WORLD TRADE
ORGANIZATIONWT/WGTCP/W/84
14 August 1998
(98-3181)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE UNITED STATES
The following communication, dated 23 July 1998, has been received from the Permanent
Mission of the United States with the request that it be circulated to Members.
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Impact of Trade Policy on Competition
Introduction
The United States has provided several written submissions for this fifth meeting of the
Working Group, given the broad-ranging nature of the agenda.  One submission discusses certain
aspects of the issues of government regulation and state monopolies and/or state trading practices as
they affect both competition and international trade.  Though we have endeavoured to sift through
some questions in a fairly focused way, these topics  in themselves are so broad-ranging as to warrant
considerably more time and attention than either our submission provides or this meeting will afford.
For the other main agenda topic, the Working Group has taken up the task of examining the
impact of trade policy on competition.  Here, too, we are faced with a topic that is almost
immeasurably broad-ranging, but at least it is a topic about which we, as representatives to an
international organization dedicated to providing the common institutional framework for the conduct
of trade relations among its Members, believe we already have a certain intellectual and professional
grounding.  While that is no doubt correct, it may also be the case that we approach the term "tradepolicy" with strikingly different assumptions about what it generally stands for or represents.  It is
also inescapable that "trade policy" will take on different objectives and different meanings as one
considers different countries, different contexts and the different instruments which may be employed
to effectuate such policy.
This submission, therefore, aims to review at least some of the different guises which trade
policy may take on as one way of attempting to understand the kinds of impacts which trade policy
may have on competition.  To the extent that we paint different pictures of trade policy, it is not
necessarily intended to argue in this context for or against a particular definition or approach, but
rather merely to invite thought and discussion within the Group.
What is Trade Policy?
In several of the previous discussions held in this Working Group, the United States had the
impression that some delegations have tended almost to equate "trade policy" with the very legal
instruments and measures through which some elements of trade policy may be pursued or given
effect.  When references to trade policy were made, the specific examples provided seemed to includeWT/WGTCP/W/84
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not only anti-dumping and countervailing duties, but also other instruments and measures such as
tariffs, quotas, safeguard measures and other restrictions on trade, most typically those which are
applied at the border.
Irrespective of whether this impression is accurate, such a depiction of trade policy not only is
too narrow but it tends also to be contrary to the orientation of trade policy in the period since the
negotiation of the GATT and, later, the WTO Agreement.  In the first instance, trade policy is itself a
neutral term in the sense that it can encompass any number of purposes or objectives which
governments may seek in the context of managing -- or not managing -- the imports into or the
exports out of their geographic jurisdiction of authority, including through a government’s efforts to
seek better access for its country’s exports to other countries’ markets.  Trade policy may be pursued
with the goal of expanding exports or limiting exports and/or of expanding or limiting imports.  Themotivation for these choices may be driven simply by the need for certain goods or services or the
need to earn foreign exchange with which to purchase additional goods and services.  Other
motivations may extend to national security, employment, economic development, consumer welfare,
electoral and any number of other broad social, political and economic goals.  It has been noted in this
Working Group that even the absence  of a competition law and/or policy is a competition "policy",
and the same can probably be said of trade policy.
Trade policy can be both reflected and implemented through national (and sub-national)
means, through regional and plurilateral agreements and initiatives, and through multilateral
institutions such as the WTO.  As a practical matter, trade policy can be promoted and appliedthrough government laws and regulation, through the negotiation and implementation of international
agreements, through financial, fiscal, monetary and exchange rate policies and, it bears noting,
through the choices which a government makes in respect of its decisions concerning the
establishment and enforcement of competition laws and policies.
As economies "globalize" and the importance of traditional trade barriers and issues is
eclipsed by new factors affecting the magnitude and direction of international trade, one of the
greatest challenges facing trade policy experts is the extent to which trade policy can be pursued in the
context of and/or paired with other policies and actions, particularly those traditionally viewed as
being within the realm of "domestic" policy.  This  can complicate the resolution of international trade
policy problems when multiple policy goals and accomplishments cannot be easily segregated or
readily reconciled.  For example, this might be said to arise in situations where trade measures areemployed to give force to environmental or human ri ghts policies.  More troubling are those situations
where the non-trade policy goal or accomplishment is manipulated to provide cover or justification
for the trade policy goal.  This phenomenon can arise most obviously, but not exclusively, in the areas
of technical product standards and sanitary and phytosanitary requirements when health and safety
considerations may be, or are claimed to be, inseparable from the result of restricting trade.
Complementarities between Modern Trade and Competition Policies
The United States and other Members participating in this Working Group have frequently
observed the broad complementarity which exists between "trade policy" and "competition policy" asthose policies are currently practised in the United States and many other countries.  We have already
discussed in this Group what is meant by the term "competition policy" and the objectives and
principles which a sound competition policy should promote.  What, then, is our notion of a sound
"trade policy" in terms of its principles and objectives?  In brief, the rough definition that we would
put forward is that, broadly speaking, trade policy s hould be aimed at addressing barriers that distortWT/WGTCP/W/84
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the operation of markets.1  Acknowledging first that the definition is one whose generality begs
further defining, we would nevertheless hasten to observe that for the United States, broad similarities
-- or complementarities -- have certainly existed between competition policy and trade policy in the
period since the Great Depression of the 1930s.
Throughout a large part of the United States’ history up to the 20th century, there was a
constant struggle between protectionists and free traders over the appropriate "tariff policy".  The era
prior to the first world war when "imperial" private companies engaged in extreme monopolist
practices to the benefit of capital owners over consumers was also the era of the "scientific tariff".  A
scientific tariff policy would have set each individual US tariff at just the level required to offset any
price advantage of competing imports.  If fully pursued and implemented, the perfect protection of the
scientific tariff would theoretically have shelte red US companies completely from international
competition through the elimination of import trade.  As with the tolerance of private anti-competitive
practices, the scientific tariff would have favoured the interest of capital owners over the overall
national economic interest and the interest of US consumers.
In the reversal of US (and other countries’) trade policy that occurred during the Great
Depression, one of the issues to be faced was how the national and consumer economic interests could
be best represented in an opened, or at least opening, global economy.  Trade theoreticians have
demonstrated that within an analysis of quite constricted scope, it is possible for large countries like
the United States to increase their economic welfare through the imposition of an "optimum tariff".
By constraining domestic demand for imports with a tariff, the United States would be able to obtainthe benefit of reduced foreign prices.  Theoretically, at the point of the optimum tariff, the benefit
from the price achieved from the last incremental increase in the tariff is just matched by the loss of
consumer welfare, arising from reduced trade.  At this point consumer and national economic interests
would be at their "best" -- or optimal -- level, and certainly better off than under completely free trade.
If conceptualization of the issue had stopped there, the United States might have a quite
different and more protectionist trade policy today.  But the story -- and history -- took a different
course, as some policy makers and opinion shapers concluded that an exclusive focus on the national
market and the assumption of no policy response on the part of trading partners was far too limited for
an objective assessment of the full national interest.  It was quickly demonstrated that what might
make sense in terms of an analysis of strictly US policy options made no sense in a more global policy
context.  When multiple trading partners attempt to  employ tariff optimization policies, and readjust
those policies in response to subsequent tariff changes by their trading partners, world economic
output is so reduced that, ultimately, no "winners" are left.  The resulting downward spiral of tariff
optimization policies means that consumers in all countries will suffer.
The lesson for US trade policy was that in attempting to defend domestic consumer and
economic interests in trade, one needed to avoid a too-exclusive focus on the domestic market.
Therefore, one of the major thrusts of US trade policy since 1934 has proceeded on the general
recognition that cooperation with other countries in building free and open markets is one of the best
guarantors of consumer protection and high living  standards.  In the post-Depression period, the
economic rationale of US trade policy has been the  removal of impediments and distortions to theoperation of free markets in the efficient allocation of scarce resources and at encouraging healthy
levels of efficient investment and growth.  While today it may seem inconceivable to have pursued
any other policy, it is still somewhat remarkable given that -- as a large and diverse country endowed
with rich natural resources, a generally favorable range of climates and a sizeable domestic market --
the classical economist’s case for the adoption of unilateral free trade does not apply to the
                                                     
1Clearly, the distinction between the broad aims of policy and its implementation in specific contexts is
relevant here insofar as accommodations may often be appr opriate or necessary if a barrier has what is perceived
as a legitimate public purpose which may overshadow consideration of its distortive effect.WT/WGTCP/W/84
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United States as readily as it does to those nations with smaller domestic markets that are more
immediately dependent on trade for prosperity.  However, if anything, the United States has chosen to
take full advantage of the size and attractiveness of its domestic market to try to influence others to
adopt more open and competitive policies by the threat of restricting and the offer of opening access
to the US market, either through unilateral action or negotiation.  We recognize there are those whowould sometimes criticize us for the tactics employed in specific cases, but we hope that all can
recognize these policies have had the goal and, in large part, effect of moving the world ahead toward
a system of rules-based, global free trade.
In many respects, trade policy both in theory and, to a large extent, in fact, has been one of the
premier US policy areas of the last 60 years in support of general consumer interests.  Opponents of
the now "traditional" US trade policy initiated by President Roosevelt have characterized it asrepresenting the interests of US private companie s.  While that might appear to be the case in
microcosm, it is not the case in broad intent and application.  Trade policy views companies with
neutrality as the instruments of production of goods and services.  With respect to companies, the
primary role of trade policy is to remove non-market barriers and distortions that influence private
company decision making, leading to sub-optimal re source use and distorted decisions with respect to
investment in physical and human capital and in levels of private saving.
The pro-competitive nature of trade theory and traditional US trade policy, in other words,
has as its intent not so much helping US compan ies as helping the United States maximize the
efficient use of resources and growth potential.  In so doing, open trade policy maximizes potentialUS living standards and consumer interests.
In fact, consumers are helped three times over.  First, as wage earners, open markets shift job
growth toward more productive industries with higher paying jobs.  Wage earners, however,
principally care about higher pay to the extent that it purchases more or better goods and services.Therefore, by way of a second benefit, we need to recognize that all workers are also consumers.
Lower prices and the greater variety of goods in the US market due to our low levels of restriction
against imports help stretch pay checks and other consumer incomes further.  Third, the dynamic
effects of market barrier removal are thought to raise the rate of return on investment and, thus,
increase investment itself.  This leads to enhanced growth, at least in the medium term, and higher
living standards for consumers in the future than would otherwise be the case.
Of course, as has been pointed out in past US submissions, US antitrust policy similarly has a
primary orientation toward the protection of consumer interests.  Like trade policy, antitrust policy
also attempts to protect consumer interests by dealing with matters that directly affect decision
making by private companies.  In trade, we have attempted to protect consumer interests from
sub-optimal company decision making (from the national point of view) by increasingly disciplininggovernment activities that inappropriately bend or distort company decision making from what it
would be in truly free and competitive markets.  In antitrust, we have attempted to protect consumer
interests from anti-competitive (and, at least in many contexts, sub-optimal) company decision
making (again, from the national point of view) by policies and rules that curb the exercise of private
market power.  Consequently, for the United States, both trade policy and antitrust policy areprofoundly pro-competitive and pro- consumer.  A major difference is that one tends to deal with
government action, the other private action, though even this distinction is not always clear cut in
each real-world setting.
An obvious linkage between the two is that efforts in one area can be substantially offset by
actions in the other.  From the trade perspective, there is the classic case of the country with low
border restrictions but whose "competition policy" -- broadly defined, including with respect to the
structure and enforcement of its antitrust law -- effectively incorporates industrial policy objectives
such that much of the domestic market is reserved for domestic producers.  From yet another tradeWT/WGTCP/W/84
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perspective, it is not hard to perceive a different yet equally important linkage.  High tariffs and
restrictive non-tariff barriers would clearly distort domestic company decision making, hurting
consumers generally, and in specific instances benefitting producers at the expense of consumers.
And, even in instances where antitrust authorities may enjoy public credibility and have a strong
commitment to enforce the laws, government sanctioned policies in those countries can act to denymarket access to foreign goods and services, thus potentially acting to diminish efficient resource use,
per capita incomes and consumer living standards in the country from which the exports originate
and, quite possibly, in the importing country as well.
Impact of Trade Policy on Competition in the WTO Context
Thus far, the trade policy that we have primar ily discussed is that which is practiced at the
national level.  Yet, trade policy can also manifest itself in the very provisions of the Agreements
which we negotiate in the WTO and in the manner of their implementation.  In a number of areas,
trade rules have been fashioned or interpreted to include reference to matters involving competition,
as that has been recognized as important in ensuring genuine market access and the credibility of
market access concessions, or in otherwise preventing distortions to international trade.  In still otherareas, disregard for or abuse of WTO rules can have as deleterious an effect on competition as on
trade.  The Secretariat has already inventoried a checklist of WTO provisions which relate to
competition, and we will not attempt to give proper consideration to all of those examples in this
submission, yet a quick look at just a few WTO prov isions -- whether or not they explicitly address
the topic of competition -- will illustrate the varied impact which trade policy as manifested in WTOrules can have on competition.
A recent and often-cited example is the decision to include commitments on pro-competitive
regulatory principles in the context of the WTO Agreement on Basic Telecommunications Services .
Because it was generally recognized that the removal of border trade barriers may not sufficientlyassure market access in this sector absent some action to address monopoly or market dominance
issues, the Agreement has had the effect of contributing to the institution of more competitive
regulatory policies in some of those countries which became signatories to the Agreement than might
otherwise have been the case.  Yet, looked at from  another perspective, the argument can be made that
the Agreement "allows" governments to take regu latory actions which result in less than fully
competitive domestic markets because the reference paper did not go "far enough" in compelling
robust competition, derogations were permitted in certain instances and not all Members wereobligated to adhere to the regulatory principles.  Undoubtedly, this sort of half-empty, half-full
perspective applies to many of the WTO provisions which might be claimed as having an impact on
competition.  Yet, it is hardly surprising, since the Agreements are the result of negotiation and
compromise which have the overall effect of pushing forward trade liberalization on the basis of
reciprocal accommodation and political balance.  These latter attributes can yield outcomes in specificareas and on specific points which may appear imperfect in some way, yet are necessary to achieving
the total, welfare-enhancing package.
To take another example, we can look at the Agreement on Subsidies and Countervailing
Measures .  Insofar as subsidies are generally recognized to distort the efficient allocation of
economic resources and to provide producers with artificial cues to sell at prices or to produce in
quantities that would not otherwise prevail in a market setting, it is reasonable to observe that these
measures can affect significantly both trade a nd competition.  Yet, the WTO Subsidies Agreement
takes a rather modulated approach to the disciplining of these practices.  Admitting to the reality that
different governments have different social and economic priorities and that in order to achieveclearer and more effective multilateral rules, one needed to find a mechanism to accommodate those
different priorities, the Agreement somewhat arbitrarily categorizes subsidies among prohibited,
actionable and non-actionable classes.  This has the effect of coupling strict disciplines on certain
subsidies which are more commonly accepted to be distortive with relatively lax trade remedyWT/WGTCP/W/84
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disciplines on other subsidies which are viewed as being either less inherently distortive or more
politically desirable, depending on one’s point of view.
The so-called "green light" provisions governing non-actionable subsidies provide very
detailed conditions and criteria for the bestowal of non-actionable status.  While these criteria aregenerally aimed at limiting the magnitude and distortive effect of the subsidization, there is no pure
economic or scientific justification for the particular terms, conditions and limits employed.  Rather,
they were also largely the result of political co mpromise which was deemed appropriate to accept in
return for the enhanced legal certainty that they c onveyed and the stricter disciplines secured for other
kinds of subsidies predicated on such clearly distortive terms as export performance, import
substitution, debt forgiveness and coverage of operating losses.  Considered narrowly, these
provisions could be interpreted as tolerating the existence and expansion of measures which have bothtrade-distorting and competition-distorting effects.  Viewed from a broader perspective, they can be
acknowledged as a necessary component in the development of more coherent multilateral rules
governing subsidies vis-à-vis what had governed in the past.
There are an abundance of other examples of WTO provisions with effects on competition or
even competition policy, to the extent that the provisions may compel or induce governments to
ensure competition or potentially penalize them if competitive conditions are not ensured.  As noted
earlier, one of the other US submissions discusses the provisions pertaining to state trading and
government regulation.  Moreover, in September, the role of trade-related intellectual property right
rules will be more closely examined.  However, it wa rrants at least mentioning at this juncture that
GATT 1994 Article II  sets forth certain disciplines relating to the operation of import monopolies;
the national treatment obligations articulated in  GATT 1994 Article III  concern themselves directly
with internal conditions of competition which may affect imported products;  and GATT 1994
Article XI’s  prohibition of quantitative import and export restrictions has a clear effect on promoting
competition in both domestic and export markets.  A paper drafted by the OECD Secretariat for thework of the Joint Group on Trade and Competition, entitled Competition Elements in International
Trade Agreements :  A Post-Uruguay Round Overview of WTO Agreements , offers a
thought-provoking glimpse at the potentially enormous impact which the interpretation and
application of WTO rules and obligations can have in either instilling or deterring competition in
various markets.
Much of the impact depends on the extent to which there is timely and full implementation of
the obligations set forth in various WTO Agreements.  For example, more than 30 countries require,
as a condition of importation, that a "preshipment inspection" be performed in the country of
exportation by a private entity.  Though these steps are taken frequently because of deficiencies in the
customs administrations of the importing country, concerns have arisen that the preshipment
inspection regimes themselves are non-transparent and have led to unnecessary delays and unequaltreatment.  Thus, the WTO Agreement on Preshipment Inspection  is intended to ensure that
inspections are undertaken on a transparent and non-discriminatory basis;  absent the full and faithful
implementation of its provisions, it is inevitable th at certain firms will be competitively disadvantaged
and that the conditions of competition and, potentia lly, consumer interests will have been affected.
Similar concerns arise in connection with the implementation of obligations pertaining to
customs valuation.  WTO customs valuation rules are supposed to ensure that the valuation of goods
for customs purposes, such as for the application of duty rates, is conducted in a neutral and uniform
manner, precluding the use of arbitrary or fictitious customs values.  It should be evident just how
critical proper valuation techniques and standards are to the realization of market accesscommitments, but their disregard can also have notable anti-competitive effects.  This is why full  and
rapid implementation of the Agreement on Customs Valuation , especially by those Members who
opted for delayed application, is so important.  The incorrect or inappropriate misuse of customs
valuation -- such as to achieve protection for domestic producers in a manner far more arbitrary andWT/WGTCP/W/84
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far less transparent and rules-based than the application of WTO-consistent trade remedy or safeguard
measures -- can exert an immensely corrosive effect on the maintenance of robust competition in the
importing country’s market.
A quick review of several other agreements and provisions further illustrates the mixed effect
which WTO rules can have on competition, and the extent to which compliance with the rules may
increase that effect.  The Agreement on Trade-Related Investment Measures  prohibits the
imposition of local content or trade-balancing requirements on firms subject to an investment-related
measure, requirements that can distort both trade and competition.  The Agreement on Import
Licensing  aims to minimize the trade-restrictive impact of non-automatic licensing regimes which
can clearly have an impact on the conditions of competition.  The various WTO provisions relating
to the use of trade restrictions to alleviate balance of payments difficulties  obviously permit
Members to take trade- (and, indirectly, potentially competition-) restricting measures, yet curtail the
circumstances under which such action is considered acceptable and encourage the use of import
surcharges over quantitative restrictions as a means of mitigating the distortive effect.
As can be seen from this admittedly summary discussion, any number of WTO Agreements
"allow" Member governments to take (or leave in place) measures that affect competition within and
outside their domestic markets.  This does not mean that the WTO Agreements are somehow
defective or misdirected.  What is does mean is that any serious effort to review WTO provisions
from the perspective of their impact on competition could not legitimately be limited to a few selected
provisions or agreements.  Rather, it would require an across-the-board examination of immensescope and armed with a much more sophisticated appreciation of the concepts and principles of
competition policy than the Working Group has had the opportunity to develop.
Conclusion
The above discussion tells us that while trade policy can take on many guises -- from
mercantilism, to protectionism to unqualified open trade -- in the latter half of the 20th century, trade
policy has come to stand alongside competition policy as a complementary tool aimed at ensuring
more open markets, greater economic opportunity and less government intervention in the
marketplace.  Because trade policy almost by necessity has historically required figuring out how
different social and economic systems can be made to interact, its evolution has differed from that of
competition policy and its development in particular contexts can sometimes be viewed as a series ofnegotiated compromises between economic rationality and other social, political and societal
objectives.
Of course, ultimately, open markets, increased economic opportunity and less government are
not the end-points of policy.  They, too, are tools -- or, more accurately, conditions -- which help tosecure prosperity, employment and improved living standards for the world’s citizens.  The fulfilment
of these goals requires that attention also be paid to the development and application of appropriate
policies in other realms of life, such as education, health, safety and nutrition, working conditions,
environmental quality and systems of private and public governance.  Neither trade policy nor
competition policy operates in a vacuum;  they are affected by policies in other areas as much as they,in turn, affect those other policies.
The events of the past year throughout the world have highlighted how lack of internal
competitive market structures can lead to resource misallocation, increasingly inappropriate
production structures, weakened financial sectors and economic crises.  The economist’s modeldescribing the benefit of trade barrier removal typically assumes free competition in the internal
market and restriction at the border.  Thus, the theoretic removal of border barriers would be expected
to quickly optimize individual country and global economic welfare.  However, when government
policies, or the lack thereof, result in fundamental  impairment of competitive mechanisms in internalWT/WGTCP/W/84
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markets, that internal market condition is likely to harm both the country concerned and other
countries with which it trades.  This issue is of fundamental significance because it calls into question
the view that current global trade disciplines will result in the otherwise expected economic outcome,
i.e., optimization of global resource use and the maximization of global income and economic
opportunity.  Without detracting from the importance of doing so, its seems clear that, when looked atin this way, the issue to be confronted in the WTO is really much more than whether one has a
competition law and vigorously enforces it.  Rather, the issue is how to ensure effective market access
by making certain that markets are contestable and competitive.
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