Overdeterrence, Non-Competition Policy Goals, and Inadequate Defense Rights: Identifying (and Fixing) Antitrust Constraints on International Trade

When the United States adopted the world’s first functional antitrust enforcement system with the passage of the Sherman Act in 1890, U.S. international trade was limited, and U.S. antitrust enforcement rarely applied to international competition. The century following passage of the Sherman Act witnessed both a dramatic increase in the size and significance of global trade and the enactment of effective antitrust systems in scores of jurisdictions worldwide. Thus, the actions of multinational firms are now almost always subject to the scrutiny of multiple antitrust enforcement agencies. Accordingly, the influence of antitrust on international trade has become significant. With more than 130 jurisdictions now involved, a wide variety of antitrust rules and institutions come to bear on the conduct of international business.

This essay will draw attention to the fact that not all of these rules and institutions are consistent with the broad objective of fostering a dynamic international competitive environment in order to expand trade for the mutual benefit of the global community. Specifically, where antitrust authorities adopt overinclusive rules that deter or punish competitively beneficial or neutral conduct, where they pursue policy objectives in conflict with the main goal of promoting trade-enhancing competition (e.g., protection of “national champion” firms), or where they deny adequate defense rights to the targets of antitrust proceedings, robust competition suffers and global trade is restrained. I describe these issues in greater detail and identify possible approaches to reduce or eliminate these trade-limiting elements of the current international antitrust enforcement environment.

For nearly a century after passage of the Sherman Act, antitrust law was largely a U.S. phenomenon. Although a handful of other jurisdictions had competition statutes on the books, their enforcement efforts were sporadic and generally inconsequential. In that era, the field of international antitrust mostly comprised a set of specialized legal and policy questions on the applicability of U.S. antitrust law to foreign parties or to conduct occurring in foreign jurisdictions—e.g., can U.S. antitrust be applied to anticompetitive acts that occur outside the United States? Because the volume of global trade was relatively limited during most of that period, questions about the antitrust laws of other jurisdictions, or about how to resolve overlapping or conflicting antitrust enforcement efforts involving distinct jurisdictions, were largely academic. Consequently, any international trade impacts attributable to antitrust were minimal.

Growth in international trade since World War II has been impressive, increasing by a multiple of more than 30 (merchandise trade) and reaching almost 25 percent of global gross domestic product (GDP) at present. Few, if any, nations are now insulated from the effects of trade. Growth in international antitrust enforcement since the 1980s has been even more impressive— perhaps “astounding” is the right word. As the sheer volume of trade and the level of antitrust enforcement have skyrocketed, both the influence of antitrust on trade and the overall economic significance of that influence have increased substantially.

Several developments combined to launch competition law into every corner of the globe, beginning in the mid-1980s. First, expansion and strengthening of key supranational European institutions ultimately produced a 28-member European Union with a volume of economic activity comparable to that of the United States. The European Commission was endowed with authority to enforce competition rules against “undertakings.” As it evolved, the European Commission became a strong new global advocate for “competition culture,” with competition rules as a critical element. Second, the Soviet Union, the only United States competitor as a superpower, suffered an economic and political collapse, then officially disbanded on Christmas Day 1991. This destroyed the global Communist movement, forcefully demonstrated the inferiority of command-and-control economies, and silenced most opposition to reliance on competitive markets (subject to antitrust rules) as a fundamental economic policy option. As a result, the leading developed nations (and their shared international economic policy agents, including the Bretton Woods institutions and the OECD) encouraged, facilitated, and welcomed the adoption of competition laws around the world.

With near-universal support for competitive markets governed by antitrust rules, there was a rapid expansion in the number of jurisdictions with actively enforced antitrust-law regimes. In 1990 the list contained at most only a handful of nations and the supranational European Economic Community (soon to become the European Union); at present, more than 130 distinct national and supranational jurisdictions are included. This total does not count scores of subordinate jurisdictions, such as U.S. states, Spanish autonomous regions, Chinese provinces, etc., with their own antitrust rules and enforcement agencies. Virtually all global commerce (domestic and international) is now governed by competition law. Even jurisdictions that remain officially committed to Communism (China, Laos, and Vietnam) have chosen to engage in or allow substantial productive activity, to participate in global trade (through private, public, or hybrid business entities), and to adopt competition law as a general rule of business conduct (although the Laotian antitrust enforcement agency appears to be in start-up mode at the time of this writing). The exceptions— e.g., Cuba (still officially Communist with strict state control of the economy) and North Korea (no longer officially Communist but maintaining total state control of the economy)—are truly rare.

With a near-universal preference for markets as a method of organizing production and broad support for antitrust as a key tool for policing marketplace conduct, one might have expected a kind of economic utopia in which international trade flourishes, supported by a legal framework that protects markets and global trade from anticompetitive conduct. In a certain sense, this is precisely what has occurred in the last 30 years: anticompetitive conduct— cartels, other restrictive agreements, anticompetitive structural transactions, and unreasonably exclusionary conduct by firms with monopoly power—now attracts profound legal risk when engaged in almost anywhere in the world. Given the severe consequences of antitrust liability—huge potential criminal and civil fines, the possibility of actual incarceration for guilty individuals, massive treble-damage civil liability in the United States, and possible dissolution of dominant firms that act abusively, to say nothing of the enormous expense, disruption, and ignominy of defending against antitrust accusations (even if unfounded)—business enterprises of all types must take great care to avoid antitrust violations or even the suspicion of them. Given that few, if any, antitrust agencies take a territorial view of their own authority, anticompetitive conduct by any substantial enterprise, if it has any nontrivial connection to international trade, is exposed to jeopardy in multiple jurisdictions, thus compounding the risk of antitrust missteps.

Were this the full story, lawmakers, economic policymakers, and antitrust enforcers could relax and take a victory lap. Of course, that is not the full story—very far from it. First, much economic activity is still conducted by government, thus displacing the market. Second, laws and regulations at all levels of government create numerous significant exceptions to exclusive reliance on competitive markets as the operative approach to economic activity and trade. Agriculture and resource extraction are classic examples due to the common presence of legally sanctioned cartels such as OPEC. Even apart from policies that explicitly displace competition, every jurisdiction engages in myriad interventions in market processes—e.g., targeted subsidies, consumer protection regulation (health and safety or anti-fraud/deception), utility-style economic regulation, and foreign-ownership restrictions. While some competition-restricting government mandates (import exclusions, quotas, or tariffs) are directed specifically at international trade (or investment), most forms of government intervention restrain domestic competitors. Such interventions are usually justified on the grounds that they address and remedy market failures (e.g., environmental externalities, underprovision of public goods, information asymmetries) and therefore, on balance, they contribute to enhanced economic success. However, a significant number of these interventions do not stand up to economic scrutiny, and thus they represent excessive restraints on both economic and trade objectives.

Most government actions that restrict competition are safely beyond the reach of antitrust law, although there are exceptions. For instance, the European Union prohibits certain “state aids” that distort competition and places limits on Member State authority to take market-restrictive actions that undermine EU objectives, while China’s Antimonopoly Law (Article 8) broadly prohibits regulatory agencies from abusing their powers to “eliminate or restrict” competition. In general, however, antitrust does not apply to most forms of government intervention. Furthermore, antitrust cannot be applied effectively to private-sector activity that is subject to comprehensive regulation that displaces market processes by, e.g., prescribing prices, quality, and output; restricting entry and exit; or limiting capacity. But this still leaves a generous portion of world commerce subject to market competition and there fore open to application of antitrust law.

Because this essay focuses on how antitrust and trade policy relate, it ignores myriad sources of government displacement of market competition to focus exclusively on the influence of competition law on international trade. There is expanding recognition that antitrust enforcement, despite its broad tendency to encourage the expansion of trade and economic activity, is itself sometimes at odds with the main objective of international trade policy. At least three key factors give rise to significant tensions between market competition and the global antitrust law environment on the one side and the objective of enhancing trade on the other: (1) excessively strict substantive antitrust prohibitions—e.g., the use of per se rules to condemn purely vertical restraints; (2) competition-law systems that incorporate policy objectives in tension or in conflict with market competition—e.g., protection of small and medium-sized enterprises; and (3) competition law enforcement schemes that provide inadequate defense rights and thereby deter or punish procompetitive or competitively benign conduct. The remainder of this essay identifies the role and consequences of these three elements and discusses some potential solutions that might allow further expansion of international trade via some systematic limitation of these trade-restraining elements of antitrust enforcement.

Continue reading the full text of this article and citations in PDF format.