Leading  Issues Journal  

Trade and Cooperation with the EU in the new Millennium

By Professor Allan Fels, Chairman, Australian Competition & Consumer Commission

The increasing degree of economic interaction between countries is generally good for the promotion of competition and the furtherance of the interests of consumers. However, it also gives rise to new forms of anticompetitive behaviour. This paper will discuss the rise of international cartels, the significance of global mergers and their relationship to the state of competition and the current debate about the interaction between trade policy and competition policy. It will discuss international developments with particular reference to European attitudes and interests.

Globalisation

As we all know, the international factor in the economic activities of countries has been increasing greatly in recent decades.

Trade has grown even faster than economic growth in the last 50 years - so also have foreign investment and international capital flows.

In 98/99 the EU was Australia's largest economic partner, with transactions worth A$59.9 bn, representing 21% of all Australian overseas transactions. The EU is the second major investment location for Australian funds invested overseas. By June 1999 it attracted almost A$74 bn or 29% of the total. The EU is second to the US with a 36% share of Australian investment overseas. Conversely, at the end of June 1999, the level of the EU's accumulated investment in Australia was about A$200 bn.

During 1999 exports from Australia to the EU totalled A$10.8 bn with the major commodities including coal, wool, alcoholic beverages, non-monetary gold and iron ore. In the same period imports from the EU to Australia amounted to A$23.1 bn and included medicines, passenger cars, telecommunications equipment, paper and paperboard, and various organic and inorganic compounds.

Clearly such strong investment links achieved over many years bring with them the scope for a durable trading relationship, technology transfers and enhancement of employment in both the domestic and export sectors of the economy. A recent survey identified about 350,000 jobs created by EU companies in Australia.

The causes of increased global trade include:

·     Economic growth itself which both creates ever increasing demand for imports and also increases the capacity of economies to produce exports; it also generates greater amounts of savings which may be invested domestically and internationally to meet the greater investment demands associated with economic growth.

·     Technological innovation. This pervades most fields of economic activity but is especially great in the areas of information and communication technology. A sector particularly affected by technological growth in these areas is the financial services sector which, in turn, facilitates higher degrees of financial and economic interaction between economies in different countries.

·      Falling transport costs.

·      International, as well as domestic, liberalisation of trade, investment and economic activity generally.

Generally speaking, globalisation has positive effects on promoting competition and in widening consumer choice. However, it can be associated, in some cases, with anticompetitive behaviour on an international scale and this can pose problems for national governments which have difficulties in dealing with behaviour taking place in other countries that can affect their own economies.

It is important to note that the European Union has been particularly active in trying to promote a global approach to competition policy and in promoting the inclusion of competition issues in the next round of trade negotiations at the WTO.

Today, I will particularly focus on the areas of international cartels and global mergers, although I shall also mention some other areas where the global dimension to anticompetitive behaviour is relevant.

I would also like to discuss the related debate about the interaction of trade policy and competition policy and some of the policy choices being discussed.

Global Cartels

Global cartels, that is, cartels organised on an international scale, have been in existence since the beginnings of international trade. There is a long history of cartels, in particular, during the nineteenth and early parts of the twentieth century. Indeed, in 1907 an important US Antitrust case sought to end the tobacco cartel which had divided up world markets between British producers, who controlled the UK; US producers, who controlled the US; and the rest of the world, which was divided up and allocated to either British or American producers who agreed not to compete in one another's markets.

However, there appears to have been a sharp increase in the extent of global cartel activity, or at least in its detection, in the past few years. If there has been an increase in the amount of international cartel activity, rather than just an increase in the amount that has been detected, this is probably due to the impact of trade liberalisation. Liberalisation is generally good for competition, but it tends to put pressure on firms that have traditionally dominated particular local markets without much international competition. Facing competition for the first time, some of them tend to get together with producers in other countries to divide up world markets and to agree on prices and output.

The Vitamins Case

The vitamins case is the most spectacular example. Vitamins is an important product supplied to the food processing industry and the animal feed industry. There is also a small amount supplied to consumers directly. Food companies blend raw vitamins into things like bread, rice and juice. The animal feed industry buys huge amounts of bulk vitamins to produce healthier and faster growing livestock. An example would be huge chicken farms.

There is evidence that the cartel increased prices by around 70% during the 1990's. Initially the conspiracy was European inspired. Most of the firms are European and were later joined by the Japanese.

The conspiracy appears to have begun in 1989 when executives at Roche AG, and BASF began holding talks about price fixing. They decided to carve up the vitamin market and to recruit other major vitamin makers to come in on the arrangement, like Rhone-Poulenc of France and Takeda Chemical Industries from Japan. Later, yet further vitamin producers joined the cartel. Nearly all world vitamin producers now face massive fines. Already Roche has paid fines of US $500 million and the total fines already collected exceed US $1 billion in the US alone.

In Australia a proposed settlement has been put before the Federal Court which would see penalties totalling A$26 million imposed upon the companies involved. Judgment has been reserved. In the EU there has been no decision yet and the investigation is continuing.

The cartel appears to have operated in a fairly stable manner for over ten years. There were frequent high level executive meetings. There were very detailed arrangements involved in the administration of the cartel, including careful budgeting, market allocation, price fixing and so on.

Archer Daniels Midlands Case

Another important cartel concerned Archer Daniels Midland which in 1996 paid $100 million to settle US charges about price fixing conspiracies that occurred with European and Japanese to fix the prices of feed additives. Some top executives are now in jail. The Archer case was revealed by Mr Mark E Whitacre, an Archer executive, who secretly tape recorded company executives discussing price fixing with rivals. In fact, he very conveniently was able to arrange for the videoing, as well as recording, of these meetings for a couple of years.

The Archer Daniels Midland's case involved international cooperation between American, Japanese and European firms to fix prices in the worldwide food and feed additives industries.

Global Mergers

In recent times there has been a spectacular increase in the extent of international merger activity, in one sector after another - finance, communications, oil, airlines, pharmaceuticals, automotive professional services and so on.

For the most part, these mergers are not anticompetitive and pose no major challenge to the global economy's major competitiveness. Indeed, in many cases, they enhance competitiveness and improve economic efficiency by creating more efficient arrangements for international business transactions.

However, it is very important that we be vigilant about these matters.

I am often asked whether in Australia, or indeed or in other smaller countries, global mergers pose an economic threat and are we powerless to deal with them.

My answer is, for the most part, the global mergers that we read about every day are not anticompetitive. Most of them are logical commercial developments occurring in response to the forces of globalisation, technological change and liberalisation. For example, many of the financial sector mergers in Europe are a response to the advent of the Euro which is leading to the emergence of a single European financial market. In the United States many of the financial mergers are a response to deregulation of financial markets which had previously prohibited operations on a truly national scale within the United States.

Likewise, telecommunications mergers have a great deal to do with the emergence of a liberalised approach to telecommunications and the breaking down of barriers to international transactions. This is similarly the case with airlines.

Another reason why these mergers do not deeply concern me is that these days in particular, major anticompetitive mergers are likely to be stopped by overseas authorities. In this respect, it is worth noting that the United States, after a rather quiet period in the 1980s, has become far more active in the public enforcement of antitrust law. The European Union is also becoming far more active than in the past. Japan and Korea are also stepping up some of their antitrust activities and I have no doubt that there are other examples. Indeed in some respects the real issue is that some global mergers have to be approved by so many regulators in so many countries that greater cooperation between regulators is required.

....it still remains the case that some mergers that occur internationally can damage competition and will force consumers to pay more in certain countries with particular market structures. Are these countries powerless to act?

My own view is that they are not. I shall take Australia as an example. When Gillette tried to take over Wilkinson Sword in the wet shaving market, the ACCC opposed the merger successfully in the Federal Court of Australia, even though the transaction occurred offshore. As a result of the Federal Court action, divestiture was imposed upon the companies with the selling off of the Wilkinson Sword brands to an independent buyer for ten years.

This case established the jurisdiction of the Trade Practices Act with respect to off shore mergers and showed that strong remedies are possible.

Moreover, when a merger occurs that is anticompetitive, it is often possible to resolve it in a manner that does not damage competition.

BAT / Rothmans

A recent example was the attempt by the British American tobacco company (trading in Australia as WD & HO Wills) to take over Rothmans. In some countries this would not have damaged competition. However, in Australia it was clear that it would. There are only three companies - WD & HO Wills, Rothmans and Philip Morris - and imports are fewer than 1%. The Commission considered that a merger of two of three big players would reduce competition. It opposed the merger. Following this, British American Tobacco and Rothmans decided to release 17% of the total brands of cigarettes on the market and they were acquired by Imperial Tobacco, a major international tobacco organisation which has now entered aided by an initial 17% market share and the introduction of its own well established brands into Australia. Some coincidental changes in tax law will also boost imports. As a result, there remain three strong credible players in the Australian market and the original merger between British American tobacco and Rothmans has been able to go ahead in Australia as well as in other parts of the world.

The point is that very often practical solutions can be found to seemingly difficult problems.

Coca-Cola / Schweppes

Another case we have dealt with has been the Coca-Cola acquisition of Schweppes. This was an interesting merger because the original proposal excluded the USA and France, where there has been a history of competition concerns with soft drink acquisitions, nor in South Africa. Following concerns raised by the EC about the possible anticompetitive effects of the merger in Europe, the deal later excluded all EU Member States, with the exceptions of the UK, Ireland and Greece.

Australia opposed the merger. It noted strong opposition by many outlets that sell Coke. Following that, Coke put two proposals to try and meet our concerns but, in each case, the Commission decided that they could not overcome our concerns. The essential concern of the Commission was the merger of the two sets of brands, ie, Coca-Cola brands and the powerful international brands of Schweppes. The undertakings to which I have referred and which the Commission rejected all failed to address this fundamental concern. They involved concessions about other minor brands and some other arrangements.

BHP / New Zealand Steel

Another interesting solution has occurred in a couple of cases where the Commission had initial concerns. When BHP, Australia's major steel company, wanted to take over New Zealand Steel, the Commission believed that there could be some anticompetitive effects in certain parts of the steel market, even though international trade would take care of many problems. However, when the Commission objected a practical solution was found. The Government agreed to reduce tariffs on an accelerated basis in relation to those parts of the market where there could have been an anticompetitive effect.

Accordingly, it is my provisional view that many of the problems for competition created by global mergers can be met by appropriate action in domestic markets.

Market Power

It is not my intention to pursue today issues about market power occurring on a global basis, other than to make one point about the Microsoft case in the United States.

In November 1999 the United States District Court found that Microsoft possessed monopoly power in the markets for Intel-compatible PC operating systems and browsers, and that it used this power to thwart competition in contravention of US anti-trust law, which resulted in substantial consumer detriment. On 6 June 2000 the Court ruled that Microsoft should be split into two distinct entities.

The point I want to make about this case is that it is essentially about anti-competition arrangements in the United States that have a global effect. Moreover, the Microsoft case illustrates the importance of applying antitrust law to areas of the economy which are characterised by high rates of technological innovation.

Questions about Microsoft are still under consideration in Europe.

Conclusion

The efforts and persistence by the European Commission in exploring other, more wide ranging and more ambitious, mechanisms for achieving greater competition at the global level and promoting fair and efficient international trade, are to be commended. I think it is fair to say that the EC are leading the drive to find practical solutions to global problems.

Competition Policy within Europe - some trends

Regarding competition policy within the European Union, several general comments can be made:

1.    Competition policy is of even greater importance than in the past in the European Union. This appears to be generally recognised and to be the subject of greater activity within the Commission and on the whole in member States.

2.    One reason for this is that with a relatively good macroeconomic climate, the introduction of the euro, and the development of the internal European market, competition policy becomes a higher priority than in the past.

3.    Competition policy is not just about the application of competition law to anticompetitive practices of business. Australia's Hilmer reforms recognise this with their emphasis on reviewing and reforming legislation that restricts competition and on dealing with a range of important matters that limit competition in such areas as the energy, communications (including telecommunications), transport and water areas where market power is typically very large, being based on the crucial role of network monopolies based on electricity grids, gas pipelines, telecommunications networks and the like. These matters are important in Europe and, as in Australia, involve difficult federal relationships between the European Union and member States. This is one area in which Australia's recent experience in applying a broader based competition law is of relevance to Europe which is generally at a less advanced stage in its dealing with these issues.

4.   The "modernisation" of European competition law has an important role to play in making competition policy more effective. Elements of modernisation include:

5.   a fresh approach to vertical trade restraints since the present approach involves a high and somewhat unproductive work burden on the competition Directorate, not to mention business and the legal community;

·     greater delegation of case work to national competition agencies, taking into account, inter alia, the lack of adequate resources for the Competition Directorate;

·      in light of (a) and (b), an attempt to give higher priority to core competition issues, especially including international cartels and global mergers.

There appears to have been a considerable increase in the volume and intensity of the application of European competition law by the Directorate of Competition with a high number of cases, some high fines, a higher rate of merger rejection, and an expanded view of the scope of the dominance test. This has been reinforced by greater competition law activity at member State level.