United States of America

Organization WT/WGTCP/W/102

WT/WGTI/W/55

25 September 1998 (98-3724) Working Group on the Interaction between Trade and Competition Policy

Working Group on the Relationship between Trade and Investment Original: English

COMMUNICATION FROM THE UNITED STATES

The following communication, dated 24 September 1998, has been received from the Permanent Mission of the United States with the request that it be circulated to Members.

RELATIONSHIP BETWEEN INVESTMENT AND COMPETITION POLICY

1. Introduction

The United States delegation presents this paper to both the WTO Working Group on the Relationship between Trade and Investment and the Working Group on the Interaction Between Trade and Competition Policy. This is the first time that the relationship between investment and competition policy has been addressed by the United States in either of these Working Groups. In this paper, we will discuss several basic points of interaction between investment and competition, including both economic connections and institutional ones. It is the view of the United States that the free flow of investment "Investment" refers here to business investment, including the acquisition, sale and de novo establishment of business enterprises, and not to "portfolio" investment nor to the activities of securities markets. The protection and regulation of capital markets are, of course, topics of great importance, but are outside the scope of this paper. Thus, the focus here is on "foreign direct investment", or "FDI". between countries has greatly benefited the general welfare of those countries, has increased economic efficiency and has, as a consequence, stimulated competition and aided consumers. As will be discussed, we believe that there is very broad agreement with these propositions. Similarly, modern, pro-consumer competition policies can enhance open investment regimes, increasing the value of such regimes to both investors and consumers. The two sets of policies thus can and should be mutually reinforcing, creating a virtuous circle of progress. In contrast, experience has shown that too heavy a use of investment regulation, including regulation purporting to be competition-oriented, can harm both investment and competition.

2. Economic Implications

Much recent work has confirmed the beneficial effects of investment for countries making and countries receiving investment. The OECD, the WTO, UNCTAD and other organizations generally have converged on the view that open investment facilitates economic growth, technological innovation and diffusion, industrial competitiveness and competitive consumer markets. As the OECD stated in its March 1998 communication to the WTO. "Foreign Direct Investment and Economic Development", communication from the OECD to the WTO Working Group on the Relationship between Trade and Investment, WT/WGTI/W/26, 23 March 1998, at 4-5.

Direct investment by [multinational enterprises (MNEs)] has the potential rapidly to restructure industries at a regional or global level and to transform host countries into prodigious exporters of manufactured goods or services to the world market. In so doing, FDI can serve to integrate national markets into the world economy far more effectively than could have been achieved by traditional trade flows alone. As with private sector investment more generally, the benefits from FDI are enhanced in an environment characterized by an open trade and investment regime, an active competition policy, macroeconomic stability and privatization and deregulation. In this environment, FDI can play a key role in improving the capacity of the host country to respond to the opportunities offered by global economic integration, a goal increasingly recognized as one of the key aims of any development strategy.

Likewise, the WTO Secretariat recently noted:

Despite the difficulties associated with the measurement of the efficiency-enhancing effects induced by FDI, let alone with the assessment of the specific channels by which a transfer of technology affects local productivity, the empirical literature offers some important conclusions. First, there appears to be a wide consensus that FDI is an important, perhaps even the most important, channel through which advanced technology is transferred to developing countries. Second, there also seems to be a consensus that FDI leads to higher productivity in locally-owned firms, particularly in the manufacturing sector. Third, there is evidence that the amount of technology transferred through FDI is influenced by various host industry and host country characteristics. More competitive conditions, higher levels of local investment in fixed capital and education, and less restrictive conditions imposed on affiliates appear to increase the extent of technology transfers. "Trade and Foreign Direct Investment", New Report by the WTO Secretariat, 9 October 1996, at 19.

And the 1997 UNCTAD World Investment Report stated:

[FDI] continues to be a driving force of the globalization process that characterizes the modern world economy. The current boom in FDI flows, which has been accompanied by increasing flows of foreign portfolio equity investments, underscores the increasingly important role played by transnational corporations (TNCs) in both developed and developing countries. This role has been facilitated by the liberalization of FDI policies that has taken place in many countries in recent years, as part of an overall movement toward more open and market-friendly policies. However, reaping the benefits of FDI liberalization requires not only that barriers to FDI are reduced and standards of treatment established -- the focus of most FDI liberalization to date -- but also that competition in markets is maintained. "World Investment Report 1997, Transnational Corporations, Market Structure and Competition Policy", at xv.

Much of this analysis has focused on countries that are net recipients of investment, not providers, but the economic benefits to provider nations are generally recognized as well. They include facilitation of international trade, specialization of production on a broader basis and the stimulation of innovation. See, e.g., the recent Note by the OECD Secretary General entitled "Open Markets Matter: the Benefits of Trade and Investment Liberalization", prepared for the Council at Ministerial Level, April 1998, Chapter 3. See also the WTO Secretariat Report, supra, at 13-14. Some countries and regions are both very large recipients and very large providers of FDI. The United States and the member States of the European Union are good examples of this situation.

Free flows of investment greatly increase the prospects for new entry -- and thus increased competition -- in specific markets. This is true not only for markets of national or international scope, but also those markets that are by necessity more local in their geographic definition. Many services markets fall into the category of relatively local and immovable. It is in part for this reason that the "modes of supply" covered by the General Agreement on Trade in Services include "through commercial presence", a term that includes the use of branches, subsidiaries and other affiliates within the territory of individual Members. Investment can not only supplement open international trade, but it can also take hold where open trade has not yet reached. In either case, new suppliers, actual and potential, become available, and thus competition clearly is enhanced. Real world examples from the current moment include the commercial air transportation sector and the basic and enhanced telecom sectors. For further example, consider international telephone "accounting rates" between countries, which have been decreasing toward actual calling costs as more and more countries allow competition for foreign calls, both through resale of existing network capacity and the establishment of new facilities. Average United States rates have declined a cumulative 46.6 per cent in the past six years. FCC News Report No. IN 98-45, "One Year Anniversary of Benchmarks Order Marked by Rapid Decline in Accounting Rates" (6 August 1998).

There are numerous studies that support the conclusion that free flows of investment increase competition. For example, in its 1996 Report, the WTO Secretariat observed that:

[I]t is argued that MNCs are able to engage in a variety of restrictive business practices in the host country which lead to higher profits, lower efficiency, barriers to entry and so forth.***

Alternatively, of course, the entry of an MNC might have the effect of breaking up a comfortable domestic oligopolistic market structure and stimulating competition and efficiency. And, of course, account must be taken of the host country's domestic antitrust policies, which are as applicable to MNCs as they are to domestic firms. In short the effect of FDI on market structure, conduct and performance in host countries is not easy to predict a priori. The empirical evidence, however, points strongly to pro-competitive effects. "Trade and Direct Foreign Investment", supra, at 16.

As the OECD has explained, "Governments have become more attentive to the beneficial effects of foreign firms' presence on domestic competition and productivity, in addition to job creation and technology transfer. "Open Markets Matter", supra, at 29 (Box 3.2).

Liberal investment rules can mitigate or eliminate local distribution bottlenecks that may frustrate trade in goods. Under such rules, an exporter who cannot place his goods through established wholesalers or retailers owned or controlled by one or more local producers can create new distribution channels or, perhaps, acquire old ones, to the benefit of consumers. This approach to distribution problems would appear to apply to distribution barriers regardless of those barriers' consistency with the WTO agreements. Establishing new distribution channels may not be as desirable in every instance as being able to utilize existing ones.

A modern, pro-consumer competition policy significantly augments an open investment policy in several ways. As has been suggested, soundly enforced antitrust laws often are part of the general "framework" of business laws that foreign investors look to for a fair, predictable legal environment in which to do business. In addition to the reports already cited and the EU's paper to this Working Group, see APEC Economic Committee, "Foreign Direct Investment and Market Framework Policies" (1996), and the 1997 Annual Report of the WTO, Volume I, Chapter IV.3. Conversely, ineffective or discriminatory competition policy enforcement could have the effect of discouraging market entry through investment (that often brings new products, technologies, service and sales strategies, etc.). More specifically, sound competition laws or regulations can aid investors by preventing local cartels or monopolies from abusing new entrants or driving them out. This is especially true for network industries, such as telecom or electricity, where an investor may need to rely upon local bottleneck transmission facilities to provide a competitive service. It was in recognition of this situation that the GATS Basic Telecom negotiators chose the so-called "Reference Paper" as a solution - it requires national telecom regulators to be established and to referee interconnection with former (or even existing) monopolies. And, of course, competition laws can prevent new market entrants from themselves engaging in collusive or monopolistic conduct.

Questions have occasionally arisen about the "sequencing" order of new investment and competition rules, suggesting that choosing where to start is a very intricate proposition. We do not share that view: governments can simply do both, and the sooner the better for both the investment and competition climates in their countries. Indeed, over 80 countries already have antitrust laws on their books, and thus need not wait to introduce such laws before taking other actions. Antitrust laws have obvious value where local markets may only be supplied by local enterprises. Antitrust law is an obvious response to cartelization and monopolization problems, which are more likely to occur absent the competitive pressures of free inward investment. Also, an antitrust law accompanying investment liberalization may be valuable in dealing with two possible harms to consumers: anti-competitive practices by local companies aimed at new investors, and such practices by investors in the local market.

In past years, many countries have maintained international (or even internal) investment screening regulations, using such regulations to force investors to make specific commitments on various performance requirements, including technology transfer requirements, and/or to force the use of local business partners or prevent the free repatriation of funds. Fortunately, fewer and fewer countries now resort to such heavy-handed devices. The adverse effects of these devices on investment flows and economic growth have now been recognized. This point is made, for example, in paragraph 12 of the EU's paper to this Working Group, and in The OECD report "Foreign Direct Investment and Economic Development", supra, at 5. They are likely to deter, not encourage, beneficial flows of capital and technology, and hinder the stimulation of competition in local markets.

Sometimes these investment screening regimes have even been given a competition policy rationale, one based on concern that efficient new market entrants could harm existing local competitors and perhaps achieve a local monopoly. For a detailed discussion of this rationale, in the context of developing country control over FDI, see the 1997 UNCTAD World Investment Report, supra. In our view, these concerns are largely misplaced, especially if foreign entry is by way of "greenfield" investment rather than through acquisition of a local competitor. On the conceptual level, competition policies that attempt to protect (established) competitors, rather than consumers, are inherently suspect; after all, competition laws should protect competition, not competitors. Northern Pacific Ry. v. United States, 358 U.S. 1(1958). While other rationales are sometimes asserted for maintaining such protective policies, competition rarely is enhanced by them. Further, if a new entrant does possess clear and sustained advantages over the older market players, the way to prevent that new firm from enjoying monopoly power is to welcome other new entrants too. By definition, a restrictive investment regulation that only allows one investor into the market at a time will tend toward monopoly effects. The cure ordinarily should be not more regulation, but less.

Finally, experience has also demonstrated that performance requirements on investment can also reduce or negate the otherwise beneficial effects on competition. For example, a requirement that all production from an investment be exported yields little, if any, benefit to the domestic (host) market in terms of increased competition. Thus, performance requirements that have the effect of preventing the greater integration of the domestic market with international supply factors will not only reduce the competitiveness and thus the attraction of investment activity, but will also sever the "virtuous circle of progress" referred to above. Even if the domestic market is not effectively "insulated" from the foreign investment, operational constrains on foreign investment can reduce, and even eliminate, the pro-competitive benefits associated with foreign direct investment. Such constraints, e.g., limitations on the range of products produced or sales distribution requirements, result in foreign investment having to operate and compare in a sub-optimal fashion.

In sum, open investment almost always enhances competition. An enlightened competition policy can and should enhance investment flows and ensure that consumer welfare is served. Investment screening in the guise of competition policy will usually fail to stimulate either investment or competition. As discussed in the paper on intellectual property rights and competition that the United States is submitting to the Working Group, intellectual property rights also enhance competition, and laws, including competition laws, that do not recognize this will fail to stimulate innovation.

3. Institutional Aspects

As noted, there are very few institutional overlaps between international investment treaties and international competition cooperation. This is neither an accident nor a problem, given the constructive parallels between the two. The Working Group on the Relationship between Trade and Competition Policy need not be reminded here of the various international antitrust cooperation efforts that are now going on See the November 24, 1997, Submission by the United States to this Working Group entitled "US Experience with Antitrust Cooperation Agreements"., but it may be useful to discuss some of the international investment efforts. Given the complexities that exist in some of these investment initiatives, we will merely describe them here, not offer detailed evaluations of them or their likely outcomes.

A. WTO Working Group on the relationship between Trade and Investment

Like the WTO Working Group on the Interaction between Trade and Competition Policy, the WTO Working Group on the Relationship between Trade and Investment is a product of discussions at the 1996 Singapore Ministerial. The Trade and Investment Working Group's role is to provide a forum for the exchange of information and experiences related to international investment, including experiences with bilateral and multilateral investment agreements. It does not have authorization to begin negotiations on an investment agreement. However, the foundations of bilateral and multilateral agreements, and their implications for individual countries, have been a topic of great interest in the Working Group. Developing countries have been particularly eager to discuss the relationship between economic development and openness to investment.

B. WTO Agreement on Trade-Related Investment Measures (TRIMs)

The WTO Agreement on Trade-Related Investment Measures prohibits the use of certain performance requirements applied to investments, notably, requirements to use domestic rather than imported products, and requirements to maintain a particular balance between imports and exports. The operation of the agreement is scheduled to be reviewed in the year 2000.

C. The Multilateral Agreement on Investment ("MAI") and Other Investment Disciplines

The sustained effort at the OECD to negotiate the MAI, a binding multinational investment treaty, is continuing. The United States will not attempt to summarize the open MAI issues here, other than to note that antitrust issues are not among them. However, we do wish to draw Members' attention to the fact that the current MAI Consolidated Text (a negotiating document with explanatory footnotes) includes a section on the behaviour of official monopolies and perhaps also state enterprises and official "concessions". MAI, Consolidated Text, DAFFE/MAI(98)7/REV1, at 31-45 (22 April 1998), and MAI Commentary to the MAI Negotiating Text, at 17 (24 April 1998). Proposed obligations regarding the behaviour of "state enterprises" would be limited to ensuring that such enterprises do not buy or sell on the basis of nationality rather than normal business considerations. Some OECD members have urged that "concessions" - which appear to be grants of exclusive rights to provide a public service for a certain territory for a certain time - should also be covered in this section of the MAI. The principal proponent of including "concessions" within the Monopolies topic has sought to require detailed, transparent and non-discriminatory rules for the granting of concessions, not special disciplines upon their behaviour. The United States and other MAI delegations have expressed scepticism as to the need for any rules regarding "concessions". The provisions regarding official monopolies (or monopsonies) would require MAI signatories to prevent such entities, public or private, from discriminating against customers (or suppliers) that were investments of foreign investors, and to prevent such monopolies from abusing their monopoly rights to engage in anti-competitive practices in other sectors to the harm of foreign investments operating in those sectors.

A number of participants in the MAI discussions on "Monopolies" language have opposed it on the grounds that it intrudes on competition policy, and that competition policy is outside of the MAI's competence. Some proponents of having Monopolies language, including the United States, have argued that it does not implicate competition policy in any general sense. Rather, it is a necessary safeguard, they argue, against governments using official monopoly/monopsony franchises to discriminate against or otherwise harm foreign investors whose enterprises rely on the official monopoly for essential inputs or outlets. Governments are free, proponents of Monopolies language note, to fulfill this obligation by direct administrative action, by use of regulatory mechanisms or, of course, by use of competition policy instruments to the extent relevant. While antitrust laws should be enforced in a non-discriminatory way, they normally are not themselves instruments for resolving national treatment or MFN issues, although they may deal with anti-competitive price discrimination. The issue has been discussed extensively in a working group but has not been resolved at the negotiating level.

Similar language already can be found in Articles 1502 and 1503 of the NAFTA, where they form part of the Competition Chapter. Article VIII of the GATS, regarding "Monopolies and Exclusive Service Providers", also lends obvious parallels. The various Bilateral Investment Treaties to which the United States is a party contain no competition provisions relating to antitrust. Negotiations commenced this month on the Free Trade Area of the Americas ("FTAA"), and among its nine negotiating groups are a Competition Policy group and an Investment group. Obviously, it is too early to say what these chapters in any agreement ultimately will contain.

D. The OECD Guidelines for Multinational Enterprises

These voluntary guidelines for "MNEs" were first adopted in 1976, and have been modified in one aspect or another in 1979, 1981, 1982 and 1991. One of their provisions is guidance on MNE adherence to competition laws and cooperation with competition authorities. The OECD Declaration on International Investment and Multinational Enterprises - Basic Texts (Paris 1992). For a brief background on the Guidelines see Waller, "Antitrust and American Business Abroad", Vol. 2, at 18-9 to 18-14 (3rd Ed. 1997). The OECD Committee on International Investment and Multinational Enterprises ("CIME") commenced work on a general update of these guidelines in June of this year, and will hold a meeting on the subject in November. The Guidelines also cover employment practices, environmental practices, taxation and corporate transparency; they constitute a voluntary code of good corporate conduct, not binding obligations on governments.

E. Relevant UNCTAD Work

UNCTAD's World Investment Report World Investment Report 1997, supra. for 1997 includes a lengthy discussion of the relationship between increased FDI and competition policy. The United States commends UNCTAD for assembling the extensive data presented in this document, and for recognizing the importance of increased FDI to the global economy. In its chapter on competition policy, this report recognizes the benefits that liberalized FDI can yield to host country markets, but also raises concerns that such FDI could harm competition in some circumstances absent competent competition law enforcement. The United States agrees that the beneficial effects of liberal investment can and should be enhanced through maintenance of a sound legal environment, including competition enforcement. We also agree that the actual effects of any particular transaction - and especially horizontal mergers and acquisitions - are very fact-specific and call for careful analysis.

We will not undertake a general discussion of UNCTAD's report here. However, we would like briefly to explain why we believe that the concerns it raises about possible anti-competitive results from liberalized investment laws may be overstated. The report posits that more efficient multinational enterprises could enter a liberalized market and replace multiple local "competitors" with a more efficient monopoly or oligopoly provider(s), thereby losing market "contestability". However, the previous closed market structure would almost certainly have been operating at inefficient levels, and quite possibly without significant competition either, unless national antitrust laws were already in operation. Thus, generally speaking, allowing more efficient providers to enter a market through FDI should benefit consumers even if providers ultimately are fewer in number. Moreover, absent some sort of "natural monopoly", there is little reason to believe that market liberalization will yield a single new entrant; many could well find the market attractive. Finally, foreign entry through de novo creation of a local enterprise is very unlikely to create antitrust problems compared to entry through merger with, or acquisition of, a major local competitor, which could sometimes raise antitrust concerns.

F. Review of Mergers under National Antitrust Laws

Nearly all national and regional antitrust laws provide for review of proposed mergers and acquisitions, and many of these laws also provide for compulsory or voluntary pre-merger notification to antitrust authorities. Many treaties and articles summarize and discuss substantive and procedural antitrust provisions involving the review of mergers and acquisitions. See, e.g., 1 American Bar Association, Antitrust Law Developments (Fourth) 307-386 (1997)(U.S. law); 2 G. Addy & W. Vanveen, Competition Law Service CA-285 - CA-311 (1996) (Canadian law); Bellamy & Child, Common Market Law of Competition, §§6-001 - 6-164 (4th ed. 1993, with 1996 Supplement)(EU law); W. Rowley & D. Baker, International Mergers: The Antitrust Process (2nd ed. 1996, with 1998 Supplement)(merger laws of 29 countries and the European Union); OECD, Merger Cases in the Real World - a Study of Merger Control Procedures (1994) (merger case studies from OECD countries); Pittman, Competition Law in Central and Eastern Europe: Five Years Later, 43 Antitrust Bull. 179 (1998) (merger laws of six Central and Eastern European countries). Such antitrust review is not the same as investment "screening". It does not apply only to foreign investors or discriminate against them, and is (or should be) a transparent process conducted according to established substantive and procedural rules. The objectives of antitrust review of mergers and acquisitions are limited to assuring antitrust authorities that proposed transactions will not harm competition, such as by raising prices, reducing output or limiting innovation.

4. Conclusion

Free flows of investment should almost always facilitate competition and thus complement sound competition policy. Competition policy can, in return, help maximize the benefits of liberal investment, not the least by making sure that any residual local monopolies do not nullify those benefits. Both investment liberalization and competition policy work should proceed apace, without undue concern for the timing of each legislative event. Investment liberalization has been and should continue to gather speed through use of investment-specific international instruments. In the same way, governments should continue to create and enhance a culture of competition that allows the full consumer benefits of investment liberalization to be realized.