Competition Policy in Trade Agreements

Introduction to Competition Policy

• Competition policy is crucial for trade agreements as it promotes competitive markets and efficient allocation of resources.
• Anticompetitive practices, such as price fixing, can increase prices by 49% on average.

Role of Competition Policy in Trade Agreements

• Effective competition policy frameworks can help achieve several objectives, including facilitating market entry, ensuring a level playing field, and discouraging anticompetitive behavior.
• Three pillars of an effective competition framework:
  • Fostering pro-competition regulations and government interventions
  • Ensuring competitive neutrality in markets
  • Economy-wide enforcement of competition laws
• Competition policy is being included in an increasing number of trade agreements, with over 200 preferential trade agreements (PTAs) including some reference to competition policy.

Prior Studies on Competition Commitments in Trade Agreements

• Studies by ECLAC, UNCTAD, and OECD have analyzed competition commitments in PTAs.
• These studies have found that competition provisions in PTAs can benefit developing economies and help achieve deeper integration.

Economy-Wide and Sector-Specific Competition Provisions in PTAs

• Key provisions covered in a 2009 study include:
  • Overall objectives of the PTA
  • Horizontal principles of non-discrimination, transparency, and procedural fairness
  • Sector-specific competition provisions involving investment, services, government procurement, and intellectual property
  • The competition policy chapter of the agreement
• Bilateral PTAs are more likely to include economy-wide and sector-specific competition provisions than multilateral agreements.

Anticompetitive Provisions in PTAs

• PTAs tend to focus on anticompetitive conduct rather than merger control or state-related market distortions.
• Concerted practices and abuse of market dominance are the most common anticompetitive issues addressed in PTAs.
• Bilateral PTAs are primarily concerned with regulating designated monopolies and state-owned enterprises (SOEs).### Multilateral Agreements and Competition Provisions
• Multilateral agreements include more competition provisions related to services and government procurement sectors (16% and 12%, respectively)
• Such agreements address market failures that national competition laws cannot, creating an incentive for implementing and locking in national competition policy regimes

Methodology

• The study reviews competition provisions in over 200 multilateral, regional, and bilateral trade agreements
• Provisions are categorized into economy-wide and sector-specific obligations, and their enforceability is assessed

Economy-Wide Obligations

• Classified into four categories:
  • General objectives: inclusion of competition as an overall objective of the trade agreement
  • Horizontal principles: transparency, non-discrimination, and procedural fairness
  • Competition policy: objectives of the competition chapter, commitments for coordination, exchange of information, and technical assistance
  • General exceptions: exceptions to the agreement and specific exceptions related to national security and competition commitments

Sector-Specific Obligations

• Classified into three categories:
  • Prohibitions against rules that reinforce dominance or limit entry
  • Prohibitions against rules conducive to collusive outcomes or increasing the cost of competing
  • Prohibitions against discrimination or protection of vested interests

Enforceability of Provisions

• Levels of enforceability: non-binding, best effort, binding with no dispute settlement mechanism, binding with state-to-state dispute settlement, binding with private-state dispute settlement, and binding with both private-state and state-state dispute settlement
• Weighted enforceability level (WEL) is calculated for each provision based on the level of enforceability

The Growing Role of Competition in PTAs

• Over 80% of PTAs studied have competition-related provisions
• PTAs with competition-related provisions are not a recent phenomenon, but have increased in proportion to the increase in the number of PTAs over the decades
• Bilateral PTAs with competition-related provisions are more common (59%) than multilateral agreements (41%)

Regional Distribution of PTAs with Competition-Related Provisions

• East Asia and the Pacific (EAP), Europe and Central Asia (ECA), and Latin America and the Caribbean (LAC) account for 95% of bilateral PTAs
• Countries from EAP and LAC are more likely to form PTAs with partners from other regions### Competition Policy in Trade Agreements
• 239 PTAs include competition provisions, with 90.1% including at least one horizontal principle (transparency, non-discrimination, and procedural fairness) and 30% including all three.
• Figure 17.7 shows the general objectives and horizontal principles of PTAs with or without competition provisions.

National Competition Requirements

• 123 PTAs require each party to adopt a competition law, and 74 require the creation of a competition authority.
• Examples of PTAs with national competition requirements include:
  • EU-Canada (CETA) agreement, which requires consistent rules tackling anticompetitive conduct.
  • 43.2% of PTAs require the law to apply to all sectors and economic agents.
• Exclusions from competition law are allowed in some PTAs, such as:
  • Chile-Australia, Canada-Colombia, and Trans-Pacific Strategic Economic Partnership (TPSEP) agreements.

Institutional Obligations

• 64% of PTAs that require a competition authority focus on the functionality of the institution rather than its independence or resources.
• Examples of PTAs with institutional obligations include:
  • PTAs with the East African Community (EAC), which require both functionality and sufficient resources.
  • Association agreements with the EU, which require both independence and functionality.

Promotion of Competition and Principles

• Competition policy provisions range from acknowledging the importance of undistorted competition to concrete obligations to promote competition under principles of transparency, enhancement of economic efficiency, and cooperation.
• Examples of PTAs with competition policy provisions include:
  • EU-Moldova, which acknowledges the importance of undistorted competition.
  • Hong Kong SAR, China-Chile, and Canada-Honduras, which include obligations to promote competition under transparency, enhancement of economic efficiency, and cooperation principles.

Substantive Provisions Regulating Competition Policies

• 114 PTAs include substantive commitments, and 44 PTAs refer to other international instruments.
• Examples of PTAs with substantive provisions include:
  • PTAs with the EU, which regulate anticompetitive behavior, abuse of dominance, and mergers.
  • Agreements with MERCOSUR, which regulate harmonization of competition policy within the region.
  • Economic Community of West African States (ECOWAS), which regulates regional competition rules.

PTAs Regulating Substantive Antitrust Obligations and Merger Control

• 113 PTAs cover cartels and abuse of dominance, 28 include only merger control provisions, and 24 PTAs cover all three types of anticompetitive conduct.
• Examples of PTAs with substantive antitrust obligations and merger control include:
  • EU agreements, which prohibit cartels, abuse of dominance, and anticompetitive mergers.
  • COMESA, which regulates anticompetitive practices and merger control.
  • CETA, which includes mutual recognition of competition definitions and application of competition policy to enterprises.

Procedural Fairness Commitments

• 80 PTAs include at least one procedural fairness provision, with 55% being bilateral PTAs.
• Examples of PTAs with procedural fairness commitments include:
  • The proposed Trans-Pacific Partnership (TPP), which emphasizes procedural fairness.
  • KORUS and the EU proposal for TTIP, which also prioritize procedural fairness.