Adverse effects of international cartels on developing
countries: limits of domestic competition legislation
Sao Paulo, April 23 2003
Dr. F.J.L. SOUTY
Counsel for Multilateral Affairs, Competition Council,
Paris
Professor, University of La Rochelle
25B
Three parts
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Part one: on trade liberalization, competition
and development

Part two: On Goals, Scope and Exemptions or
Exceptions of competition law for development

Part three: On actual international anticompetitive
practices and their harm to development
Part One
On trade liberalization, competition and
development
On Trade Liberalization,
competition and development
Trade liberalization is a necessary condition for the growth
of developing economies, because it allows them to buy
cheaper and to sell on larger markets
 However, trade liberalization is insufficient to ensure that
international trade will take place or that the expected
benefits from trade will materialize
 Indeed, private anticompetitive practices as well as
domestic regulations can:
- defeat trade liberalization and

- deprive nations of the benefits of free trade
On the contribution of competition to
development
Economic analysis suggests that market rivalry
and competitive behaviors contribute to static and
dynamic efficiencies
 Promoting competition both in developed and
developing economies may well contribute to:
- increasing the competitiveness of industries
-enhancing the real income of consumers
- allowing the exercise of freedom of
entrepreneurship

Competition policy and development

Competition policy is necessary
1) to prevent domestic monopolization, crony capitalism and
anticompeitive practices leading to inefficiencies
2) to allow economic agents to reap the benefits of economic freedom
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Industrial policy and capacity building are also useful
in the initial stages of economic development because of
imperfect markets, scale economies and need of
technology transfer
Developing countries (just as developed countries have
done) need an «optimal amount» of competition (a
blend between competition policy and industrial policy)
As markets progress in maturity (i.e. develop), competition policy plays an increasingly important role
A particular case: small economies
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Competition law should promote competition whenever
competition is likely to promote efficiency
In small economies, market concentration tends to be
higher than in larger economies (see «relevant market»
definition perspectives); small economies are particularly
vulnerable to abuses or misuses of market power
Small economies tend to be more open and more
dependent on foreign trade than larger economies and
more vulnerable to offshore anticompetitive practices
(World Bank study)
There is no One-size-fits-all
Competition law
The design of a Competition law must take into
consideration:
- the legal environment (i.e. administrative fines vs
criminal sanctions; public enforcement vs private
enforcement, per se rules vs rules of reason)
- Economic circumstances (efficiency defense,
exemptions, relationship with regulatory agencies
- Political and social choices (scope of the law,
substantive standards such as public interest,
consumer surplus, regional surplus etc...)

Part Two
On Goals, Scope and Exemptions or
Exceptions of competition law for
development
What are the different goals of
Competition Law ?
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Efficiency (US and most other jurisdictions but often combined
with other goals)
Fairness (Japan, France, Korea)
Limiting Economic Power (Germany, Korea, Countries in
transition)
Promotion of competitiveness (Canada)
Empowering disenfranchised segments of population (South
Africa)
Other socio-economic goals (i.e. promotion of employment)
Trade-off: A Competition Law cannot be a stand-alone law or ignore
the cost of transition to a market economy; it can thus legitimately
include socio-political goals. But there is a risk that the goals contradict each other resulting in legal uncertainty and unpredictability
Scope & boundaries of Compet° Law
Anywhere Competition Law has limits:
 Other laws (i.e. labor laws, sector specific
regulations, public procurement law/code...)
 Legal and economic exemptions written
into the competition law (i.e. efficiency
defence)
 General Legal principles (i.e. export cartels)
Exemptions: Sectoral
 Agriculture
(EU, US, Japan)
 Baseball (US)
 Maritime conferences (many countries)
 Books, newspapers, CDs are partially exempted in a number of countries in which
RPM is not illegal
 Banking and Insurance sectors (structural
aspects)
Exemptions for certain practices
 Crisis
cartels (Germany, Japan, Korea)
 Government practices (State Action Doctrin
in the US)
 Public subsidies (exempted in the US but
partly covered in the EU)
 Export Cartels (mostly exempted following
the Effect Doctrin)
 Legal harassment (cannot be an anticompetitive practice in France)
Exemptions for certain economic actors
Some operators are exempted because of a.o. the nature
of their activity for general social or political purposes
 Professional organizations
 SMBs («de minimis» rule in the EU, equivalent in the US)
 Services of general interest performed by Enterprises
enjoying Exclusive or special rights (State owned enterprises in certain countries, private enterprises in others)
 Labor Unions
 Individuals
Exemptions/Exceptions
Trade-offs:
- exemptions and exceptions may facilitate the achievement
of the politicial consensus necessary for the adoption a
Compet° Law (particularly when thet concern sectors in
which there is a risk of a massive transitional cost
following the introduction of competition)
- E&E must be TRANSPARENT, should be reviewed
regularly. They can weaken the effectiveness of the
competition law and encourage political lobbying by
professionnal groups
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Part Three
On actual international anticompetitive
practices and their harm to development
What are the transnational private
anti-competitive practices ?
 Horizontal
cartels (Lysine, Vitamins,
Cement)
 Vertical arrangements (Kodak/Fuji case)
 Abuse of a Dominant Position (Microsoft)
 Mergers (Boeing-McDonnel Douglas,
GE/Honeywell, Coca-cola/CadburySchweppes, Beer in L.A., Dairy industry in
Africa, Cement industry anywhere)
Transnational A/C practices that
affect Trade: a Typology
 Two
types:
1. Defeating trade liberalization (import
cartels, domestic abuses of a dominant
position and monopolization, vertical
restraints, some international cartels)
2. Depriving Nations of the benefit of Trade
(export cartels, domestic abuses of a
dominant position A/C transnational
Mergers, international cartels)
The cost of transnational A/C
behaviors and practices
Contrary to frequently held misconceptions, transnational A/C practices:
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inflict serious harm to consumers (i.e. in the graphite electrode
case, the cartel members increased their price by 60% resulting in
an overcharge of nearly USD 1 billion a year; in the lysine cartel,
prices were doubled)
are often stable over time (average duration of cartels for which
there is publicly available information is 6 to 8 years but some
cartels may last considerably longer (up to 40 years for the
International Electrical equipment cartel)
affect a large number of sectors (i.e. steel, plastic diner ware,
thermal fax paper, heavy electrical equipment, glass, graphite
electodes, vitamins, lysine, citric acid etc.)
International A/C practices and developing
countries
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A/C practices are often aimed at preventing the emergence of local
industries in developing countries (i.e. use of dumping by heavy
electrical equipment manufacturers and in the steel industry)
They are most harmful in countries which do not have strong
antitrust laws (mainly developing countries now)
They hurt developing countries which are crucially dependent on
imports (for access to basic industrial products not produced
locally) or on exports (for their growth) and have weak industrial
structures
In 1997, developing countries imported USD 81 billion of goods
from industries which had been affected by price fixing
conspiracies during the 1990s. These imports represented 6.7% of
imports and 1.2% of the GDP of the developing countries (data
from World Bank)
International A/C practices and developing
countries: costs and magnitude I
The order of magnitude of international aid to
development is about USD 50 billion p.a.
 Thus, at a minimum, the existence of A/C
transnational cartels implies tranfers (in the form
of overcharge) from developing countries to cartel
members (often if not mostly firms from developed countries) which represent at least half of the
value of the development aid given by governments of developed countries to developing
countries
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International A/C practices and developing
countries: costs and magnitude II
A Feb 2003 UNCTAD study estimates the welfare impact of various
hypothetical trade liberalization measures and states « a worldwide
reduction of 50% in all agriculture tariffs brings about an aggregate
welfare gain of USD 21.5 billion... The largest absolute gains are
captured by Japan, North America, the NICs, North Africa and the
Middle East, and Oceania. The estimate percentage gain for subsaharan Africa and L.A. is lower than in other studies conducted
under similar assumptions.... Since Africa and L.A. are among the
major beneficiaries of preferential schemes, it sems likely that gains
from liberalization for these countries in other studies could be
overstated when full account is not taken of tariff preferences as has
been done here». A further analysis using the UNCTAD figures
shows that the net welfare benefit for developing countries from
such an agreement would be equal to USD 13.4, down from the
USD 21.5 billion in total.
International A/C practices and developing
countries: costs and magnitude III
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Following the Feb 2003 UNCTAD study*, the net annual
welfare benefit for developing countries from a theoretical
drastic multilateral reduction in agricultural tariffs (USD
13.4 billion) is about half the minimum estimate of the
direct benefit they would get if a multilateral agreement on
compeition enabled the elimination of international cartels
and therefore the supra-competitive margin they have to
pay to cartels members when they import goods (USD 2025 billion)
* UNCTAD, «Back to Basics: Market Access Issues in the Doha Agenda,
Chapter V, Estimated gains from multilateral trade liberalization», Geneva,
United Nations Feb. 2003