WORLD TRADE
ORGANIZATIONWT/WGTCP/W/85
27 August 1998
(98-3324)
Working Party on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM HONG KONG, CHINA
The following communication, dated 27 July 1998, has been received from the
Hong Kong, China Economic and Trade Office with th e request that it be circulated to Members.
_______________
Impact of Trade Policy on Competition:
Furtherance of the WTO Approach
I. INTRODUCTION
1. At the last meeting held in March 1998, Hong Kong, China submitted the "WTO Approach"1
which contends that this Working Group should focus on the interaction between trade and
competition policy, and on governmental measures affecting competition.  We suggest that work
commence with an examination of the extent of consistency between trade and competition policies.
2. While the positive impact of trade liberalization on competition should be fully
acknowledged, the inconsistencies between existing trade and competition regimes remain a serious
concern.  Part II of the current paper notes the importance of a mutually reinforcing free trade andcompetition policy, using the case of Hong Kong, China as a reference.  Part III uses the example of
international price differentiation to illustrate inconsistencies between trade and competition policies.
Part IV suggests some options for enhancing consistency.  Part V sums up past discussions and points
to the way forward.
II. WTO MEMBERS AND WTO LAW SHOULD STRIVE FOR CONSISTENCY
BETWEEN TRADE AND COMPETITION POLICIES AND RULES
3. In a "Statement on Competition Policy" promulgated in May 1998, the Government of the
Hong Kong Special Administrative Region (HKSAR) specified that the objective of Hong Kong,
China's competition policy is to enhance economic efficiency and the free flow of trade, thereby also
benefiting consumer welfare.  The Government considers that competition is best nurtured andsustained by allowing the free play of market forces, including liberal trade.  Thus, the Government
will intervene only when market imperfections or distortions limit market accessibility or market
contestability, and impair economic efficiency, to th e detriment of the overall interest of Hong Kong,
China.  Details are in the text of the policy statement which can be found at the website
http://www.info.gov.hk.
                                                     
1See the submission from Hong Kong, China on th e need for a "WTO Approach" to the interactions
between trade and competition policies in WT/WGTCP/W/64 (1998).WT/WGTCP/W/85
Page 2
4. Hong Kong, China believes that mutually reinforcing liberal trade and competition policies
are instrumental to optimizing economic efficiency and consumer welfare, as well as promoting
greater transparency and coherence of government policies.  In addition, complementary liberal trade
and competition policies can enhance the political credibility and integrity of the WTO system.  On
this basis, the "WTO Approach" has been advan ced to address the many inconsistencies between
existing trade and competition rules and policies - not only at the international level but also within
WTO Member economies.
5. In its previous submissions to this Working Group, Hong Kong, China has set out its views
and practical experiences regarding the need for making trade and competition policy objectives and
instruments more consistent.2  In summary, we submit that the policy challenge is for WTO Members
to promote the welfare-increasing synergies between trade liberalization and pro-competition policies,
and to reduce the inconsistencies and welfare-reducing effects of trade restrictions and exemptionsfrom competition rules.
III. DIFFERENT TREATMENT OF INTERNATIONAL PRICE DIFFERENTIATION
UNDER TRADE AND COMPETITION RULES AND POLICIES
6. Proposals for introducing into WTO new competition rules on private  anti-competitive
practices, though important, will remain one-sided and lack credibility, if governments undertake orcondone at the same time other policies which undermine the quality of the competitive market.
Additional WTO disciplines requiring governments to review anti-competitive trade rules are
warranted.
7. Trade restrictions can reduce import competition and consumer welfare, while distorting
relative prices.  The following paragraphs illust rate inconsistencies between trade rules in their
treatment of international price differentiation, a nd how such inconsistencies may conflict with the
basic trade and competition objectives of optimizing economic efficiency and consumer welfare.
They point to the need for competition-oriented reforms of WTO rules.
(a) International Price Differentiation Allowed under GATT State Trading Rules
8. GATT Article XVII on STEs does not prohibit public or private enterprises from practising
price differentiation in their sales.  Paragraph 1 of the interpretative note regarding Article XVII
states:  "[t]he charging by a state enterprise of different prices for its sale of a product in different
markets is not precluded by the provisions of this Article, provided that such different prices are
charged for commercial reasons, to meet conditions of supply and demand in export markets."  The
economic rationale of this provision is the recognition that there may be legitimate commercial
reasons for enterprises to differentiate their inte rnational sales prices according to differences among
the relevant markets (e.g., different consumer preferences) and according to what the market bears.
(b) Price Differentiation and the WTO Subsidies and Countervailing Rules
9. Price differentiation is not prohibited under the WTO Agreement on Subsidies and
Countervailing Measures, even though actionable subsidies may be liable to remedies and
countervailing measures.  In fact, production subsid ies do not necessarily distort consumer prices, and
many WTO Members who practise such subsidies seldom resort to countervailing measures toneutralize the cost-advantage of subsidized imports.
                                                     
2See notably our submissions published in documents WT/WGTCP/W/15, 26, 50, 53 and 64.WT/WGTCP/W/85
Page 3
(c) Price Differentiation Protected by Intellectual Property Rights
10. GATT (e.g. Article XX(d)) permits WTO Members to protect international price
differentiation based on intellectual property rights (IPRs), licensing agreements, and judicial or
administrative injunctions blocking "parallel importation" of goods or services into a national or
regional territory.  The importation of a good or service into a national or regional territory where it isprotected by an IPR after it has been sold with the right holder's consent outside that territory is
commonly referred to as the "parallel importation" of that good or service.  Within national territories
and also within regional common markets like the European Community, governments support the
idea of "national exhaustion" or "regional exhaustion", according to which the private right to control
the movement of a good or service based on an IPR is exhausted when such a good or service is first
sold with the consent of its IPR holder inside the national or regional market.  Yet, if the good or
service is sold outside the national territory of the IPR holder, or outside the regional common market,many governments allow the IPR holder to block parallel imports of genuine products outside
contractual channels of distribution.  This denial of "international exhaustion" enables IPR holders to
separate markets and differentiate prices in different markets.
(d) Competition Rules Promote Economically Justified Prices
11. Competition rules in general are not concerned about price differentiation  per se .  The focus
is on whether the price is economically justified, having regard to the cost structure, market situation
and intention of the suppliers involved.  Given the importance of the pricing mechanism in the
operation of market forces, price differentiation per se  is neither condoned nor condemned.  Only a
pricing policy which cannot be justified economically and which can be abused for predatory
purposes would competition rules prohibit.  Selling below costs is prohibited by EC competition lawonly if a dominant firm sells below average variable costs, or below average total costs with the intent
to drive a competitor out of the market.  US antitrust law regarding predatory pricing considers below-
cost sales to be illegal only if the alleged predator has a dominant position and is able to recoup its
losses during the "predatory pricing period" so much so that the market risks becoming monopolized.
3
(e) International Price Differentiation and Anti-Dumping Rules
12. GATT Article VI and the various GATT and WTO Agreements on Implementation of
Article VI do not prohibit international price differentiation either.  Dumping is condemned only "if it
causes or threatens material injury to an establishe d industry in the territory of a contracting party or
materially retards the establishment of a domestic industry" (Article VI:1).  As anti-dumping
initiatives are liable to come from industries dominated by a few domestic suppliers with the intention
of limiting import competition and enable import-competing producers to maintain high consumer
prices and "protection rents", Article 3 of the WTO Anti-Dumping Agreement requires that "trade-restrictive practices of and competition between the foreign and domestic producers" be taken into
account in the determination of injury.
13. However, the WTO rules on the determination of dumping, injury and causality are so
broadly drafted that anti-dumping measures are often imposed even if international price
differentiation is economically justified (e.g. because of anticipated change in tastes or differentelasticity in different economies), and if dumping neither endangers nor distorts competition in the
importing economy (e.g. when the often small market shares of allegedly dumped imports render
abuses of market power impossible).  Empirical st udies have shown that anti-dumping measures are
often abused for restricting import competitio n and for complementing domestic restraints of
competition.  While price collusion is regarded as anti-competitive, "price undertaking" by the
                                                     
3For details see:  E.U. Petersmann, The Need for Integrating Trade and Competition Rules in the WTO
World Trade and Legal System, Geneva:  Graduate Institute of International Studies, 1996, at 33-34.WT/WGTCP/W/85
Page 4
exporting producers at the request of domestic producers of the importing economy is considered an
acceptable way to terminate anti-dumping proceedings.
IV. OPTIONS FOR ENHANCING CONSISTENCY BETWEEN TRADE AND
COMPETITION POLICY
14. Central to the realization of the WTO objective of enhancing economic welfare is the
promotion of efficient resource allocation.  This can best be achieved by ensuring the contestability of
markets through greater transparency, greater coherence in economic governance, and the elimination
of trade and competition distorting practices.  Thus, options need to be identified to address the
current inconsistencies between trade and competition policies.
(a) The Need to Address Distortions of Competition Directly at Source
15. The economic theory of optimal interventions prescribes that efficient government policies
must correct distortions of competition at th eir sources, without creating additional by-product
distortions.  Distortions are likely to arise when government policies protect competitors rather than
competition;  or when they fail to address the problems at their sources.
16. Competition aims at ensuring that, in the long run, resources are used most efficiently and
consumer welfare is optimized through greatest possible product choices at lowest possible prices.Should price differentiation result from the predatory practices of a monopoly in an exporting
economy with a captive and closed market, then redu cing market barriers and promoting competition
in the exporting economy provides the solution.  If , however, the markets in both the importing and
exporting economies are open and contestable with minimal barriers to new entrants, and dumping is
"found" only because of the mechanical application of certain formulae or an alleged injury on thepart of the importing-competing producers, then there is a case first to examine the comparative
disadvantages of import-competing producers, with a view to ascertaining whether economic
structural adjustment is called for, despite the short-term pain it may cause to the domestic sectors
affected.
(b) Possible Incentives for Pro-Competitive Trade Liberalization:  Example of "Free Trade
and Competition Commitments"
17. The need to address distortions of competition at source calls for more incentives to be
provided for pro-competitive trade liberalization.  Reference may be drawn from the model of
phasing-out anti-dumping rules in some regional trade agreements.  The WTO may consider
providing for the phasing-out of anti-dumping measures vis-à-vis WTO Members which commit
themselves to free trade and open competition.  Detailed modalities will need to be developed.  Theprinciple is that such "free trade and competiti on commitments" should set pro-competitive, mutually
beneficial incentives for trade liberalization and effective competition, in contrast to the anti-
competitive, mutually harmful trade restric tions imposed under existing anti-dumping rules.
(c) Competition-Oriented Reform of Existing WTO Rules18. To ensure that the benefits of trade liberalization will not be undermined by anti-competitive
measures, there is a need for a competition-oriented reform of WTO rules.  Such reform should
remove the bias towards competitors which constrains market access and competition from foreign
sources.
19. Governments professing liberal trade and pro-competition philosophies can take a lead in
such reform.  A starting point would be anti-dum ping laws, where existing provisions should be
reviewed.  Such review should ensure, inter alia , that international price differentiation on its own
would not be a pretext for action;  and the producer-oriented injury concept should be replaced by aWT/WGTCP/W/85
Page 5
competition-oriented concept focusing on the risks of "monopolizing dumping.4  Empirical studies
show that anti-dumping measures are often imposed without evidence of "monopolizing dumping",
and they have reduced competition and consumer welfare in the importing economies.5
V. CONCLUSION
20. Pursuant to the time-honoured GATT and WTO traditions, governments should continue to
accord priority to reducing their own market barriers, this being the most direct and efficient way to
redress distortions of trade and competition.  In  addition, an amalgamation of pro-competitive
incentives with existing trade measures will inject a fresh impetus towards liberalization.
21. If important inconsistencies are recognized between trade and competition policies, and we
wish to arrive at greater consistency, then the Working Group should recommend a gradual reform of
WTO rules.  Discussions of policies relating to private monopolies and dominant suppliers can serve
a useful complementary function, provided that they do not divert attention from the priority task ofintroducing competition-oriented reform to tackle widespread governmental  distortions affecting trade
and competition.
__________
                                                     
4For a recent survey of this literature see e.g.:  R.A. Lipstein, "Using Antitrust Principles to Reform
Antidumping Law", in:  E.M. Graham and J.D. Richardson (eds.), Global Competition Policy , Institute for
International Economics, Washington, D.C., 1997, 405 - 438.
5OECD Economics Department Working Paper No. 165, Trade and Competition:  Frictions after the
Uruguay Round,  Paris 1996.  Attention is also drawn to "Antidumping:  What Does the Evidence Show?" by
Robert Willig, in Robert Z. Lawrence (ed), Brookings Trade Forum:  1998 , the Brookings Institution, to be
published.