WORLD TRADE
WT/WGTI/W/63
12 November 1998
ORGANIZATION
(98-4466)
Original: English
Working Group on the Relationship
between Trade and Investment
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 5 November 1998, has been received from the
Permanent Delegation of the European Commission with the request that it be circulated to Members.
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The following submission is the second part of a paper "On the relationship between the
trade-related aspects of intellectual property rights and competition policy, and between investment
and competition policy", already submitted by the European Community to the WTO Working Group
on the Interaction between Trade and Competition Policy.
The relation between investment and competition policy
Introduction
1.
Foreign investment1 has become an important source for governments seeking to create
employment, attract technology and enhance the competitive base of the domestic economy. Foreign
investment has grown very rapidly in the last years, driven by companies adopting international
production methods or wanting to serve different markets.
2.
This part of the submission will examine the interaction between the adoption of liberal trade
and investment policies and the putting in place of domestic competition structures. This submission
will highlight the basic complementarity of these two policies, as witnessed by the fact that so many
countries have recently changed their investment régimes and have enacted or are considering to enact
competition laws. Special attention will be devoted to policy choices for developing countries.
3.
It should be noted, by way of background, that UNCTAD's 1997 World Investment Report2 is
devoted specifically to the relationship between foreign investment liberalization and competition
policy, and that this relationship has also been covered in the WTO Secretariat's 1997 Annual Report3.
Background
4.
International flows of foreign investment have in recent years grown at a much faster rate than
cross-border trade of goods. The growing consensus that the effects of foreign investment on a
domestic economy are generally positive, coupled with the adoption of more liberal trade policies and
deregulation world-wide, have triggered a very rapid increase of foreign direct investment ("FDI")
flows. Both developed and developing countries have benefited from this trend, and developing
1
Foreign investment in this submission is understood to be foreign direct investment characterised by a
longer-term investment horizon including a degree of management control. This is distinct from foreign
portfolio equity investment, which can also be an important source of incoming capital, but generally has a more
volatile character.
2
See notably pages 183-233.
3
See pages 70-72.
WT/WGTI/W/63
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countries are now host to about 40 per cent of incoming investment, while their share of outflows is
around 15 per cent. Overall the liberalization of investment opportunities, whether its origin is
foreign or domestic, is seen as central to the increase of competition and growth of economies.
5.
It is generally recognized today that regulatory policy, trade policy, FDI policy and
competition policy are at the centre of choices of governments seeking to enhance national growth
and welfare by improving the allocation of resources and contestability of markets. It is also
increasingly confirmed that consistency and coherence between these policies is important, all the
more so in view of the fact that in many countries trade liberalization, FDI liberalization, domestic
deregulation and the introduction or reinforcement of compeition policies are taking place
simultaneously.
Domestic competition structures are complementary to liberal trade and investment policies
6.
A key question for many countries applying more liberal trade and investment policies, or in
the process of deregulation, is to what extent these policies need to be supported by the adoption of
competition policy structures. This question is notably poignant for developing countries, since
competition policy may require additional resources to set up new administrative capacity and
structures.
7.
The main arguments that are put forward to support the establishment of domestic
competition structures can be summed up as follows:
8.
Firstly, there are sectors in the economy of every country that may remain, to a degree,
unaffected by trade and investment liberalization, such as for example services that are not traded
internationally and may depend on national qualifications. For these sectors competition policy can
be a good instrument at hand to guarantee effective competition so that benefits of policy reforms
accrue to consumers.
9.
Secondly, the deregulation and privatisation policies that are being pursued in many countries
are often far-reaching, ranging from telecommunications, energy and postal services to airlines and
other forms of transport. The success of these policies, as well as their acceptance by the public at
large, will depend on the ability of governments to inject and uphold sound competition once the
market has been liberalized, including through the application of competition law and pro-competitive
regulatory régimes.
10.
It is interesting to note that the European Community's member States have also strengthened
their competition policies individually. An example, among many, is the Netherlands, which has a
relatively small domestic market compared to the EU as a whole and a great openness to foreign trade
and investment, yet has in the last few years chosen to change its basic competition law and to
strengthen the independence, administrative capacity and instruments of the competition law
enforcer4.
11.
Thirdly, a legal and administrative framework to guarantee sound competition can help set
proper conditions for a successful implementation of liberal trade and investment policies. A key
element in the overall policy debate is that foreign companies, when considering investment options
in different markets, will place a high premium on the country that has the most developed legal
system in terms of allowing access and protection of the investment, reducing administrative burdens
and addressing distortions of the competitive process. A stable framework of competition rules will
attract foreign investment by strengthening the regulatory fabric of the economy and confidence in the
stability of policy.
4
Of course, EC competition law applies to all practices in the Community as soon as trade between
member States may be affected.
WT/WGTI/W/63
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12.
The change in the investment régimes of many countries has been driven by the recognition
that an ex ante screening of foreign investment through centralised application procedures, often
including onerous pre-establishment requirements or targeted priority sectors, may in fact lead to
significant welfare costs, deter the transfer of technology and discourage foreign investment
generally. Nowadays, in many different countries, governments may even seek to encourage
investment through policies such as the granting of tailor-made fiscal or other benefits, or through the
application of trade restrictions such as higher tariffs, to shield the new investor from competition
through imports.
13.
While the above bears witness to the policy changes that have been adopted more or less
widely, many countries, including developing ones, may remain concerned that investment
liberalization could lead to unfair competition or monopolisation by capital-intensive foreign
companies seeking to enter the market. In all such cases, antitrust agencies can perform an important
task to protect consumers and competitors against anticompetitive practices.
14.
It should be noted that no clear correlation has been found to exist between a liberalization of
foreign investment by developing countries and an increase of concentration in their markets.
Moreover, as the object of competition laws is to benefit consumers and uphold the competitive
process of a national economy irrespective of the origin of a producer or service provider, their
application may, of course, also work the other way. It could, for example, affect incumbent firms if
these should seek to form a cartel or resort to other anticompetitive behaviour to keep out a foreign
entrant. It is therefore essential that competition laws are neutral in their application, so that
anticompetitive practices can be addressed regardless of whether they are undertaken by domestic or
foreign companies. Procedural aspects of competition laws, such as the provisions relating to access
to national courts, the imposition of remedies, appeal procedures, transparency and motivation
requirements, should also in general be neutral and not in any way differentiate between domestic or
foreign producers.
15.
Fourthly, competition policy can be an essential complement to investment liberalization in
other respects too. Investment, both foreign and domestic, can take a number of forms, such as
through a greenfield investment or through a merger or acquisition. The effect on competition may be
different in each case: while a greenfield investment will generally increase the number of
competitors, in case of a merger or acquisition efficiency advantages may have to be weighed against
a reduction in the number of suppliers or the strengthening of a dominant position. Here again the
advantages of case-by-case supervision by a well-functioning competition authority, and of the ex
ante control provided by merger pre-notification legislation, may be invaluable to support healthy
competition in the economy.
16.
Overall, when liberal investment and trade policies are combined with an effective
competition policy and are pursued together, this is likely to increase the positive effects of
investments including foreign investment, and to lead to improved levels of competitiveness both in
the domestic market and in the ability of companies to compete on international markets.
WT/WGTI/W/63
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Costs and benefits of competition laws
17.
The application of competition policy requires a complex assessment of business practices in
dynamic markets, as well as the use of investigative powers, and therefore necessitates a qualified
staff and a proper administrative and judicial capacity. Yet despite these costs, over seventy countries
have adopted competition laws, many of which have also been strengthened in the past decade in
terms of stricter and broader rules and higher penalties. Many other countries are also in the process
of elaborating such laws or considering their adoption. It is, therefore, fair to say that it is
increasingly accepted that a well-functioning competition agency is the appropriate vehicle to replace
heavy ex ante administrative procedures to vet foreign investment and other establishment
requirements5, while it also confers related advantages such as facilitating further deregulation of the
economy. Moreover, because competition policy takes a case-by-case and an almost surgical
approach to protect the competitive process, it is likely to turn out to be an efficient and cost-effective
instrument. In general, it may also enable a decrease of bureaucracy in the government as a whole.
Lastly, much enforcement of competition laws is also realised by private parties before civil courts,
and would not require the involvement of governmental agencies.
The international dimension of investment and competition policies
18.
It is interesting to note that as the GATT has evolved into the WTO, the trading system now
includes an increasing number of rules on either investment or competition protection. The most
important mode of delivery in services trade, for example, is generally foreign investment through
commercial presence. An access commitment negotiated accepted in a services negotiation thereby
creates a right to invest through establishment in that country. Moreover, the GATS Agreement 6 on
trade in services provides that WTO Members shall ensure in all sectors where commitments are
taken, including on investment through commercial presence, that a supplier in that sector does not
abuse its monopoly position or act in a manner inconsistent with those commitments. Furthermore,
during the recent telecommunications negotiations, it was recognized that commercial presence
commitments needed to be strengthened by competitive safeguard provisions to protect competition
between providers and to ensure competitive and non-discriminatory access to fixed networks. More
than 55 countries agreed to guarantee such procompetitive regulatory principles through adoption of
the so-called reference paper.
19.
As a response to the growth of FDI more and more countries have come to conclude bilateral
investment protection agreements. There are today about 1,600 bilateral investment protection
agreements, where there were about 600 in the early nineties.
20.
Similarly, the last few years have seen an increase in the number of bilateral and regional
agreements containing provisions on cooperation in the field of competition policy. It is true that the
latter can differ in scope and depth, depending on the development of domestic competition
structures. An increasing number of countries, however, have come to recognize the benefits of
closer international cooperation.
5
Many countries have started streamlining their foreign investment laws and phasing out preestablishment requirements such as those relating to the product range or production capacity of a potential
investment, to minimum local content, export performance, foreign exchange balancing and technology transfer
requirements, as well as to maximum foreign equity caps in specific sectors. It should be noted that effective
screening procedures also require considerable administrative resources, which would be freed by this
streamlining process.
6
Article VIII GATS.
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Summary and conclusions
1.
This submission, which should be seen together with previous submissions by the European
Community and its member States, draws particular attention to the following issues:
2.
There is a basic complementarity between the liberalization of trade and investment régimes,
the protection of intellectual property rights and an active policy of competition law enforcement.
Many WTO members, including in particular developing countries, have undertaken economic
reforms in all these areas, as a means of promoting growth and efficiency and enhancing the capacity
of domestic firms to compete in international markets. These reforms have also implied moving away
from administratively burdensome and inefficient methods of ex ante screening of foreign investment.
A stable, non-discriminatory and transparent legal framework for business, of which competition law
is an essential component, is increasingly seen as essential for attracting investment, ensuring the
benefits of trade liberalization, as well as to address anticompetitive practices.
3.
The benefits for growth and development of liberalization of foreign investment régimes are
generally recognized. Many WTO members, including in particular developing countries, have seen
the advantages of proceeding in parallel with a liberalization of rules concerning foreign investment
and a reinforcement of competition law structures. A transparent and non-discriminatory competition
law framework provides the means to address anticompetitive practices, regardless of whether these
are undertaken by domestic or foreign firms. This function can be best exercised by a competition
authority with sufficient powers of investigation and enforcement in relation to anticompetitive
agreements or abuses of a dominant position, as well as through the ex ante control provided by
merger pre-notification legislation. As already noted, in setting out such an authority and enhancing
their enforcement capacity, developing countries would require international assistance and
cooperation.
4.
These trends underscore that investment and competition policies, while distinct and separate,
have an increasing international dimension and would both benefit from enhanced multilateral
cooperation. Open investment policies and active competition policy enforcement complement each
other and contribute to enhanced efficiency growth and development.
5.
The WTO Singapore Declaration established two Working Groups to examine the
relationship between trade and investment and the interaction between trade and competition policy.
The European Community and its member States believe that there is a case to consider the
development of a multilateral framework in each of these areas. In our view, multilateral rules would
contribute towards enhanced coherence, predictability and convergence, as well as reinforce the
multilateral trading system.
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