Trade and competition policy in WTO 121

VII. TRADE AND COMPETITION POLICY IN WTO1

A. Progress in the WTO Working Group on Interaction

between Trade and Competition Policy

1. The Singapore mandate

Discussion on international cooperation in competition policy or the

establishment of an international competition regime is not new. It dates back to
the Havana Charter of the unsuccessful International Trade Organization in 1948.
There had been sporadic attempts to revive the issue thereafter, but they proved to
be politically unpopular. In the 1970s, the major issue was containing
anti-competitive activities of dominant multinationals, especially in the developing
world (Yoon, 2000:149). UNCTAD has done important work in this regard,
producing the United Nations Set of Principles and Rules on Competition Policy2 in
1980 (see UNCTAD, 1980). However, these rules constitute only non-binding
recommendations.

Since then, greater attention has been focused on competition issues

directly related to international trade, namely, market access. This issue was also
seriously discussed in OECD, and constituted a prelude to WTO discussions on
competition policy, although developing countries considered UNCTAD to be the
more appropriate international forum to discuss competition policy issues. The
main thrust behind the WTO initiative was based on the belief of some participants
that, despite trade liberalization achieved through GATT/WTO, domestic policies
such as competition policy could act as non-tariff barriers to trade. High profile
cases such as the Kodak-Fuji film case3 reinforced this belief.

Nevertheless, competition policy issues are not only about market access.
Increased trade liberalization and integration of the global economy necessitates
international coordination and cooperation. More and more firms are currently
involved in international operations, making it more likely that trade conflict could
arise from incongruent competition laws and policies that are nationally based.

1 This paper has been prepared by Mikyung Yun, Korea Institute for International Economic

Policy (KIEP), Republic of Korea. The views expressed in the paper are those of the author and do
not necessarily reflect the views of the Government of the Republic of Korea.
2 They are reviewed every five years. The title “Set of Multilaterally Agreed Principles and

Rules for the Control of Restrictive Business Practices” was simplified to “United Nations Set of
Principles and Rules on Competition” during the fourth review in July 2000.
3 See the WTO Panel Report of 1996 for more information on this case.
122 Regional Perspectives on the WTO Agenda: Concerns and common Interests

There is a genuine and sincere belief that strengthening of domestic anti-trust

policies and developing mutual trust through some common understanding of
competition issues would promote greater world trade through the resolution of
trade conflicts, the curbing of anti-competitive practices by large multinational
corporations (MNCs) and international cartels, with which it is difficult for a single
country to deal, the enhancement of and enhancing development as well as the
long-term competitiveness of firms.

These multiple motives thus formed the background to the Singapore

Declaration in 1997, which established the Working Group on Interaction between
Trade and Competition Policy, and gave it a two-year mandate to explore the issue,
with a view to possibly negotiating an agreement. The work of the Group was to be
educational in nature. Its mandate covered a broad range of issues, including the
impact of competition policy on trade as well as the impact of trade policy on
competition, gathering information on the current status in member countries, and
evaluating alternative modalities of international cooperation. Other important
issues concerned the interface between competition and foreign direct investment
and intellectual property rights, the use of exemption provisions, the effects on
development, and consistency with other competition-related provisions elsewhere
in the WTO agreements. Recent discussions concentrated on the application of
WTO principles such as national treatment, non-discrimination and transparency.

2. Discussions of the Working Group

(a) Progress in the Working Group discussions

While all the topics listed above were discussed at length during the two
years of the Working Group’s mandate, anti-dumping issues dominated the
discussion. For some members, for example, Hong Kong, China; Japan; and the
Republic of Korea, considering only the impact of competition policy on trade was
not enough. They felt that the trade policies allowed under the WTO provisions,
where the anti-competitive aspect is conspicuous such as in the anti-dumping
agreement, needed to be addressed. However, discussing anti-dumping issues from
the perspective of competition policy was simply not politically acceptable to the
United States of America, which considered it more effective to deal with
competition policies bilaterally. The disagreement regarding anti-dumping became
a major stumbling block against reaching a consensus on establishing an agreement
on competition policy.

Although the sentiment that the whole WTO agreement should be reviewed
from the competition perspective was not totally abandoned, for strategic reasons to
move the discussions forward, the emphasis on anti-dumping was eventually
Trade and competition policy in WTO 123

dropped, especially as discussions in the Anti-dumping Committee itself gained

momentum. Since the Seattle WTO Conference in 2000, discussion has
concentrated on evaluating the advantages and disadvantages of alternative
international cooperation mechanisms, and applying WTO principles to competition
rules. Reflecting the concerns of developing countries forcefully expressed at the
Seattle Ministerial Conference, a great deal of discussion during the last two
meetings in 2001 was also devoted to international cooperation, capacity building,
technical assistance and the impact of competition policy on development.

The most recent development has seen a change in the position of the
United States, which, until the July 2001 meeting of the Working Group, had
remained strongly opposed to a competition agreement. With the insistence on
anti-dumping dropped, the United States has moved towards a more favourable
stance vis-à-vis a competition policy agreement. The United States Trade
Representation (USTR) has recently made public statements that the United States
would cooperate with the EU on the main proponent of a competition agreement. It
also seems that USTR has made this statement in close consultation with the
country’s anti-trust authorities (Zoellick, 2000).4 Informal consultations are
presumably currently continuing, and this change has increased the prospects of
opening negotiations on competition policy. However, developing countries, which
have constituted the other major opposing group, have not yet been convinced.

Developing countries are concerned about the possible adverse

consequences of an international competition rule on domestic industrial policies.
Further, many of the developing country members do not have competition laws
and associated enforcement institutions, or have little experience in putting such
a law into operation. In these cases, it is impossible to assess the full implications
of a competition agreement. In the first instance, developing countries foresee
major costs in overhauling existing domestic legislation or introducing new
legislation and overcoming their lack of expertise to comply with a possible
agreement. Some members also feel that each country has to implement its own
competition policies to fit its specific needs, and a single common international rule
could not replace a domestic competition regime.

(b) The proposed framework agreement

The revised proposal for a competition agreement by the EU has attempted

to address these concerns of developing countries. The EU has called for a flexible
“framework agreement” where members are to be committed to a set of core
4 The USTR statement shows that United States is open to adopting competition policy as a

new agenda and will cooperate with the EU to achieve greater convergence, but does not yet clearly
state that it will support opening negotiations on competition policy.
124 Regional Perspectives on the WTO Agenda: Concerns and common Interests

principles, with a minimum number of rules on substantive elements. The main

elements of an agreement currently being tabled consist of the following:

(i) Members commit themselves to a core principle of setting up

a competition law and enforcing it in some form. The specific ways
to implement competition policy and institutional design are left to
the decision of each member to fit its own specific needs, but the
WTO principle of national treatment, non-discrimination and
transparency will be applied;

(ii) Member countries would cooperate through notification to and

consultation with the countries involved, when necessary, and
support a voluntary exchange of information within the boundaries
set by individual legislation regarding the release of confidential
information;

(iii) The possible agreement will be narrowly focused, and will recognize
the necessity of other social or development policies. Members will
be free to establish exemptions from the competition policy for
particular sectors of concern, as long as these exemptions are
transparent. Small economies could adhere to a regional competition
policy and need not set up their own competition law or enforcement
institutions. The needs of developing countries should be recognized
through commitment to technical assistance, provision of transition
periods and other special and differential treatment;

(iv) In view of the wide discrepancy among national competition laws,

only limited agreement on a substantive rule is sought. Since little
disagreement exists regarding the harmful effects of hard-core cartels
(explicit price fixing), the possible agreement will agree to prohibit
only hard-core cartels;

(v) However, considering the complexities of antitrust decision-making,

neither the core principles nor substantive element on hard-core
cartels would be subject to dispute settlement. Compliance would be
monitored by peer review, using procedures similar to the Trade
Policy Review Mechanism, but exclusively focused on competition
policy.

The proponents of the proposal argue that such a framework agreement

would be flexible enough to incorporate specific needs of a member, including
considerations for development policy. They argue that such an agreement could
facilitate mutual trust, enabling international cooperation not only at the multilateral
Trade and competition policy in WTO 125

level, but also at the bilateral and regional levels. The agreement would also help to
coordinate international cooperation and technical assistance. Further, the
agreement would facilitate the institution of a competition policy among members
that do not yet have one, by incorporating some mandatory elements, and through
technical assistance. The agreement would also benefit small developing countries,
enabling them to combat the anti-competitive activities of powerful multinationals
or international cartels, which adversely affect their economies.

However, many members remain skeptical about the benefits of a possible

competition agreement and are afraid that it may simply be used as a market-opening
tool by developed countries. They believe that it would be difficult to apply
national treatment and non-discrimination principles, as competition policy cases
are so context-specific and may interfere with policies aimed at enabling domestic
firms to compete with multinationals or at providing support to nurture small and
medium enterprises. In addition, the greater efficiency of centralized coordination
of international cooperation under a WTO agreement is not apparent to them.

They argue instead that a similar degree of coordination could be achieved

through bilateral and regional agreements. To convince these members would
require more hard evidence that national competition policies do indeed act as
non-tariff barriers or that trade-related anti-competitive activities are widespread.
Developing countries also want more systematic evidence that a competition
agreement can deliver actual, tangible benefits and not just potential benefits based
on theoretical considerations. Moreover, developing countries argue that special
and differential treatment would need to be spelled out more specifically for
an agreement to be acceptable. A mere transitional period is not enough.

There is, however, increasing acknowledgment that strengthening domestic

competition policy is not always incompatible with development policies,
especially in the event of privatization and deregulation. There is considerable
enthusiasm in seeking technical assistance to set up national competition laws.
Interest has also been expressed in learning about the experience of existing
regional or bilateral FTAs between developed and developing countries. This
acknowledgment is perhaps the only consensus that has emerged from the Working
Group. Whether a multilateral agreement is necessary for strengthening domestic
policies is nevertheless still open to debate, and the impasse between the proponents
and opponents of a possible WTO competition agreement has not yet been resolved,
making implications for the forthcoming 2001 Ministerial Conference very
uncertain.
126 Regional Perspectives on the WTO Agenda: Concerns and common Interests

(c) Implications for anti-dumping, safeguards, subsidies and countervailing

duty provisions

The proposals for an agreement on competition policy so far comprise

an outline of the main elements to be included, and many of the detailed aspects of
a possible agreement remain open to negotiation should members come to
a consensus about opening negotiations. It is evident, however, that any feasible
agreement would not contain in its substantive elements reference to other
provisions of the WTO agreement, such as anti-dumping (the “Anti-dumping
Agreement” and GATT VI), safeguards (the Safeguard Agreement and GATT XIX),
subsidies and countervailing duties (CVDs) (GATT VI, XVI and Agreement on
Subsidies and Countervailing Measures), which are inherently anti-competitive in
some aspects. Of these, the main controversy surrounds anti-dumping, as noted
above. As for subsidies, the safeguard agreement and CVDs, these provisions are
seen as having stringent requirements for use and contain some safeguards against
anti-competitive abuse. For example, the safeguard agreement prohibits voluntary
export restraints and orderly market agreements. In the Working Group
discussions, little complaint has been directed towards the latter three provisions in
the context of competition policy. This particular issue, as a whole, did not receive
much attention during the Working Group meetings.

The primary argument against dealing with these provisions in a possible

competition agreement is that it is impractical to bring together into a single
competition agreement the many provisions relating to competition that are
dispersed throughout a wide range of different WTO agreements. The proper forum
to discuss these issues, it is argued, is in separate agreements and not in a possible
competition agreement.

Therefore, few implications of a possible competition agreement, if any, for

anti-dumping, safeguards, subsidies and CVDs can realistically be envisaged.
However, it is possible that a competition agreement would generally create
an atmosphere and apply peer pressure to view the rest of the WTO provisions from
a competition perspective, and act to encourage more competition-friendly ways of
using these provisions. Such a development would limit the latitude with which
these agreements could be used to protect domestic industries at the cost of
foregone international trade, and leave a basis for future discussions on these
elements. Since anti-dumping and countervailing duties have been the principal
market-protection tool used by developed countries, such a change in atmosphere
should help to improve market access for developing countries.
Trade and competition policy in WTO 127

B. The Experience of the Republic of Korea

1. Evolution of competition law and policy

in the Republic of Korea

Competition law and policy in the Republic of Korea has evolved over two
decades. The Price Stabilization and Fair Trade Act legislated in 1975 was the
country’s first competition law. The main priority of this Act was to stabilize
prices; promoting competition in product markets per se was a secondary objective.
However, the industrial policies of the 1970s resulted in heavy market
concentration, and acknowledging this problem, a general competition law, the
“Monopoly Regulation and Fair Trade Act” (MRFTA) was legislated in 1980. That
Act, modelled after competition laws of Germany and Japan, covers all of the
principal competition policy areas, such as prohibition of monopolies and
monopolistic behaviour, collusion and unfair practices.

The Act was substantially revised in 1986 to strengthen the regulation of

the expansion and exercise of economic power by chaebols (conglomerates). For
example, holding companies were prohibited until recently, and the top-30 large
business groups are designated by the Korean Fair Trade Commission. These
designated groups are subject to special regulations to reduce their economic power.
These regulations include, for example, banning of direct inter-company
shareholding between group members and prevention of finance company members
from voting their shares in other group members. Also, equity investment in other
companies is limited. The problems of the chaebols were seen as wielding market
power from conglomeration and concentration of ownership in economic assets
rather than direct anti-competitive activities in product markets. Therefore, many
aspects of MRFTA to curb the market power of chaebols concern corporate
governance issues rather than what would be normally regarded as competition
problems.

Thus, the nature of competition law and policy in the Republic of Korea
has been shaped greatly by the kind of industrial policy pursued. The promotion of
heavy and chemical industries, which have tended to favour large chaebol firms,
had to be complemented later by competition policy to curb the economic power of
these large market players. For this reason, MRFTA has taken on a more regulatory
character than competition laws in other jurisdictions, and relies heavily on
administrative discretion. The monitoring cost of such a system is presumably
quite high. In certain cases, these MRFTA provisions act as an unnecessary
regulation of legitimate business activities. At the same time, some of these
regulations have become outdated with greater market liberalization and the recent
introduction of legislation to improve corporate governance and transparency. The
128 Regional Perspectives on the WTO Agenda: Concerns and common Interests

Government of the Republic of Korea has recently put efforts into shedding some
of these regulatory characteristics. Currently under intense debate is how to change
key chaebol-related policies contained in the MRFTA, such as investment
limitation and large firm designation for special regulation. Significant reforms in
MRFTA have taken place after 1997, although a great deal more would be
necessary to modernize the Act, given the fast-changing economic environment.

2. Lessons learned and implications for developing countries

of the ESCAP region

The main lessons of the Korean experience seem to be that perhaps it is

beneficial for sustained economic development to introduce competition policies
early in the development process, before monopolistic power takes root. Achieving
economies of scale through competition and market-led consolidation would
enhance competitiveness and would probably be a better means of fostering growth
than protecting certain picked “winners” by prohibiting entry of other firms, which
may well have been potentially more efficient. Further, competition policy does not
stand against achieving economies of scale. Concentration and dominance alone
are no longer regarded as direct evidence of market power in modern-day
competition analysis. Sustained excess profit and abuse of dominance or attempts
to monopolize through explicit anti-competitive activities (for example, market
foreclosure, exclusions, price fixing, and anti-competitive mergers) would be
required for anti-trust actions. Protecting big, but inefficient, firms in order to
achieve economies of scale, and allowing extensive rent-seeking, which is very
likely under such circumstances, are not beneficial to economic development.

Developing countries may also consider a different development paradigm

than the one the Republic of Korea followed. The world’s trading environment has
changed a great deal since the country embarked on industrialization during the
1970s. Not only have the policy tools of Governments become more restricted, but
there is also a general disillusionment with strong industrial policies accompanied
by heavily regulated markets. Consequently, many developing countries have taken
liberalization measures, and privatization is still an actively ongoing process in
many parts of the world, including in developing countries. The strengthening of
competition policy, whether or not required by a WTO agreement, is an essential
follow-up to such structural adjustment programmes. It should also be noted that,
so far, competition policy related trade conflict has erupted mostly among
developed countries rather than between developed and developing countries. The
Kodak-Fuji film case between Japan and the United States and aircraft industry
merger cases5 between the EU and the United States are conspicuous examples.
5 The Boeing-McDonnell Douglas merger of 1997 and, more recently, the Gemrd

Electric-Honeywell attempted merger, early in 2001.

Trade and competition policy in WTO 129

At the same time, there are also new opportunities. New technological
developments support small firms. Economies of scale or concentration thus need
not always be a prerequisite to industrial development. Support for pre-competition
research and development (R&D) collaboration or subsidies (which is still allowed
under current WTO provisions), developing financial markets to finance small
venture firms, and infrastructure development, for example, would probably be a
better strategic development policy option that could better meet the challenges of
current international competition than protecting would-be inefficient monopolies.
To enable this strategy, developing countries must call for greater technology
transfer and specific technical assistance in such infrastructure development as
specific trade-offs against agreeing to a competition agenda in the new round.

C. Possibility and implications of a future round

of negotiations

Given such unreadiness on the part of a majority of WTO members

regarding competition policy, a binding international rule seems to be quite
premature. Further, efforts to incorporate various concerns and flexibility have
rendered the proposed framework agreement to be nothing more than a symbolic
proclamation of competition advocacy, with little substance. As discussed above,
the proposed agreement leaves the ways of implementing competition policy to
individual countries, contains a limited number of substantive elements, which are
in any case not subject to dispute settlement, and cooperation remains voluntary.
These factors would leave the status of such an agreement as one fostered by WTO
somewhat dubious, while not being able to dispel completely the concerns of
developing countries. Moreover, there has been inadequate discussion about how
to make such an agreement consistent with other competition-related provisions in
the rest of the WTO agreement: in case of conflict, it is imperative to provide
certainty about which agreement would take supremacy.

Nevertheless, some of the advantages offersed by such an agreement should

not be totally ignored. Many countries remain vulnerable to bilateral pressures to
strengthen competition policy, and where such pressures exist, given the skewed
balance of power between a developing and a developed country, a multilateral
agreement would work more favourably for developing countries than a bilateral
agreement would. Although a possible agreement would not have strong
enforcement mechanisms, it could set international norms regarding competition
analysis, and facilitate group consensus to act as an effective means of applying
peer pressure, without imposing an unduly onerous burden to comply with rigid
rules. Generally, group consensus tends to be more objective and tolerant than
unilateral actions or bilateral negotiations.
130 Regional Perspectives on the WTO Agenda: Concerns and common Interests

Further, commitment to a mandatory requirement may facilitate

strengthening of domestic competition policies, the merits of which are not denied
by developing countries, and help in overcoming domestic vested interests against
strong competition policies. The experience of the Republic of Korea shows that
“picking the winners” to facilitate rapid industrial development early in the
development process may result in the payment of high costs later; it also shows
that developing countries have other policy options for development. Perhaps the
speed of development would be slower and less spectacular; however, it is possible
that development policies, coupled with strong competition policies early in the
development stages, may promote more stable and sustained development.

Further, a single undertaking may not simply enable trade-offs between

unrelated agreements, but also offer complementarity. For example, the potentially
adverse effects of an investment agreement and the TRIPS Agreement may
be alleviated through a commitment to stronger competition policy by the
international community. Competition policy would be necessary to monitor the
anti-competitive activities of multinationals which currently would have greater
access to developing country markets under the WTO investment regime.
Prohibition of restrictive licensing and other anti-competitive abuse of intellectual
property rights provided for in the TRIPS Agreement would not be sufficient unless
backed by strong anti-trust policies. International competition is increasingly
dependent on technology competition, but continued R&D requires heavy outlays
of expenses and sunken costs, resulting in high levels of concentration.
Competition in the R&D sector must be promoted. It may be encouraging to note
that, in the United States, many compulsory licensing orders are issued under the
competition law rather than intellectal property rights-related laws.

Therefore, a WTO agreement on competition policy has some apparent

advantages for developing countries, as well as for developed countries. The
concerns of developing countries may be further alleviated through more concrete
special and differential treatment than just offering transitional periods and
technical assistance. A possibility may be that developing countries meeting certain
requirements (for example, those dependent on exports of raw materials) be
allowed a specific number of cartels for a given number of years. There could be
concession agreements for particular cartels as there is for particular sectors in
GATS. Most of all, more systematic and reliable empirical studies on the economic
impact of hard-core cartels, the relationship between competition policy and
development or industrial policies, and greater refinement of how WTO principles
could be applied to competition policy are urgently called for.

Allowing sufficient time to see how bilateral and regional agreements work
in developed and developing countries could also be valuable by demonstrating
Trade and competition policy in WTO 131

more tangibly what implications a multilateral agreement might have. Allowing

a convincing duration for the transition period, say 5-10 years, accompanied by
continued functioning of the Working Group (including peer review), with the
proviso of automatic negotiations at the end of the transition period, could also be
a viable option.

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