Where does competition fit in?

Speaking Notes for an Address by Patricia Smith
Deputy Director of Investigation and Research,
Economics and International Affairs Branch
Competition Bureau

The 4th annual Canadian Importers Association Conference
Toronto, Ontario

September 25, 1997

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Introduction

I will concentrate my talk today on global efforts to determine how competition fits in with trade policy. I will start with an overview of competition law in Canada and its interface with international trade liberalization. I will then outline efforts underway at the WTO to study the similarities and differences in the two disciplines, to see if they can be more fully integrated. One element of this discussion will be trade remedies.

There has been a fundamental shift in economic philosophy over the past decade, away from the government interventionist approach which prevailed in the past and towards a new vision of an economy in which competitive forces are the key factor shaping this global economy. There are two manifestations of this trend towards greater emphasis on competitive market forces. At the international level, successive rounds of multilateral trade liberalization efforts have opened new doors and offered increased market access worldwide. As well, multilateral efforts have been supplemented by regional and bilateral agreements, such as NAFTA and the Canada-Chile agreement.

Liberalization on the international front has been reinforced domestically by an increasing trend toward privatization and deregulation in most countries of the world. National governments are increasingly aware of the adverse effects inefficient regulation can have on productivity growth and economic performance. Regulatory reform has been undertaken by numerous countries to sharpen competitive pressure, thereby encouraging firms to become more efficient, innovative and competitive.

The increased acceptance of the market-based model of economic development has meant more countries have either implemented, or strengthened, competition laws.

The Objectives of Canadian Competition Policy;

Canadian competition policy focuses on the goals of protecting and preserving competition and promoting economic efficiency. The concept of economic efficiency as an objective of competition policy in Canada and elsewhere has further evolved to encompass the goal of international competitiveness. Increased efficiency is now widely acknowledged as the key to improved Canadian performance in world markets. At the same time, it has been noted that foreign competition via imports can play a key role in limiting the potential for abuse of market power in the domestic economy.

The Competition Act

Canada's competition law is set out in the Competition Act . The Act is a framework law which establishes basic rules for the conduct of business in Canada, with both criminal and non-criminal provisions.

The purpose clause of the Act summarizes the objectives of competition law in Canada. Specifically, its intent is to maintain and encourage competition in Canada, in support of four specific objectives: (1) to promote the efficiency and adaptability of the Canadian economy; (2) to expand opportunities for Canadian participation in world markets (while at the same time recognizing the role of foreign competition in Canada); (3) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy; and (4) to provide consumers with competitive prices and product choices.

The Act applies to practically all sectors of the economy. Activities specifically exempted include collective bargaining and amateur sport, those subject to Crown immunity and those that fall within the so-called regulated conduct defence in the jurisprudence. The rules under the Act differ fundamentally from direct economic regulation by a board or tribunal in that they establish a broad framework within which businesses are largely self-governing. A high degree of voluntary compliance with the rules of the Act is relied upon, thereby precluding the need for ongoing monitoring of the behaviour and performance of firms.

The Director of Investigation and Research is an independent law enforcement official responsible for the administration and enforcement of the Act. He is appointed by the Governor in Council. The Director's role is to investigate, not to adjudicate, and he is empowered to conduct investigations with respect to both criminal and civil provisions of the Act. Evidence of criminal matters is referred to the Attorney General of Canada for possible prosecution in the criminal courts. With regard to civil matters, the Director may apply to the Competition Tribunal for remedial orders designed to preserve or restore competition.

It would be useful to outline three specific sections of the Act which are relevant to your discussions.

Predatory Pricing

Section 50(1)(b) of the Act makes it a criminal offence to engage in a policy of selling products at prices unreasonably low that have the effect or tendency of substantially lessening competition or eliminating a competitor, or are designed to have that effect.

There is a fine line between predatory pricing and vigorous, but healthy price competition, and little jurisprudence to guide the business community. In order to remove any chilling effect that the existence of the provision may have on vigorous price competition, the Director published the Predatory Pricing Enforcement Guidelines. Under the guidelines, rather than focusing initially on whether the alleged predator's prices are below cost, emphasis is placed on the likelihood of the firm being able to recoup its losses in a later period. This involves an analysis of market power, the ability of the alleged predator to profitably maintain prices above the level that would prevail in competitive conditions.

According to the guidelines, prices at or above average total cost ("ATC") will not be regarded as unreasonably low under any circumstances. Prices below average variable cost ("AVC") are likely to be regarded as unreasonably low in the absence of a clear justification, such as the need to sell off perishable or obsolete inventory. Prices in the "gray range" between ATC and AVC call for an examination of the surrounding circumstances, including demand conditions, excess capacity, whether the firm in question was loss minimizing and evidence of competitive intent.

Predatory pricing activity may also be addressed under the abuse of dominance provision, section 79.

Price Discrimination

The price discrimination provision of the Act, like the predatory pricing provision, was introduced in 1935 as a result of the report of the Royal Commission on Price Spreads, which was of the view that unfair price discrimination promoted the survival of the powerful rather than of the efficient. Under section 50(1) of the Act, the seller must not only knowingly discriminate between competitors in the purchase of an article, but must engage in a practice of discriminating.

Price Discrimination Enforcement Guidelines published in 1992 describe the enforcement policy. The Director observed in the preface to the Guidelines that a primary reason for their publication is to ensure that business persons do not, because of uncertainty about the application of the law, "refrain to some extent from engaging in forms of pricing behaviour which would be healthy and beneficial for the markets involved".

Assessments under section 50(1)(a) essentially involve a retrospective examination of the selling conditions which were at play at the time competing purchasers were engaged in dealing or negotiating with a common seller to acquire articles from the seller. Price discrimination does not require the Director to show the extent to which competition is lessened in the markets involved.

The crux of reviewing a matter under the guidelines will often involve determining what prices (including concessions) were "available" to the allegedly disadvantaged competitor at the time of the sale in question to the allegedly favoured purchaser. If the same prices were available to both purchasers but not acted upon by one, the fact that a purchaser paid higher prices should not raise a question under the section, even if all of the other elements of the provisions were satisfied.

Abuse of Dominance

The abuse of dominance provision, section 79, is one of the key elements of the Act. For the provision to apply, one or more persons must substantially control a class of business throughout Canada, and have engaged in, or currently be engaging in, a practice of anti-competitive acts that has the effect of preventing or lessening competition substantially. In these circumstances, the Tribunal may issue an order prohibiting or otherwise remedying the anti-competitive conduct at issue.

However, when considering whether the practice of anti-competitive acts is having or is likely to have the effect of preventing or lessening competition substantially, the Tribunal may consider whether the practice is a result of superior competitive performance. This provision recognizes that consumers benefit when product innovation or improved distribution systems result in one firm out-distancing its rivals in the marketplace. The legislation also provides that the legitimate exercise of intellectual property rights is not an anti-competitive act.

Considerable experience has been developed with respect to the abuse of dominance provision on such issues as market definition, contract exclusivity, allocation of markets, the concept of joint dominance, directed sales and the creation of barriers to product innovation.

Interface with Trade Policy

Trade liberalization and competition policy share broadly similar goals. Both seek to ensure that artificial barriers to the competitive process are removed to the greatest extent possible in order to encourage efficiency in the production and allocation of goods and services. One specific goal -- market access -- represents an important confluence between trade and competition policies.

There is a growing acceptance of the linkage between strong rivalry in the domestic market, supported by vigorous anti-trust enforcement, and the realization of gains from trade liberalization agreements. Domestic competition laws complement trade liberalization agreements by ensuring that the benefits of such agreements are not negated by private restraints to trade. Strong competition in domestic markets also helps to smooth the structural adjustments which are the inevitable result of any trade liberalization accord.

The close relationship between competition policy and international trade is directly reflected in several provisions of the Act. With trade liberalization, Canadian competition authorities are giving greater weight to the ability of imports, and possible entry by foreign investors, to discipline the pricing behaviour and other commercial practices of merging parties after transactions, and of companies which allegedly are part of a domestic cartel. This methodological approach is captured in the merger provisions of the Act, which list the extent of foreign competition as a separate factor to be assessed after the relevant market and market concentration have been determined.

Since the early 1980's, the Director has intervened as a party in several cases before the Canadian International Trade Tribunal and its predecessors to address questions of material injury and public interest. These interventions have involved the following industries: sugar, cars from Korea, fiberglass pipe insulation, beer, footwear, surgical tapes and home canning materials.

The Competition Bureau is also playing an important role in the reform of anti-dumping and countervail policy in Canada. Most recently, the Competition Bureau made a number of submissions and an appearance before a special House of Commons' Committee examining the Special Import Measures Act. The Committees' Report and, most recently, the government's response to the Report, adopted a significant number of the Bureau's proposals.

Competition policy has also made an appearance in various regional agreements. In the North American Free Trade Agreement (NAFTA) there is an explicit inclusion of competition law; Chapter 15 reflects a commitment in principle to maintain and enforce national competition laws and to promote effective competition law enforcement in the North American free trade area. In the Canada-Chile Free Trade Agreement, the parties agreed to mirror the language of NAFTA on competition. It is particularly noteworthy that the parties also agreed to the mutual elimination of anti-dumping duties within six years.

And in December 1996, governments agreed to "establish a WTO working group to study issues raised by Members relating to the interaction between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration". The decision to form a working party to study these issues and make recommendations at a future date reflected the lack of consensus as to what action, if any, was needed. But at the same time indicated that the issue was important.

Although traditionally directed to addressing economic activity within national borders, competition policy plays an increasingly important role in the international trading system. Domestic competition laws complement trade liberalization agreements by ensuring that the benefits of such agreements are realized and not negated by private restraints to trade -- international cartels, abuses of a dominant position or anti-competitive mergers. Strong competition in domestic markets also helps to smooth the structural adjustments that arise from trade liberalization. It is, therefore, critical to the success of trade liberalization and effective market access that anti-competitive practices be checked through effective competition policies.

Why is the Trade and Competition Relationship Important?

The interest in the subject of trade and competition policy stems from at least four factors:

First, as formal barriers, notably border measures such as tariffs, are reduced or eliminated, there is a risk that private barriers to trade could replace them and negate the benefits of progressive trade liberalization. Certainly the incentive for collusion and similar practices increases as other types of barriers fall.

Second, the distinction between domestic and international markets have become blurred through globalization. So too have the links between trade and competition policies, especially as they apply to business activity in multiple jurisdictions. For example, corporate mergers increasingly have to be approved by more than one competition authority and hence investment and subsequently trade flows are affected by competition rules in several jurisdictions.

Third, governments are increasingly concerned with the adverse impact inappropriate or inefficient regulations have on economic performance. Regulatory reform, including deregulation, and privatization expands trade and investment opportunities and fosters a more productive economy. It also opens up the domestic market to more vigorous international competition. Enforcement of competition principles is a key element in assuring that private anti-competitive conduct does not replace public conduct in previously regulated sectors and that trade and investment opportunities are not closed off to foreign competition.

Fourth, specific competition policy issues are emerging in a number of areas subject to WTO rules. Examples have arisen in services liberalization (notably the GATS agreement on basic telecommunications) investment measures, and trade remedies. The issue has also surfaced in connection with some recent market access disputes involving rules affecting the distribution and marketing of goods. There is concern that a more strategic approach needs to replace the rather haphazard application of competition principles to trade agreements.

Building an Agenda for the Working Group

Canada, therefore, has been very supportive of a substantive work program that builds on the mandate given the Working Group by Ministers at Singapore. In responding to the WTO's call for contributions, Canada put forward several suggestions as indicative of topics we would like to see covered. These were:

(i) Objectives of competition policy:

- To undertake an assessment of competition policy's contribution to economic growth and development. In this regard we considered that it would be helpful to study key elements of competition law and policy and to analyze the interface of competition policy, market structure and deregulation as applied by Members. What role does trade play in developing effective competition policy?

(ii) Survey of current treatment of competition issues in trade agreements:

- To examine the existing coverage and treatment of competition policy matters in GATT 94 and other WTO agreements, including GATS, TRIPS and TRIMS, and the linkages to the Anti-dumping Agreement. The survey should also broadly include bilateral, regional and plurilateral arrangements/agreements and initiatives. How does the existing framework of international trade agreements deal with competition policy considerations?

- Here it is anticipated that we will look at the Canada-Chile provision on anti-dumping, as well as those in the Australia-New Zealand Agreement. And at how the EU has dealt with trade remedies.

(iii) Relationship with foreign direct investment/intellectual property:

- To analyze the linkages between competition policy and foreign investment. These include globalization and cross-border restrictive business practices, and multi-jurisdictional mergers.

(iv) Market access and market presence:

- To assess the impact of private sector anti-competitive measures, such as international price discrimination, vertical and horizontal restraints, and cartels on markets, producers and consumers. By extension, the group could also assess the impact of government measures and practices such as sectoral exemptions from competition rules.

There was some discussion surrounding the details of the workplan, in particular concerning when and how anti-dumping laws would be examined, but in the end it was basically agreed that it was necessary to examine both the impact of trade policy on competition and the impact of competition on trade policy.

The understanding of both the desirability of a phase-out of anti-dumping measures and the willingness to do so is more advanced in Canada than it is in the United States. Therefore, it should be recognized that an international consensus, and subsequent agreement on this subject, is a long term project. In the interim, we need to ensure that the Canadian regime serves Canadian interests -- including Canadian interests' in competitive markets.

Status Report

During the first meeting in July, the Canadian delegation made it clear that we saw merit in seeking better understanding among WTO members of the relationship between competition policy and trade, the objectives and operation of domestic competition rules, and the means for ensuring effective competition laws and their enforcement.

We supported a targeted WTO work program on the interaction between trade and competition, with the goal of determining the potential use and effectiveness of the WTO framework for addressing competition policy matters.

There was a great deal of consensus around that objective and a five meeting workplan covering 1997 and 1998 was proposed and accepted by delegates.

Much of the early work of the Working Group is aimed at stocktaking of existing instruments and how they impact on economic growth. To a certain extent, we are selling the benefits of an effective competition policy to the third of the WTO members who do not yet have one.

Later work will attempt to analyze the interaction of trade, competition, regulatory policy, investment and intellectual property rights to see if further action is needed by the WTO, post 1998.

The second meeting of the Working Party, held Tuesday and Wednesday of last week, went well, despite some differences between the trade and competition policy communities as to how the work ahead should be approached. This is not surprising, and explains why so much of the early workplan is dedicated to stocktaking.

Although they share broadly similar goals and growing interaction, trade and competition are focused on two different elements: competition on economic efficiencies and trade on cross-border flows. Each describes the problem in different terms and as a result each focuses on different priorities.

Add to this the lack of uniformity among antitrust jurisdictions in terms of: objectives, substantive provisions and enforcement practices, and the differing views regarding extra-territoriality of national statutes.

But WTO has a proven track record. It has been successful in establishing enforceable rules and compliance procedures across a range of issues. Trade negotiations, at least those at the WTO, are cautious undertakings advanced generally by incremental strategies; it has been described as a game of inches not yards. But it has made remarkable progress in 50 years. And I believe we need to be patient and allow the process to work.

The Future

In my own view, it is likely that we will end up in negotiations at the WTO. I do not think we will be negotiating an international competition code or establishing an international antitrust authority, which would have the power to substitute itself for a national competition authority or enforce its orders through each member's courts.

Rather, we will probably be negotiating a set of minimum standards that would be necessary for each member to implement in their own jurisdictions. For example, as a minimum we might want to see that every WTO member had a competition law with provisions dealing with anti-competitive cartels, mergers and abuse of a dominant position, and that in addition each member state had an independent competition authority and an appeal process.

Once established, each WTO member would implement and enforce these minimum principles based on their own particular system.

These rules would be backed by the existing WTO dispute resolution machinery. If a member state did not meet the minimum standards, it would be required to amend its laws.

How will trade remedies 'fit in'? I am, sadly, unable to predict. It is still too early. But I believe we have put in place a good process that will result in a detailed discussion of competition principles and trade principles. We can only hope that reason prevails.