International Harmonization and Enforcement Cooperation: the Canadian Experience

George N. Addy
Director of Investigation and Research
Bureau of Competition Policy

Background Paper Submitted for the
Symposium on International Harmonization of Competition Laws
Taipei, Taiwan

March 11-14, 1994

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Introduction

This document is provided as a background paper for the Taipei Conference on International Harmonization of Competition Laws. The two objectives of the paper are to set out the rationale for, and the merits of, international harmonization of competition laws, policies and, practices and to provide a brief description of Canada's experience in the areas of antitrust cooperation with other jurisdictions.

Plan of the Paper

Section I lays out the rationale for harmonization of competition policy rules while Section II identifies and discusses some of the more obvious benefits and costs of international harmonization. Section III recounts Canada's experience with respect to international cooperation in antitrust matters and describes some of the international agreements and arrangements to which Canada is a party. Finally, Section IVpresents some concluding remarks.

I Rationale for Harmonization of Competition Law and Practices

By definition, the process of globalization has accelerated the integration of economies, substantially increasing the level of cross-border trade, investment and the exchange of technology. As a consequence, industry is continually being challenged to address new market demands and opportunities. A significant amount of this global restructuring has taken place through various forms of inter-firm alliance. These alliances have been formed to achieve a variety of goals, for example, some have been formed to facilitate technological synergy or to share product-development costs and risks. Others have been formed simply to facilitate access to one another's markets. Alliances may take the form of informal agreements or, at the other extreme, may involve the full integration or merging of the firms involved. While the market may dictate a certain degree of restructuring, it is important for antitrust authorities throughout the global marketplace to ensure that inter-firm al liances do not significantly pre-empt competition, either directly, or as facilitating devices. This requires more cooperation between the antitrust authorities of trading nations.

Given that anti-competitive behavior can be expected to take place across jurisdictions with increasing frequency, the challenge to antitrust enforcement in a global marketplace will be to secure greater enforcement cooperation and harmonization of competition policy.

a) Harmonization

Greater harmonization makes sense from the business perspective as well. Global markets require that firms operate in a number of jurisdictions. The uncertainty created by variations in the approach taken by different antitrust authorities can impose significant costs on these firms. A set of consistent rules regarding business conduct, made as transparent as possible, should be one of the direct benefits of any efforts made to harmonize antitrust laws.

What is meant by harmonization in the context of competition law? From our perspective, it does not imply identical rules across jurisdictions, but simply denotes a greeter convergence and coherence of underlying principles, statutory rules, enforcement practices and analytical methods across jurisdictions. The aim of harmonization should be to promote a level of compatibility among the basic objectives and rules associated with competition, under which domestic and foreign business enterprises will operate, without compromising a nation's fundamental right to regulate conduct in its own territory.

Harmonization should be achievable given the fact that competition policy is premised on a general acceptance of the free-market system and the need for competition as a means of promoting society's welfare. While the basic tenets of each nation's competition policy are generally the same, there are some differences in the enforcement approach taken in areas such as the treatment of vertical restraints, mergers and monopolies. However, our recent involvement in the Organization of Economic Cooperation and Development (OECD) convergence process indicates that the policy differences which do exist between jurisdictions are more the exception than the rule.

There are some good examples of the diverging approaches to otherwise similar antitrust policies. Take for example the approach of Canada and the United States with respect to efficiencies which result from a merger. Both nations have long recognized that a merger may allow for the exploitation of certain welfare enhancing efficiencies which, to some degree, offset the anti-competitive effects of the merger. Only Canada has codified this issue by including it in the statute. Furthermore, in Canada, these welfare effects are deemed to be important regardless of whether or not they are passed on to consumers. (The Canadian approach is generally referred to as a "total welfare approach".) In the United States, only those efficiencies which are passed on to consumers are factored into the analysis of the merger.

b) Cooperation

The increasing frequency of transborder mergers has created a strong need for greater international cooperation between antitrust authorities. These mergers must typically be examined by more than one country's antitrust authorities. This creates significant costs to firms who want to restructure, but must seek the approval of a number of different antitrust authorities. Each enforcement agency requires a sufficient amount of information about the transaction to reach a decision. in instances where customers, suppliers and competitors of the merging companies reside in different jurisdictions, the difficulties associated with data collection can be minimized through greater cooperation between antitrust authorities. This would most certainly assist the business community by providing for a quicker review process by cooperating agencies.

Cooperation between agencies will not , however, completely eliminate the costs to firms wishing to merge companies that span a number of jurisdictions. There are also number of variations in the review process of each antitrust authority which, if harmonized, could significantly reduce the burden placed on firms. For example, an American Bar Association report (Report of the Special Committee on International Antitrust, Section of Antitrust Law, American Bar Association, October 1991) surveyed eleven jurisdictions (the United States, Canada, Australia, Japan, the European Community, the United Kingdom, France, Germany, Italy, Spain and Ireland) and found wide divergence in their merger procedures:

• In respect of notification requirements, seven of the jurisdictions make such notifications compulsory, while in the other four, it is voluntary;
• the notification thresholds vary greatly between the seven jurisdictions;
• the time limit for initial decision varies from 20 working days (United Kingdom) to two months (France);
• the criteria for decision varies widely;
• confidentiality ranged from being discretionary to being assured; and,
• penalties for the failure to notify were not uniform.

Other problems have arisen in the past relating to concurrent jurisdiction with respect to the application of antitrust laws. This was frequently the case with regard to trans-border mergers, particularly in cases where the merger may not have raised competition concerns in one jurisdiction, but was considered as potentially anti-competitive in another. For example, in 1991, the proposed acquisition of the Canadian aircraft manufacturer, de Havilland, by a consortium of France's Aerospatiale and Italy's Alenia, was not challenged under Canadian law because it was concluded, in consideration of the fact that de Havilland was a failing firm, that the merger would not lead to a substantial lessening of competition. (When the impact of a merger is assessed under the Competition Act, consideration is given, among other factors, to whether the acquired company is a failing firm.)

The transaction, however, did not proceed because of the European Commission's adverse ruling on grounds of unacceptably high market share in the Community. Other examples of such divergent views are furnished by cases such as British Telecom United Kingdom)/Mitel (Canada), Elders (Australia)/Allied-Lyons (United Kingdom), Deere (United States)/Versatile (Canada).

The de Havilland and the earlier uranium antitrust cases also brought into focus another dilemma for antitrust authorities emanating directly from a lack of harmonization. Both the United States and the European Community have demonstrated their willingness to apply their competition laws in a cross-jurisdictional manner, based on the "effects" doctrine. This approach involves the unilateral assertion of jurisdiction by a country when anti-competitive conduct outside the country was deemed to have "effects" on the market(s) of that country. A number of United States court cases have also pointed to the assertion of jurisdiction where companies located in other countries were deemed to be "American" on the basis of their ownership or control by United States nationals. This "effects" doctrine, when acted upon, can introduce an element of extra territoriality over the application of antitrust law. The impact of this can be to seriously undermine the goodwill and cooperativ e spirit that are required to effectively enforce antitrust laws on an international scale. In situations where nations see fit to seek some action on the basis of an "effects" doctrine, some pre-determined understanding (unilateral or multilateral in nature) between antitrust authorities may serve to alleviate some potential problems.

The divergences are just as significant in many other aspects of antitrust enforcement. For example, in the case of horizontal agreements, it is almost universally accepted that agreements between competitors to fix prices, restrict output or allocate markets are anti-competitive, and as such, should be subject to prohibition. (One encounters per se prohibition in the United States, modified rule of reason approach in Canada, and prohibition with exemptions in the European Community.) However, there is no clear consensus on whether these activities should be treated as criminal offences per se, or examined on a broader analytical basis through some form of rule of reason. In addition, while cartels are generally prohibited, some jurisdictions offer special treatment to recession, crisis or rationalization cartels, and virtually all jurisdictions provide an exemption to export agreements.

The recognition of the need for harmonization/convergence of antitrust laws has led the Competition Law and Policy Committee (CLP) of the OECD to initiate a study on merger process convergence. The Committee has also established a Convergence Steering Group to examine the feasibility and desirability of international harmonization of competition law, policy and practices, and to explore ways and means to further such harmonization where required to enhance international enforcement and cooperation.

Harmonization of competition policy and enforcement practices also makes sense from a trade perspective. Many trade policy experts have expressed growing concerns that the lack of competition policy rules, or differences in their enforcement, act as an impediment to market access through international trade. (For example, see the writings and presentation of Geza Feketuty, Senior Advisor to the United States Trade Representative and the Chairman of the OECD Trade Committee.) It has been argued, for example, that lax antitrust enforcement against Japanese keiretsu is a major reason why U.S. and other exporters cannot penetrate Japanese markets. Whether or not these concerns have any basis, it provides an example of an area where greater convergence of antitrust rules and practices could minimize such concerns.

Moreover, the appropriate application of competition policy that is transparent and coherent could further enhance the commercial interests of countries such as Canada by reducing the incidence of strategic dumping in the global economy. Strategic dumping is often motivated by a monopolizing intent. This involves subsidizing exports through higher domestic prices sustained by dominant market positions/collusive price behavior and a protected domestic market. Traditionally, Canada, like other countries, has attacked strategic and other forms of dumping through anti-dumping actions which raise prices for Canadian consumers and other industries and give us no relief in third country markets. The effective application of competition policy in the exporting country, through combating the dominant positions, could become the preferred route for countries in the 1990s.

Finally coherent antitrust treatment of intellectual property rights, licensing agreements, and strategic alliances in high technology industries could preserve and enhance access to foreign technologies for such countries. A harmonized set of rules would make it unlikely that a pro-efficiency inter-firm agreement under one country's law would face a private antitrust "harassment" suit in another jurisdiction. (Including a specialization agreement as defined under Canadian law.) This could be particularly relevant for technology-intensive small and medium-sized enterprises.

II. International Cooperation in Antitrust Matters - The Canadian Experience

Historically the motive behind improving international antitrust relations has been to minimize the friction resulting from the extraterritorial impact of antitrust enforcement. It is for this reason that existing agreements, bilateral and multilateral, generally assist in ensuring proper and timely notification and consultation between governments when antitrust enforcement by one might have an impact on the economic interests of another.

II.1. Bilateral & Regional Cooperation

Canada's most active bilateral dealings have been, and continue to be, with the United States. These dealings began only a few years after antitrust laws were first enacted in Canada (1889) and the United States (1890). They involved a Canadian inquiry into alleged cartel behavior in newsprint which took place in April, 1901. This international cooperation resulted in exposing a cartel on both sides of the Canada-United States border.

More recently, a formal consultative antitrust procedure was enacted between Canada and the United States in 1959. It is known informally as the Fulton-Rogers Agreement and formally as the Joint Statement Concerning Cooperation in Antitrust Matters. The current successor to this arrangement, the Memorandum of Understanding as to Notification, Consultation and Cooperation (MOU) with respect to the Application of National Antitrust Law was signed in 1984. The MOU is clearly broader in scope and was designed to moderate conflicts between the authorities of the two countries and to foster closer cooperation between them. Under the MOU, each party is required to notify the other whenever antitrust investigations or proceedings, or actions related thereto, (a) affect, or could affect, the national interests of the other party, or (b) necessitate a search for information in the other country.

With respect to criminal provisions of the two countries' laws, a Mutual Legal Assistance Treaty (MLAT) also has been in place since 1990. The MLAT allows the enforcement authorities of either country to invoke the assistance of compulsory process -- such as, search warrants, grand juries, etc. in the other country in order to obtain evidence of criminal offenses, including antitrust violations. The Canada-United States MLAT is becoming an effective instrument of cooperative assistance for many types of criminal investigations, including violations of competition law. In the first few opportunities for the utilization of the MLAT, the treaty has proven to be very valuable for both Canada and the United States, and this is likely to continue as the two economies become progressively more integrated. The treaty has made it possible for each country to locate and obtain evidence in the other country. Finally, there is also an Extradition Treaty under wh ich the two countries provide criminal enforcement assistance to each other via extradition of the accused.

These instruments of bilateral cooperation are reinforced by regular contacts and meetings between officials of the antitrust agencies in the two countries. Typically, the heads of agencies and other senior officials meet once or twice a year to review the state of bilateral cooperation in enforcement maters and to apprise each other of new developments and cases. Such bilateral meetings are also held with officials from the antitrust authorities of other major jurisdictions.

Bilateral cooperation agreements have become fairly common instruments of enforcement cooperation between jurisdictions. For example, in addition to its bilateral agreements with Canada, the United States has also signed such agreements with Germany, Australia and the European Community. The United States-European Community agreement (Agreement Between The Government of the United States of America and the Commission of the European Communities Regarding the Application of Their Competition Laws, September 23, 1991) has the twin themes of avoidance or minimization of conflicts and enforcement cooperation as its stated goats, and includes provisions for notification, information sharing and comity. Australia and New Zealand, and Germany and France have also signed agreements on bilateral enforcement cooperation.

In a regional context, the North American Free Trade Agreement (NAFTA) contains provisions for competition law. The Agreement has a chapter on competition law, monopolies and state enterprises (chapter 15) which states under Article 1501 that:

Each Party shall adopt or maintain measures to proscribe anti-competitive business conduct and take appropriate action with respect thereto, recognizing that such measures will enhance the fulfillment of the objectives of this Agreement. To this end the Parties shall consult from time to time about the effectiveness of measures undertaken by each Party.

Each Party recognizes the importance of cooperation and coordination among their authorities to further effective competition law enforcement in the free trade area. The Parties shall cooperate on issues of competition law enforcement policy, including mutual legal assistance, notification, consultation and exchange of information relating to the enforcement of competition laws and policies in the free trade area.

No Party may have recourse to dispute settlement under this Agreement for any matter regarding this Article.

In addition, Article 1504 of the Agreement establishes a Working Group on Trade and Competition, to report and make recommendations on further work as appropriate, to the three member countries within five years after the date of entry into force of the Agreement on relevant issues concerning the relationship between trade and competition laws and policies in the NAFTA area.

II.2. Multilateral Cooperation

Following the United Nations Conference on Trade and Employment, held in Havana between November 1947 to March1948, the Havana Charter called for the creation of an International Trade Organization (ITO). This was the forerunner of the General Agreement on Tariff: and Trade (GATI). The United States had proposed that the ITO could, among other functions, deal with restrictions imposed by private combines and cartels. The United States proposal argued that:

Goods can surmount a tariff if they pay the duty; they can enter despite a quota if they are within it. But when a private agreement divides the markets of the world among the members of a cartel, none of those goods can move between the zones (...) if trade is to increase as a result of the lightening of government restrictions, the governments concerned must make sure that it is not restrained by private combinations. (Jackson, John H., "World Trade and the Law of GATT", The Michie Company, Charlottesville, Va., 1969, p. 522.)

The Havana Charter contained a chapter with nine articles on the problems of restrictive business practices but these were not included in the GATT. However, in more recent times, there is renewed interest among many nations in bringing competition law, policy and practices back into the fold of multilateral discussion at the GATT, the intent being to ensure that the goals of trade liberalization, as promoted by the successive GATI' Rounds, should not be thwarted by private restrictions. if and when this occurs, the urgency of developing a more harmonized set of rules and for forging greater inter-jurisdictional cooperation could once again be highlighted.

Inter-jurisdictional coordination began in 1953 when Canada, the United States, and other countries, through the UN Economic and Social Council, drafted an agreement which envisaged the formation of an international coordinating organization which would receive, investigate and recommend remedial action relating to complaints about restrictive business practices (RBPs) in international trade which restrain competition, limit market access and foster monopoly power. Five years later, GATT set up a committee to study RBPs in international trade and how they ought to be dealt with. What limited the extent of international coordination of competition policy rules at that time were the great differences among national policies. As a result, it was impossible to go beyond simple recommendations.

In 1959, the OECD adopted a policy calling for "the collecting and distributing of information relating to the legislation concerning restrictive business practices". This led to the emergence of the OECD Competition Law and Policy Committee in 1961. It is this committee that has been stressing the need for and promoting the cause of harmonization. As noted earlier, the CLP Committee's Convergence Steering Group is exploring the potential for greater harmonization in competition policies, statutes and procedures among OECD member states. The Group is currently preparing for the CLP Committee a report on recent harmonization trends and the medium-term work program needed to promote greater harmonization in the future. After approval by the CLP Committee, this report will be forwarded to the OECD Ministers for review and approval at the June 1994 Ministerial.

The OECD members have developed and updated successive (1967, 1973, 1979 and 1986) recommendations regarding cooperation on restrictive business practices (RBPs). The 1986 recommendation sets out procedures for notifications, the exchange of information and the coordination of action when antitrust enforcement activities have significant cross-border spillovers. The adherence to the 1986 Recommendations by the OECD member countries has contributed significantly to the reduction of friction, the advancement of cooperative efforts and the trend towards more similar and compatible competition laws. This trend has been referred to as "soft" harmonization, whereby harmonization occurs not through international agreements (like the Treaty of Rome) but rather through the informal process of information sharing and discussion at fora likethe OECD.

A similarprocess of mutual learning hastaken place atthe United Nations. Following a Resolution adopted in 1974 by the Economic and Social Council of the United Nations, what is now known as the Intergovernmental Group of Experts on Restrictive Business Practices has evolved as part of the United Nations Conference on Trade and Development (UNCTAD). As well, the profound changes in Eastern Europe, the countries of the former Soviet Union, as well as in many developing countries have led to a rebirth of interest by many countries in the development of modern competition law and policy. This renewed interest has led to the enactment or substantial modification of competition laws in such jurisdictions as the Czech Republic, the Slovak Republic, Poland, Taiwan, India, Mexico and Venezuela.

The need for greater harmonization of competition policy is also likely to come up m the context of the Asia Pacific Economic Cooperation (APEC) - the newly-emerging regional trade body encompassing the dynamic economies of the Pacific Rim countries as well as North America, Australia and New Zealand. The APEC Ministerial meeting of 1992 created an Eminent Persons' Group (EPO) whose recommendations, made in November 1993, included the promotion of greater convergence of competition policies. The EPG also noted the increasingly important role that competition plays in the interactions between APEC economies, and stressed the need for enhanced cooperation between these countries on major economic matters, including competition policy.

Other examples of practical cooperation and efforts at developing harmonized competition rules can be found in the General Agreement on Trade in Services (GATS) and the Energy Charter. Inboth of these multilateral agreements, broad competition policy principles that areconsistent across jurisdictions arebeing incorporated to deal with monopolies and exclusive supply arrangements.

IV. Conclusion

This paper has described the factors that are accelerating the movement towards harmonized competition laws, policies and practices, and enhanced international cooperation between antitrust authorities. As global economic interdependence increases, the benefits of such harmonization and international cooperation are being emphasized more and more by competition policy specialists as well as by the trade and other policy communities.

Globalization, the increasing internationalization of national economies, has two implications for national competition authorities. First, competition authorities will likely face a growing number of transactions with cross-border dimensions. Secondly, domestic business practices could increasingly be judged by other nations in light of their impact on economic flows from abroad. Differing national practices in these maters may become a source of tension. This is particularly so as other barriers to globalization, like trade restrictions, government enterprise and regulatory controls over domestic industry diminish in importance.

The movement towards greater harmonization could be facilitated by the fact that different national competition regimes do tend to have a common "core" set of values. These similarities should, however, not be overstated. Differences do exist in specific applications and processes, as well as the recognition given by competition policy to other social values. It is widely recognized as well that full harmonization of competition laws and practices is neither feasible nor desirable since competition law and policy must continue to reflect the economic circumstances and legal traditions of each jurisdiction. Nonetheless, greater coherence and consistency are becoming evident across jurisdictions, and this harmonization trend is expected to continue.

Finally, the pursuit of harmonization and enhanced international cooperation could pose a challenge for competition authorities, particularly those from small- or mid-sized countries, in terms of a potential trade-off. This will involve the perceived loss of sovereignty associated with the development of common rules and procedures versus the ability to influence global or regional rule-making principles, and to better protect their citizens from international anti-competitive activity and from harassment through unwarranted antitrust actions. The responses of competition authorities throughout the world to this trade-off could play an important role in helping to determine the future course of harmonization and inter-jurisdictional cooperation.