GLC TREATY APPRECIATION COMPETITION 2017
THEME: “INTERNATIONAL COMPETITION LAW AND POLICY EUROPEAN CONVENTION ON COMPETITION LAW AND POLICY ARTICLES 101 -109 OF THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION”
TABLE OF CONTENTS S YNOPSIS.................................................................................................................................................................2
GLC TREATY APPRECIATION COMPETITION 2017 ISSUE I:
WHETHER
OR NOT UNDER ARTICLE
101,
THE POINT OF FOCUS SHOULD BE ON THE MODE AND
MANNER IN WHICH A HARMONY CAN BE STRUCK BETWEEN THE
MEMBER
STATES AND THE
EU LEVEL?..3
[B]VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE 101(1) 1................4 ISSUE II: WHETHER PROPERTY RIGHTS
THE
PROCESS
INTER SE TWO
OF
EXPLOITATION
MEMBER STATE
OF
PATENTS
AND
OTHER
INTELLECTUAL
ENTITIES PURSUANT TO AN AGREEMENT
(WHILE
GIVING A FAIR SHARE OF BENEFITS TO THE PUBLIC AND CONSUMERS , BY DETERMINING A REDUCED APPLICABLE PRICE ) AMOUNTS TO THE IMPOSITION OF RESTRICTIONS ON EITHER ONE OF THE
STATE
ENTITIES AGAINST THE PROVISIONS MENTIONED IN
ARTICLE 101(3) ( A)
AND ( B )
MEMBER
?.........................5
[A]
The safe harbour of Regulation 772/2004.............................................................................................6
[B]
Assessment of licensing agreements outside the TTBER.....................................................................7
[C]
Expiry of the TTBER in 2014 and review of the current regime.........................................................7
[D]
Pay-for-delay patent settlements in the pharmaceutical sector.............................................................7
[E]
Article 102 TFEU: refusal to grant IP licences and compulsory licensing...........................................8
ISSUE III:
WHERE
ANY PARTICULAR ENTITY OF
M EMBER STATE
HAVING DOMINANCE OVER A
PARTICULAR BUSINESS IN THE INTERNAL MARKET , PURCHASES GOODS / EXCLUSIVE RAW MATERIALS FROM OUTSIDE THE INTERNAL MARKET FOR E. G.
AFRICA,
ON ACCOUNT OF AN ELEVATED OFFER PRICE
OFFERED ONLY BY SUCH DOMINANT ENTITY ; AND WHEN THIS WOULD RESULT IN EXCLUDING THE POSSIBILITY OF PURCHASE BY SMALLER ENTITIES OF SUCH RAW MATERIALS , WOULD THE SAME ATTRACT THE PROVISIONS PERTAINING TO ABUSE OF DOMINANCE ?.
WOULD
THE COUNTRY FROM WHICH THE RAW MATERIALS ARE PROCURED
ISSUE IV: WHEN
READ
THIS INVOLVE THE JURISDICTION OF
(AFRICA)?.............................................9
WHAT ARE THE LIMITS ON STATE AIDS AND PUBLIC PROCUREMENT LAWS AND POLICIES TOGETHER
SO
SIGNIFICANTLY PREJUDICED
/
THAT EVEN
THE
INTEREST
OF
M EMBER STATE
ENTITIES
IS
NOT
TO AN UNFAIR EXTENT ?.................................................................................10
[F]
Market Barriers...................................................................................................................................11
[G]
Procurement Policies Related Issues...................................................................................................13
SYNOPSIS The administrative process for applying the law is adapting in order to strengthen 1|Page
GLC TREATY APPRECIATION COMPETITION 2017 investigative powers and better incorporate economic evidence in decision-making, and thus convince the courts while maintaining policy consistency in a system of decentralised enforcement. Member State competition agencies and courts can apply Community substantive law, and the informal “European Competition Network” (ECN) is the medium for facilitating inter-agency co-ordination. Modernisation of the enforcement process, by eliminating notification and prior approval of exemptions while sharing enforcement responsibility with national agencies, is designed, among other things, to redirect resources so that DG Comp can concentrate on complex, Community-wide issues and investigations. A high priority here is to clarify the relationships among the leniency programmes of the Community and the national enforcement agencies. Coverage of Community competition law is broad and generally consistent, with no sectoral exclusions and few provisions for special enforcement processes. Treaty provisions that prohibit Member State measures contrary to Treaty rules about public undertakings and undertakings with special or exclusive rights have been the foundation for the long-term liberalisation program to reform traditional infrastructure monopolies. Treaty principles about controlling State aid try to prevent competitiondistorting actions by national public authorities. The Commission’s new program for impact analysis of EU legislative proposals that might affect competition in the internal market is turning attention to avoiding unnecessary and disproportionate restrictions on competition in the legislation of the EU. The view that competition law should aim to promote some form of economic welfare is intrinsically linked to the influence of economics and in particular welfare economics, consumer theory and related fields in competition law analysis. This influence may be explained by the more economics-oriented approach that has been gradually introduced in EU competition law with the implementation of the EU merger regulation in the 1990s, the reform of the law on vertical restraints and cooperation agreements in the late 1990s and early 2000s, and most recently the discussion over a more effects-based economic approach in the implementation of the abuse of dominance provisions of EU competition law9 .
ISSUE I:
WHETHER OR NOT UNDER ARTICLE 101, THE POINT OF FOCUS SHOULD BE ON THE MODE AND MANNER IN WHICH A HARMONY CAN BE STRUCK BETWEEN THE
MEMBER STATES AND THE EU LEVEL? 2|Page
GLC TREATY APPRECIATION COMPETITION 2017 The Block Exemption Regulation and Guidelines do not apply to agreements with final consumers where the latter are not undertakings, since Article 101 only applies to agreements between undertakings. [A] APPLICABILITY
OF
ARTICLE 101
TO VERTICAL AGREEMENTS :
Article 101 applies to vertical agreements that may affect trade between Member States and that prevent, restrict or distort competition ("vertical restraints") . Article 101 provides a legal framework for the assessment of vertical restraints, which takes into consideration the distinction between anti-competitive and pro-competitive effects. Article 101(1) prohibits those agreements which appreciably restrict or distort competition, while Article 101(3) exempts those agreements which confer sufficient benefits to outweigh the anti-competitive effects.4 (6) For most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, i.e. if there is some degree of market power at the level of the supplier or the buyer or at both levels. Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies. (7) The objective of Article 101 is to ensure that undertakings do not use agreements – in this context, vertical agreements – to restrict competition on the market to the detriment of consumers. Assessing vertical restraints is also important in the context of the wider objective of achieving an integrated internal market. Market integration enhances competition in the European Union. Companies should not be allowed to recreate private barriers between Member States where State barriers have been successfully abolished.1
[B]VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE 1 Article 11(2) of Regulation 1/2003 and Article 14(3) of Commission Regulation (EC) No 773/2004 of 7 April 2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty (OJ L 123, 27.4.2004, p. 18), as amended by Commission Regulation (EC) No 622/2008 of 30 June 2008 amending Regulation (EC) No 773/2004, as regards the conduct of settlement procedures in cartel cases (OJ L 171, 1.7.2008, p. 3). 3|Page
GLC TREATY APPRECIATION COMPETITION 2017 101(1) 1 Agreements of minor importance and SMEs (8) Agreements that are not capable of appreciably affecting trade between Member States or of appreciably restricting competition by object or effect are not caught by Article 101(1). The Block Exemption Regulation applies only to agreements falling within the scope of application of Article 101(1). These Guidelines are without prejudice to the application of the present or any future "de minimis" notice2 . (9) Subject to the conditions set out in the "de minimis" notice concerning hardcore restrictions and cumulative effect issues, vertical agreements entered into by non-competing undertakings whose individual market share on the relevant market does not exceed 15% are generally considered to fall outside the scope of Article 101(1)6 . There is no presumption that vertical agreements concluded by undertakings having more than 15% market share automatically infringe Article 101(1). Agreements between undertakings whose market share exceeds the 15% threshold may still not have an appreciable effect on trade between Member States or may not constitute an appreciable restriction of competition7 . Such agreements need to be assessed in their legal and economic context. The criteria for the assessment of individual agreements are set out in paragraphs 96 to 229. (10) As regards hardcore restrictions referred to in the "de minimis" notice, Article 101(1) may apply below the 15% threshold, provided that there is an appreciable effect on trade between Member States and on competition. The applicable case-law of the Court of Justice and the General Court is relevant in this respect.8 Reference is also made to the possible need to assess positive and negative effects of hard core restrictions as described in particular in paragraph 47 of the Guidelines. (11) In addition, the Commission considers that, subject to cumulative effect and hard core restrictions, vertical agreements between small and medium-sized undertakings as defined in the Annex to Commission Recommendation 2003/361/EC9 are rarely capable of appreciably affecting trade between Member States or of appreciably restricting competition within the meaning of Article 101(1), and therefore generally fall outside the scope of Article 101(1). In cases where such agreements nonetheless meet the conditions for the application of Article 101(1), the Commission will normally refrain from opening proceedings for lack of sufficient interest for the European Union unless those undertakings collectively or individually hold a
2 Helen Disney, A more subtle anti-trust regime for Europe, Fin. Times (London), Oct. 13, 2004, at 21 4|Page
GLC TREATY APPRECIATION COMPETITION 2017 dominant position in a substantial part of the internal market.3 Companies can of course dispute the duration of the infringement and the possible aggravating and mitigating factors taken into account by the Commission when determining the fine. But if the starting point for the fine’s calculation is solely within the discretion of the Commission, such arguments are unlikely to reduce the fines substantially. Moreover, these arguments have rarely succeeded. Since 1998, the Commission only accepted the presence of mitigating circumstances in three cases, namely, Michelin, Deutsche Telekom AG, and Wanadoo Espana v Telefónica.4
ISSUE II:
WHETHER
THE PROCESS OF EXPLOITATION OF PATENTS AND OTHER
INTELLECTUAL PROPERTY RIGHTS
INTER SE TWO
MEMBER STATE
ENTITIES
PURSUANT TO AN AGREEMENT (WHILE GIVING A FAIR SHARE OF BENEFITS TO THE PUBLIC AND CONSUMERS , BY DETERMINING A REDUCED APPLICABLE PRICE ) AMOUNTS TO THE IMPOSITION OF RESTRICTIONS ON EITHER ONE OF THE
MEMBER STATE
ENTITIES AGAINST THE PROVISIONS MENTIONED IN
ARTICLE 101(3) (A) AND (B).
In recent years there has been a remarkable expansion of antitrust enforcement in the area of intellectual property (IP). This trend is illustrated by an increasing willingness of the European Commission (the Commission) and other antitrust enforcement agencies to challenge IP-related transactions, often on the basis of novel theories of competitive harm. This is particularly true where intellectual property rights (IPRs) are of strategic importance, as is the case in the high-tech and pharmaceutical sectors.5 The fact that IP laws grant exclusive rights of exploitation does not imply that IPRs are immune from competition law intervention. On the contrary, articles 101 and 102 of the 3 Council Regulation 139/2004 on The Control of Concentrations Between Undertakings (the EC Merger Regulation), art. 1, 2004 O.J. (L 24) 1, 6 4 Philip Shishkin, European Regulators Spark Controversy with ‘Dawn Raids,’ Wall St. J., Mar. 1, 2002, at A1 5|Page
GLC TREATY APPRECIATION COMPETITION 2017 Treaty on the Functioning of the European Union (TFEU), as well as equivalent provisions in national competition law, are fully applicable to unilateral conduct of IP owners and agreements whereby the holder of IP licenses another firm to use its IPRs. In fact, over the past few years, the use of IPRs has given rise to an increasing number of highly visible and hotly debated cases in EU competition law.6 For instance, in the Microsoft case, the Commission concluded that Microsoft had abused its dominant position by deliberately refusing to provide interoperability information to competitors. As a result, the Commission imposed a fine of €497 million and obliged Microsoft to disclose complete and accurate interface information to allow developers to compete efficiently. However, as Microsoft did not comply with the Commission’s 2004 decision, the Commission imposed additional periodic penalties on Microsoft, which, in June 2012, the General Court eventually fixed at €860 million.7 Similarly in AstraZeneca, in December 2012 the European Court of Justice upheld the judgment of the General Court, which found that AstraZeneca had abused its dominant position by misleading patent offices and misusing the patent system in order to prevent generic competition against its anti-ulcer medicine, Losec. In that case the Commission had established that AstraZeneca had provided misleading information to several national patent offices in the EU resulting in AstraZeneca gaining extended patent protection for Losec, and that it had selectively deregistered market authorisations for Losec capsules in certain member states, in violation of article 102 TFEU. The Commission imposed a fine of €52.5 million.8
5 Blaug, M. (2007) ‘The Fundamental Theorems of Modern Welfare Economics, Historically Contemplated’, History of Political Economy 39(2) 185-207. 6 J. Rawls (1971), A Theory of Justice, Harvard University Press 7 McDonnel, B. & D.A. Farber (2003) ‘Are Efficient Antitrust Rules Always Optimal?’ Antitrust Bulletin Fall 2003 807-835, p. 825. 8 Cowen, T. (1993) ‘The Scope and Limits of Preference Sovereignty’ Economics and Philosophy 9 253-269, spec. pp. 254-258. 6|Page
GLC TREATY APPRECIATION COMPETITION 2017 [A]
THE SAFE HARBOUR OF REGULATION 772/2004
While many technology licensing agreements are of minor importance, or can be deemed not to be capable of affecting trade to an appreciable extent and are therefore not caught by the prohibition of article 101(1) TFEU, many other licensing agreements are quite likely to fall under article 101 TFEU.9 This applies both to agreements that may restrict intra-technology competition and inter-technology competition. Inter-technology competition refers to competition between firms that license or produce on the basis of substitutable technologies, whereas intra-technology competition relates to competition between firms that produce on the basis of the same technology. Restrictive licence agreements that fall within the terms of the TTBER are automatically exempted from the article 101(1) TFEU prohibition.10 [B]
ASSESSMENT OF LICENSING AGREEMENTS OUTSIDE THE TTBER
Agreements that fall outside the exemption because the market share thresholds are exceeded are not necessarily illegal; they may, upon individual assessment, be in compliance with article 101(1) and (3) TFEU. In contrast, the Commission takes the view that the hard-core restrictions of article 4 are almost always anti-competitive. As a result, it considers that in the context of individual assessment those restrictions will only exceptionally fulfil the conditions of article 101(3) TFEU and, on balance, not be restrictive of competition.11 The individual assessment of licensing agreements under article 101(1) and (3) TFEU outside the safe harbour of the TTBER is to be conducted on the basis of the Technology Transfer Guidelines (2004) (the TT Guidelines) and the Commission Notice on Article 101(3) (2004). [C]
EXPIRY OF THE TTBER IN 2014 AND REVIEW OF THE CURRENT REGIME
The TTBER and the TT Guidelines will expire in April 2014. As part of its evaluation of the current regime, the Commission commissioned an economic study by Pierre Régibeau and Katherine Rockett of the 2004 Technology Transfer Guidelines. The November 2011 report by Régibeau and Rockett identifies a number of relevant 9 Tversky, A. & Kahneman, D. (1986), Rational Choice and the Framing of Decisions, Journal of Business Studies 59 251-278 10 11 Hausman D.M. (2012), Preference, Value, Choice, and Welfare, Cambridge University Press. 7|Page
GLC TREATY APPRECIATION COMPETITION 2017 developments, in particular the growth of patent thickets. Patent thickets refer to situations where access to a large number of IPRs are required in order to manufacture a non-infringing product, and these IPRs are owned by a significant number of different firms. 12 The report discusses the main effects generally associated with patent thickets – royalty stacking and increased transaction costs for prospective licensees – together with industry responses to alleviate those negative effects, in particular cross-licensing and patent pools, which may, however, themselves give rise to anti-competitive issues. It also suggests a number of changes to the current TTBER and TT Guidelines.13 [D]
PAY-FOR-DELAY PATENT SETTLEMENTS IN THE PHARMACEUTICAL SECTOR
The Commission’s competition inquiry into the pharmaceutical sector revealed a number of structural issues and problems in companies’ practices that potentially lead to distortions of competition. The anti-competitive practices highlighted by the Commission in its 2009 report included, inter alia, patent clusters, interventions before national authorities with regard to regulatory approvals, and pay-for-delay arrangements between originators and generics. In the pharmaceutical sector, the Commission now specifically focuses on reverse payment settlements, whereby brand firms typically pay generic firms not to challenge the validity of the IP owner’s patents and keep the generic version of the drug out of the market for some period of time. At the root of the Commission’s argument is the concern that pay-for-delay settlements amount to anti-competitive market sharing. The Commission is concerned that these types of settlements can be an anti-competitive pay-off for an otherwise eligible competitor not to enter the market. The brand companies argue that pay-for-delay and ‘reverse payments’ are a legitimate means to protect and maintain their lawful patent terms and avoid lengthy and costly litigation.14 [E]
ARTICLE 102 TFEU: REFUSAL TO GRANT IP LICENCES AND COMPULSORY
LICENSING
The mere refusal to license IPRs is not in itself objectionable under EU competition law. 12 Adler M.D. and E.A. Posner (2006), New Foundations of Cost Benefit Analysis, Harvard University Press, p. 33 13 Ibid. 14 Joined Cases C-468/06 to 478/06, Sot Lelos kai Sia v GlaxoSmithKline [2008] ECR I7139, para. 54 8|Page
GLC TREATY APPRECIATION COMPETITION 2017 However, in exceptional circumstances the refusal by a dominant company to grant a licence under its IPRs can be considered to be an abuse under Article 102 TFEU. The community courts have considered this question in a number of cases, in particular Magill (1992), Microsoft (2007) and IMS Health (2004). In Magill, the ECJ held that the refusal by copyright holders in the United Kingdom and Ireland to grant licences to third parties to provide a new comprehensive television listings magazine was abusive under article 102 TFEU. In Microsoft, Microsoft abused its dominant position by refusing to license the specifications required to ensure interoperability between its operating system and work group server operating systems of competitors, and IMS Health concerned the refusal to license a copyright-protected data analysis structure in Germany that is used in the pharmaceutical sector.15 Recently, in the 2012 Microsoft judgment, the ECJ confirmed that a refusal by a dominant company to license its IPR that is indispensable for carrying on a particular business, is an abuse under article 102 TFEU where three cumulative conditions are satisfied, namely: (i) that the refusal is preventing the emergence of a new product for which there is a potential consumer demand; (ii) that it is unjustified; and (iii) that it is such as to exclude any competition on a secondary market.16
ISSUE III:
WHERE
ANY
PARTICULAR
ENTITY
OF
MEMBER STATE
HAVING
DOMINANCE OVER A PARTICULAR BUSINESS IN THE INTERNAL MARKET , PURCHASES
GOODS /
EXCLUSIVE
INTERNAL MARKET FOR E. G.
RAW
AFRICA,
MATERIALS
FROM
OUTSIDE
THE
ON ACCOUNT OF AN ELEVATED OFFER
PRICE OFFERED ONLY BY SUCH DOMINANT ENTITY ; AND WHEN THIS WOULD RESULT IN EXCLUDING THE POSSIBILITY OF PURCHASE BY SMALLER ENTITIES OF SUCH RAW MATERIALS , WOULD THE SAME ATTRACT THE PROVISIONS
15 Nazzini, R (2011), The Foundations of European Union Competition Law – The Objective and Principles of Article 102, Oxford University Press, p. 49. 16 Ibid 9|Page
GLC TREATY APPRECIATION COMPETITION 2017 PERTAINING
TO
ABUSE
OF
DOMINANCE ?.
WOULD
THIS
INVOLVE
THE
JURISDICTION OF THE COUNTRY FROM WHICH THE RAW MATERIALS ARE PROCURED
(AFRICA)?
Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Any entity engaged in an economic activity, regardless of its legal status of the entity and the way in which it is financed (Hofner Elser v. Macrotron GmbH)Economic activity: any activity consisting in offering goods or services on a given market is an economic activity (Pavlov). “The dominant position referred to in this article relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”17 Hoffman-la Roche “Such a position does not preclude some competition, which it does where there is a monopoly or a quasi-monopoly, but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.”18 To the extent that a full-function joint venture has as its object or effect the co-ordination of the competitive behaviour of its parents outside the joint venture (sometimes referred to as "spill over" effects), such co-ordination will also be examined in accordance with the criteria of Article 101 of the TFEU in order to establish whether the operation is compatible with the internal market (Article 2(4), Merger Regulation; see Assessment under Article 101). Joint ventures falling into this category are therefore subject to a double test: first, whether the 17 Hausman D.M. (2012), Preference, Value, Choice, and Welfare, Cambridge University Press, pp. 31-33 18 Judgment of the Court of Justice of 28 February 1991 in Case C-234/89, Stergios Delimitis v Henninger Bräu AG 10 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 establishment of the joint venture itself would significantly impede effective competition, and, second, whether the co-ordination between its parents is contrary to Article 101(1) (see box, An assessment under the Merger Regulation and Article 101).19 The possibility of co-ordination of the parties' competitive behaviour arises if two or more of the parents participate, actively or potentially, in the same, similar or related product markets, and on the same or potentially the same geographic markets, as the joint venture. Article 101 comes into play where such co-ordination is the object or likely effect of the joint venture. In applying the Article 101(1) test, the Commission must in particular ascertain:
Whether two or more parent companies retain significant activities in the same market as the joint venture, or in a market which is downstream or upstream from that of the joint venture, or in a neighbouring market closely related to this market, so that it is likely that they will co-ordinate their behaviour on the market(s) concerned; and
Whether the co-ordination which is the direct consequence of the creation of the joint venture (there must therefore be a direct causal link between the creation of the joint venture and any co-ordination of the parties' behaviour) affords the parties the possibility of eliminating competition in respect of a substantial part of the products or services in question (Article 2(4), Merger Regulation). For example, the Commission decided in BSkyB/Kirch Pay TV (Case COMP/JV.37, 21 March, 2000) that although there was some incentive for the parties to co-ordinate their behaviour (in an effort to reduce 20
ISSUE IV:
WHAT ARE THE LIMITS ON STATE AIDS AND PUBLIC PROCUREMENT LAWS
AND POLICIES WHEN READ TOGETHER SO THAT EVEN THE INTEREST OF
19 1994 in Tetra Pak International SA v Commission of the European Communities (T-83/91) [1994] E.C.R. II-755; [1997] 4 C.M.L.R. 726 at [236]. 20 Ibid 11 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 MEMBER STATE
ENTITIES IS NOT SIGNIFICANTLY PREJUDICED
/
TO AN UNFAIR
EXTENT ?
If free trade is in principle considered beneficial by governments that are party to free trade agreements, this raises the question of why these governments do not simply unilaterally open up their markets, and why it is necessary to conclude international agreements on free trade to assist in this process. One reason, of course, can be that national governments do not accept the basic value of wealth maximisation on which free trade is based or – for the various reasons above – do not consider that it is in general a suitable strategy for their own country (for example, they may consider that they are acting in exceptional circumstances in which the economic benefits of protection outweigh the costs (such as to promote “infant industries”)). They may participate in free trade agreements because of various external pressures, rather than from a belief in the value of free trade – for example, pressure from international financing institutions, such as the EU, or fear of being excluded from trade altogether if they do not open their markets in ways required by their trading partners. However, even governments that do accept the desirability of significant free trade in principle often do not unilaterally open their markets. A large part of the explanation for this lies in the fact that, even for governments that accept the benefits of free trade, it is often difficult to achieve within the political system.21 To a large extent, this is because – as noted above – the costs of free trade are more visible to the general public than the benefits, and are also concentrated in their impact on specific individuals or communities who have an incentive to act politically (whether through the exercise of a vote or other means). Removing protection from an industry, for example, will lead to immediate job losses that can significantly affect behaviour. On the other hand, the costs of protection in terms of higher prices are broadly distributed across the consumer and business community, and are often too hidden, and too limited in their impact on individuals, to affect their political behaviour. Trade agreements are useful instruments to help overcome the domestic political constraints in achieving open markets for governments that consider free trade to be beneficial. In particular: 1. Under trade agreements some domestic constituencies will gain, by obtaining access to foreign market for their own goods and 21 1999 in Irish Sugar Plc v Commission of the European Communities (T-228/97) [1999] E.C.R II-2969; [1999] 5 C.M.L.R. 1300 at [291]. 12 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 services, and these will offer political support to government that can offset any political opposition from the immediate losers from free trade (such as those who will lose jobs in an industry that is opened up to foreign competition).22 [F]
MARKET BARRIERS
Once markets have been opened the existence of international commitments to that effect can help guard against “backsliding”, including as a result of a change of government or economic crisis. The global free trade system under the General Agreement on Tariffs and Trade (GATT), now administered through the World Trade Organisation (WTO), was instituted largely from a desire to avoid the erection of trade barriers as a response to economic crisis, something which had happened after the Wall Street Crash of 1929 and was considered to have played a large part in the subsequent economic crisis known as the Great Depression. The more recent global economic crisis has, as such crises generally do, precipitated 48 calls for protection, and so far the existing free trade agreements have assisted in maintaining open markets (including in the area of public procurement).23 It is also sometimes said that international organisations or free trade agreements can provide a “scapegoat” that can deflect criticism from national governments – governments can blame “Brussels” or “Geneva” for job losses etc that result from opening up particular markets. Of course, in a world of free trade agreements, governments may also hold off from opening their markets unilaterally even if they are able and willing to do so, in the expectation that greater benefits can be achieved by using the opening of their own markets as a bargaining chip to motivate trading partners to open markets to them in return, than by purely unilateral market opening.24
Protection of potentially competitive industries Another justification for discriminatory procurement is to support industries which are potentially competitive but are held back by 22 Supra f.n. 12 23 Ibid 24 A. Tepperman and M. Sanderson, Innovation and Dynamic Efficiencies in Merger Review (Canada, Competition Bureau, 2007), available at http://www.competitionbureau.gc.ca/eic/site/cbbc.nsf/eng/02378.html#key_concepts , pp. 6-7
13 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 market imperfections such as inadequate access to capital, or to create a comparative advantage in industries which themselves are affected by market imperfections such as high entry barriers (“infant industry” arguments). The use of procurement to develop competitive national supply markets in this way may be particularly important in developing countries and economies in transition. From a global perspective, such policies are often unobjectionable in principle as they do not go against the principle of comparative advantage, and from a national point of view they may produce economic benefits if implemented successfully.25 However, the practical problems of putting such policies into effect mean that often the anticipated results do not materialise, and the costs involved (which, as in (1) above, are higher prices paid by government, diversion of resources to less productive uses and inefficiency from lack of competition) outweigh any benefits. These problems include the difficulties of selecting the correct industries for protection; the challenge of providing incentives for the protected industry to operate in an efficient manner; and the distorting effects of lobbying by industry. Even where such policies do produce net benefits, it must always be considered whether preferential procurement is the most effective method of achieving the government’s objectives when compared with possible alternatives such as state loan guarantees, training, direct financial aid etc.26 Support for social and environmental objectives Another reason why government procurement operates as a barrier to trade is that it is frequently used as a tool for promoting social, political and environmental objectives, such as the economic participation of women, the handicapped or disadvantaged ethnic groups, or the development of poor regions of a country. This may involve, inter alia, setting aside some government requirements for these groups; giving them price preferences; requiring subcontracting to such groups; or requiring all government contractors to demonstrate that their own businesses are conducted in accordance with antidiscrimination or affirmative action policies.27 25Perry, S. (2000), ‘On the Relationship between Corrective and Distributive Justice’ in Horder, J. (eds.), Oxford Essays in Jurisprudence, Oxford: OUP, 237, p.238 26 Ibid 27 Nazzini, R (2011) The Foundations of European Union Competition Law – The Objective and Principles of Article 102, Oxford University Press, chapter 2. 14 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 Many of these policies have the effect of excluding or limiting foreign competition as an inevitable by-product of advancing the interests of the national group. For example, a price preference of 5% given to a national ethnic group disadvantages foreign firms as well as national firms that are not owned by the relevant group. In some cases governments accept that the policies concerned are not efficient in the sense of maximising economic welfare, from either a global or national viewpoint, but accept the inefficiencies as a justifiable cost of other goals, such as social or regional equality or political harmony. In addition, however, these policies may be compatible with both national and international goals of economic efficiency if they bring into the economy those who have previously been relatively inactive because of market imperfections. As with other procurement policies there is, however, a danger that the anticompetitive effects of the policies may outweigh the benefits. A first condition for avoiding this is, of course, that the policies should achieve their purported objectives, and this is not always easy to ensure or to measure.28 [G]
PROCUREMENT POLICIES RELATED ISSUES
For example, programmes to improve the position of ethnic groups must ensure that firms 50 benefiting from the programme provide a genuine, and not merely a token involvement, of the targeted group. Striking a balance between the benefits of trade and the legitimate objectives of government in using procurement to promote social and environmental goals is one of the most difficult problems for systems that seek to open up markets in procurement and will be considered in detail in chapter 11. National security National security concerns are another common reason for placing contracts with national industry, particularly in the defence sector. For example, defence contracts may be given to national firms in order to ensure that spare parts and maintenance are easily available in time of conflict, or to ensure that the country retains its own capability to manufacture, say, tanks or radar systems. As with social goals, where national security goals are concerned any adverse economic effects are accepted on the basis that they are secondary to other objectives.29 However, as with other procurement policy measures, there are potential problems in ensuring that decisions are taken on genuine security grounds rather than being influenced by the economic interests of lobby groups. This is a particular problem with defence because the 28 Vanberg, V.J. (2009) ‘Consumer Welfare, Total Welfare and Economic Freedom – On the Normative Foundations of Competition Policy’, 09/3, Walter Eucken Institut, p. 24. 29 Ibid 15 | P a g e
GLC TREATY APPRECIATION COMPETITION 2017 industries involved often support a large number of jobs. The special problem of opening up defence procurement markets in the EU is considered in detail in chapter 9. 5. Corruption and patronage Another barrier to trade is the influence of corruption and patronage. For example, contracts may be awarded to firms that have paid bribes or to firms in which politicians, purchasers or their families have a financial interest, or which have contributed to an election campaign. Exploitation of comparative advantage requires that purchasing decisions should be based on commercial criteria. Such policies can also have a discriminatory effect in favour of national industry (for example, when contracts are awarded to firms with personal connections to politicians) and can distort trade patterns as between foreign firms (since some countries have stricter rules than others on bribing foreign officials to obtain contracts). 30 Absence of commercial pressures Barriers to trade in government markets may also be presented by the nature of government purchasing. In general, government procurement as compared with private sector procurement is characterised by an absence of market pressures to seek value for money. Thus there is a danger that public contracts may be placed with traditional (national) suppliers as a result of “inertia” factors: for example, purchasers may feel more comfortable dealing with familiar faces; there may be resistance to new technology; or purchasers may lack the resources to evaluate products made to unfamiliar specifications. The natural tendency of purchasers to behave in this way will be counteracted in the private sector by market pressures, but in the public sector other mechanisms are needed to achieve a commercial approach. Like corruption, such inefficient practices may affect both foreign and domestic suppliers, but will have a disproportionate effect on foreign suppliers.31
30 Tribe, K. (1995) Strategies of Economic Order – German Economic Discourse 1750-1950, Cambridge: Cambridge University Press, pp. 203-240 31 Vanberg, V.J. (2004) The Freiburg School: Walter Eucken and Ordoliberalism, op. cit., p. 2 16 | P a g e
