The Relationship Between Trade and Competition in a Globalized Economy

Competition and international trade policies are both potential sources of efficiency in the economy. It could be argued that, in an ideal world with no impediments to domestic and international trade and full mobility of inputs, products, and services, free trade would be the main source of market competition and efficiency that would allow countries to specialize in those sectors where they have comparative advantage. In this ideal world, free trade would be the main instrument of competition policy.

Nevertheless, in the real world, maintaining free international trade can present significant challenges. As soon as less than full mobility of inputs and products, market imperfections, regulatory distortions, and economies of scale are introduced, there is a need for competition policy and enforcement to complement international trade policy. Also, markets of different products may be highly related to one another, even though they are extremely different from each other. This inherent network of relationships creates the necessity of intervening in certain markets to offset issues arising in other related markets.

Services, for example, are important internationally non-tradable sectors that interact with the rest of the economy because they are key inputs with horizontal and vertical impact for the rest of economic activities. They are usually non-tradable in international markets, mainly explained by the existence of regulatory barriers of different types. Service sectors, like telecommunications, transport in different modalities, financial services, and energy normally present highly concentrated market structures because they have important network and scale economies, and in many cases they manage essential facilities so they require regulatory frameworks based on procompetitive principles and sound competition law enforcement to avoid private incentives to diminish competition. In this situation, an open international trade policy is not the only instrument to promote market efficiency. Trade policy can allow just a few players in the market; therefore, there is also a need for domestic competition policy and enforcement to increase effectiveness in service markets. Both instruments, competition policy and international trade policy, can thus become complementary to promote economic efficiency, growth, and economic development. The balance between both policies would depend on the specific needs of each market, considering product characteristics and the particular features of the country or region were such a market is present.

Competition law enforcement concentrates on the elimination of private incentives to restrain competition through anticompetitive unilateral conduct, market cartelization, and merger control, while international trade policy focuses mostly on the elimination of regulatory restraints and governmental decisions to regulate international trade flows. Given that both policies, international trade and competition, are complementary, the question that follows is how both policies should be coordinated, especially in a world of increasing global interconnection of jurisdictions that have different approaches to these matters.

International trade barriers are usually dismantled by a mercantilist exchange of commitments among nations through negotiations between governments in different settings: bilateral, regional, plurilateral, or multilateral. Those agreements normally include, among other provisions, competition policy commitments.

The degree of liberalization and the real injection of competition from trade in those agreements vary from the scope of the negotiation itself, the protectionist pressures and political agendas that different parties face in the process, as well as the value of commitments that parties have to exchange. Competition policy and enforcement commitments in trade agreements are usually light and vary from exchange of information, cooperation, and coordination, and normally do not include provisions addressing anticompetitive behavior.

On the other side of the discussion, there are forums where competition authorities interact and cooperate. Competition authorities interact in bilateral settings; plurilateral forums, such as the Organisation for Economic Cooperation and Development (OECD); regional groups (Latin America, Asia, Africa, and Europe); and the multilateral network—International Competition Network (ICN). The main general feature of the interaction is a high level of solidarity and a constructive exchange of information and methodologies of analysis. This may be one of the features that distinguish these forums from all mechanisms of interaction among competition authorities of different parts of the world—exchange of information and methodologies of analysis as well as the development of best international practices. These organizations promote cooperation between agencies around the world when they face a common competition case that has impact in various jurisdictions. Legally, commitments derived from these organizations constitute soft international law since they are not enforceable; nevertheless, they can have some effectiveness due to the fact that they create pressure on the member states or parties, so these commitments can create a coordination incentive tool and provide a basic common ground from which the parties can begin to cooperate.

International trade is not an issue on the agenda in any of the forums where competition agencies participate, but certainly international trade policies have an important impact in competition matters and competition agencies. Also, decisions of competition agencies in domestic markets may impact trade and foreign investment. For example, international trade policies are clearly considered by competition agencies when they define relevant markets in their analyses of mergers, unilateral conduct, or the impact of some cartelization practices.

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