Encouraged by the success of the Basle Agreements in establishing international capital standards for commercial banks, the authors put forth their view that "similar, strategic 'cooperative unilateralism' could have the same catalytic power for integrating trade, investment, and competition policies." Edward M. Graham is a senior fellow at the Institute for International Economics (IIE) in Washington, D.C. J. David Richardson, a visiting fellow at IIE, is professor of economics in the Maxwell School of Citizenship and Public Affairs, Syracuse University.

In recent writings, we have advocated a progressive three-stage integration of competition policies with trade and investment policies. We summarize our proposal here and put forth our view that the United States and the European Union (EU) are ideally poised to begin pursuing it.

Our proposal begins with what we call "cooperative unilateralism" and advances to full-fledged multilateralism as long as performance at the earlier stages is satisfactory. This process is explicitly experimental. That means that commitments are not just incremental, but time-limited. We anticipate more than occasional backtracking from failed procedures and principles -- that is, after all, the way every country's competition policies have proceeded historically.

Similarities and Differences

The United States and the European Union provide ample examples of this experimental process, having, along with Canada, the longest histories of competition policy of any nations. The broad goals of the U.S. and EU competition laws are quite similar -- to prevent the abusive practices associated with cartels, monopoly, and market power. Both the United States and the EU deal, implicitly and explicitly, with trade and investment across subregions within their external boundaries.

But within these broad similarities, the specifics differ substantially as the result of different histories and experiences. Furthermore, these specifics have changed with time, experience, and the benefit of new analytical thinking. For example, in the United States, interpretations of the antitrust laws have shifted in recent years to reflect a growing consensus that the ultimate goal of these laws is to foster economic efficiency exclusively.

Older doctrine considered that there was some tradeoff between efficiency and fairness. While this might sound reasonable and even just, often "fairness" could be interpreted as the need to protect an inefficient seller in a market from an efficient one. Thus, a firm that was innovative or extremely cost effective might, in effect, be punished for its own good efforts. Also, under earlier doctrine, there tended to be excessive concern about market "concentration," often without consideration of the possibility that actions that increased this concentration might also create efficiencies that led to consumer benefit.

This shifting interpretation has been reflected both in the policies of the U.S. antitrust enforcement agencies, the Antitrust Division of the Department of Justice and the Federal Trade Commission, and in decisions taken in U.S. courts.

For example, in past years, so-called "vertical restraints," such as exclusive dealings between supplier and user firms or the granting of exclusive territorial rights to sell a product or service, were often held to be illegal per se. But with some exceptions, these now are judged on the basis of a "rule of reason." When it can be shown that consumers gain from economic efficiencies created by these arrangements, they are held to be legal. Likewise, mergers that significantly increase the market share of merging firms and increase seller concentration were once routinely blocked by the enforcement agencies. Now such mergers likely will be approved (within limits) if they can be shown to increase efficiency such that consumers benefit. None of this changes the basic concept in U.S. law that monopolization of a market is illegal. However, different standards as to what exactly is monopolization and how to prevent monopoly in its incipient stage now prevail relative to those of 20 years ago, and there is widespread consensus among experts that the new standards make much more sense than the old ones.

Similar observations can be made about the European Union's competition policy. It has developed different standards and procedures from those of the United States, partly because of its emphasis on breaking down barriers to integration of its various national markets. Thus, for example, most vertical restraints are illegal in Europe, especially if they create barriers to intra-European trade. However, whole sectors can apply for and receive specific exemptions from the prohibitions. The granting of an exemption is done on a discretionary basis by the officials of the main EU enforcement agency, the Directorate General IV (DG-IV) of the European Commission. Although the basis for an exemption is not necessarily that a particular practice leads to efficiency, it seems to be growing as a justification. Likewise, European policy toward mergers, which rests on a determination of whether a merger is likely to lead to "abuse of a dominant firm position," is evolving toward more explicit consideration of efficiency as a positive factor in this determination. Thus, the evolution of EU policy seems to be in the same general direction as in the United States, although the specifics differ.

Integrating Competition Policies

Our three-stage proposal for competition policy builds on these common goals and the growing consensus over standards and procedures. The first stage also reflects the common U.S. and EU experience of rule-of-reason refinements. We call it "cooperative unilateralism" and purposely make it very procedural. It aims simply to build up a base of informed experience.

The first stage features fact-finding [notified to the World Trade Organization (WTO)], consultation, and mediation, all coupled with clear maintenance of national operational sovereignty. There are no cross-territorial rules and no international panels or tribunals. We envision obligations undertaken by national competition policy authorities, perhaps in concert with trade policy authorities, to investigate, if requested after consultations, specified behavior in their jurisdictions that spills over anticompetitively to others (perhaps subject to some threshold of injury), and to mediate conflicts that remain, with eventual publication of the mediator's report. Eligible practices would be those that most clearly impede "market accessibility," sometimes called contestability. Cartel practices are the clearest example in goods and services trade; investment practices would include barriers to national treatment and to evaluation of mergers and acquisitions with cross-border effects.

The procedural effort would itself be nurtured progressively. It would begin with positive comity, then advance to consultation (eventually mandatory), even among countries with little formal competition policy. It would ultimately involve a commitment to informational mediation, as nations take on more organized competition policy commitments. It would explicitly not involve dispute settlement procedures, which would flow only from our second stage.

Our second stage moves toward multilateralism. It involves a WTO TRAMs (Trade-Related Antitrust Measures) agreement that is patterned on the Uruguay Round's TRIPs (Trade-Related Intellectual Property) agreement. A TRAMs agreement would desirably establish minimal standards for market accessibility. These would concern cartel practices and other "horizontal" restrictions, national treatment for investors (subject to circumscribed exceptions), and procedural rules for cross-border evaluation of mergers and acquisitions that have important international spillovers. One attractive by-product of integrating competition policies with investment policies is that unilateral national enforcement of competition policies becomes easier when there is substantial corporate cross-penetration of markets with affiliates and assets that can be "reached" easily by policy without extraterritorial "over-reaching."

Assuming satisfactory performance at this second stage, our third stage (TRAMs-plus) would extend the coverage of the second stage to more controversial issues, including vertical practices and competition policy "safeguards" -- exemptions for industries that are downsizing. An agreement on vertical practices would attempt to isolate and discipline those that are egregiously anti-competitive, ignoring those that can be argued to enhance efficiencies in contractual supply and distribution chains. Downsizing exemptions would aim at reducing exit costs on a national treatment basis. One example would be to ease restrictions on "rationalization mergers," in which domestic and foreign firms have equal opportunity to absorb weaker rivals in designated "declining sectors" as long as state aid to such sectors (subsidies and trade barriers, including trade remedies) falls below a critical threshold. The second and third stages might be initially restricted to "plurilateral" sets of first movers within the WTO, or more desirably, phased in at different rates by different member groups, as in the case of TRIPs.

All of our stages aim at market accessibility, not market access. Market accessibility is the right to compete; market access is the fruit of successful competition. Our proposals hold sacred the competition policy credo to "protect competition, not the competitor." There is a reason for this strong distinction. Virtually every conception of market access involves a measure. Virtually every measure of market access involves a market share quota. Virtually every quota invites collusion and nonchalance and insulation against bad judgment. Exit becomes unnecessary, even for the incompetent and obsolete. Entry becomes correspondingly more difficult for those with new ideas and new products. Incumbents are coddled, entrants are kept on the fringe. Market access commitments reward mindless incumbency, mere seniority. Market accessibility commitments, in contrast, reward productive ambition and market-tested merit. Market accessibility is not hard to measure. Market accessibility is evaluated by all the new antitrust tests of entry barriers and foreclosure: effects of anti-competitive practices on prices, on competition upstream, downstream, and in adjacent regions and products, on the sunk costs of entry, and on the range of desirable attributes of a product or service.

Breaking New Ground

Until recently, there has been strong caution about proposals like ours. They were viewed as visionary at best. To critics of international competition policy, the complexities, the cultural differences, and the dangers of capture have appeared overwhelming. But we are persuaded that there is a precedent to give a more hopeful foundation and that the two most important players in our proposed process are poised to initiate it.

The precedent that encourages us is not TRIPs, but the Basle Agreements on international capital standards for commercial banks. Those agreements were equally complex. They took more than 10 years to negotiate. They involved diverse agencies. They cut across yawning cross-national differences in the "culture" of finance. They left intact a nation's sovereign power to implement the eventual agreements and to define the important "second-tier" capital assets for its banks. There is no evidence that the agreements have been "captured" by the banking industry.

But the Basle Agreements would never have become plurilateral if it had not been for a daring proposal by the United States and the United Kingdom to proceed bilaterally. That proposal (with open accession) broke the logjam in the broader Basle negotiations and became the foundation of the eventual plurilateral agreement, to the advantage of the British and the Americans.

We think that similar, strategic "cooperative unilateralism" could have the same catalytic power for integrating trade, investment, and competition policies. We think that the United States and the European Union are the ideal candidates for such bilateral policy activism. They could focus the multilateral discussion. Their competition policies have been refined far beyond any others, yet still have a lot to teach each other. A U.S.-EU initiative would be far superior to a "web of bilateral agreements" proposed by some other commentators. We say no web, no cross-cutting sticky strands in which to become entangled. Just solid, straight cooperation between the two players with the most to gain and most to teach, leading naturally, but sequentially, to a multilateral counterpart in the WTO.