to trade, but additional PTAs often include stricter restrictions on obstacles to trade.
     
    • “Behind-the-border” barriers to trade include technical barriers such as product safety standards, rules for the treatment of foreign investment, and other domestic policies.
       
    • The additional limits in PTAs require governments to commit to or to avoid domestic policies that affect trade.
       
  • Many PTAs include terms concerning competition policy, that is, laws that prevent the abuse of market power by dominant firms, prevent the formation of cartels, or that help regulate mergers.
     
  • Some argue that free trade drives out anticompetitive practices by increasing competition, and, theoretically, free trade should reduce the need for competition policy; if so, the inclusion of competition policy terms in PTAs is unnecessary and puzzling.
     
  • Over the past two decades, PTAs have included competition policy terms more often, and competition policy terms have become longer and much more detailed.
     
  • A survey of 137 PTAs with competition policy terms shows that the content of the terms varies.
     
    • 69 percent address horizontal anticompetitive practices such as formation of cartels (involving firms that compete directly).
       
    • 63 percent address anticompetitive vertical agreements (between a firm and its suppliers or customers).
       
    • 89 percent address anticompetitive behavior by a dominant firm or monopolist.
       
  • Some argue that competition policy terms are included in PTAs to hinder national governments from using competition policy to protect domestic firms from foreign competitors.
     
    • One theory is that if a nation’s government seeks to maximize the welfare of domestic consumers and producers combined, and imports exceed exports, the government will overuse competition policy to help local consumers at the expense of foreign firms.
       
    • Another theory is that local firms will lobby their governments to use competition policy against foreign firms to protect local markets.
       
  • If either “protectionism” theory is correct, PTAs should include terms hindering domestic government from using competition policy rules selectively against foreign firms.
     
    • Such terms might include procedural rights or rights of appeal for foreign firms.
       
    • About one-fifth of PTAs require that competition authorities proceeding against a foreign firm notify that firm’s home government first.
       
    • Otherwise, such terms are rare.
       
  • A better theory is that competition policy provisions have been included in PTAs because competition policy complements free trade.
     
    • Free trade enables firms to form international cartels or engage in other anticompetitive conduct on a large scale, making competition policy rules hard to enforce.
       
    • If this theory is correct, PTAs should include provisions to promote cooperation and comity between national authorities enforcing competition policy rules.
       
    • Many PTAs include such terms.

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