WT/WGTCP/W/127
Page 1

World Trade
Organization / RESTRICTED
WT/WGTCP/W/127
7 June 1999
(99-2281)
Working Group on the Interaction
between Trade and Competition Policy

THE FUNDAMENTAL PRINCIPLES OF COMPETITION POLICY

Background Note by the Secretariat

  1. This note has been prepared in response to a request made by the Group at the meeting which took place on 19 and 20 April 1999,[1] to provide a note setting out factual background on the fundamental principles of competition policy. It is intended to assist in the Group's consideration of the relevance of the fundamental WTO principles of national treatment, transparency, and mostfavourednation treatment to competition policy and vice versa (the first specific element incorporated in the General Council's decision regarding the work of the Group in 1999 [2]). Following the approach used in the earlier background note prepared by the Secretariat on the Fundamental WTO Principles of National Treatment, Most-Favoured-Nation Treatment and Transparency,[3] the present note does not attempt to analyse the relevance of the principles discussed in it for trade policy. Rather, it is understood that this is a task for Members in the Working Group.
  2. Following the approach that has been used in past discussions in the Group on related matters, the term "competition policy" is considered, for the purposes of this note, to comprise the full range of measures that may be used to promote competitive market structures and behaviour, including but not limited to a comprehensive competition law dealing with anti-competitive practices of enterprises.[4]
  3. At the outset, it might be noted that, whereas the fundamental WTO principles that were the subject of the earlier paper prepared for this item of the work programme of the Working Group were identified in that work programme and had been codified in multilateral law and jurisprudence (namely that of the WTO), the same cannot be said for the fundamental principles of competition policy. There is one multilateral instrument which addresses principles relating to the control of restrictive business practices, mainly from the perspective of ensuring that such practices do not impede or negate the realization of the benefits of trade liberalization, particularly for the trade and development of developing countries. This is the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices ("the Set") which was adopted by the General Assembly of the United Nations on 5 December 1980 (Resolution 35/63). The Set is of obvious interest for the Working Group and is summarized in Section II of this paper and referred to elsewhere as appropriate. For the rest, in selecting the principles on which to focus, the Secretariat has had to seek guidance from such diverse sources as observations made by Members in meetings of the Working Group, guidelines, policy statements and analyses prepared by other international organizations, national laws and guidelines, and academic analyses.
  4. As mentioned above, in contrast to the situation regarding fundamental WTO principles, there is no unified body of jurisprudence relating to the application of the fundamental principles of competition law and policy at the multilateral level. Rather, the jurisprudence that exists is developed with reference to diverse national laws and policies. Furthermore, it tends to be concerned with the application of specific statutory elements or jurisprudential doctrines which embody, in varying degrees, the relevant principles, rather than with the application of the principles themselves. Therefore, rather than attempting to trace systematically the application of the fundamental principles of competition law and policy in the national jurisprudence of Members, the note, for the most part, seeks to identify the relevant principles and to illustrate their application by reference to elements of national laws and policies which embody the principles.
  5. A word may be in order as to what is meant by a "fundamental principle" of competition policy. The term is not regarded as being synonymous with the elements of competition or antitrust law.[5] Rather, what has been identified in preparing this paper are principles of policy design and application, including but not limited to objectives set out in national competition laws, whose impact transcends specific statutory provisions and sectors, and is common to a broad range of jurisdictions having competition policies.[6]
  6. From this perspective, three general categories of principles have been identified in this note. The first category concerns principles in the sense of the overriding goals or objectives of competition policy (e.g., the promotion of economic efficiency and development, the promotion of consumer welfare, or, possibly, other objectives). These objectives serve as important guideposts for officials in applying diverse aspects of related laws and policies. The second category consists of more operational principles of policy design and application. Examples of principles in this category would include, for example, the promotion of market-opening measures and the identification of situations in which market power is likely to be exercised. Another such principle would be the distinction that is made in virtually all competition law systems between arrangements that are primarily horizontal in nature (i.e., they involve restrictions on competition between firms that would otherwise be in direct competition with each other) and arrangements which are primarily vertical in nature (i.e., they limit competition within an individual product production and distribution chain). A third major category of principles relates to the institutions and processes through which competition policy is applied.[7] An important example of a fundamental principle in this category would be adherence to due process in the application of competition law and policy.
  7. It should be noted that, while the principles discussed in this paper would appear to be common to a large number of jurisdictions having competition policies, it is not necessarily the case that the principles are present in all jurisdictions having such policies, at least in all respects. Rather, in some cases they are better understood as ideals which legislators and officials charged with implementation strive to meet over time, taking into account other relevant goals, public policy priorities and constraints. This is similar, to an extent, to the situation prevailing in regard to the fundamental WTO principles of national treatment, most-favoured-nation treatment and transparency, which are also subject to an element of progressivity in their application, in important respects.[8]
  8. The structure of the paper is as follows. Part I notes some observations that have been made by Members relevant to the fundamental principles of competition law and policy in meetings of the Working Group. Part II outlines the contents of the United Nations Set. Parts III, IV and V deal, respectively, with the three categories of fundamental principles of competition law and policy which are set out above, namely fundamental principles in the sense of the objectives of competition law and policy; operational principles of policy design and implementation; and institutional and procedural principles that are considered important to the effective application of competition law and policy.

i.relevant observations by members

  1. In the course of the various meetings of the Working Group, Members have made a number of observations relevant to the fundamental principles of competition policy. In addition to observations made with regard to Item I of the Checklist of Issues Suggested for Study, which calls for study of "the relationship of the objectives, principles, concepts, scope and instruments of trade and competition policy to development and economic growth",[9] relevant comments have been made with regard to the description of national competition regimes and other elements of the Group's work programme. In many cases, the comments made with regard to Item I of the Checklist were concerned with the general relationship between the trade and competition policy, rather than the principles of competition policy per se. Comments relevant to the principles that are discussed in Parts III, IV and V of this paper are noted in those sections. In addition, this section briefly notes some main themes of Members' more general comments relevant to the fundamental principles of competition policy. These are broadly suggestive of the overall approach and categorization of fundamental principles of competition policy which is developed below.
  2. With regard to the objectives of competition policy, a number of Members have made the point that these are essentially the same as those of trade liberalization – i.e., they relate to the promotion of economic efficiency and consumer welfare.[10] A related point that has been made is that both competition policy and trade policy can contribute directly to ensuring the effective equality of competitive opportunities for Members in world markets – a consideration which is a fundamental goal of the multilateral trading system as a whole.[11] It has been noted, as well, that a number of other goals are reflected in the design and application of national competition policies, to varying degrees. These include, for example, the promotion of opportunities for small- and medium-sized businesses, market integration and (in some cases) industrial policy goals relating to local employment and other matters.
  3. With regard to the design and application of national competition policies, the point has been made that competition policy is fundamentally concerned with identifying situations where market power can be exercised, to the detriment of consumers.[12] The relationship of this concern to the analytical techniques of competition policy, including market definition, has been noted.[13] The distinction between horizontal and vertical relationships has also been stressed,[14] as has the importance of striking a balance between competition law enforcement and advocacy activities, and the mutually-reinforcing nature of these activities.[15] Another important point of emphasis has been on the potential pro-and anti-competitive effects of economic regulation,[16] and the need for coherence between the roles of competition policy and regulation.[17]
  4. With regard to questions of institutional design and process, the importance of adherence to due process and the rule of law has been stressed on various occasions.[18] In addition, the point has been made that, at least in the case of some jurisdictions, competition law and policy already reflect, and appear to be generally consistent with, the core WTO principles of national treatment, most-favoured-nation treatment and transparency.[19] The point has also been made that, in any formalization of the link between competition policy and WTO principles, it may be necessary to adapt the principles to the specific subject-matter and procedures of competition policy.[20] The important role that international cooperation can play in the effective application of competition law and policy has also been stressed on a number of occasions.[21]
  5. In the most recent meeting of the Working Group (on 19-20 April 1999), in addition to the relevance of fundamental WTO principles to competition policy, observations were made by some Members regarding principles of competition policy that might have relevance for trade policy. In this regard, in its contribution (WT/WGTCP/W/118), Hong Kong, China referred to three "broad principles" of competition policy, namely the promotion of open markets, non-discriminatory conditions of competition and consumer welfare.[22] The European Community and its member States, in their submission (WT/WGTCP/W/115), referred to three elements for consideration in future work on the development of core principles of competition policy, namely: adoption of a comprehensive competition law, administration and enforcement of the law and the rights of private parties, in addition to a number of related elements and sub-elements. This approach seeks to focus on those aspects of competition law and policy which are considered to be more relevant for the multilateral trading system, while fully recognizing the development dimension and differences in domestic legal and institutional frameworks.[23] A submission by Japan (WT/WGTCP/W/119) referred to a "competition-oriented principle" which is considered to constitute a fundamental concept of competition law. The submission indicates that this principle "is based on the idea of not obstructing the market mechanism. It implies prohibiting those anti-competitive practices that distort the market mechanism (e.g. cartels, boycotts) and systems that relate to competition law and that restrict the sectors or areas where the market mechanism is allowed to work (e.g. exemption systems)".

II.THE United nations SET of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices

  1. The United Nations Set of 1980 contains principles and rules for the control of restrictive business practices, which take the form of recommendations to States. Its particular focus is on practices that impede or negate the realization of benefits from international trade and thereby economic and social development, particularly of developing countries. It calls for appropriate action to be taken at the national, regional and international levels to eliminate, or effectively deal with, restrictive business practices having such effects. It calls on States to take into account in such action the development, financial and trade needs of developing countries. It contains principles and rules calling on enterprises, including transnational corporations, to desist from horizontal restraints of various types and the abuse or acquisition and abuse of a dominant position of market power. It further contains principles and rules directed at States, notably that States should, at the national level or through regional groupings, adopt, improve and effectively enforce appropriate legislation and implement judicial and administrative procedures for the control of restrictive business practices. The Set further seeks to encourage various forms of collaboration aimed at eliminating or effectively dealing with restrictive business practices.[24]

III.the goals of competition policy

  1. It is widely stated that the most basic goal of competition policy is to promote and maintain healthy inter-firm rivalry in markets, wherever this is viable.[25] This is achieved in two principal ways: first, anti-competitive market structures and enterprise practices that impede competition can be addressed through the application of a competition law and/or the use of pro-competitive regulation, in appropriate cases; second, government measures that pose unnecessary obstacles to trade and competition can be reduced or eliminated.
  2. In addition to the broad objective of promoting healthy rivalry in the marketplace, competition policy is often considered with reference to more specific economic goals, which guide and may be referred to specifically in policy implementation. Two such goals that would appear to constitute fundamental principles of competition policy in many jurisdictions, in that they serve as guideposts for officials in the application of diverse aspects of their respective laws and policies, are: (i) economic efficiency; and (ii) consumer welfare.[26] By advancing these objectives, competition policy can also contribute to the overall process of economic development.[27] In addition, a number of other goals are embodied in national laws and policies, and can affect the application of such laws and policies in various circumstances.

A.the promotion of economic efficiency

  1. The goal of promoting economic efficiency is an explicit objective of competition policy in many if not most jurisdictions with such policies.[28] In fact, the concept of efficiency as it is applied in competition law typically embraces three discrete aspects. First, "allocative efficiency" is achieved when society's scarce resources are allocated to produce the goods and services that are most desired by consumers. This requires that price be equal to the marginal costs of production and distribution from the social point of view. "Productive efficiency" is achieved when goods are produced using the most cost-effective combination of productive resources available under existing technology. "Dynamic efficiency" is achieved through an optimal rate of invention, development, and diffusion of new products and production processes.[29]

B.promoting the welfare of consumers

  1. A goal that is widely viewed as a central purpose of competition policy and is used as the leading overall guidepost for the application of competition law in a number of major jurisdictions is that of consumer welfare.[30] Under this approach, a fundamental criterion for the application of such policy to particular business arrangements is whether the arrangements in question have a detrimental impact on the prices charged to and/or the array of choices available to consumers.[31] Even in jurisdictions where competition policy is also intended to serve other economic and social goals, the promotion of consumer welfare is generally acknowledged to be an important or even a central goal of such policy. Where consumer welfare is treated as the pre-eminent goal of competition policy, this approach would differ from a "pure" efficiency-based approach in that efficiencies would be given weight to the extent that there is a reasonable expectation that their benefits would ultimately flow through to consumers, and not be retained by producers.[32]

C.promoting economic development

  1. As has been discussed extensively in the Working Group[33], competition policy should also contribute to the process of economic development. It can do this through various channels, including by:[34] (i) promoting an efficient allocation of resources; (ii) protecting the welfare of consumers; (iii)preventing/addressing excessive concentration levels and resulting structural rigidities; (iv)addressing anti-competitive practices of enterprises (including by multinational enterprises) that have a trade dimension, and that may impact particularly on developing countries; (v) increasing an economy's ability to attract foreign investment and to maximize the benefits of such investment; (vi)reinforcing the benefits of privatization and regulatory reform/deregulation initiatives; and (vii)establishing an institutional focal point for the advocacy of pro-competitive policy reforms and a competition culture. The goal of promoting economic development is also emphasized in the United Nations Set, a fundamental objective of which is "To ensure that restrictive business practices do not impede or negate the realization of benefits that should arise from the liberalization of tariff and non-tariff barriers affecting world trade, particularly those affecting the trade and development of developing countries".[35]

D.other goals of competition policy

  1. A number of other goals and objectives (explicit and implicit) figure in the application of competition laws and policies of Members.