FEBRUARY 15 1986 - VOLUME 7 - NUMBER 3
Over Coming Competition
The Trojan Horse in Antitrust Policyby David Dale Martin
New international competition and the weakening of the overall U.S. competitive position has given rise to calls for both protectionism and elimination of U.S. antitrust laws. The assertion that these laws put American corporations at a disadvantage in competing with foreign-based companies is not new, but the argument has gained support as foreign countries have gradually become more effective competitors for U.S. as well as foreign markets. Clearly, U.S. antitrust laws "shackle" U.S. companies by prohibiting them from participating in cartels. Whether the inability legally to participate in arrangements to divide and share markets reduces a company's ability to compete is another matter.
Critics charge that since foreign competition to U.S. industry exists in almost all product lines, including those of most concentrated businesses, antitrust laws are no longer necessary. More important, it is argued that industries would be more competitive with foreign firms if they could merge, engage in joint research and development, price collectively or share bids-all behavior inhibited by -risk of antitrust prosecution or private treble damage suits.
Much of the recent industrial policy literature calls for a closer government, business, and labor collaboration to enhance U.S. competitiveness with rival nations in the world economy. A positive role for government is visualized not in maintaining a legal framework within which competition takes place, but in planning and supporting strategic decisions in such areas as investment, technological development, and trade.
Antitrust policy and trade policy are closely linked. Both policies deal with restrictive practices and barriers to competition. The problem of the "competitiveness" of U.S. industry has to do with the ability of U.S. products, without restrictive practices, to compete with imports from other countries as well as the ability of U.S. exports to compete in the markets of the rest of the world. Both the import and the export aspects of the problem present antitrust policy issues. U.S. antitrust law cannot reach all foreign restrictive business practices nor can our antitrust law alone cope with either domestic -or foreign governmental restraints on competition. Nonetheless, just as every nation can gain if all move toward freer trade, every nation can gain if all move toward stronger antitrust policies.
Post-World War II U.S. antitrust policy was part of a general strategy aimed at preventing the return to the economic nationalism of the inter-war period. National struggles for access to markets for resources and manufactured goods were underway in the aftermath of the Versailles treaty. Even before the Great Depression and collapse of world trade, economic rivalry among the developed nations was characterized by cartelization in many industries with government encouragement in many countries. Typically the home markets of each developed country were reserved for domestic enterprises to allocate among themselves and "third country" markets-i.e., the less developed world-were divided up as exclusive territories for cartel participants. Cartelization was a system of neocolonialism in which the "mother country" as well as the colonial roles were negotiated industry by industry.
The close connection between antitrust policies and free trade policies was embedded in the treaties that established the European Communities. Removal of government-imposed barriers to international trade among the member nations would have accomplished little expansion of trade if private restrictive agreements and market dominance had been permitted as in the prewar period. Thus both the Treaty of Paris and the Treaty of Rome contained strong antitrust provisions modeled on United States antitrust law.
Changes in the structure of the international economy during the post-war years have aggressively decreased the adequacy of existing antitrust laws as the cornerstone of industrial policies.
The dominant corporations within the United States have become increasingly multinational, thus becoming more and more interrelated with each other and with foreign-based multinationals in legal jurisdictions other than the United States. Most important, perhaps, the growth of U.S. exports and imports has placed a growing portion of our economic activity under the control of decision-makers beyond the effective reach of U.S. law.
From the very enactment of the Sherman Act opposition to the law has come from those with vested interests directly affected by its application. Given the immense political power of such interests, including much of the leadership of both big business and organized labor, the survival of the policy, albeit seldom in full flower, is evidence of the grass-roots support for social control of restrictive business practices.
Support for the antitrust policy traditionally has come from conservative advocates of laissez-faire and free trade as well as from populist advocates of positive governmental programs to protect the people from powerful economic interests. The current wave of anti-antitrust sentiment is particularly significant because conservative advocates of laissez-faire, under the leadership of the "New Chicago School," have joined forces with the vested business interests in attacking antitrust as unwarranted interference with market processes. That view seems to rest on the assumption that markets are "natural" and require no legal framework. Arguments against antitrust are now being made not only by laissez-faire advocates but also by liberal advocates of industrial policy. Lester C. Thurow, a prominent MIT economist, has been widely quoted in the popular press for his criticism of U.S. antitrust policy. Thurow's arguments on the surface appear quite persuasive. Like the more conservative opponents of antitrust laws, he makes no argument against competition. His criticism is that U.S. antitrust laws are not cost effective and that they are unnecessary in today's world. In The Zero-Sum Society,Thurow says:
If we are to establish a competitive economy within a framework of international trade and international competition, it is time to recognize that the techniques of the nineteenth century are not applicable in getting ready for the twenty-first century. The late nineteenth and early twentieth centuries witnessed a two-pronged effort to create and maintain competitive capitalism. Antitrust laws were developed to break up man-made monopolies, and regulations were developed to make natural monopolies act as if they were competitive. While both of these approaches have had their problems, the time has come to recognize that the antitrust approach has been a failure. The costs it imposes far exceed any benefits it brings.
Thurow's cost-benefit analysis warrants careful critique. His arguments on the "futility and obsolescence" of U.S. antitrust laws are organized around five points: (1) the consequences of international trade, (2) the market definitions used in antitrust cases, (3) the conglomerate movement, (4) the innocuous remedies usually achieved in antitrust cases, and (5) the consequences of non-price competition. Thurow's discussion of the last four points reveals a broader position held by conservative and liberal advocates of industrial policy on the crucial question of what constitutes adequate or workable competition. Implicitly, they argue that (1) monopolization always engenders competition in a broader market, (2) the big conglomerates will enter any market in which monopoly power exists and operate in that market competitively, (3) antitrust remedies are ineffective in making significant changes and have no deterrent effect, and (4) price-fixing and price leadership do no harm because firms behave competitively with respect to all non-price decision variables and such non-price competition is adequate to achieve the benefits of competition.
With such views of what constitutes adequate competition, the anti-antitrusters see antitrust laws as at best innocuous. But they go further and argue that the new international inter-dependency makes them harmful. Keeping their concepts of competition in mind, the primary point-that in markets where international trade exists, national antitrust laws no longer make sense can be evaluated. Imports have increased and Thurow advocates continuation of a free trade policy. The question, however, is not merely whether import competition, with floating foreign exchange rates, is an adequate substitute for antitrust laws, but also whether import competition will remain competitive if U.S. and foreign multinational corporations are freed from the constraints of U.S. antitrust laws. Thurow only hints at the possibility of a world market restraint of trade or a monopoly problem, but dismisses the question by concluding that since nothing could be done about it, we should ignore it. All lie has to say on this crucial point is:
One could debate whether international antitrust laws would make sense, but this debate would be completely irrelevant from a practical perspective. In the absence of anything resembling world government, and in the presence of widely differing views on the usefulness of antitrust legislation, no enforceable, international antitrust laws are going to come into existence.
In spite of this pessimism about international antitrust laws, Thurow is very optimistic about the efficacy of import competition. He makes his argument by reference to the automobile and steel industries. He says that General Motors' domestic market share is irrelevant to judging competition in the U.S. automobile industry because G.M. "must deal with strong Japanese and European competitors." Any good effects on the U.S. auto and steel industries from antitrust enforcement are minor compared with the actual and potential good effects of Japanese and European imports. Yet, absent antitrust laws, one way G.M. can deal with the Japanese rival is by joint venture and cartelization rather than by competition.
One other argument must be considered. Thurow says, "If they [the U.S. antitrust laws] do anything, they only serve to hinder U.S. competitors who must live by a code that their foreign competitors can ignore." Yet, he cites no evidence to support this claim. U.S. firms are generally bigger than foreign competitors and prohibition of participation in international cartels is the chief restraint imposed by U.S. antitrust laws on U.S. firms operating in foreign markets. Furthermore, Thurow neglects the fact that U.S. antitrust laws apply to all firms operating in U.S. markets whether they be U.S. or foreign-based and U.S. firms along with foreign firms are subject to the antitrust laws of other countries and the European Communities. Prohibition of participation in international cartels does not reduce a U.S. firm's ability to compete. Indeed, firms outside a cartel have better sales and profits than those within. Antitrust laws, albeit, inadequately, serve to inhibit the substitution of private negotiation for competition.
In attempting to prevent or remedy private restrictive practices that limit competition from imports into U.S. markets, U.S. antitrust laws also seek to prevent or remedy privately imposed restrictions on the export of goods, services, or capital from the United States. Particularly, this aspect of enforcement policy is aimed at collective efforts by one group of exporters to exclude another firm from some export market. Both the Webb-Pomerene Act and the newly-enacted Export Trading Company Act contain provisos designed to continue the Sherman Act policy against both cartelization of the import markets and restriction of export opportunities. Thus, both statutes are, in principle, consistent with the Sherman Act policy of promoting competition in foreign trade.
The U.S. antitrust laws do not reach all of the activities of either U.S.-based or foreign multinational corporations. The Antitrust Division statement of policy points out that extension of the Sherman Act to combinations with no direct or intended effect on U.S. consumers or export opportunities would encroach on the sovereignty of foreign states without any justification based on U.S. interests. Trade restraints beyond U.S. reach should be redressed by other nations' antitrust law. The United States, however, is a party to the 1976 Code of Conduct for Multinational Enterprises adopted by the Organization for Economic Cooperation and Development Council of the Committee on International Investment and Multinational Enterprises. In addition, the United States is committed to cooperation with foreign antitrust agencies. Thus, a basis exists from which to embark on a policy of promoting harmonization of our trading partners' antitrust laws as well as development of a body of international common law. National promotional industrial policies themselves could be brought under such a law of fair competition. Free trade would perhaps be more easily achieved within such an international legal framework.
Antitrust policy is often superseded by other policies both in the United States and abroad. In its attempt to hold on to the free trade principles embodied in the General Agreement on Tariffs and Trade, the industrialized countries, including the United States, have resorted to voluntary export restraint arrangements. VRAs, limited in both scope and duration, are viewed by many as more palpable than permanent trade barriers. The fact that they are negotiated among governments makes them less offensive to free trade than unilaterally imposed quotas. Yet, VRAs are seldom temporary and never truly voluntary. Not only is competition from the foreign country's exports reduced in the aggregate, but competition among the otherwise competing exporting companies has to be eliminated. Whenever the U.S. government induces the Japanese government voluntarily to restrain automobile or steel exports to the United States, the Japanese government must in some manner allocate the quota among the exporting companies. These arrangements force the Japanese to depart from the policy of competition the U.S. attempted to instill in them under the occupation, while at the same time flying in the face of U.S. antitrust policy. Indeed, a lower court once decided that the Secretary of State was included in the "any person" language of the Sherman Act and thus violated the law by negotiating the 1971 renewal of the Japanese steel VRA.
The question remains whether the United States should at this time of economic crisis make changes short of abandonment of antitrust laws. The pressures to abandon the policy of competition are part and parcel of the pressures to abandon free trade. Indeed, a free trade policy could not be sustained, nor would it have much relevance, if we gave legal sanction to corporate arrangements to negotiate the allocation of the world's markets.
David Dale Martin is professor of business economics and public policy in the School of Business, Indiana University, Bloomington. In 1971-74, he was chief economist of the U.S. Senate Judiciary Subcommittee on Antitrust and Monopoly and has served as a consultant to the Antitrust Division, the Federal Trade Commission, and the Council of Economic Advisers.