Robert Schuman

Competition Dimensions of NAFTA and the European Union: Semi-Common Competition Policy, Uncommon Rules, and No Common Institutions - Clifford Jones

Jean Monnet/Robert Schuman Paper Series Vol. 6 No. 18 October 2006

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Competition Dimensions of NAFTA and the European Union: Semi-Common Competition Policy, Uncommon Rules, and No Common Institutions

Clifford A. Jones

∗

The Jean Monnet Chair University of Miami Miami, Florida October 2006

∗

J.D. (Okla.), M.Phil., Ph.D. (Cantab), Frederic G. Levin College of Law, Center For Governmental Responsibility, University of Florida, P.O. Box 117629 Gainesville, FL 32611-7629, Tel. (352) 273-0845 Fax (352) 392-1457, Email: [email protected]. Paper Presented to the V International Symposium on Comparative Regionalism and the European Union, “The European Union in Comparative Perspective: A model and reference for the Americas,” University of Miami, Miami, Florida, November 4, 2005.

Competition Dimensions of NAFTA and the European Union: Semi-Common Competition Policy, Uncommon Rules, and No Common Institutions Introduction This paper compares the development of competition policy in the European Union (EU) with developments in the North American Free Trade Agreement (NAFTA). While the implementation of competition policy is of substantial importance to expanding free trade in both organizations, there are significant differences in the commonality of rules and institutions which might serve to apply competition policy in both organizations. Except in certain narrowly defined areas, NAFTA lacks the common antitrust rules present in the EU, and these differences have grown since the 1994 effective date of the NAFTA as Council Regulation 1/2003 (effective May 1, 2004) has increased the uniformity of competition rules in the EU, while NAFTA has failed to refine its competition rules as originally contemplated. Moreover, NAFTA lacks the common (supranational) institutions of the EU (e.g., no Commission, no Court of Justice), and excludes competition policy from its dispute resolution procedures, which ironically results in disputes on competition policy being taken to the World Trade Organization. The absence of more robust competition provisions in NAFTA hampers the development of North American regional competition policy within NAFTA and enhances the importance of other non-NAFTA cooperation measures. Why Competition Rules in International and Regional Trade Agreements? I have previously noted the reasons why competition (the European term) or antitrust (the U.S. term) rules are important in the context of international trade agreements, and these reasons apply with equal importance whether the trading arrangements are global or regional in scope: The importance of antitrust policy to world trade development includes consideration of the adverse effect of private restrictive practices on the opening of competitive markets. The GATT, now WTO, system has resulted in opening up of national markets over a period of decades by dismantling or lowering government barriers to trade such as tariffs and quantitative restrictions (quotas) and requiring nondiscrimination in the form of national and most favored nation treatment of foreign products. In general, private restrictive practices are not directly eliminated by reductions in governmental trade barriers, and those practices which have the effect of blocking or restricting access to markets by foreign traders may either substitute private trade barriers for governmental ones or prevent the elimination of governmental barriers from having the desired effect. The effectiveness of antitrust law enforcement which seeks to

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eliminate private barriers is therefore of great significance to the world trading system.1 It may be helpful to describe in summary form the nature of the rules that tend to make up competition policy in many countries. As noted by Bhattacharjea, Competition policy (also known as antitrust policy), at a minimum, involves the prohibition or regulation of restrictive business practices (RBPs, also known as anti-competitive practices) that firms undertake in order to limit competition. The most common RBPs include: Collusive agreements between competitors selling the same or similar products to restrict competition between themselves. The most egregious are agreements to fix prices, restrict output, divide up markets, or make collusive bids in an auction or procurement process. Groups of firms that enter into such agreements are commonly known as “hard core cartels.”  greements between firms at different stages in the distribution chain that A would limit competition. For example, agreements in which producers require distributors not to sell a competitor’s product, not to sell outside a particular territory, or to maintain recommended retail prices. Actions taken by a dominant firm to drive out rivals or prevent entry by potential competitors. This may involve charging artificially low (‘predatory’) prices, or denying rivals access to a crucial raw material or essential facilities such as a wire network (for telecommunications) that are owned by the dominant firm. Apart from controlling RBPs, many countries regulate corporate mergers and acquisitions that might have an adverse effect on competition by reducing the number of competitors in the market, which could also increase the likelihood of collusion between them. In many countries, the agency that is entrusted with the control of RBPs is also charged with entertaining complaints about misleading advertising or supply of defective goods, while other countries leave these matters to be handled by the regular court system as cases of contract violation, or by specialized consumer forums. Competition policy may also encompass a range of other government measures that affect competition, such as policies towards international trade, foreign investment, licensing, regulation, taxation, government procurement and standard-setting. But its core remains the regulation of RBPs by enterprises, so as to promote and protect a competitive market, which encourages lower prices, better quality, enhanced choice and variety, efficient allocation of society’s resources, and (more controversially) innovation and growth.2 1

Clifford A. Jones and Mitsuo Matsushita, eds, Competition Policy in the Global Trading System (The Hague: Kluwer, International, 2002), 2. 2 Aditya Bhattacharjea, Trade and Competition Policy, (New Delhi: ICRIER, 2004), 1-2. Working Paper No. 146, Indian Council For Research On International Economic Relations, available at 2

The Role of Competition Rules in the European Union3 Competition (antitrust) policy is one of the most fundamental policies underlying the European Community because of its relationship to the original overarching goals of the Community to create a European common market in which distinct national markets give way to the “Single Market.” While this may come as a surprise to those familiar with the large role played by cartels in the industrialization of Europe,4 the emphasis on competition rules followed from the decartelization of Germany during the Allied occupation in the aftermath of the Second World War. When the “Schuman Plan” for the creation of the European Coal and Steel Community (ECSC) (1952-2002) was presented to U.S. Secretary of State Dean Acheson on May 7, 1950, Acheson’s first reaction was fear that the plan was a clever cover for a “gigantic European cartel.”5 www.icrier.org, last accessed November 1, 2005. Bhattacharjea also notes the significance of competition rules in a liberalized trading market: “Firms that were hitherto sheltered by government measures would now resort to RBPs to ward off competition. Also, to the extent that privatization is part of the liberalization package, it could result in public-sector monopolies, whose pricing policies were often curbed so as to protect consumers, becoming privately owned. Many of these firms are utilities (such as gas, power, and telecommunications) which have “natural monopoly” characteristics (that is, only one firm can efficiently serve a market because of the high overhead cost of distribution networks), and competition from imports is not feasible. Others are highly capital intensive industries where fresh entry is difficult. Once they are privatized, they would charge profit maximizing monopoly prices and attempt to retain their inherited monopoly power through abuse of dominance.” Id. 3 The term European Union (EU) is used, for purposes of this paper, interchangeably with the European Community (EC), formerly known as the European Economic Community, although the EC is the technically correct term for the entity being discussed. Until 2004, the Member States and their dates of accession were France, Germany, Italy, Belgium, the Netherlands, and Luxembourg (1958); Great Britain, Ireland, Denmark (1973); Greece (1981); Spain and Portugal (1986); and Austria, Finland, and Sweden (1995). These 15 Member States were joined by 10 new Members in 2004, as listed, infra, at note 15. 4 See, generally, Clive Trebilcock, The Industrialization of the continental powers 1780-1914 (Oxford: Oxford Press, 1981), and Christopher Harding & Julian Joshua, Regulating Cartels in Europe: A Study of Legal Control of Corporate Delinquency (Oxford: Oxford Press, 2003). 5 Dean Acheson, Present at the Creation: My Years in the State Department (New York: W.W. Norton, Inc.,1969), 383. D. Dinan, Ever Closer Union? (Boulder, Colorado: Lynn Rienner, 1994), 23. Acheson feared objections by the Antitrust Division of the Department of Justice, which took a dim view of cartels controlling essential war material in light of then recent experience with the powerful cartelized German economy. The now-defunct ECSC placed coal and steel in the then six Member States (France, Germany, Italy, Belgium, The Netherlands, and Luxembourg) under the supranational control of the High Authority in order to make war impossible. The coal and steel industries of the members were essentially administered by the High Authority as to production, allocation, employment, pricing, and quotas. Coal and steel now fall under the general EC Treaty since the 50-year term of the ECSC Treaty expired in 2002. Acheson’s reaction to the ECSC was not without basis: ‘…[T]he ECSC then substituted a supranational system of extensive public management. Part of the latter entailed the ability of the new supranational body, the High Authority [later the Commission] , to require conformity with arrangements reminiscent of a conventional business cartel. Article 58 of the ECSC Treaty enabled the High Authority to impose production quotas in response to crisis conditions or decline in demand. Article 61 allowed the High Authority to fix maximum and minimum prices. Article 63 enabled the High Authority to specify conditions of sale. To that extent the ECSC organized coal and steel producers into a kind of public cartel.’ Christopher Harding & Julian Joshua, Regulating Cartels in Europe: A Study of Legal Control of Corporate Delinquency (Oxford: Oxford Press 2003), 94. Competition rules were added later to assuage these concerns.

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The German Cartel Law followed the aforementioned ECSC Treaty and predated its broader counterpart, the EC Treaty. Jean Monnet, first President of the ECSC’s High Authority, described the antitrust provisions of the ECSC Treaty by stating that, “For Europe, they were a fundamental innovation: the extensive antitrust legislation now applied by the European Community essentially derives from those few lines in the Schuman Treaty.”6 The competition provisions of the EC Treaty closely follow the ECSC Treaty and bear the substantive imprint of the Sherman Act derived from their American ancestry. 7 Moreover, the gradual expansion of the European Community has thus spread 6

JEAN MONNET, MEMOIRS [R. Mayne trans.] ( Garden City, N.Y.: Doubleday, 1978), 352-3. Compare Article 65 of the Treaty Instituting the ECSC, Apr. 18, 1951, 261 U.N.T.S. 143, with Article 81 of the Treaty Establishing the EC, Nov. 10, 1997, O.J. (C 340) 3 (1997). Monnet noted that Robert Bowie, the drafter of the Treaty provisions, was a “young Harvard professor. . .who was said to be the leading expert on US anti-trust legislation, which the Americans applied as rigorously as morality itself.” Bowie’s American text was ‘reworked into “European idiom” by Maurice Lagrange,’ later Advocate General to the European Court of Justice. Harding & Joshua, note 6 above, at 95. Hence, the language differs from the Sherman Act but lays down the same substantive principles as developed in the U.S. case law. 7

The later EC Treaty version of Section 1 reflects a substantive summary of judicial authority under the Sherman and Clayton Acts version: The following shall be prohibited as incompatible with the common market; all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: —any agreement or category of agreements between undertakings; —any decision or category of decisions by associations of undertakings; —any concerted practice or category of concerted practices; which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. EC TREATY art. 81. 4

the competition rules derived from Robert Bowie’s “few lines in the Schuman Treaty” to many more countries. The now-expired European Coal and Steel Community Treaty (1952-2002) was of limited scope but nonetheless laid the single market groundwork for the more expansive European Community Treaty. Competition policy was seen by the then-High Authority (now the Commission of the European Community) as integral to this objective, as was noted in an early policy memorandum: A genuine single market cannot be brought about except through free competition. If the market were to remain subject to the arbitrary decisions of the cartels, or to the restrictive practices of monopolies, then the benefits of the single market would soon be offset by the effects of pricefixing and production quotas. This of course was understood by the framers of the [ECSC] Treaty, who provided in Articles 65 and 66 a set of standards and guiding procedural principles which together constitute the first effective anti-trust law in Europe. (There is a resemblance to American models here. Article 65, which relates to combinations in restraint of trade, and Article 66, which relates to illegal concentrations of economic power, respectively correspond somewhat to Articles 1 and 2 of the Sherman Anti-Trust Act.)8 In the EC it has often been said that the “first principle” of competition law is single market integration and the elimination of private practices which interfere with integration.9 As Deringer has commented, “the basic sin in Europe is not so much restricting competition but creating an obstacle to integration.”10 Competition law serves the purpose of European integration by preventing private concerns from erecting or maintaining private barriers to free trade after or as governmental barriers are dismantled under the Treaty of Rome.11 As Faull put it, “the EC's overriding objective of prising

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High Authority, European Coal and Steel Community, Memorandum On The Anti-Trust Policy of The High Authority 1 (1954). (Translation by the High Authority) The original antitrust rules of Articles 65 and 66 of the ECSC Treaty migrated into what are now Articles 81 and 82 of the EC Treaty. 9

Barry Hawk, United States, Common Market and international antitrust, (2d edn.), (Englewood Cliffs, N.J. Prentice-Hall, Supp. 1990), II, 6. 10

Arved Deringer, in conference discussions, Enterprise law of the 80's: European and American perspectives on competition and industrial organization , eds. F. Rowe, F. Jacobs & M. Joelson,(Chicago: Am. Bar Ass’n, 1980), 65. 11

Nicholas Green, Trevor Hartley, & John Usher, The legal foundations of the Single European Market , ed.T. Hartley, Oxford: Oxford Press, 1991), 201; Valentine Korah, EC competition law and practice, 5th ed. (London: Sweet & Maxwell, 1994), 1.

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open national markets … is not the invisible hand; it is competition policy as can opener.”12 While more recent documents have placed more emphasis on maintenance of competitive markets as the first objective of EC competition policy13 and seemingly demoted the single market objective to second place, there is no doubt that both are important. Because the Community welcomed ten new members in 200414 and expects two more in 2007,15 the single market objective may well take on renewed importance. Many of the new Member States and candidates for EU membership are former Communist states to whom “free market”16 has been a pejorative term for most of the decades since the close of World War II. The new Member States frequently are also new market economies in which those former state-owned industries which have survived the collapse of the Soviet Union are often dominant in the national markets. The challenges of the creation of a single market free of distortions and restrictions of competition in the context of so many new members are arguably comparable to, if not greater than, those which faced the original six Member States in 1952 and 1958 at the founding of the ECSC and EEC, respectively. The Role of Competition Rules in NAFTA The North American Free Trade Agreement (NAFTA), effective January 1, 1994, is comprised of the United States, Mexico, and Canada. The NAFTA agreement itself confines its antitrust and competition provisions to the five articles of Chapter 15.17 With the exception of provisions governing the behavior of state monopolies,18 the NAFTA 12

Jonathan Faull, ‘The enforcement of competition policy in the European Community: a mature system’, 18 Fordham Corp. Law Inst. (1992): 139, 141 (B. Hawk, ed.). 13

Commission, XXIXth Report on Competition Policy, (Luxembourg: Office of Official Publications, 1999), ¶¶ 2-3. 14

New Member States in 2004 were Poland, Hungary, Czech Republic, Slovakia, Malta, Cyprus, Slovenia, Latvia, Lithuania, and Estonia, bringing the total to 25 Member States. 15

Romania and Bulgaria are expected to join at January 1, 2007.

16

The original Treaty of Rome commands “the institution of a system ensuring that competition in the common market is not distorted …” Art. 3(g) EC. As amended at Maastricht, in addition the Treaty now explicitly requires the Member States to adopt an economic policy which is “conducted in accordance with the principle of an open market economy with free competition.” Art. (4)(1) EC. It has also been said that following the entry into force of the Single European Act, the Community already has the “most strongly free-market oriented constitution in the world.” Claus-Dieter Ehlermann, “The contribution of EC competition policy to the Single Market”, Common Market Law Review 29, (1992):257, 273. 17

North American Free Trade Agreement (NAFTA), Chapter Fifteen: Competition Policy, Monopolies And State Enterprises. 18

The sole example of a substantive antitrust rule in the agreement is found in Article 1502(3) of NAFTA, which essentially provides that state-designated monopolies or enterprises are supposed to behave themselves, in that:

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agreement does not dictate substantive competition or antitrust rules, but merely obligates the parties to have such rules, without specifying what those rules should be. Article 1501(1) of the NAFTA Agreement states: Each Party shall adopt or maintain measures to proscribe anticompetitive business conduct and take appropriate action with respect thereto, recognizing that such measures will enhance the fulfillment of the objectives of this Agreement. To this end the Parties shall consult from time to time about the effectiveness of measures undertaken by each Party. This appears to require that the NAFTA Parties not only have such rules, but ensure that the rules are enforced. Towards that end, the parties obligate themselves to consult each other and cooperate in the enforcement by assisting the other parties where needed.19 However, since in general the content of the rules is not specified, there can be wide variation among the substantive requirement of the national rules. Unlike in the EU, where a single set of Treaty rules (primarily Articles 81 and 82 EC) applies uniformly throughout the EU, NAFTA provides no uniform competition measures. When the EC Treaty first went into effect, only Germany had national competition rules, so the EC Treaty essentially wrote on very nearly a blank slate.

Each Party shall ensure, through regulatory control, administrative supervision or the application of other measures, that any privately owned monopoly that it designates and any government monopoly that it maintains or designates: 1.

2.

3. 4.

acts in a manner that is not inconsistent with the Party's obligations under this Agreement wherever such a monopoly exercises any regulatory, administrative or other governmental authority that the Party has delegated to it in connection with the monopoly good or service, such as the power to grant import or export licenses, approve commercial transactions or impose quotas, fees or other charges; except to comply with any terms of its designation that are not inconsistent with subparagraph (c) or (d), acts solely in accordance with commercial considerations in its purchase or sale of the monopoly good or service in the relevant market, including with regard to price, quality, availability, marketability, transportation and other terms and conditions of purchase or sale; provides non-discriminatory treatment to investments of investors, to goods and to service providers of another Party in its purchase or sale of the monopoly good or service in the relevant market; and does not use its monopoly position to engage, either directly or indirectly, including through its dealings with its parent, its subsidiary or other enterprise with common ownership, in anticompetitive practices in a non-monopolized market in its territory that adversely affect an investment of an investor of another Party, including through the discriminatory provision of the monopoly good or service, cross subsidization or predatory conduct. 19

Article 1501(2) of NAFTA states that: “Each Party recognizes the importance of cooperation and coordination among their authorities to further effective competition law enforcement in the free trade area. The Parties shall cooperate on issues of competition law enforcement policy, including mutual legal assistance, notification, consultation and exchange of information relating to the enforcement of competition laws and policies in the free trade area.”

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In sharp contrast to the EU, by the time NAFTA became effective, all of the Parties had their own antitrust laws. In the case of the United States, the Sherman Antitrust Act (1890) and the Clayton Antitrust Act (1914) and Federal Trade Commission Act (1914) meant that the U.S. had already had such rules for over one hundred years. Thus, the United States adopted no new legislation to comply with the NAFTA requirement that it proscribe anticompetitive practices. Similarly, Canada’s20 first federal competition law (1888) actually predated the Sherman Act, although its current competition law,21 quite close in some respects to the U.S. antitrust laws, dates from 1976 as amended, all of which substantially predate NAFTA, of course. Mexico, on the other hand, while it had general proscriptions of monopolies and restraints in its Constitution of 191722 and 1934 Monopolies law,23 had the form of competition law without the substance. The law was difficult to apply, enforcement was scant and politicized, and the government itself was such a dominant force in the economy as supplier and purchaser of goods as well as direct price regulator that the law had little if any effect. However, in contemplation of the coming into force of NAFTA and as part of President Carlos Salinas de Gortari’s economic reforms intended to make free competition Mexico’s primary engine of economic growth, a new Federal Economic Competition Law (LFCE)24 was adopted in December, 1992 effective in June 1993 in time for the entry into force of NAFTA on January 1, 1994. NAFTA25 established a Working Group on Trade and Competition (now defunct) to consider further the development of competition rules and in particular the relationships between competition and trade. NAFTA thus obligates the parties to have competition laws and to apply them without discrimination, but does not impose new uniform competition law on the parties in the same way that the Articles 81 and 82, et.al., of the EC Treaty do with respect to the Member States. The NAFTA Working Group 20

See, generally, CalvinS. Goldman & John D. Bodrug, eds., COMPETITION LAW OF CANADA (New York: Juris Publishing, 1993). 21

See, generally, Charles M. Wright & Matthew D. Baer, “Price-Fixing Class Actions: A Canadian Perspective,” Loyola Consumer Law Review 16 (2004): 461 and Charles Stark, “Improving Bilateral Antitrust Cooperation,” in Competition Policy in the Global Trading System, ed. Clifford A. Jones and Mitsuo Matsushita, 83 (The Hague: Kluwer International, 2002). 22

Art. 28, MEXICAN CONST. (1917).

23

Ley Organica del Articulo 28 Constitucional en Material de Monopolios, D.O. Aug. 31, 1934.

24

Ley Federal de Competencia Econ∴mica, D.O. Dec. 24, 1992.

25

Article 1504 of NAFTA states: “The Commission shall establish a Working Group on Trade and Competition, comprising representatives of each Party, to report, and to make recommendations on further work as appropriate, to the Commission within five years of the date of entry into force of this Agreement on relevant issues concerning the relationship between competition laws and policies and trade in the free trade area.”

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had several meetings, but they never resulted in any changes to the competition rules or policies of any of the parties or of the NAFTA itself. In comparison, the EU did not merely rely on the terms of the original 1958 EEC Treaty, but adopted an implementing regulation (Regulation 17 of 1962) which gave the EC’s Commission exclusive power over granting of exemptions to the provisions of Article 81 EC, the EU equivalent to the Sherman Act Section 1 in the United States. More recently, the EC radically reformed its enforcement regulations and adopted a new Regulation (Regulation1/2003),26 which took effect in May, 2004, coincident with the expansion of the EU to 25 Member States.27 Perhaps the most radical and interesting provision for our purposes here is found in Article 3 of Reg. 1, in which it is provided that national courts applying national competition rules to conduct affecting trade between Member States must also apply Article 81 and 82 EC. In other words, national competition rules must be applied in tandem with Community rules if the conduct might infringe Articles 81 or 82 EC. Moreover, national competition law may not prohibit the conduct unless it would also infringe Community rules.28 The significance of this new provision is that now EU competition law is not only uniform at EU level, but also at national level. National competition law must in most cases only prohibit what EU law prohibits, and cannot permit what EU law does not. In contrast, NAFTA has no general antitrust rules that are uniform throughout the NAFTA area, and the antitrust laws of the Parties can prohibit or not any practices the parties wish without reference to any competition law standard but their own national policy choices. The lack of any minimum standard does not bode well for effective application of antitrust law in the NAFTA area. The only exception is that NAFTA specifies in Article 1502(3)(4) that state-designated monopolies may “not use its monopoly position to engage … in anticompetitive practices in a non-monopolized market in its territory that adversely affect an investment of an investor of another Party, including through the discriminatory provision of the monopoly good or service, cross subsidization or predatory conduct.” As noted later, this sole exception was involved in a damages claim by UPS that Canada permitted Canada Post to violate NAFTA through anticompetitive acts covered by this provision.

26

“Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty,” OJ L 1, 4.1.2003. 27

See, generally, Clifford A. Jones, “The Second Devolution of European Competition Law: Empowering National Courts, National Authorities, and Private Litigants in the Expanding European Union,” paper presented at the European Union Studies Association Conference (Nashville, Tennessee, Mar. 29, 2003) (On file with the author and the European Union Studies Association). 28 Reg. 1, Article 15(2). This rule does not apply when national merger laws are applied, when national laws are applied “which pursue an objective different from that pursued by Articles 81 and 82 of the Treaty,” (e.g., unfair competition or deceptive practices laws) (Article 3 (2)), or when stricter national laws punishing unilateral conduct are applied to conduct on the national territory, Article 15(3). 9

Of course, NAFTA was not intended to aspire to the same level of economic or potential political integration as the EU does. NAFTA lacks the institutions of the EU, as well as the political and security objectives of the EU.29 NAFTA is merely a free trade area, not a customs union or a common market. There is no NAFTA competition enforcement agency, no NAFTA Court of Justice, no NAFTA executive comparable to the EC Commission, and no NAFTA Parliament. There is a binding dispute settlement process involving multilateral panels, but the competition provisions of Art. 1501 are expressly excluded from the dispute settlement procedures by the provisions of Art. 1501(3).30 The assumption may have been that the Working Group would ultimately result in more precise rules, but this did not occur during its lifetime, and it has now expired. NAFTA thus provides at most a bare framework for the development of cooperative or collective competition policies, at least in comparison to the EU. However, the reason for having any provisions for competition policy in the agreement echoes the reasoning of the EU: to prevent governmental trade barriers from being replaced by private trade restraints, as noted by an American Bar Association Task Force:31 First, competition policy and trade policy go hand in hand in providing fundamental economic underpinnings of market economies, notwithstanding significant derogations from these policies. Just as free trade measures lift government barriers to trade, competition law enforcement can eliminate private barriers to trade. Second, as trade becomes freer, private and national incentives to block trade and protect traditional markets may become stronger; a competition policy to prevent rebuilding barriers by anticompetitive restraints becomes more imperative. It some ways it is “unfair” to compare the development of competition law in NAFTA at 12 years of age to the EU. The EU has been developing its competition rules for over fifty years, and represents a mature competition system as well as the most comprehensive effort at economic, monetary and perhaps political integration of any regional organization in the world. As recently as May 1, 2004 the EU admitted 10 new Member States and simultaneously put into force new competition regulations that among other things devolved some enforcement responsibility to the Member States and 29

See, e.g., the “Schuman Declaration” of May 9, 1950 sparking the creation of the now expired European Coal and Steel Community (1952-2002), precursor to the EEC. The Declaration lays down the political objectives of European integration, including the making of war impossible by granting supranational control over essential war material such as coal and steel. This original security basis for the European Communities and the EU is often overlooked on this side of the Atlantic, where purely economic considerations sometimes seem to prevail. 30 Article 1501(3) of NAFTA succinctly provides: “No Party may have recourse to dispute settlement under this Agreement for any matter arising under this Article.” 31

ABA Section Of Antitrust Law, Report Of The Task Force On The Competition Dimensions Of NAFTA, (Chicago: Am. Bar Ass’n, 1994), 1. 10

centralized the European Commission’s control over competition policy. This included aforementioned provisions that the Member States must apply EC competition rules in any case involving trade among the Member States and that conflicting national competition rules may not be applied.32 The new EC legislation33 also requires the Member States give their national competition authorities power to enforce EC competition rules, so that the European Commission and all 25 Member States, as well as private litigants in the national courts collectively will be engaged in a higher level of enforcement activity. In contrast, while the U.S. is the global paradigm of effective governmental and private antitrust enforcement, Canada is active in governmental enforcement and becoming more active in private enforcement, and Mexico is still very much a beginner at both, this activity is all based on national antitrust laws, whereas the most active enforcement in the EU has been at the supranational or regional level. In the NAFTA, there is no real regional or supranational competition policy or enforcement. This makes broad comparisons of enforcement levels difficult and comparative assessments of competition policy doubtful and qualified. Nonetheless, a few examples exist which offer some interesting if limited comparisons. Weaknesses Exposed: The UPS and Telmex Cases in NAFTA and the EU It is apparent from the discussion above that NAFTA falls well short of the EU in the degree of regional economic integration in general and competition rules in particular. NAFTA was not intended to be more than a free trade area, and this, together with the pre-existence of strong national antitrust legislation in most of the Parties, has no doubt caused the role of supranational competition rules in NAFTA to be significantly less than in the EU. However, this does not make the need for effective antitrust enforcement in the NAFTA countries any less than it is in the EU simply because the enforcement comes at national level, with some bilateral cooperation, for example between the U.S. and Canada. It means that for competition rules to play the role in NAFTA they play in the EU, that is preventing private barriers to trade from replacing governmental barriers to trade, the need is for active national enforcement in the place of active supranational enforcement. If that does not occur, then the trade benefits of NAFTA may be reduced over what they should be. UPS in Germany (the EU)

32

See, generally, Clifford A. Jones, The Second Devolution of European Competition Law: Empowering National Courts, National Authorities, and Private Litigants in the Expanding European Union, Paper presented at the European Union Studies Association Conference (Nashville, Tennessee, Mar. 29, 2003) (On file with the author and the European Union Studies Association). 33

Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty,” 2003 O.J. (L 1), 1 [hereinafter “Reg. 1”].

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United Parcel Service (UPS), originally a U.S. company, provides business letter, small package, and freight delivery services on an overnight or slower basis in numerous countries in the world, including Member States of the EU and Canada. Its chief competitors aside from other private companies are the government postal systems, including the Deutches Bundespost (German Post or DP) and Canada Post. For a number of years, UPS has complained to the U.S. Justice Department’s Antitrust Division, the EU Commission, and other national competition enforcement agencies about the anticompetitive practices engaged in by the government postal offices, including subsidies granted to the postal agencies but made available to private firms such as UPS. Government postal offices in some countries tend to be dominant in the business if not literal monopolies. Because they have certain advantages, such as not having to make a profit and the ability to cross-subsidize their business letter and small package overnight or rapid delivery services from fees generated by other services ranging from personal mail to cable television, they can make it very difficult for private firms like UPS. In Germany, UPS formally complained about anticompetitive fidelity rebates by DP and predatory pricing conduct (pricing below cost) of the dominant DP in 1994. The German authorities took no action against DP, although eventually the European Commission opened an investigation in 2000. Finally, in 2001, the European Commission upheld UPS’s34 complaint and fined DP €24 million for violation of Article 82 of the EC Treaty, the provision prohibiting abuse of a dominant position, for its unlawful use of fidelity rebates to exclude competition. In addition, DP was ordered to bring to an end its predatory pricing practices and rebate policies. In this situation, the competition enforcement occurred only because the regional antitrust authority, the Commission of the European Communities, took action under the competition rules of the EC Treaty, even though the relevant geographic market was Germany. In the absence of supranational action, it is likely that no relief would have been afforded to UPS, and the German market would not have received the benefit of competition in this field by a foreign company. UPS in Canada (NAFTA) UPS encountered similar problems in its efforts to compete in Canada against Canada Post, a Crown Corporation which engaged in predatory practices competing in non-monopoly markets against UPS, including cross-subsidizing its rapid letter packet service with revenues from its postal monopoly. In 1995, Canada appointed an independent commission to evaluate the conduct of Canada Post, and the Commission reported in late 1996 that Canada Post was an unregulated monopoly engaging in seriously unfair and unrestrained competition with the private sector, including predatory pricing built on the resources of a government monopoly, and had developed such a reputation as a vicious competitor that firms refrained from criticizing it out of fear of retaliation. In 1997, Canada decided to take no action against Canada Post.

34

Deutsche Post AG, OJ L 125, 05.05.2001, p. 27-44.

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UPS brought an investor versus government Party claim for damages against Canada under the provisions of the Article 1105 of the NAFTA Agreement, resulting in the convocation of a multinational arbitration panel under Chapter 11. Canada challenged the jurisdiction of the panel to hear a claim based (in part) on Articles 1501, 1502, and 1503 of the NAFTA agreement, which are the provisions dealing with competition rules. The Arbitration Tribunal35 ruled that claims brought for anticompetitive conduct by Canada Post and the failure to control Canada Post’s predatory practices were outside the jurisdiction of the Tribunal.36 The Tribunal considered that no claims that Canada had failed to regulated anticompetitive practices in general or regulate the conduct of its state monopolies fell within the jurisdiction of the Tribunal due to the exclusion of competition rules from the dispute resolution system37 and the fact that failure to protect foreign nationals (UPS) against anticompetitive conduct did not violate minimum standards of treatment since there was no obligation under customary international law to regulate anticompetitive business practices.38 While the UPS claim against Canada Post is still pending on other issues related to whether Canada extended national treatment to foreign investors of a Party, it is clear that NAFTA provides no protection or remedies to private firms who might be the victims of antitrust violations. Canada’s competition authority provided no relief. If UPS ultimately receives any relief from the NAFTA Arbitration Tribunal, it will not be because of either national or regional antitrust rules. This result, especially in comparison to the experience in the EU, which ultimately if slowly resulted in antitrust enforcement, signals that competition rules are not playing their part in NAFTA. The U.S. in the WTO (Mexico-Telecoms) The U.S. complained that Mexico was not treating U.S. telecom companies fairly in their efforts to provide international call services from the U.S. into Mexico by conducting or allowing discriminatory and anticompetitive conduct in certain telecommunications markets. In particular, Mexico had delegated the negotiations for pricing of such services for all Mexican suppliers to the national monopoly carrier Teléfonos de México (“Telmex”), which prevented U.S. carriers from negotiating more competitive rates with other Mexican carriers, and Mexico had failed to prevent Telmex from engaging in other discriminatory and anticompetitive conduct. The U.S. could not resolve this dispute under NAFTA since NAFTA dispute resolution procedures, as noted, excluded the competition rules from jurisdiction. The ironic solution was the U.S. took its complaint to the World Trade Organization (WTO), claiming Mexico violated the terms of its commitments under the GATS (General Agreement on Trade in Services) obligations. A Dispute Resolution Body Panel was requested in 2000, convened in 2002, and in 2004, the Panel upheld the 35

United Parcel Service of America, Inc. v. Government of Canada, Award on Jurisdiction, (NAFTA Arbitration Tribunal, November 22, 2002). Available at http://www.dfait-maeci.gc.ca/tnanac/parcel-en.asp. 36 Id., at ¶¶ 99, 134. 37 Id., at ¶¶ 24, 61. 38 Id., at ¶¶ 83-92. 13

U.S. claim, finding that Mexico had failed to honor its GATS commitments in several respects, including its failure to prevent the Telmex monopoly from engaging in anticompetitive practices.39 The great irony here is that the U.S. did not act under NAFTA, which does have explicit competition rules, but did act under the dispute settlement procedures of the WTO, which does not have explicit competition rules, except incidentally in the context of individual provisions such as those relating to services (GATS) or intellectual property (TRIPS). One conclusion is hat something is seriously wrong with the competition rules of NAFTA when the Parties have to resolve their competition-related issues by the dispute procedures of the WTO. This is even more ironic when one considers that the current Doha Round of negotiations, which was intended to introduce negotiations about multilateral competition rules40 in the WTO system, has had competition rules taken off the table41 due to failure to make progress, but NAFTA members can get competitionrelated relief in the WTO they can’t get in NAFTA itself. Conclusion A comparison of the content and procedures related to competition policy in the EU and NAFTA reveals that NAFTA is woefully underdeveloped in comparison to the EU in terms of its development of regional or supranational competition policy. At national level, competition policy and enforcement is quite advanced in the U.S. and Canada and relatively lagging in Mexico. However, the NAFTA agreement provides no means of settling disputes among the NAFTA Parties related to competition policy, whereas the EC Treaty provides that the supranational Commission is the final arbiter of competition policy within the EU. NAFTA’s lack of supranational or regional, as distinct from national, competition policy reflects the comparable lack of supranational institutions. The result is that competition disputes are settled by informal cooperation between the Parties, or in rare instances, by resort to the dispute resolution procedures of the WTO, or not settled at all. The flaws in NAFTA competition policy are unlikely to be resolved unless the agreement itself is renegotiated and moves toward higher levels of economic integration, as has occurred in the EU. If competition policy problems are to be solved in the absence of greater economic integration, it will have to be through bilateral cooperation or other international agreements outside the procedures of NAFTA itself. In that sense, the EU model of supranationality does not serve well as an example for NAFTA.

39

Panel Report, Mexico—Measures Affecting Telecommunications Services, WT/DS204/R (2 April 2004), available online at http://docsonline.wto.org. Mexico changed its rules, and the Panel Report was adopted without any review by the Appellate Body. 40 Doha Declaration, WTO document WT/MIN(01)/DEC/1, paragraphs 23-25. (November 14, 2001), available online at http://docsonline.wto.org. 41 WTO document WT/L/579. (August 1, 2004), available online at http://docsonline.wto.org.

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