Should the World Trade Organisation's (WTO) remit be extended to cover national competition
policies? The common argument in favour of such a move is that countries are increasingly using
competition policy in a 'beggar-my-neighbour' fashion similar to the way they would use trade
policy if not constrained by their WTO commitments. But according to new research by Henrik
Horn and Jim Levinsohn, published in the latest issue of the Economic Journal, the benefits from
an international agreement on competition policy are highly uncertain, while the associated costs
are likely to be high.
Horn and Levinsohn point out that there is very little systematic empirical evidence on the
increasing strategic use of competition policy to pursue national interests. But it is alleged, for
example, that anti-competitive mergers are not blocked when firms mainly serve export markets,
that export cartels are not only allowed but often even encouraged, and that countries increasingly
apply their national competition policy extra-territorially when national interests are seen to be
threatened. If such practices were indeed becoming more common, extending the WTO
Agreement to include competition policy would seem to make eminent sense.
The alleged increase in the strategic use of competition policy is believed to be a by-product of
successful multilateral trade liberalisation. According to one line of reasoning, when countries
cannot use trade policies to 'beggar' their neighbours, they have to look for different means. One
possibility is then to let competition policy accomplish what trade policy no longer can.
An alternative view is that trade liberalisation increases competition in domestic markets, thus
acting as a substitute for a stricter competition policy. Hence, as trade is liberalised, there is less of
a need for competition policy, and rationally acting countries will therefore pursue slacker policies
than before liberalisation.
Based on such reasoning, it is often suggested that the WTO should be extended to include an
agreement on competition policy. Indeed, since 1997, there has been a WTO Working Group
examining the trade and competition policy interface. Proposals for an international competition
policy agreement range from very modest to improvements in bilateral exchange of information
between national competition authorities, to a full-fledged international competition authority.
Horn and Levinsohn acknowledge, of course, that international competition indeed acts as a
substitute for domestic competition, disciplining firms serving domestic markets. But whether
trade liberalisation will increase the use of competition policy to enhance purely national interests
is another matter.
Competition policy always makes trade-offs between various interests, such those of various
consumer groups and firms. But what matters is how this trade-off is affected by trade
liberalisation. Indeed, the researchers show that the link between trade policy and competition
policy is highly indeterminate even under the simplest possible circumstances where interaction
between sets of policies is possible.
The research suggests severe difficulties in making a convincing case for why an international
competition policy agreement should be in the WTO. Coupled with the lack of systematic
empirical evidence to suggest a close link between the two sets of policies, the benefits from
including competition policy in the WTO thus seem highly uncertain.
What is more, there are likely to be significant costs, in particular from burdening an already
complicated agreement with even more issues and sources of contention. For this reason, Horn
and Levinsohn conclude, proposals for a competition policy agreement in the WTO should be
viewed with considerable scepticism.
Note for Editors: 'Merger Policies and Trade Liberalisation' by Henrik Horn and Jim Levinsohn
is published in the April 2001 issue of the Economic Journal. Horn, formerly an economist at the
WTO, is at Stockholm University; Levinsohn is at the University of Michigan.
For Further Information: contact Jim Levinsohn on 001-734-763-2319 (email:
jamesl@umich.edu); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-
661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-
2919 (email: nflynn@cepr.org).