ICPAC Hearing Minutes From May 17, 1999

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6Washington, D.C.

7May 17, 1999






13This document constitutes accurate minutes of the

14meeting held May 17, 1999 by the International

15Competition Policy Advisory Committee. It has been

16edited for transcription errors.


_____________________   _____________________

James F. Rill   Co-Chair

Paula Stern   Co-Chair
































6Washington, D.C.

7May 17, 1999







14Taken at the American Geophysical Union, 2000 Florida Avenue,

15N.W., First Floor Conference Center, Washington, D.C., beginning at 9:15 A.M.,

16before Bryan Wayne, a court reporter and notary public in and for the District of










2Advisory Committee Members:

3James F. Rill, Co-Chair and Senior Partner, Collier, Shannon, Rill & Scott,


5Paula Stern, Co-Chair and President, The Stern Group, Inc.

6Merit E. Janow, Executive Director and Professor in the Practice of

7International Trade, School of International and Public Affairs, Columbia


9Thomas E. Donilon, Partner, O'Melveny & Myers

10John T. Dunlop, Lamont University Professor, Emeritus, Harvard

11 University

12Department of Justice Employees:

13The Honorable Janet Reno, Attorney General of the United States

14Joel I. Klein, Assistant Attorney General, Antitrust Division

15Members of the Public Who Made an Appearance and Presented Written or Oral


17Panelists: Members of the ABA Section of Antitrust Law ICPAC Task Force

18Phillip A. Proger, Jones, Day, Reavis & Pogue; Chair, ABA Section of

19Antitrust Law

20Harvey M. Applebaum, Covington & Burling; Co-Chair, ABA Section of

21Antitrust Law ICPAC Task Force

22A. Paul Victor, Weil, Gotshal & Manges LLP; Co-Chair, ABA Section of

23Antitrust Law ICPAC Task Force


1Panelists: Members of the ABA Section of Antitrust Law ICPAC Task Force


3Margaret E. Guerin-Calvert, Economists Incorporated

4Joseph F. Winterscheid, Jones, Day, Reavis & Pogue

5Janet L. McDavid, Hogan & Hartson LLP

6Panelists: Economists

7Simon J. Evenett, The Brookings Institution; Department of Economics,

8Rutgers University

9David J. Salant, Law and Economics Consulting Group

10Leonard Waverman, Law and Economics Consulting Group

11Andrew R. Wechsler, Analytic Studies International, Inc.

12Panelists: Representatives of U.S. Businesses

13Eastman Kodak Company - Christopher A. Padilla, Director, International

14Trade Relations

15Guardian Industries Corp. - Stephen P. Farrar, Director, International Business

16United Parcel Service - Larry Stevenson, Vice President, International

17Industrial Engineering; Andrew R. Wechsler, Director of International

18Economic Strategy and Analysis, Analytic Studies International, Inc.; and

19Raymond Calamaro, Hogan & Hartson LLP

20Panelists: Institution Building and Competition Law Advocacy

21Richard Gordon, International Monetary Fund

22R. Shyam Khemani, The World Bank

23Emmy Simmons, U.S. Agency for International Development



2Advisory Committee Staff:

3Cynthia R. Lewis, Counsel

4Andrew J. Shapiro, Counsel

5Stephanie G. Victor, Counsel

6Eric J. Weiner, Paralegal

7Estimated Number of Members of the Public in Attendance: 19

8Reports or Other Documents Received, Issued, or Approved by the Advisory


10American Bar Association Section of Antitrust Law: "Report on the Use of

11Private Litigation to Challenge Private Anticompetitive Conduct Affecting

12U.S. Foreign Commerce"

13American Bar Association Section of Antitrust Law: "Report on

14Multijurisdictional Merger Review Issues"

15The Brookings Institution: "Strengthening Trans-Atlantic Antitrust

16 Cooperation," A project jointly sponsored by The Brookings Institution and

17the Royal Institute of International Affairs - Case Studies - Compiled by

18Simon J. Evenett, The Brookings Institution, Rutgers University and CEPR

19Law and Economics Consulting Group (LECG): "Standards Wars - News

20 From the Front Lines and International Solutions," presentation by David

21 Salant, Leonard Waverman, and Andrew R. Wechsler Law and Economics

22Consulting Group (LECG): "Standards WARS: The Use of Standard

23Setting as a Means of Facilitating Cartels; Third Generation Wireless


1Telecommunications Standard Setting" by Peter Grindley, David J. Salant,

2and Leonard Waverman

3Guardian Industries Corp.: "Barriers to Entry Into the Japanese Flat Glass

4 Market: Opportunities for Bilateral Cooperation"

5United Parcel Service: Statement of Larry Stevenson, Vice President of

6International Industrial Engineering, United Parcel Service attaching "The

7 Entry into Unregulated Markets by State Owned Enterprises and Regulated

8Monopolies; A Serious Threat to International Competition?" by Andrew

9R. Wechsler, Analytic Studies International, Inc. and statement by James

10P. Kelly, Chairman and CEO, UPS (1/29/99), among other attachments

11U.S. Agency for International Development: "USAID and Competition Law

12Advocacy and Institution Building," presented by Emmy B. Simmons,

13 Deputy Assistant Administrator, Center for Economic Growth and

14Agricultural Development, Global Bureau, U.S. Agency for International











1(9:15 a.m.)

2DR. STERN: Good morning. I'd like to call to order our hearings

3 for May 17th. It is a pleasure to welcome you all to, actually, the second day

4of our International Competition Policy Advisory Committee Spring hearings. We

5are particularly honored this morning that the Attorney General of the United

6States, Janet Reno, joins us with the Assistant Attorney General of the United

7States for Antitrust, Joel Klein, to make some opening remarks.

8First, let me say very briefly, the International Competition Policy

9Advisory Committee was established by the Attorney General and the Assistant

10Attorney General for Antitrust back in the Fall of '97 to provide guidance to the

11 Department of Justice on the topics of multijurisdictional mergers, the interface of

12trade and antitrust policies, and cooperation between the U.S. and foreign

13authorities in antitrust enforcement, particularly enforcement prosecutions against

14international cartels.

15Jim will certainly speak for himself, but I certainly wish to say that

16my appointment to co-chair this initiative with Jim is a great personal privilege

17and a great honor.

18I wish now to introduce the Attorney General. Bearing in mind that

19every day you have a schedule packed to accommodate the immediate and the

20 important, your attendance this morning underlines the importance of this

21Committee's work, and we very much appreciate it. I'd like to invite you now to

22share any remarks you wish to make, followed by Joel Klein.

23ATTORNEY GENERAL RENO: I thank you so much, Dr. Stern,


1and to you and Jim, I say a very special thank you, and to Merit Janow, for all

2that you have done.

3When one comes to Washington for the first time and you don't

4know too many people and you're suddenly Attorney General of the United States,

5you remember those people that you rely on in those early days. And Jim Rill was

6 one of those people who made a point of being there in a bipartisan way, and I

7think it was in a great tradition of public service.

8Your, Paula, willingness to do this is a further example, and I'm

9just deeply deeply grateful.

10MR. RILL: Thank you, General.

11ATTORNEY GENERAL RENO: To the members of the Committee,

12thank you so much. I know the time that something like this takes and I am deeply

13grateful for your willingness to do it because I think it is profoundly important. I

14think sometimes we get blinders on and for ICPAC to spend the time to hear from

15 people is so very important.

16To all of those who are willing to come and give of their time, their

17wisdom, their advice, their thoughts, I say thank you. I think it is again

18very important that government be informed.

19I think one of the first points that Anne Bingaman and Jim made to

20me, and then Joel has made it again and again and again, is that international

21competition policy is playing an increasingly important role in the global

22economy. I'm called to the White House to talk about things that relate to

23this issue more often in the last six years as each year goes by. And so I think it's



2I look at the perspective of the Justice Department and, Tom, you

3will appreciate this. I think all crime is becoming global. Antitrust issues are

4becoming global. And as Strobe Talbott told me, he said: We're going to have to

5start developing a working relationship such as the State Department and the

6Defense Department have long had, out of necessity. We're going to have to do

7the same thing with the Justice Department.

8You realize, whether it be criminal prosecution, cyber crime,

9antitrust issues, it is going to be so important that we inform ourselves in a global

10way about the antitrust implications of all that we do. So I'm particularly glad

11that we have a former State Department perspective.

12We're committed to meeting the challenges posed by the new global

13economy, and Joel, I think, has done just a wonderful job. He has advised me on

14so many different issues and you haven't been wrong once yet. And I just want to

15personally thank you for your willingness to lead this Division, and I think you've

16done a wonderful job.

17Through its sustained enforcement efforts, the Antitrust Division

18has succeeded in exposing international cartels. The result has been numerous

19guilty pleas and in the last two fiscal years record fines. Just two weeks ago, SGL

20AG, the world's largest producer of graphite and carbon products, agreed to pay a

21record fine of $135 million and pled guilty to participating in an international

22conspiracy to fix prices and to allocate the volume of graphite electrodes in the

23U.S. and elsewhere.


1With numerous grand juries currently investigating suspected

2international cartel activity, the unmasking and prosecution of international

3cartels is likely to increase dramatically.

4Another area where the Justice Department has met challenges

5posed by globalization is in its review of multinational mergers. The global

6economy is currently undergoing an unprecedented merger wave. Many of these

7transactions require review by several different national antitrust enforcement

8agencies. The Antitrust Division I think has managed this flood of multinational

9merger notifications with great skill and it has assured that the interests of U.S.

10consumers are protected.

11 While the Department has enjoyed important successes in its

12international antitrust enforcement efforts, the increasing globalization of markets

13presents unique challenges to the development of sound competition policy. That's

14the reason that Joel and I agreed that the Department could benefit greatly from

15bringing together a diverse group of experts for two years to make

16recommendations concerning the really critical issues that we face in international

17competition policy. Again, I am just so deeply grateful that we were able to

18attract such great people and those that can provide such a variety of perspectives.

19Paula has described the issues that we're confronting: first,

20building on U.S. antitrust cooperation agreements, how do we build a consensus

21among governments for cooperation in effective enforcement efforts aimed at

22eliminating international cartels? This is vital to me because I have seen so much

23progress made on a number of fronts in terms of international law enforcement


1policy generally.

2We're trying to develop a system of working relationships with other

3nations so that there will be no safe place to hide, so that we can ensure the

4extradition of nationals, so we can focus on domestic prosecutions if extradition

5does not succeed. But again I see in that situation an occasion where we take

6three steps forward and four steps back sometimes as governments change and as

7policies change. So your thoughts on this effort will be very important.

8Second, given the proliferation of national antitrust laws and

9premerger notification requirements, how can the various antitrust agencies

10achieve sound results for both merging firms and consumers?

11And third, how should the U.S. address anticompetitive schemes by

12private firms in other countries that impede access to markets?

13From what I've heard, the Advisory Committee has made impressive

14progress toward its goal of delivering a report to the Justice Department by the

15end of this year. Just a few weeks ago, the Advisory Committee, as I understand

16it, held the first day of its Spring hearings with testimony from members of

17prominent trade associations, bar associations and other experts. This testimony I

18think is going to be very vital in developing recommendations and reports for the


20I have long felt that public service is one of the great callings that

21anyone can undertake. When you've done public service and then you go out into

22the private sector and are still willing to come back and lend the wisdom of your

23vantage point of both public and private experience, I think it is so important and


1am deeply grateful.

2So people have been thanking me for being here this morning. I just

3thank you so many times over for your willingness to do this.

4DR. STERN: Thank you so much.

5MR. RILL: Thank you, General.

6DR. STERN: Joel.

7MR. KLEIN: First let me say to you, Madam Attorney General,

8without your leadership and support this Advisory Committee would not have been

9possible, and without your continuing strong support for effective antitrust

10enforcement the Division could not be doing the important work that it is doing

11today in the global economy. So we all owe you a great debt of gratitude and most

12particularly, frankly, America's consumers, who I think benefit from the work that

13the Division does.

14I join with you in saluting Paula and Jim, two stalwarts in the field

15who have been enormous support and help to me, and Merit, who has led the work

16of this Committee with great sensitivity and effectiveness.

17I would just be very brief in saying a couple of points. This world-

18wide web, this State Department-like view of the Justice Department's role in the

19global economy, is actually continuing to develop with remarkable,

20remarkable success, even as the Committee does its work.

21We have no choice in doing that because our outreach in

22international cartel cooperation, our necessity to review on a daily basis

23multinational mergers that are being reviewed by other countries, and our issues at


1the interface of trade and competition policy, whether it's the kind of positive

2comity referral we had with DG-IV, is forcing us to work on an increasing basis in

3a global way with our counterparts.

4I am pleased to say that we have some of the best possible working

5relationships with our colleagues in Europe at DG-IV, with our colleagues in

6Canada, with our colleagues in Australia. And we are looking to expand and

7recently the President and the Japanese Prime Minister announced what will soon

8become a formal agreement with the Japanese, hoping to bring them into the

9family of effective cooperation in international antitrust enforcement.

10So in an ironic kind of way, we are developing a bilateral lattice of

11interrelationships which I think will effectively develop into really a multilateral

12system of multinational antitrust enforcement.

13The issues before this Committee could not be more timely or more

14important. We are heading into a round at the end of this year with respect to the

15World Trade Organization where the issues of trade and competition policy will be

16 before us.

17Every day that I wake up, I read in the newspaper about a new

18merger that I know we and somebody else somewhere in the world or many other

19places in the world is going to review. And just last week the Senate Antitrust

20Subcommittee held hearings on trade and competition policy issues, and you'll

21hear from some of the same people with some of the same concerns later today.

22Last week at the OECD, the Antitrust Division put on a key

23 presentation with respect to international cartel enforcement which I think was


1really an eye opener for many of the members of the OECD organization and I

2suspect will have significant implications for long-term antitrust cooperation.

3I along with Karel Van Miert and many industry leaders were in

4Berlin last week to discuss the set of issues involved in international antitrust

5enforcement and multijurisdictional merger review. We heard from Jürgen

6Schrempp of DaimlerChrysler, who went through the process in ten different

7 antitrust authorities when the Daimler-Chrysler merger was put forward.

8Again, what you could see there was a growing consensus, including

9I think even the Germans, a consensus with respect to a sensible WTO policy, one

10that would aim toward developing a culture of competition not only within the

11WTO but worldwide, and one that would move away from dangerous efforts such

12as premature dispute resolution.

13Both Alex Schaub of DG-IV and Konrad von Finckenstein of

14Canada supported notions along those lines which I found personally very


16Just this past Friday I was at the Mentor Group for a four-hour

17session, which is a group that sponsors key EU-U.S. conferences, a four-hour

18session on these very issues.

19So what I want to say is, enough preliminary remarks. There's a lot

20 of work ahead for this Committee. I can see from the talent assembled here at this

21table, some of the leading thinkers in our field, that you are going to have a

22robust, exciting, and I suspect, highly informative meeting today.

23I want to thank all of you for the effort and we are very eager to see


1your report later this year.

2ATTORNEY GENERAL RENO: And if anybody has any questions

3or suggestions for us at this point, we're certainly receptive to them.

4DR. STERN: Hearing none, with respect to you and your busy

5schedule --



8DR. STERN: Okay, well, let's resume the hearing. I'll have to give

9Joel my quip separately, because when he talked about this lattice that he was

10making I kept thinking that good fences make good neighbors. In this case I guess

11a good lattice may make good trading partners.

12Our hearings, as I said, are a continuation of the April 22nd

13hearing, and together these Spring hearings complement those that were conducted

14by the Advisory Committee last November.

15Today's format is as follows: It's designed to allow members of the

16Advisory Committee to hear from associations and individuals who have been

17developing input for the Advisory Committee for many months. We've heard from

18individual U.S. businesses, economists, attorneys and others engaged in technical

19assistance to develop antitrust regulations around the world. These hearings

20provide us an opportunity to hear from participants who will share with the

21 Committee their views and experience on matters relating, as I said very briefly,

22 to multijurisdictional merger reviews, the interface of trade and competition

23 policy, and thirdly the cooperation between antitrust enforcement authorities.


1Last November the Advisory Committee held hearings featuring

2roundtable discussions with the heads of 10 foreign competition authorities as well

3as distinguished lawyers, economists, academics and other experts. And the

4transcripts of those hearings as well as the full meetings of the Advisory

5Committee are posted now on the Advisory Committee's website, along with a host

6of other useful materials relating to this Committee's work. I will save you all of

7the letters of the website address -- it's a mouthful -- but the staff can certainly

8provide you with that.

9Let me take a few minutes to discuss the substance of today's

10hearing. The Advisory Committee will hear presentations by the ABA Section of

11Antitrust Law's task force that was established to provide input to our Advisory

12Committee. We shall hear from its members about the ABA Antitrust Section's

13 views on two basic topics: first, multijurisdictional mergers and joint ventures;

14and secondly, the use of private litigation to challenge private anticompetitive

15 conduct affecting U.S. foreign commerce. Again, I want to thank all of you for

16your continued dedication, for coming, and for providing us -- as the year

17 stretches to two years -- with your expertise.

18After a break for lunch, we then have scheduled three more

19sessions. The first afternoon session is a presentation by economists, again on

20two distinct topics. First we'll hear a presentation about a Brookings Institution

21study that's underway on trans-Atlantic antitrust cooperation. And then we'll have

22an opportunity to hear about the use of standard-setting as a means of facilitating

23cartels and market blockage, and its potential trade effects, particularly in


1high-tech industries.

2At the next afternoon session, the Advisory Committee will hear

3presentation from the representatives of three U.S. businesses: Eastman Kodak,

4Guardian Industries and the United Parcel Service -- UPS -- about the experience

5of these businesses in their overseas markets.

6We will conclude with presentations on institution-building and

7competition law advocacy. And our panelists in that concluding session have

8broad experience, representing the U.S. Agency for International Development, the

9World Bank, and the International Monetary Fund. They will share with us their

10experience with technical assistance programs of their respective organizations in

11competition law and policy.

12We welcome everyone's attendance in the audience. We appreciate

13your interest in our Committee and its work. I'd like just to note that the audience

14should please refrain from giving us their views at this particular moment during

15the day -- our format does not accommodate that kind of input -- but we do

16welcome and indeed invite any reactions that you may have to today's meeting in

17writing. You may contact one of the staff people who are arrayed here if you wish

18to submit written comments to the Advisory Committee.

19I think that we should further bless this Committee by saying that

20this meeting is being held in accordance with the Federal Register notice.

21I would now like to say that we are eager to hear from the other

22participants who have prepared their remarks. But before doing so, I'd like to turn

23 to my esteemed colleague, Co-Chair Jim Rill, for any remarks he might wish to



2MR. RILL: Thank you, Paula. I think you have with great

3articulateness described the format of the day and the purpose for which we are


5I simply want to add my thanks to all of the panelists who are going

6to appear today for the very hard work that they've done. And the value it's going

7to have to our deliberations is, I'm sure, extraordinarily substantial. Having said

8that, I don't want to take up any more of your time.

9DR. STERN: Okay. Well, I think the group has decided to adjust

10their format so that we'll hear presentations on both issues and then we'll open it

11up to questions.

12Phil, are you going to lead off?

13MR. PROGER: Yes, I am.

14DR. STERN: I could somehow tell by that eager smile.

15MR. PROGER: Good morning and thank you for having us. While

16many of us have appeared before you in our individual capacity, I am pleased that

17we can appear today representing the Section of Antitrust Law of the American

18Bar Association. The views expressed today in the two papers that we are

19transmitting, while not formal views of the American Bar Association, are formal

20views of the Section of Antitrust Law of the American Bar Association.

21I'd like to introduce my co-panelists. To my far right is Jan

22McDavid, the Chair Elect of the Section and who already has testified in an

23individual capacity. Next to Jan is one of our two Co-Chairs of our Task Force on


1ICPAC, Paul Victor. Paul is a past Vice Chair of the Section and extremely

2active in the area of international antitrust. To my immediate right, Harvey

3Applebaum, past Chair of the Section and Co-Chair of our ICPAC Task Force.

4Harvey brings a wealth of experience and expertise to the Section's deliberations

5in this area.

6And on behalf of the Section, I want to express our thanks to them

7in co-chairing our task force and producing these two excellent papers, which have

8been approved by our council and gone through the blanket authority process of

9the American Bar Association. As such, these two papers formally represent the

10views of the Section of Antitrust Law.

11Across my way also are Meg Guerin-Calvert and Joe Winterscheid,

12members of the ICPAC Task Force who appear today to help respond to any

13questions that you might have.

14The format that we thought we would do was to start with the paper

15on Multijurisdictional Mergers and Joint Ventures and then go to the Private

16Litigation paper. The way we were going to do it is that Joe is going to introduce

17the multijurisdictional mergers and Harvey is going to give a brief overview on

18private litigation. And then we'll be open for any questions from the members of


20DR. STERN: Great.

21MR. PROGER: Joe.

22MR. WINTERSCHEID: Thank you, Phil.

23I too am pleased to be here today to be able to present the views of


1our Working Group on Multijurisdictional Merger Review issues. Our working

2group consisted, in addition to myself, of Michael Byowitz, Barry Hawk, and

3Spencer Weber Waller, and in their absence I'd like to commend them for the fine

4work that they did in helping us to prepare and present the paper.

5At present there are over 50 jurisdictions, I've heard estimates of up

6to 80 jurisdictions, with antitrust merger control laws on the books, up from only

7a handful a decade ago. This fact, coupled with the increasing number of

8transactions which have some significant international dimension, has resulted in a

9dramatic increase in the incidence of multijurisdictional merger reviews by

10multiple jurisdictions.

11The parties to international transactions of any consequence these

12days are subjected to a multitude of filing requirements and mandatory waiting

13 periods around the world. This process imposes significant costs on transactions,

14and the Advisory Committee's focus on the issues that this process raises is of

15great importance to the business community, the antitrust bar, and the

16international enforcement missions of both agencies.

17I think it's significant that in prior comments submitted by various

18trade and industry groups, including the National Association of Manufacturers,

19the transaction costs and burdens associated with the multijurisdictional merger

20review process were identified as one of the most significant problems facing

21American business in the area of international antitrust enforcement and antitrust

22enforcement generally.

23The Advisory Committee's earlier working drafts on these issues set


1forth a number of possible solutions ranging from substantive convergence of

2international antitrust laws to procedural harmonization, including a common

3notification form, common time periods, or alternatively, focusing on problems

4presented in specific individual jurisdictions.

5We believe that broad-base initiatives directed at substantive

6convergence, formalized allocation of enforcement responsibility, and/or

7supranational mediation efforts offer little prospect of success. We therefore

8believe that the Advisory Committee's merger review initiative should focus on

9a more limited agenda directed at reducing unnecessary transaction costs associated

10with the international merger review process, in particular as to those transactions

11which do not raise serious competitive issues.

12In that respect, we believe that there is little prospect for resolving

13the significant issues arising in the context of Boeing-McDonnell Douglas or

14 Daimler Benz-Chrysler, for that matter, where transactions on their face raise

15significant substantive issues in various jurisdictions and give various

16jurisdictions a legitimate basis for examining the effects of those transactions

17within their local territory.

18On the other hand, we believe that the focus of the Advisory

19Committee's efforts and the agency's efforts should be on those transactions which

20do not raise serious competitive concerns, in an effort to try to streamline the

21multijurisdictional review process so as to avoid unnecessary transaction costs as

22to those transactions which do not raise any serious enforcement issues in a

23growing number of jurisdictions having onerous premerger notification



2The most effective means to reduce unnecessary transaction costs

3associated with the multijurisdictional process is to promote the adoption of clear

4objective tests for determining when notification is required, to eliminate

5notification requirements in those jurisdictions lacking any reasonable basis for

6asserting jurisdiction over a transaction, and to limit the information required in

7connection with those transactions which lack antitrust significance.

8The ultimate goal should be to minimize transaction costs and

9burdens without reducing the public benefit and without compromising the ability

10of any jurisdiction to enforce its own competition laws. The main goal in

11addressing multijurisdictional merger review issues therefore should be directed

12towards promoting reforms in individual merger control regimes so that they focus

13on those transactions that raise competitive concerns within their territory and do

14not unduly burden transactions that lack anticompetitive potential.

15Secondarily, ICPAC should promote limited procedural reforms in

16an effort to reduce unnecessary transaction costs associated with the notification

17process itself.

18Towards these ends, we would propose the following specific

19agenda items, which are detailed in our paper. First, the agencies should promote

20objective jurisdictional tests for premerger notification which incorporate

21appropriate de minimis local contacts thresholds. Transaction costs associated

22with the multijurisdictional merger review process could be substantially reduced

23if filing requirements were based on readily-accessible and objectively based


1jurisdictional thresholds.

2In particular, notification thresholds based on market share-based

3tests should be eliminated or at a minimum coupled with an appropriate

4objectively based de minimis local sales or other local contacts threshold.

5Examples of jurisdictions which are problematic in this respect include Belgium --

6the present test is combined worldwide turnover of approximately $84 million

7and a market share in Belgium of more than 25 percent; Brazil, 20 percent market

8share; Greece, 25 percent, and so forth. There are a growing number of

9jurisdictions in which premerger notification requirements are predicated on

10 market share-based tests. Parties should not be required to undertake a full-blown

11substantive review of a proposed transaction in a multitude of jurisdictions simply

12to determine whether premerger notification is required.

13The agencies should promote elimination of these market share-

14based tests in favor of objectively quantifiable and readily accessible information

15such as sales or turnover in the affected jurisdiction. Appropriate models are

16provided not just in the United States, but significantly by a number of other

17jurisdictions in the international community, including Canada, the Netherlands,

18Switzerland, and the European Union.

19Notification thresholds should also incorporate an appropriate and

20objectively-based de minimis standard as to the level of local contacts required to

21trigger premerger notification, especially as to foreign-to-foreign transactions.

22That is, transactions involving firms which do not have actual business operations

23within the territorial confines of the particular jurisdiction involved.


1Requiring premerger notification on the basis of worldwide assets

2or sales, especially at the exceedingly low levels which characterize many of these

3regimes, as to transactions that lack any significant local nexus increase

4transaction costs without any corresponding enforcement benefit. Notification

5should not be required in any jurisdiction based merely on potential local

6"effects," broadly defined, or local business activity

7unless such effects or activity exceed some de minimis standard as measured either by reference to the target's

8local sales activity and/or an appropriate minimal level of contacts by both parties

9to the transaction.

10Once again, suitable models in this regard include Canada, which

11incorporates a target company business operations in Canada coupled with

12 combined Canadian assets and sales; the Netherlands, combined worldwide

13turnover plus the parties' individual Dutch turnover; and the Hart-Scott-Rodino

14Act, in particular the foreign transaction exemptions provided for in the rules.

15Second, the agencies should promote harmonization of initial

16premerger review periods and harmonization of rules pertaining to when

17 premerger filings can or must be made. Achieving harmonization of review

18periods in cases which raise serious competitive issues once again we believe is an

19unrealistic objective, at least in the short run. With respect to timing issues

20associated with the merger review process, we therefore believe that the agencies

21should focus on the disparate initial review periods, and again in particular as to

22those transactions lacking any significant anticompetitive potential.

23In most jurisdictions the initial review period is in the one-month


1time frame, as, for example, the Hart-Scott-Rodino-Act, EU merger control

2regulation, Germany, and Canada, which is being extended to 14 days on the short

3form and 42 days on the long form filing. Marginal differences in the review

4period are inconsequential since they can be managed from a transaction planning

5standpoint. There are, however, a number of "outlier" jurisdictions as to which

6the timing requirements do impose significant transaction costs and these should

7 be the focus of continued discussions and efforts. These would include the Czech

8Republic, with an indefinite review period; Greece, a three-month initial period;

9Hungary, 90 days; Brazil, up to 72 days. Jurisdictions such as these, which have

10 either open-ended or very extended initial review periods, are where the greatest

11efforts should be directed.

12The agencies should also promote harmonization of rules pertaining

13to when parties are permitted to file. Under the Hart-Scott-Rodino process, of

14course, parties are permitted to file as soon as a letter of intent, agreement in

15principle or contract has been executed. Many other jurisdictions also follow this

16example, most notably Germany and Canada.

17In many jurisdictions, however, including the European Union and

18most jurisdictions following the basic EU-format on premerger notification,

19including Belgium, many other European Union jurisdictions, as well as Eastern

20European jurisdictions, premerger notification is not permitted until the parties

21have actually executed a definitive agreement.

22This definitive agreement requirement is unnecessary and impedes

23the parties from orchestrating the multijurisdictional filing process in the most


1efficient manner. The difficulties associated with the definitive agreement

2requirement are exacerbated by the fact that, although the parties cannot file prior

3to the execution of the definitive agreement, they must file in many of these

4jurisdictions within a short time frame following the execution. This is the case,

5for example, under the EU Merger Regulation, one week; Belgium, likewise one

6week; Finland, one week; Greece, 10 days; and Brazil, 15 days.

7It is virtually impossible to prepare the required detailed

8submissions within these specified timeframes and, to the extent that the parties

9are required to observe mandatory waiting periods after filing, these filing

10deadlines are entirely superfluous. As a consequence, we believe that the agencies

11should advocate the elimination of the definitive agreement requirement and these

12compressed post- execution filing deadlines. This would permit the parties to

13proceed more efficiently in orchestrating their multijurisdictional filing

14requirements and it would also, we believe, promote de facto harmonization of the

15initial review periods themselves, as well as perhaps promoting voluntary

16confidentiality waivers, since the review of transactions in various jurisdictions

17would be undertaken within the same basic time parameters.

18Third, the agencies should promote the elimination of unnecessary

19burdens imposed by premerger notification systems, in particular as to the initial

20 filing requirements. Filing requirements and the information required should be

21tailored so as to avoid imposing unnecessary transaction costs that do not have a

22direct correlation to effective competition law enforcement in the affected

23jurisdiction. The minimum amount of information needed to make that


1determination should be all that is required and to the extent possible that

2information should be limited to information maintained by the parties in the

3ordinary course of business.

4In this connection, it is often observed that in jurisdictions imposing

5a burdensome initial filing requirement, the European Union being one example,

6the system seems to work well because the agencies are willing to cut back on

7those requirements in the context of premerger notification meetings. While this is

8workable in connection with a single or limited number of jurisdictions, in our

9experience it is very difficult and sometimes unworkable when you're dealing with

1012, 15 or 20 individual jurisdictions. Also, success in achieving these more

11reasonable requirements is somewhat limited in connection with those jurisdictions

12lacking significant substantive expertise in the merger review process in

13determining what information they actually need.

14Finally, I would like to offer a few comments in connection with

15observations relating to transparency. It has been observed, for example, that the

16overall merger review process could be improved by greater transparency within

17particular jurisdictions, including the U.S. For example, it has been proposed that

18the reviewing agencies should be required to provide greater detail in their

19explanations as to why action has not been taken in addition to articulating the

20reasons why a particular transaction has been challenged.

21While this suggestion has merit in the abstract, it should be

22recognized that it may also have a negative correlation with the burdens imposed

23on the parties in the notification process itself. In our experience, those agencies


1which have been less inclined to acquiesce in more limited disclosure and

2 information requirements are those jurisdictions which have a "reasoned decision"

3requirement at the back end. In other words, they need the information very often

4 not necessarily to assess the merits of the transaction, but rather simply to assist

5them in drafting and publishing their reasoned decision. So while "transparency"

6is an objective in the abstract to be promoted, it should be recognized that there

7are countervailing considerations which need to be taken into account.

8Nevertheless, we believe that the agencies should promote greater

9 clarity and transparency in the multijurisdictional merger review process itself,

10particularly as it relates to international cooperative enforcement initiatives.

11Antitrust enforcers here and abroad have frequently touted the benefits of

12information sharing and cooperation with their foreign counterparts, and in that

13context they have promoted the notion that it is almost invariably in the parties'

14best interest to waive the confidentiality restrictions which characterize many of

15the national regimes to facilitate that process.

16We believe that the agencies need to do more to help the business

17community and their legal advisors to better understand the cooperative process,

18with particular emphasis on how voluntary confidentiality waivers can be

19beneficial to the merging parties. The lack of transparency which exists at present

20makes it difficult to assess the benefits of voluntary waivers to the merging parties

21notwithstanding the agencies' assurances that it is in the client's best interest to do


23In closing, we would offer the following recommendations


1respecting interagency coordination. In working towards these changes, we

2 believe that the United States government and the agencies playing a lead role

3must present a consistent message to the rest of the world if serious progress is to

4be made. This requires both substantial coordination between the various United

5States government agencies and private groups involved in the formulation of

6competition and trade policy.

7We believe that the Division and the Federal Trade Commission

8have done a good job in presenting a uniform and coordinated message to the

9international community. We believe that it's very important that they redouble

10those efforts, in particular in connection with their technical missions and the

11interagency consultation process. As the agencies consult with countries which

12are considering enacting an antitrust statute or modifying their existing statutes,

13these themes should invariably be part of that mission. Finally in this connection

14 -- and this afternoon's session I think is a case in point -- we need to make sure

15that the other government groups -- for example, the U.S. Trade Representative,

16Departments of State, Defense, Transportation, Commerce, and Treasury, all of

17which have some role in developing trade and competition policy in their

18intergovernmental advisory capacities -- likewise need to be delivering a

19consistent message as to the need for avoiding unnecessary transaction costs in the

20multijurisdictional merger review process as they pursue their individual missions

21as well.

22That concludes my overview of our paper. Details are set forth in

23the paper itself, and once again I appreciate having the opportunity to make this


1presentation this morning. Thank you.

2DR. STERN: Thank you very much.

3We're not going to open it to questions until we've heard from the

4whole panel.

5MR. PROGER: Harvey is now going to present our paper on

6Private Litigation and then Paul has some follow-up comments on both papers,

7and then we would be happy to take your questions.

8DR. STERN: Excellent. Thank you.

9MR. APPLEBAUM: It's a pleasure to be here again. As you know,

10I testified in my personal capacity in November, so I may have to exercise more

11restraint today since I am testifying on behalf of the ABA Antitrust Section and,

12as Phil indicated, as one of the ICPAC co-chairs along with Paul Victor.

13Let me mention at the outset that, while we have prepared these

14papers, we'll continue to provide input. Paul and I both look forward to

15evaluating this Committee's report and undertaking our own analysis once there is

16an ICPAC report. That is another objective of the ABA Antitrust Section task


18I am, as Phil indicated, going to provide a very brief overview of the

19Section's paper on the use of private litigation to challenge anticompetitive

20conduct affecting U.S. foreign commerce. As you can see from the original

21calendar, Tad Lipsky of The Coca-Cola Company was scheduled to present this

22overview and Tad was the principal author of the paper, or at least responsible for

23pulling it together at the end. I only learned of Tad's absence on Saturday



2Just for your information, Tad is in London today, which probably

3reconfirms the globalization of the antitrust process in that one can cross the

4Atlantic on very short notice.

5Members of the private litigation task force subgroup besides Tad

6were Margaret Guerin-Calvert, who is here with us today, Thomas Green, and

7Doug Rosenthal. Others contributed to the paper, particularly the development of

8the studies of the six cases.

9There have been hundreds of private antitrust cases over the years

10that have involved foreign commerce and obviously there was neither time nor

11practicality to try and analyze even a significant number of them. What the

12subgroup did initially was to discuss which cases might be landmarks which would

13best identify and present the major issues that occur in cases that involve, one,

14foreign commerce and, two, almost invariably, the roles, the positions, and the

15policies of foreign governments.

16The themes of these cases, as the paper indicates, present the issues

17which we believe that the ICPAC should consider. They were purposely also

18selected to reflect a mix of import and export trade, sometimes referred to as

19inbound and outbound.

20These cases reflect the kind of well-known complexity of any kind

21of international suit, and I might note, not unique to private suits. When the

22Department of Justice undertakes in a suit involving foreign commerce, it also

23encounters problems of jurisdiction, discovery of relevant evidence, difficulty of


1enforcing judgments and the like. The procedural complexity of these suits is thus

2not unique to private litigation, and affects government suits as well.

3More importantly, these cases typically involve issues which are by

4and large unresolved and complex, such as when to apply principles of

5international comity, when to sustain the foreign sovereign immunity defense,

6when to apply the foreign sovereign compulsion defense, when does the act of

7state apply, etc.

8The Section in particular refers the ICPAC to its 1995 Section

9monograph entitled "Special Defenses in International Antitrust Litigation," which

10deals with the particular defenses that occur in these cases. All of them in one

11way or another, as already indicated, reflect the potential interest or the potential

12role of a foreign government in a case involving U.S. foreign commerce, and that

13can be true whether it's export or import trade.

14There was some consideration of whether to consider private

15litigation elsewhere. We decided to concentrate on U.S. litigation for several

16reasons: First, the Section believes that any consideration of the United States'

17role in international antitrust enforcement has to take into account our relatively

18unique private treble damage remedy. It is very popular, it is widely used, and

19while other governments are receptive to private complaints, they are usually

20prosecuted in the form of government suits, not private suits.

21Putting it another way, it is virtually impossible to consider

22international antitrust enforcement from the United States perspective without

23taking into account strongly encouraged use of private actions.


1I have identified six issues and themes from the cases. They appear

2in both our executive summary and our conclusions. The executive summary

3which was inserted at the end is not totally overlapping with the conclusions, so

4 one should read both of them to recognize the six themes.

5The first theme is what mechanisms should courts employ, the U.S.

6federal courts, to obtain the views of foreign governments? Foreign governments

7often have a legitimate interest in these cases, but what procedures should be

8developed for their participation, and as the paper notes, if they so desire,

9governments sometimes as a matter of choice may decide they would prefer to be

10silent in these cases.

11The second theme is whether there is a need for consistent principles

12in determining when United States antitrust rules and standards should be

13 modified or adjusted to accommodate foreign laws and policies? The most recent

14interpretation in this area is the Supreme Court decision in Hartford Fire

15Insurance, which many have read to say that only a literal

16conflict, a clear literal inconsistency or conflict between the foreign law and the U.S. law, will cause or

17provoke a consideration of an adjustment.

18The paper suggests that that standard may be too narrow for

19purposes of determining when U.S. law should accommodate foreign government

20interests and policies.

21The third theme is really a corollary of that. We are all familiar

22with the principle of international comity in these cases, the Timberlane doctrine

23and the like, but there is a question of consistency as to when and how the courts


1undertake their balancing, and it is a very complex and unsettled area. The

2Supreme Court decision in Hartford Fire does not necessarily contribute a great

3deal of enlightenment on the subject.

4The fourth theme is an interesting one. Could one approach this

5subject somewhat similar to the well-developed United States state action

6doctrine? Mid-Cal Aluminum is cited in the paper. When a foreign government

7asserts it has an interest that it authorizes the challenged conduct or its law should

8be taken into account, should the U.S. courts inquire into whether the alleged

9anticompetitive conduct or restraint of trade was in fact authorized by and

10actively supervised by the foreign government? That is a doctrine that is fairly

11well developed in the United States.

12The fifth theme is very familiar to Jim Rill. Some would call it the

13DOJ International Guidelines Footnote 159 controversy. That is, should the

14United States continue to take the position that export trade or export

15opportunities alone can potentially constitute a Sherman Act violation? This is

16the old issue of whether United States consumer welfare is being protected when

17only export trade is involved.

18Perhaps more importantly, the paper suggests that it should be made

19clear in any event that the fact that export trade can be potentially covered or

20challenged under the Sherman Act is not substantive; it is simply jurisdiction. If

21there is a challenge involving export trade, it still has to be shown there was

22substantive antitrust law violation.

23This issue begins to dovetail with the broader issue that you were


1considering in November and continue to consider of whether if it is export trade

2or U.S. market access that is involved, whether the Sherman Act or the trade laws

3and trade policy are the better vehicle or approach.

4The sixth theme is the more broader one, should there be any special

5procedural rules or limitations in a foreign commerce case. This is not necessarily

6a question of comity, but for example, should there be at least discretion on the

7part of the court to limit any damages to single damages? Should the court have

8the authority in foreign commerce cases when the defendant prevails to do

9anything with attorneys fees and in any event should attorneys fees or treble

10damages be awarded automatically in these foreign commerce suits?

11Those six themes, which are found in the executive summary and the

12conclusions, are what the Antitrust Section suggests that the ICPAC Committee

13should consider. Thank you.

14DR. STERN: Thank you.

15MR. VICTOR: Thank you. Good morning. I have a little frog in

16my throat. I'll try not to -- what do frogs do? Croak?

17MR. RILL: I don't know. You sound like you always sound.

18MR. VICTOR: I was just listening to Harvey and one thought that

19comes to me is actually a broader thought, which I don't know that I thought of

20before in the same way. But that is this committee might want to give some

21thought to what should the role of private litigation be today in the context of an

22effort to develop greater coordination, enforcement coordination and cooperation

23with other nations and other regimes.


1Is there some benefits to gain by moderating or modifying our own

2 private litigation rights in an international context when we are trying to bring

3along the rest of the world to see antitrust enforcement in a roughly similar

4context that we see it, although not trying to convert everybody to the exact same

5substantive or procedural standards? I don't know the answer, but it's just

6occurred to me that that's a more global question.

7The only other thing I have to add as a preliminary matter is that we

8 do have one additional working group on the task force, and that's a group that's

9 working on the issue of enforcement policy and cooperation. I am told we are

10pretty close to having a paper for the task force and then the Section council and

11 officers to consider and, assuming that that does follow a normal course,

12hopefully we'll have one additional paper to submit to this Committee for


14Thank you.

15MR. PROGER: I should mention that Jan had a scheduling conflict

16which she moved back to be here this morning, but unfortunately we are shortly

17going to lose her. Therefore, before she has to leave, we wanted to give her the

18opportunity to comment.

19MS. McDAVID: Very briefly, I think the two papers that have been

20presented to you and the views of the members of the task force that will be

21presented today bring a unique perspective in that they really focus on the

22practical realities of how you approach these issues from an unbiased perspective,

23without the views of any particular client in mind, such as for example, Joe's


1paper on international merger review or the comments that Harvey and Paul have

2made with respect to private antitrust litigation involving multinationals.

3I think that is almost a unique perspective because many other

4groups that will be presenting to you today have a particular interest or client's

5interest in mind. I think that is one of the unique benefits of an organization like

6the Antitrust Section, one of the reasons that all of us have been so proud for

7many years to have worked on it.

8This is the finest tradition of the Section to make views known with

9 respect to both policy questions and the practical realities, for example, of trying

10 to figure out whether you've got 25 percent of the Belgium market when the law

11doesn't define how you figure out what the market is. You can usually identify the

12numerator, but figuring out the denominator is virtually impossible, and it's

13extraordinarily difficult, as Joe's paper really does explain.

14This is an area in which the ICPAC can take a leadership role and

15accomplish some genuine benefits for multinational corporations.

16DR. STERN: That completes your formal presentation. And we

17were planning to take a break before we started the Q's and A's. I'm aware now

18that you're going to be leaving, which is too bad.

19MS. McDAVID: Don't work around me.

20DR. STERN: Well, I think I should at least give the opportunity to

21anyone, if they want to ask you questions before we break, to Janet, and then go

22ahead and break and then come back for Q's and A's for the rest of the panel.

23MR. RILL: I'd just like to thank you, Jan, for adjusting your


1schedule to be with us today, and personally, and I think at least I can speak for

2my law firm, I'd like to wish you the best of good fortune for a superb year that I

3know you're going to have, following the superb year that Phil is still having.

4MS. McDAVID: Thank you.

5MR. RILL: Notice I said "is still having."

6MS. McDAVID: One of the things we will do -- we will be very

7anxious to follow the work Phil has done in communication with the committee as

8 you move forward with your actual recommendations.

9MR. RILL: We very much appreciate that and we'll certainly make

10 use of it.

11DR. STERN: Indeed, this paper and your presentation today are

12extremely helpful. They're very much aligned with our requirements to come up

13with a set of recommendations which are practical and hopefully constructive.

14And your perspective that you've just added that you have tried to distill the

15thoughts and experience of the various practitioners in practical suggestions, is

16extremely helpful.

17My only statement that I'd like to make for you to think about as

18you leave and maybe as everyone has coffee right now is the statement that comes

19at the very conclusion of your first paper, which dwells on the importance of the

20European Union, that finding common ground with the EU perhaps holds the

21greatest promise. I had the cursory impression because I need to really study

22these papers which reflect a great deal of work, that some of the concerns, at least

23in the first paper, are looking at potential recommendations out of this committee


1applied to the whole world and how we relate with the whole world, whereas in

2fact you recognize that there is a daily convergence, if you will, on a very

3practical level, particularly with the EU, bearing in mind of course the importance

4of Canada in that statement as well.

5And so I would be interested in hearing what your optimal level of

6 convergence and harmonization would be with the EU. And then what your level

7of comfort would be with countries other than the EU, perhaps in Canada and

8Australia. In other words, your take on all of this might be different if we were

9 only asking you about a bilateral as opposed to a whole international set of


11MS. JANOW: I'd like to just also extend my appreciation for all the

12 work that's been done over many months, and of course I have some specific

13questions we can come back to, but I did want to share that, and also wanted to

14extend my appreciation for the clarity of these papers and their definitiveness. As

15a professor, I am very mindful that this be a business and policy relevant

16document that we produce ultimately and not one that is read mandatorily by my

17students alone.

18MR. RILL: Notice she said alone.

19MS. JANOW: So the definitiveness of the views, that is to say this

20is not a wishy washy set of papers. This is very clear as to what your participants

21thought would be useful. I think there are some dimensions that I'm hoping our

22discussion can amplify. If a perfect world does not close all of these gaps that

23you point to, what the consequences are of incompletion, whether that's regional


1or more specific, and I think we need to talk about that a little bit more and hear

2your views.

3But I just want to thank you for all the hard work and also for the

4 business and policy-relevant focus.

5DR. STERN: Okay. Let's take a break for 15 minutes for coffee

6and side conversations.


8DR. STERN: Well, let's resume the hearings where we left off,

9which was to have questions and answers of this panel of the American Bar

10Association Section of Antitrust Law Task Force for the International Competition

11Policy Advisory Committee.

12Phil, would you like to perhaps -- you had some comments that you

13wanted to make. I think it wouldn't hurt to put that right on the record and then

14we'll just turn to questions.

15MR. PROGER: Thank you. The only thing I was commenting to

16Paula when we recessed was that there is a noticeable dichotomy between these

17two issues. There is a general consensus worldwide that the concept of merger

18review is a good concept, and we are trying to avoid undue burden on the parties.

19But the concept of private litigation is very different. Private

20antitrust litigation is not accepted worldwide and there is a fairly extraordinary

21cultural clash between the United States and the rest of the world on the value of

22private litigation. I think that because of that dichotomy these issues pose a whole

23 different set of issues for ICPAC to consider.


1DR. STERN: Absolutely. Let's open it up to questions. Jim?

2MR. RILL: Thank you. Again, let me express appreciation for the

3hard work that's been done.

4I would like to pose a couple of questions, if I may, to Joe, and

5obviously anyone else on the panel. You suggest that initial filings should contain

6the minimum amount of information needed to determine whether or not there's a

7competitive issue. I'd like to ask you whether you think the U.S. current HSR

8form provides that information, based as it is on industrial codes that are

9developed for different purposes, and if you think it doesn't contain adequate

10information, what further information do you, speaking either in your personal or

11institutional capacity, think might be added?

12MR. WINTERSCHEID: Well, first as to the Hart-Scott-Rodino

13 form itself. Again, certainly it meets the minimal information requirement. In

14terms of whether it's the right information, obviously there are various schools of

15thought on whether the SIC code format is the right format. It does at least

16provide an objective way to present business information by product line,

17recognizing that it does not necessarily represent a properly defined product


19So I think that the SIC codes, while imperfect, certainly at least

20provide a baseline for providing the information. An alternative might be, in lieu

21of the SIC codes, reporting as to lines of business or product lines in the manner

22that the businesses themselves normally describe their businesses.

23But I think what should be avoided, again coming back to the


1market share and market definition point, and one of the key objections that we

2have voiced with respect to the OECD common notification form, is to try and

3capture market definition and market share information in that initial

4filing. Market definition is usually contestable, and it is therefore not always necessarily

5clear in any given situation, and it really goes to the heart of the competitive

6analysis that the agencies need to undertake in their assessment.

7MR. RILL: Thank you.

8MR. PROGER: If you look at the form one has to make certain

9assumptions as to what particular questions were designed to do and, while I think

10that SIC code information does not necessarily properly define a relevant market,

11the parties are free to supplement that initial submission if they want to draw

12attention to what they think is the correct relevant market.

13But sales by SIC codes is information usually maintained by the

14 parties which allows the agencies to easily identify overlaps. And I really do not

15think it's intended to go much further than that. I would be concerned about any

16other type of requirement that required a more subjective information basis.

17MR. WINTERSCHEID: Coming back to one of the points made in

18our paper, you'll recall the legislative history of the Hart-Scott-Act itself, one of

19the key points was that the information called for should be limited to information

20maintained by businesses in the ordinary course of their business, that they should

21 not be required to undertake significant information gathering simply for purposes

22of making their initial submissions.

23MS. JANOW: I'd like to ask two merger questions if we're talking


1about mergers initially. One is given the differences in timetables, say between

2the United States and the EU, if some of these improvements were made you could

3still have a situation where, given the fixed timetable in Europe, that they would

4be, in effect, completing their process ahead of the U.S. process.

5The more global question is, this Committee's been thinking about

6some of the issues that you've highlighted here in terms of problematic practices in

7foreign jurisdictions and how to encourage jurisdictions to address those

8deficiencies, move them away from market share and so on. And in the course of

9this Committee's deliberation a recurring theme has been leading by example as a

10 stimulant for corrective action in those jurisdictions.

11So my question to you is how does one stimulate change in your

12 view in foreign jurisdictions with respect to these practices? What are the

13 incentives? Certainly addressing our own imperfections is one way. But since we

14know that for some jurisdictions introduction of merger control and filing fees is

15 the basis for legitimacy and worldwide turnover is a way to give jurisdictions a

16bigger role in the world than maybe they should, based on the nexus to the

17jurisdiction, how does one get over that mind set? Have you deliberated on that


19MR. WINTERSCHEID: I'll deal with the second question first, if I

20may, because that also I think in part responds to Dr. Stern's earlier question on

21the importance of the EU. In terms of leading by example, the EU is particularly

22important, I think, in this process, because there are two basic world views as to

23 merger notification process and procedure: the U.S. example and, generally


1stated, the EU example.

2In the scheme of things, the U.S. example is really the minority

3view, in fact, the distinct minority view. Those jurisdictions which are in the

4process of enacting merger control laws by and large are tending towards the EU

5format. Certainly, this is the case as to the EU member states and an increasing

6 number of jurisdiction which are positioning themselves for ultimate accession to

7the EU.

8So recognizing the European Commission as an important

9constituency at least in part merely recognizes the very important fact that, in

10terms of counseling these jurisdictions, frankly, what the European Commission

11has to say in many instances will be as important, if not more important, than

12what the U.S. agencies are saying.

13The European Commission, in our discussions with them, seems

14 generally sympathetic with many of these points. They recognize, for example,

15that their procedures, while perhaps suitable for a transaction with Community

16dimension, which by definition is a significant transaction with potential

17significant effects within their jurisdiction, may not be suitable as a model for

18national legislation absent an adequate local effects impact. Absent such an

19 impact, I believe that the European Commission is sympathetic to the view that the

20Form CO format may impose unreasonable burdens or has the potential to impose

21unreasonable burdens on parties.

22You also see aspects of the EU procedures that have been

23 incorporated in national jurisdictions in ways that they were not really intended to


1be used. For example, the market share-based jurisdictional test seems to have

2been derived from the EU's "affected market" test, which defines your reporting

3obligations -- that is, how much information you have to give -- not whether

4notification should be required.

5So the EU is an extremely important constituency in terms of

6leading by example. Certainly the U.S. agencies need to lead by example and to

7help to educate jurisdictions as to the burdens that are involved and the sometimes

8unintended burdens imposed on their own agencies that might not be necessary to

9accomplish their enforcement mission. But the agencies must also enlist the

10assistance of the European Commission in leading by example as well. In

11educating jurisdictions as to issues and problems presented by the EU format, a

12format which may or may not be the appropriate model to be adopted in particular

13situations, the European Commission will undoubtedly be even more influential

14than the U.S. agencies.

15In terms of incentives, I think that there are clear incentives to

16streamline the process, both in terms of interagency coordination and in terms of

17promoting compliance with local law. I think, unfortunately, that one consequence

18 of the overexpansive jurisdictional tests is that companies are really becoming

19somewhat selective in complying with international premerger notification

20requirements, because the tests are subjective, because compliance is

21unreasonably burdensome, and because risk of actual enforcement is oftentimes


23So in terms of promoting compliance and corporate good citizenship


1in a global environment, I think that streamlining the process would promote those

2objectives and, correspondingly, should incentivize the local jurisdictions to think

3seriously about these issues.

4As to the timing in the EU, the dyssymmetry in the EU timeline as to

5transactions that are investigated is generally not a serious issue because once

6again you can manage the timing process. In the U.S., again, you can initiate the

7HSR process at the letter of intent stage. The EU process can't be initiated,

8formally at least, until you have a definitive agreement. So there's a built-in

9cushion, if you will, that in most instances tends to equalize the review periods as

10a practical matter.

11On a going forward basis, assuming that the EU would permit filing

12contemporaneously based on a letter of intent, then, yes, there could be a greater

13potential for serious issues arising just from the timing of the review. I'm not

14sure, again given the very strict deadlines that the European Commission operates

15under, that there's any easy solution to those problems.

16But still the fact remains, again focusing on those transactions that

17 don't raise serious issues on the merits, I think the business community is better

18 off in having a common time frame, recognizing that in those transactions where

19there are serious substantive issues that there are going to be some necessary

20 dyssymmetries in the actual review processes.

21MS. JANOW: Thank you.

22DR. STERN: Paul.

23MR. VICTOR: I was going to make a couple of different comments


1on timing. Of course, if you get clearance from one of the jurisdictions in

2advance, that's wonderful from the standpoint of the client. If you don't get

3clearance, if there's a problem that surfaces, you're going to know about that

4anyway, and you're going to be well aware of whether or not that problem is going

5 to have an overlap in the other jurisdiction and be able to deal with the

6 implications of that.

7As to how to stimulate change in foreign jurisdictions, I don't think

8 we should lose sight of the fact that what's happening today informally is probably

9 stimulating more change than might happen formally in the sense that, Merit, you

10were in Berlin, Jim, you were in Berlin, and we all heard Joel talk about how the

11European Community and the United States antitrust authorities are working these

12days almost as a seamless web. I think those were his words.

13And, of course, they're learning from shared experiences. They

14apparently speak to each other with great regularity and, even though the written

15rules and regulations may be different, and they have to of course be mindful of

16that and apply them as they are required under each jurisdiction, nevertheless the

17pragmatic aspects of coordination tend to be taking place in many situations today

18even on an informal basis and you can have influence that way.

19MR. WINTERSCHEID: Merit, could I come back to one additional

20point that Paul's comments raised. Again, on timing generally and also on our

21overall initiative in consulting on a bilateral basis and what can realistically be

22achieved and what the incentives are, all of these issues are interrelated.

23I think, as Paul notes, when you are working on a transaction you


1know pretty well up front if you're going to have serious issues on the merits in

2the United States, in Europe and other foreign jurisdictions. And so you can

3manage the process with that in mind.

4The focus, again, needs to be on those transactions which do not

5 raise serious issues on the merits, and that really is a thread that runs throughout

6this discussion. In terms of how to incentivize other jurisdictions to make certain

7 changes, these incentives are less of an issue as to transactions where all parties

8 can agree that there is no competitive issue than in those situations where we're

9trying to solve the imponderables, as in Boeing-McDonnell Douglas, for example.

10So I think that by keeping our focus generally on those

11noncontroversial transactions, a great deal of good can be done for the business

12community in streamlining the process and eliminating unnecessary transaction

13 costs.

14MR. RILL: Joe, let me if I may just pick up on this. I agree that a

15lot could be accomplished in the area where there's no issue in one or another

16 jurisdiction. I don't think we should turn our back and I don't read you as

17suggesting that we should turn our back on those areas where there are

18overlapping or converging issues that do raise questions concerning a transaction.

19In fact, I read you as saying in the mature jurisdictions leading by

20example is a good thing; I think you would suggest that it's a good thing in

21substance as well as procedure; that convergence, sensible convergence, in

22substance is probably a good thing; and to pick up on Joel's lattice of bilaterals,

23that cooperation is a good thing.


1Now to jump to another point you made, at least one of the elements

2where the business community could profit by enhanced cooperation which could

3result from enhanced information sharing and voluntary waivers of confidentiality

4restrictions. I would like to ask you and the rest of the panel to comment on that,

5but in addition to that to put the question back to you that you put to the agencies:

6What do you see as the benefits to private parties to grant a waiver of confidential

7information under, let's assume, appropriate downstream confidentiality


9MR. WINTERSCHEID: We're certainly not suggesting that

10 contested transactions be ignored altogether. But the bottom line there, as the

11agencies have indicated, is that in those situations the right course is probably

12through the bilateral discussion process and achieving consensus through those

13means, as opposed to broad-based initiatives directed at substantive convergence,

14 at least at this time.

15As to the information-sharing point, certainly in a number of

16transactions there are clear benefits to be achieved from waiving confidentiality so

17that the agencies can coordinate their investigations more effectively and thereby

18hopefully decrease the burdens on the parties. Certainly, there are situations

19 where in dealing with potential remedies it is essential that the agencies have the

20ability to communicate freely so that they can work together and affect a

21"one-stop shop," if you will, as to possible remedies that would be satisfactory to

22both or all of the jurisdictions involved.

23So there certainly are circumstances where there are benefits to


1waiving confidentiality. I think the principal point, though, is that it's not clear

2that in all cases that's necessarily the case. And the agencies have not really

3provided much guidance, at least in my experience, as to the specifics of the

4coordination process, other than in broad brush, to help us to educate our clients

5 as to why it is inevitably in their best interest to do so.

6Indeed, there has developed something of a presumption -- first I

7think unspoken and now a spoken presumption -- that if you have any hesitation

8about granting a waiver that necessarily means you must have something to hide.

9This I think is an unfortunate development in the overall process, which doesn't

10promote the overall objective in achieving greater transparency so as to permit the

11parties and their legal advisors to make more informed decisions as to those

12circumstances when a waiver is in their best interest, again assuming that

13downstream confidentiality and the confidentiality issues are adequately


15MR. RILL: Phil?

16MR. PROGER: I want to go back to what has been raised as to

17what the United States can do in terms of worldwide leadership on competition

18issues. I think we have to be realistic about our role and our ability to lead in this

19area. We are such a large country, we are so powerful, we are the first mover in

20this area, that we intuitively feel that we should be the leader here.

21But, I think it is difficult for us to be a leader for a number of

22reasons. Joe mentioned several. First, there are a number of countries that want

23to be part of the EU and therefore are more inclined to follow the EU rather than


1the U.S.

2But the underlying cultural and political substance is the one that

3really is the most difficult for us to overcome. Our system, which has as its

4 anchor enforcement through the courts, is intuitively different than the rest of the

5world and they are less comfortable with it. If you are a nation trying to develop a

6set of competition principles, it is far easier to set up a competition enforcement

7agency modeled after the EU. So I think we have to be realistic that our system is

8not necessarily intuitively the one that people will gravitate towards.

9The second thing is that there already is a lot of bilateral

10cooperation among enforcement agencies, particularly the U.S. with DG-IV,

11Canada, Germany and other more developed enforcement regimes. That

12cooperation likely will increase.

13I think bilateral cooperation is important, but we should not confuse

14that with the substantive analysis. While there is a process advantage to one-stop

15shopping, that does not necessarily mean you are going to have one-stop answers.

16I think it is particularly important to note that antitrust competition

17analysis by its very nature is fact- intensive and often locally fact-intensive. So

18even though you get the one-shop advantage, you may get different answers. For

19example, the effect in the United States may be different than the effect in Europe.

20Last and I do not think least, I think that there are things that can be

21done that will reduce the procedural differences, but in so doing I would urge

22ICPAC to be very careful to make sure what we don't end up with is the lowest

23common denominator so that everyone gets, as someone said before, a Christmas


1ornament and what we end up with is a more burdensome.

2DR. STERN: Those are three very wise comments. On the first

3one, this common law court enforcement that is the anchor for our system reminds

4me of the point that has been made actually several times now both by you, Joe,

5 and particularly in this footnote in the first paper on page 22, which talked about

6"The U.S. agencies may need more information than their EU counterparts in order

7to be ready to litigate a preliminary injunction case," and then the footnote is

8dropped that says: "There are grounds to question the legitimacy of this concern.

9 The HSR process was designed to give the agency sufficient information to

10 determine whether or not to challenge a merger. Preliminary injunction merger

11cases frequently involve extensive expedited discovery in which the agency can

12seek to enhance its litigation position."

13It's this kind of morphing, if you will, of what may have been

14 original intention into something that, because of the litigation potentials, has

15created a different outcome than that which even the policymakers, in the form of

16members of Congress and the President who signed the HSR, had in mind in the

17first place.

18I wonder how we get back, if you will, to that starting point,

19because in a sense that's where we are now.

20MR. WINTERSCHEID: These comments obviously go not to the

21initial filing but to the second request process.

22DR. STERN: Right, but it relates to something you had already said

23in the context of what had been the initial intentions.


1MR. WINTERSCHEID: That's true. And the second request

2process has been the subject of concern and debate for as long as the HSR Act has

3been in place, with successive commitments by the agencies to review the process

4and successive drafts of the model second request and so forth.

5Without question, turning to the investigative phase and as pointed

6out in our paper, the HSR Act second request process in itself is unduly

7burdensome as it presently stands. What can be done as a fix comes back I think

8to Phil's point and it's been made elsewhere, that at that point it is a prelitigation

9process, for better or worse.

10But that's not to say that the agency should have unfettered

11discretion in the process. And some suggestions have been made respecting

12avenues of review for substantial compliance outside the agency or expedited

13review within the agency as to substantial compliance. Those are all avenues

14which should be explored, but I'm not sure, again given the litigation focus, that

15there's going to be an easy solution that will satisfy the agencies that they have

16access to all the information that they need.

17At the same time, I don't think that there's any serious debate that

18the process does generate more information than could reasonably be expected to

19be used or that is even relevant. I mean, the second request process is really used

20as a means to cover all the bases, which is understandable in a prelitigation

21context, but still gives rise to situations where undue burden is clearly imposed.

22DR. STERN: Well, it relates to this overall cultural difference that

23 we in the U.S. are challenged by if we're going to talk about convergence with


1other nations and other cultures and make recommendations, at least in this field,

2that will have some possibility of being persuasive.

3And to the extent -- I guess this is just to underline Merit's request -

4- that you have further thoughts on how we can be persuasive in leading by

5 example or other ways, it would be most helpful.

6MR. PROGER: I'm not going to speak now for the Section because

7 I do not think we've vetted this. But I think the agencies have articulated two

8separate and distinct concerns for the reason why they have to be as thorough on

9the second request. They sound similar, but they are really different.

10DR. STERN: Okay.

11MR. PROGER: One is prelitigation preparation; the second is

12 assessing their chances of success in litigation. If the concern is litigation

13preparation, then there could be a process where there are two second requests, an

14extensive one and a second one that is more narrow -- and this is not an original

15idea with me; someone else suggested this to me -- but the second one being with

16the stipulation that if it goes to litigation the parties will not oppose reasonable

17expedited discovery.

18If the concern is the second articulated reason, that I as the

19Assistant Attorney General in charge of the Antitrust Division or we collectively

20as five Commissioners who are required to make a judgment and that judgment

21incorporates what our likelihood of success will be in litigation, I do not know

22how you ever curtail the Second Request because you are in a virtually endless

23 desire for information.


1Some of the more recent second requests -- and I'm sure ICPAC can

2get access to them -- are running 90 to 100 pages and require the production of

3thousands of documents. So I think there is a real practical problem here.

4DR. STERN: Thank you.


6MS. JANOW: Could I shift us to the private litigation paper for a

7 minute?

8DR. STERN: Sure.

9MS. JANOW: I thought this was a very interesting paper and it was

10 a delicious appetizer to the questions that you've raised. I just wanted to invite

11 you to share with us where you'd go with some of your suggestions.

12First a statistical point. It's very interesting that there's been this

13 dramatic drop-off in private litigation. What dimension of that is of an

14 international nature was something that we have been trying to better understand.

15 If you have developed a methodology to see whether or not the international aspect

16is constant or increasing in an environment of declining private litigation, that's

17not only statistical, but it's also a question about what is the environment.

18I guess the related question: It's often assumed that the private

19litigation, particularly with respect to outbound, can be linked to government

20action; so whether or not you are finding any correlation there with respect to

21either outbound or inbound?

22The broader question I have for you is where you might recommend

23 your themes taking us. For example, there have been lots of proposals advanced


1by different groups, including the ABA Special Committees, about additional

2mechanisms that courts could employ to get the views of foreign governments, be

3 that through a more formalized amicus proceedings or otherwise, or what could be

4done to establish more consistent principles for accommodation, given the

5questions raised by Hartford Fire.

6The Justice Department has elaborated its own comity elements and

7those are in the International Guidelines and elsewhere. Does one need to do

8something different or more to establish more opportunity or possibility of

9consistent application by the courts and, if so, what would that be?

10Some have talked about guidelines for comity like the sentencing

11guidelines more specifically. So I would invite you to comment on where your

12themes take you.

13The last one I think you mentioned, Harvey, one of the last ones,

14was discretion to limit damages perhaps in foreign commerce cases as well as

15attorneys fees. That raises this intriguing question of is this a de-trebling

16suggestion? If so, does one de-treble only in foreign commerce or where are the

17 parameters here and how does one ensure that the approach is not discriminatory

18 in its impact?

19So I'd just invite you to share with us wherever you'd like to go

20further with respect to the very important themes you've suggested that we focus

21 on.

22MR. APPLEBAUM: You have asked a number of questions and

23there are many others here who can respond to them besides me. I will respond


1and ask Meg if she wants to comment since she was on this task force.

2I am not sure it can identify or compare the decline in foreign

3commerce cases to the general decline. I would assume they are similar. We

4could discuss some other time the reasons for the declines.

5The Section certainly is not here advocating the elimination of the

6 treble damage remedy, but it obviously has occurred in some contexts. I mean, the

7 notion is not radical because we have elimination with certain joint ventures and

8export trading companies.

9But the thought here was that in a case that involves imports or

10exports, or a multinational or a foreign plaintiff or defendant, we should develop

11 criteria for single damages.

12One potential theme is cases where there is some element of a

13defense or some element of the case involves foreign government activity -- in any

14 of those defenses enumerated or any time that a defendant argues, I had to do this

15because the foreign government compelled me to, asked me to, suggested I do it, or

16what I did was consistent with foreign government policy and the like.

17The main theme is where there are legitimate foreign government or

18 maybe even foreign multinational private interests, to what extent should the

19courts, as they do from time to time and as they have over the years in applying

20comity or with other principles, accommodate or adjust U.S. antitrust law?

21It is this dimension of private litigation which makes the U.S. both

22 unique and makes it more difficult to deal with in the international context.

23Meg, would you like to comment? And maybe Paul would also like


1 to comment?

2MS. GUERIN-CALVERT: To start off with, we chose the six cases

3 on the basis of trying to have three that were representative of inbound and three

4representative of outbound. We found was that the distinction between inbound

5and outbound was not as important a distinction as the idea of trying to look at

6where had there been private litigation that, without government intervention, was

7designed to try to enhance competition.

8So in looking at that, one of the things that struck the working

9group as we were examining each case and writing up summaries of the various

10cases is how in each there was the following issue: was there a clear system in

11 place by which, ahead of time, the plaintiffs and the defendants would know the

12extent to which foreign government approval, oversight, or policy -- that is,

13something akin to state action -- could be brought into play as a defense? In

14particular, the working group found that in the various cases and decisions such

15issues were being brought up as a defense and in amicus briefs being filed on

16behalf of the defense. There was, however, no clear standard articulated for how

17or whether or not the U.S. court would be allowed to ask for articulation of the

18foreign government's policy, whether or not they could require it and, once it was

19obtained, how it should be balanced against other issues.

20In our written submission to you we raised a number of issues; this

21one seemed to be the one to focus on the most significantly. It goes to comity but

22also somewhat broader in terms of the issue: "is it possible to have an articulated

23set of principles or guidelines that would apply to a court that would be generally


1recognized, that would at least set up the process by which a foreign government's

2input could be requested, required, or utilized."

3On your narrow comment, I know that in some of the data they do

4involve foreign claims, and we could check to see whether there's a separate

5tracking that would specifically identify federal cases.

6DR. STERN: Thank you very much.

7MR. VICTOR: May I? I have a few comments to make.

8First of all, with respect to private litigation involving international

9aspects, I don't know that there's anything unique about that vis-a-vis domestic. I

10think if Joel and Gary continue on their quest for international cartel activity and

11are successful in bringing indictments, you're going to see cases involving foreign

12defendants and international activity as the aftermath in the treble damage


14With respect to noncriminal-related type of conduct, I think that

15there's relatively little unique with respect to the international context via-a-vis

16with respect to the domestic context. It's the evaluation by the plaintiffs as to

17whether they think they can achieve relief, whether monetary or injunctive relief,

18and in that sense it's affected by the wave of private actions and the trend of

19decisions and the infusion of economic thinking that has happened in the last 15

20 years, which probably is a large contributor to the decline of private litigation in


22With respect to this whole business about comity and foreign

23governments making known their views and the like, once again, in the private


1litigation context it's not the government, so you're not thinking government to

2government. You've got litigators, you've got people fighting. You've got private

3interests fighting for a particular objective regardless of how they obtain it,

4utilizing the courts, presumably properly, and the law, properly -- otherwise

5you're not going to achieve the objective.

6And a private plaintiff doesn't care about comity as such. I mean,

7they don't have to evaluate what the sensitivities are. They go ahead and plow

8ahead and bring suit, and let the courts worry about it if it's a proper thing to do

9in a particular case.

10I don't recall what the latest status of the law is, but my view has

11always been that comity is not jurisdictional in nature, but rather an issue of

12 whether or not a court should proceed with a proceeding. That is, the statute

13gives the jurisdiction, and the issue as to whether to proceed depending on the

14sensitivities involved (comity) is a different though related issue.

15But private parties on the plaintiff's side are certainly not going to

16be too concerned about comity situations or looking for some perfect-world

17 solution in that context. They're likely to try to pick courts that they know are

18going to favor their position if they can otherwise get into that particular court,

19 that venue, rather than a court which looks at it differently.

20As to the views of foreign governments in these cases, from my own

21personal experience so far, I've been involved in one or more cases where this has

22played a role. Remember, the issue is one of foreign sovereign participation or

23encouragement versus compulsion. As a matter of law, there's no defense for


1encouragement or participation. There's only a defense for compulsion.

2So again, courts may have to grapple with that sort of thing, but it's

3not the proper venue necessarily to deal with that issue. The issue is more

4 properly dealt with in the actual law itself and perhaps some negotiation of

5common views by governments.

6I think that's about it.

7MS. JANOW: Thank you.

8MR. RILL: I'd like to follow up on that and on another issue. I

9 made a note to ask you all to determine whether or not act of state would be

10applicable in an international context. I think you're right. I think it's only where

11there's foreign sovereign compulsion. So that the Mid-Cal principle wouldn't

12apply, I think, in an international context.

13We have to make policy determinations and one question is, and it

14relates to the efficacy of cooperation; should the United States government -- and

15the issue is before the OECD right now -- advocate private litigation options in

16foreign jurisdictions? And what would be the efficacy of that advocacy in your

17opinion? What incentives would foreign governments or foreign legislatures have

18to be sensitive to for such advocacy?

19MR. VICTOR: If I may, my personal view is that that's probably

20not the issue the U.S. Government should be pushing for. That gets into a

21tremendous culture issue as to how foreign countries view litigation and the way

22in which persons or entities resolve conflicts between themselves.

23I think that the U.S. Government probably has enough on its agenda


1to try to deal with the pragmatic problems of coordination and cooperation that

2 would involve government enforcement authorities rather than to take on the effort

3of persuading other countries that treble damage or even single damage type

4actions are something that they should seriously consider.

5I think those countries are not blind to what exists here and most of

6them seem to criticize our approach. We're probably not likely to succeed even if

7 we undertook such an effort, but I'm doing this off the top of my head.

8MR. RILL: Suppose there were a modification of our approach

9 along the lines that Harvey's suggesting, a de-trebling or court discretion in the

10 grant of attorneys fees, as an incentive? I don't want to pursue this too much

11longer, but it is a policy question that's on the table at OECD and one that we

12want to address.

13I'll just ask one more question --

14MR. APPLEBAUM: Let me just mention, the paper does

15specifically address that. It states: "In light of the spectacular worldwide

16proliferation of antitrust laws in the past decade -- still underway -- it is doubtful

17whether there is any generalized need for enhanced private antitrust litigation

18 under foreign regimes as a means of addressing private anticompetitive conduct,

19 including conduct that may restrain U.S. foreign trade."

20MR. RILL: I take it that's a no as to advocacy.

21MR. APPLEBAUM: That's a generalized no, the Section Task

22Force believing very much along the lines of what Paul has said, that we have our

23own unique phenomenon. As Phil has mentioned, our treble damage system is


1pretty universally criticized. It would not make a lot of sense to, if we're thinking

2about restraints on U.S. export trade, urge private litigation rights under foreign

3antitrust laws.

4DR. STERN: What page were you quoting from?

5MR. APPLEBAUM: I was reading from page 2.

6DR. STERN: Thank you.

7MR. RILL: I'm going to have to excuse myself in a minute, but I do

8want to come back to a question that Joe raised, and I think it has some very

9interesting implications, and that is the united front comment. I think that the

10united front between FTC and DOJ is working quite well in general terms.

11But you also raised the issue of other agencies having antitrust or

12quasi-antitrust or at least some competition responsibilities. I wonder if you or

13the other members of the panel would suggest as a response to that that the

14 competition authority, the Department of Justice or the FTC, have a seat at the

15table in White House deliberations on competition policy. This should, perhaps,

16be the case in instances where specialized agencies have a seat at the table, or as I

17think Commissioner Powell of the FCC has proposed, that competition decisions

18by the antitrust agencies be binding on other deliberations -- universal service, for

19example -- by the specialized agencies.

20MR. WINTERSCHEID: I think certainly the antitrust agencies

21should play a leading role, if not the leading role, in developing our competition

22 policy portfolio in the international community. How that is formalized, I'm not

23sure I have a direct view in terms of having a "seat at the table" in a formal sense.


1Certainly they should be at the table when those decisions are being made, and in

2addressing issues as fundamental as, in developing countries, do we really want to

3promote the enactment of competition laws at any given stage of their economic

4development, and, assuming that the answer is yes, how that policy is developed

5consistent with, not just U.S. business interests, but, more fundamentally, with the

6effective enforcement of competition law principles on a global basis.

7That's one of the main thrusts of our paper. Because of their

8 experience and their sensitivities to the real world issues presented by global

9 enforcement, it's critical that the antitrust agencies play a leading role in the

10development of the policies that are being articulated by other U.S. government

11agencies in other contexts.

12MR. VICTOR: I would echo that thought. I think our competition

13 agencies are not only sophisticated, but they are clearly the only agencies that

14really have an understanding of competition issues. My impression is that the

15other agencies that deal with those issues really do not have a deep understanding

16and/or appreciation of the issues themselves, much less how those issues would fit

17in and be considered in the context of the particular problem that's being

18addressed by the various agencies considering an issue. So I would strongly echo


20Without taking sides -- and working on the basis of anecdotal

21information -- I think what happened in the Fuji-Kodak situation reflects the

22absence of in-depth understanding of competition issues by at least one of the

23agencies that was involved.


1MR. APPLEBAUM: I also agree with what Paul and Joe said. But

2more broadly, there was a colloquy here in November on the whole issue. The fact

3that generally speaking the WTO doesn't cover, arguably doesn't cover,

4 competition policy or, if it does, it's under nullification and impairment, and the

5problem of having the United States Trade Representative in Section 301 cases

6deal with complex issues of competition in the Japanese market is a formidable


8The USTR has just announced an interim decision involving an

9alleged anticompetitive restraint engaged in by the government of Mexico on

10exports of high fructose corn syrup from the United States. If you consider the

11 allegation, it's a traditional boycott type issue, antitrust issue. But the question of

12whether the Mexican government was involved is a fact question, and what impact

13it may have had in the Mexican market is before the United States Trade

14 Representative.

15What Paul and I are saying is the Kodak-Fuji case involved a

16 non-antitrust, non-competition agency -- and that is not a criticism of the USTR.

17I question whether the USTR has the resources or the experience or the depth of

18expertise, that is antitrust or competition law expertise, to deal with issues like


20MR. PROGER: I agree with the comments that have been made. I

21think that actually your question touches on almost every issue we have dealt with

22today. And it starts with one fundamental point that we have not really talked

23 about. Competition policy is a public interest, but it is not the only public



2One of the things that we in the United States at times have been

3severe in our criticism of other competition regimes is that they bring in other

4public interests. Yet we have the FCC, the FERC, the Federal Energy Regulatory

5Commission, Surface Transportation Board. We have agencies where we bring in

6other public interests in their deliberations.

7So, in answer to your two questions: One, we would be better off,

8 if we are going to have within our government some entity in which competition

9 expertise and policy resides, it should be the competition agencies and not

10 agencies that regulate specialized industries. To the extent that there are other

11public interests, there has to be coordination of those interests within our


13That gives rise to the second point. I think competition policy

14should be given an equal seat at the table within our government as that given

15trade policy. I think both are important to national public interest. So right now

16trade is there, competition is not. That does not strike me as an appropriate

17perfect balance.

18But the last point raises an interesting point, the one Harvey raised

19on the Mexican corn. Here I am truly speaking for myself because, as the Section

20papers point out, we are not for proliferation of private litigation.

21But the Mexican point raises an interesting point. The U.S. created

22 the private attorney generals to say that there are other ways of enforcing antitrust

23laws other than through government action. There are limitations to the resources


1of the government, so we created the private attorney general as an additional


3That has led in some cases to abuses. Not withstanding that, in

4 situations where we as a country want to promote worldwide free markets and

5 open market access, I do wonder whether having some system where, despite the

6fact that the foreign government does not want to enforce the law, a private party

7 victimized by an anticompetitive effect might seek redress in two ways.

8One, it might stop the process of U.S. courts now reaching way out

9 to get at conduct that is probably beyond us, but for which the party does not have

10any other immediate venue to seek redress; and two, it might lead to greater open

11access and freer markets in other countries.

12DR. STERN: Where would it be, where would this thing be located,

13 this ability? Would it be within the U.S. Government?

14MS. JANOW: Can I give a footnote on that?

15DR. STERN: Yes.

16MS. JANOW: One approach that has been taken, obviously, in the

17SII negotiations and others, is that for those jurisdictions that have chosen to have

18private litigation, that they make that effective within their own systems, that the

19impediments to effective litigation be removed, whether those be filing fees or

20presumptions or so on.

21So rather than being an advocate necessarily in whole cloth, being

22an advocate in those jurisdictions that have chosen, that would be one approach.

23MR. PROGER: There is an obvious difficulty going forward. You


1are really raising a much broader question for the foreign nation and its society.

2Does it want to have an effective judicial system and a system of private redress?

3I do not think you are going to create this solely to deal with

4competition issues. You have to first have in the foreign jurisdiction an innate

5belief that there needs to be a judicial system which provides private redress.

6MR. WINTERSCHEID: It's important not to lose sight of the fact

7 that in many jurisdictions, and particularly in Europe, there is a private right of

8 action. The point is that it's not exercised. So technically it's there, but again it's

9a cultural issue as much as anything else.

10The other footnote to proposing expanding those rights of private

11action in foreign courts under foreign systems, is the potential effect that that may

12have on the rights of U.S. litigants. In particular I'm thinking of the Second

13Circuit's 1998 decision in Westminster Bank, where a private U.S. antitrust action

14was dismissed on forum non conveniens grounds because the United Kingdom has

15a private right of action. Never mind that there was no inquiry as to whether it's

16an effective right of action, having determined that there is technically a private

17 right of action in the UK, the U.S. case was dismissed.

18So in terms of the need for clear rules, to the extent that the

19existence of foreign private rights of action are going to be grounds for dismissing

20 U.S. antitrust actions, it seems to me that this is another area where clear rules

21should be established so that the U.S. district courts aren't dismissing meritorious

22rights of action in the United States merely because of the theoretical availability

23 of a private right of action in some foreign jurisdiction.


1DR. STERN: I keep coming back to this page 3 of point C, in

2 which you have stated that "ICPAC could help to increase awareness that neither a

3 direct, substantial and reasonably foreseeable effect on U.S. import commerce nor

4the denial of a U.S. export opportunity constitutes a substantive antitrust violation

5in itself." You're saying that this would be useful if the Committee made that very

6 clear and repeated that mantra.

7I keep looking at this thing thinking about Section 301, because

8 you're saying if we did that, "clarification" -- I'm quoting -- "will simplify debate

9and permit the recognition and distinct treatment of market access remedies based

10on substantive standards different from those of antitrust law."

11Are you stating that Section 301 should never be used in the pursuit

12of a case in which even there's been a display of an adverse effect on competition?

13What are you saying here?

14MR. APPLEBAUM: Item C in the executive summary on page 3

15 has to do only with the Sherman Act. It is not commenting on Section 301. In

16fact, the paper doesn't comment on Section 301 at all.

17DR. STERN: I know. But I can't help but --

18MR. APPLEBAUM: Paul and I, and Phil maybe, have commented

19outside of the paper on Section 301. But this is an issue of long standing and I

20have referred to the fact there was at one time in the Antitrust Guidelines of the

21Department of Justice a footnote that provided that where U.S. consumer welfare

22was not affected, i.e., exports, that at least the Department of Justice would not

23exercise any jurisdiction.


1That was later reversed by the Department of Justice --

2DR. STERN: Right.

3MR. APPLEBAUM: -- when Jim Rill was Assistant Attorney

4General, and there remains a longstanding debate.

5I think that the concern that the Section had with this approach is

6that it leads to the impression that there is a Sherman Act violation every time a

7U.S. exporter is barred from a foreign market. The point is that, like any other

8antitrust case, whether it's private or governmental, there has to be a showing of

9either a per se violation or a rule of reason, unreasonable restraint of trade. That

10 is, the denial of an export opportunity alone is not an antitrust violation.

11The Section in a sense has raised the broader issue of whether that

12should be considered an antitrust violation at all. There are different views on

13that issue among antitrust practitioners. But obviously, if it is not an antitrust

14violation, that does not mean it is not a market access issue under the WTO and/or

15under Section 301. There is a much broader question of whether -- which we

16discussed in November -- the WTO should somehow embrace competition policy

17and market access cases wouldn't need to have an outlet through Section 301.

18But to be very precise, this Section comment has only to do with the

19antitrust laws and is not a comment on Section 301.

20MR. PROGER: Correct me if I'm wrong, but the Section has long

21 held the policy or the belief that market access issues should be dealt with

22appropriately, where appropriate, under the trade laws and the antitrust laws

23 should not be used as a club to gain what is essentially a trade issue, not a


1competition issue.

2MR. VICTOR: Yeah, the antitrust laws are not a panacea for the

3 market access issues.

4DR. STERN: Okay.

5MR. APPLEBAUM: And I might add that there is obviously a

6distinction between a private suit where a U.S. exporter alleges that it was

7improperly barred from access to a foreign market and a criminal case, such as the

8one Paul alluded to. If the Department of Justice has evidence that a group of

9foreign companies are engaging in such collusive activity, whether it's outbound

10or inbound, that is a per se violation of the Sherman Act.

11Most private litigation would fall into the category that footnote

12159 was concerned about, as the paper suggests, a lost export opportunity.

13DR. STERN: Yes, that's helpful. I didn't want to pull this thing

14 out of context. The paper is entitled "Report on the Use of Private Litigation."

15But you have suggested there may be a role for private litigation in 301.

16MR. APPLEBAUM: No, I was not suggesting Section 301 as an

17 alternative. Presently it's clear that the Sherman Act does apply to a claim of

18 denied market access. There are, however, jurisdictional issues and there is the

19 need to prove the violation.

20DR. STERN: Yes.

21MR. APPLEBAUM: But Section 301 is also available, and it may

22or may not be a competition-based claim. It may be simply a claim against the

23foreign government for taking certain steps which has nothing to do with private


1 anticompetitive conduct. The Japanese film market case was a combination of

2both alleged governmental restraints, which is traditional Section 301, and also

3private conduct restraints, which is not traditional 301, and which could have

4 possibly been the subject of a private antitrust suit.

5I believe I testified in November, and others have said that, if

6Kodak had filed a private antitrust suit, it would likely have been met with a

7 foreign sovereign compulsion defense, given Kodak's own view of the role of the

8 Japanese government.

9But there is always going to be, if someone wishes to pursue a

10 market access issue, considerations of a private antitrust suit or a complaint to the

11Department of Justice or a Section 301 action, or a combination thereof. They're

12not necessarily mutually exclusive.

13MR. VICTOR: Or positive comity, under some of the agreements

14 today.

15MR. APPLEBAUM: Paul's right. Or one can go to the foreign

16government and ask that it bring a suit against the group alleged to be blocking

17market access by U.S. companies.

18DR. STERN: Except when the government may be part of the

19allegation. Well, sometimes the right hand doesn't know what the left hand is

20doing. That's conceivable.

21Are there any other questions for this panel?

22MS. JANOW: Thank you so much.

23DR. STERN: Okay.


1MS. JANOW: You will have an opportunity to hear what the

2participants in that dispute feel about it later today if you wish to stay for it.

3DR. STERN: That's right. That's a little bit of the reason why I

4wanted to get you back on record on this, Harvey, because we will be hearing

5more about this this afternoon.

6Okay. Well, thank you again for all your hard work, and I'm sure

7 we will be in further discussions. My request for fine-tuning your

8recommendations, particularly in the first paper, as it would relate just to the U.S.

9and the EU and the degree to which you think it would be constructive to advance

10recommendations to enhance convergence, which as you said is already helping,

11would be extremely valuable.

12Merit, did you want to say one other thing?

13MS. JANOW: I wanted also to acknowledge that our interest is

14very high in the work that you mentioned was being developed and we will

15welcome that whenever it is ready. So thank you for that as well. I know they're

16not here today, but I know that there is real work going on. So thank you.

17MR. APPLEBAUM: Thank you for having us.

18DR. STERN: Okay. We will stand adjourned, or in recess I should

19say, until 1:00 o'clock, when we will begin session two, presentations by

20 economists.

21(Whereupon, at 11:53 a.m., the meeting was recessed, to reconvene

22 the same day.)















13(1:13 p.m.)

14DR. STERN: We're coming back into order. And we are prepared

15now for session two, the presentations by the economists. We have before us

16several papers. I want to say personally how much I appreciate not only the work

17 that went into it, but the fact that you've reproduced them so we can read them

18along as you make your presentations.

19This is the way it's shaping up: We're going to have four

20economists, and I think the way we've got it working is that Simon Evenett will

21 kick off from the Brookings Institution, followed by David Salant, Len Waverman

22and Andrew Wechsler of Law and Economics Consulting Group. So fire away.

23MR. EVENETT: Thank you very much and thank you for the


1opportunity to come today. I know you were expecting Bob Litan and I'm going to

2be a very inferior substitute. Just please bear with me while I explain what

3 Brookings has been up to.

4In cooperation with our colleagues with the Royal Institute of

5International Affairs in London, we've been engaged in a year long effort studying

6how transatlantic antitrust cooperation could be strengthened or should be

7strengthened. And we're looking in the areas of mergers, vertical restraints and

8cartels, and we also have a piece written on the extent of cooperation over time.

9This project will have a series of components. First there's a series

10of academic studies and there are a series of case studies, which I have distributed

11and submitted to the Advisory Committee. These case studies were commissioned

12by us and outline the key factual and substantive issues underlying fourteen

13transatlantic antitrust cases over the last three or four years. We're very grateful

14to some of the case study authors for putting these notes together for us. Since

15some of them are here, I definitely should say that. Thanks, Jim.

16MR. RILL: You're welcome.

17MR. EVENETT: Very grateful.

18So the project was based on those materials, plus two conferences,

19one in London and one in Washington, and Bob Litan has also been advising us

20throughout the whole process.

21But let's turn to what I think we're beginning to learn from this

22particular project, especially in the area of mergers and cooperation in merger

23enforcement between the United States and the European Union. Looking across


1the case studies and reviewing the academic literature, I think it's fair to say that

2it's been fairly well demonstrated that close cooperation is very feasible,

3extremely feasible, but it's by no means inevitable; and also it's not clear that

4cooperation is good in and of its own self. We should have some clear objectives

5in mind. And if it were the case that further cooperation meant adopting a

6standard which was inferior to the one that we have already, then that's by no

7means a good outcome.

8Now, I think in the case studies certainly in the merger area, of

9course the WorldCom/MCI case comes to mind as one where everything went

10 swimmingly along, though there are a number of reasons for that which are well

11 documented and well known. But I think, more importantly, we have to recognize

12that cooperation or successful cooperation is not inevitable and that there are

13going to be substantial difficulties which are likely to recur. Or another way of

14looking at this is nothing has happened which would stop these difficulties from

15recurring, and that's the key.

16What I'm going to try and develop here is that we should have far

17more pragmatic and seasoned expectations about what cooperation can deliver

18without major substantive changes and when we hit bumps in the road, like Boeing

19and McDonnell Douglas, we don't all go out screaming saying cooperation is over

20forever. And since we know that trouble is likely to come down the pike, we can

21inoculate ourselves against extreme reactions.

22I think the reason we should adopt this pragmatic approach is

23because we've seen in some cases that cooperation does have very beneficial


1effects in helping to reduce transaction costs, adding a little clarity to the purpose

2of, and reducing the uncertainty of, these investigations.

3But what are these impediments to cooperation? The first -- and

4this comes through in several of the cases -- is that often antitrust authorities are

5not the only authorities that are going to be reviewing cases. In the telecoms and

6transportation cases, this has come to the fore. And I think without obviously

7changes in laws in those areas, then we can expect these types of jurisdictional

8fights to come up and we should be aware of that. And given that there are now so

9many mergers, or at least joint ventures, in telecoms and transportation, this is

10very, very important.

11The second impediment are in views about what the role of the state

12is in market relations. This is particularly important in the EU. We now have the

13 nomination of a new European Commission President, Sënor Prodi, and he has

14very clear designs about how he wants to reshape European industry. We've

15already had proposals floated in London and in Paris for consolidation of the

16European defense industry and this will not be the only industry where this is

17going to happen. I would expect you'll see a substantial amount of consolidation

18in the European side, driven not only by economic motives, often by political

19motives, too. And somehow we have to have a system which is robust to those

20types of changes. Looking forward, we will come across cases where it's going to

21 be very striking that the U.S. and the EU have very different views about the role

22of the state in consolidating industries.

23The third area are differences in analysis, and I guess here the


1primary example of this is on the so-called efficiency defense. I should point here

2that I'm drawing from the work of James Venit and William Kolasky, who wrote a

3paper for us in this project pointing to the differences to the U.S. approach to the

4efficiency defense, which is far more accommodating, to the European view, which

5is a lot more skeptical.

6I should add that, having reviewed the academic literature myself

7and the industrial organization literature, there is very little evidence of

8improvements in efficiency which result from mergers. Can two firms when they

9merge turn inputs into outputs more efficiently than the two separate entities?

10And the answer is there's not much evidence for that.

11However, interestingly, there is finance literature now within

12economics, which points to the benefits of reductions in costs which result from

13mergers, particularly international mergers, and this involves reductions in shared

14fixed costs in advertising, distribution networks. So some of the claims which

15people have made about why you're seeing so many of these international mergers

16are beginning to filter through in the empirical literature, and the benefits seem to

17 be not on the variable costs in the production technologies, but more in the

18advertising and overheads. How this literature evolves over time may well

19reinforce, undermine, or alter the way in which the efficiency defense is viewed by

20authorities, and if that particular literature is interpreted in different ways across

21 the Atlantic we could run into some problems.

22And finally, the area I think we can do something about is that in

23some cases we've seen the authorities receiving very, very different data sets and


1information to analyze and, unsurprisingly, coming up with very different

2conclusions. We have a case study by Gary Doernhoefer on the British Airways-

3 American Airways case and he rams that point home.

4So what do I take from these? Of the four impediments to

5cooperation, the jurisdictional questions and the difference in views of the role of

6the state are huge questions, which are unlikely to be changed by legislation in the

7next foreseeable future. And so we should expect them to occasionally produce

8problems in antitrust cooperation. Again, the other impediment is contingent, in

9part, on the evolving academic debate over the efficiency defense.

10But it does seem to us -- and this is very much a tentative

11proposition -- that one area where we could make some progress is in eliminating

12disagreements between merger and other authorities caused solely by the fact that

13they have different information. That seems to be perhaps an outcome you really

14want to avoid.

15So we've been toying with a proposal which I will throw out for

16discussion. As I say, it's very tentative and we'd like to get your feedback. That

17 is, perhaps it makes sense to have a separate track for merger investigations -- it

18would be recognized as a separate track -- and it would be optional. The parties

19could submit the Hart-Scott filing in the U.S. and an analogue to the Form CO,

20but maybe not as demanding as the CO form in the U.S., and they'd file the same

21information in the EU, assuring that the parties have the same information on day

22one. In return for that additional burden of supplying that information up front,

23there would be a presumption in the U.S., a presumption but not an obligation,


1that the second request filing would be a lot more selective and tailored to the

2 specific questions at hand and not this broad encompassing affair that it is at the

3 moment.

4So the idea here would simply be to try and get the same

5 information to the regulators on day one and, because it's an optional mechanism,

6 both the authorities and the parties themselves could choose when to exercise it.

7And if it turns out that the U.S. authorities don't start narrowing down or focusing

8their second requests, then the private sector will respond by not using this

9particular optional mechanism.

10I think what it would mean for the EU and the U.S. is if they want

11 to have a separate track for investigations where they want to have the information

12up front from day one, then they could encourage parties to go down this route and

13that quid pro quo would be established.

14So why don't I stop there, since I've spoken for about 15 minutes,

15and I'd be delighted to answer any questions about the project. And if any of you

16need to contact me, I'm sure if I don't get to see you you can reach me through the

17staff here. Thank you.

18DR. STERN: Thank you.

19I think we're going to hear from the entire panel, because maybe

20they'll answer some of the questions which we have.

21Okay. Len, are you going to start it off?

22MR. WAVERMAN: Yes, I'm going to start off.

23DR. STERN: Okay.


1MR. WAVERMAN: I appreciate having the chance to come back

2for a second time after I was here in November and spoke generally about how

3standards setting can be a new cartel facilitating device. Today we would like to

4talk about a specific example -- the setting of standards for third generation

5mobile technology. So that's going to be a case study.

6We're going to examine in detail, the European Telecommunications

7Standards Institute, or ETSI, which we feel is an institution which favors the

8home team. That is, the way in which it comes to decisions and the way in which

9membership in that committee is allowed to, in a follow-up technology such as

10third generation mobile, which is a follow-up from second generation mobile, it

11allows incumbent equipment manufacturers in Europe basically to leapfrog into

12the third generation. And this can be to the detriment of consumers in Europe and

13worldwide and to the detriment of corporate manufacturers outside Europe.

14Therefore, we think that standard setting can be a cartel facilitating

15device and it can also stymie innovation. As a result, there's restricted market

16access. Because telecommunications equipment has network effects, that is there

17are both economies of scale and the desire to have the same type of equipment as

18others, if you can get a larger base initially you can tip the market such that

19everyone then jumps on your bandwagon, your standard bandwagon. This we

20think is a major potential problem for standard setting.

21I turn the my colleague, David.

22MR. SALANT: Thank you, Len. And thank you for the

23opportunity to speak here.


1I'm going to talk about the decisionmaking process for setting

2standards, briefly. Spectrum management decisions in Europe are fairly

3complicated and I'll just briefly go through the major players involved. The EC

4decides -- makes European-wide decisions now about spectrum allocation. So the

5EC has allocated some part of the radio frequency for UMTS or 3G spectrum.

6They've also delegated to ETSI decisions for setting the standards for how that

7spectrum will be used.

8There had been, and there still is to some extent, a battle between

9two main competing standards. One is called WCDMA; Ericsson has been the

10main proponent of that. The other one is called CDMA2000, and Qualcomm has

11been the main proponent of that standard. Qualcomm is the initial developer of

12 CDMA and they own most of the intellectual property to CDMA, including the 3G

13versions of it.

14Just a couple of months ago there was an agreement for licensing

15CDMA intellectual property between Qualcomm and Ericsson, and Ericsson

16acquired a division of Qualcomm, but that has yet to settle the issue in a lot of

17 ways.

18Other entities involved include other SDO's, standards developing

19organizations, such as the TIA and ITU for setting standards. In the United

20States, the FCC allocates spectrum and assigns it, i.e., decides who gets to use the

21spectrum. They also traditionally decided the standards for spectrum in the

22United States, but it's less and less common for the FCC to make a standards

23decision. It's more and more common for the FCC to let the market decide. And


1so, for instance, in standard PCS cellular frequencies, there are three or four

2 different standards being used and all of them basically work throughout the

3country. The FCC let the operators choose what standards to deploy.

4Now, one other thing that's important in the EC is that the member

5countries retain a certain amount of discretion, and it's very unclear how much

6discretion they really have or are willing to exercise. So, for instance, the

7Telecom Act that the EC passed this past year gave all the member countries some

8 discretion in making some decisions based on public policy concerns in their

9 countries.

10To date, despite what I would view as fairly strong compelling

11arguments to allow the market to decide at least for some frequency bands, no EC

12 country has deviated in the least from the single ETSI standard. And as things

13stand right now, the EC -- the individual countries that handle the actual process

14of allocating and assigning frequency rights are adhering to a single mode, a single

15path, and all applying one standard, mandating one standard.

16So who are the players in the sense what firms will be affected, are

17affected and have an interest in this issue? Well, Qualcomm is clearly one of the

18leaders in the sense that they developed CDMA technology and that's the basis of

19both major standards. There are a number of equipment providers in Europe who

20so far have dominated European supply of infrastructure equipment and most other

21equipment, and Ericsson and Nokia are two of the leaders, and they also

22 have a significant presence at ETSI.

23There are large number of U.S. equipment suppliers whose


1prospects for doing business in Europe are clearly affected by the standards. I

2believe that Lucent is probably the leading U.S. equipment supplier. And then the

3operators, those firms that provide wireless telecommunication services

4In Europe the only digital service used for voice is GSM. There's

5one standard and that standard is available here in Washington and in most of the

6 United States, but it's probably the least available standard in the United States.

7 It also tends to have the highest rates. But if you want a hand set that you can

8take to Europe, you have to buy GSM. You can't buy Sprint, you can't buy

9AT&T, you can't buy Bell Atlantic, you can't buy U.S. West or Airtouch. They

10don't have GSM technology.

11So the American operators will be affected, and I just listed briefly

12who the major American operators are and what their technology choices are.

13Sprint, Bell Atlantic, Airtouch, U.S. West, operate CDMA. AT&T operates only

14TDMA. Bell South and SBC operate both TDMA and GSM, and Pac Bell and

15 Omnipoint operate GSM. So there's going to be a differential, a discriminatory

16impact based on what happens in the development of these standards.

17My colleague Drew Wechsler -- Len. Sorry.

18MR. WAVERMAN: The slides are slightly out of order from the

19ones we gave earlier.

20As David has shown, there is clearly competition between

21 technologies. What we want to look at now is the European Telecommunications

22 Standards Institute, ETSI, which was founded in 1988. It has a similar makeup, a

23similar way of forming consensus, to other European institutions, which is


1weighted voting. Voting is based on European Union turnover and the weighted

2 voting was institutionalized in 1988 in order to prevent hold-ups by small member

3states or small companies.

4However, if you don't have EU turnover you can still become a

5 member of ETSI, but you only get one vote. There is a 71 percent rule for

6 consensus. You need 71 percent for consensus.

7Now, to become a member of ETSI you have to agree to uphold the

8 ETSI standard. You have to support a common position at the ITU and you have

9to "make use of the standards proposed by ETSI." Now if you're a competitor to

10technology in Europe, for example GSM, which as we'll see in a moment is

11 manufactured mainly by Ericsson, Nokia and Motorola, if you're a company like

12Qualcomm, which does not produce GSM technology and whose present

13technology for second generation mobile is not accepted in Europe, so the second

14generation, I-95 standard, is not an accepted standard in Europe and so Qualcomm

15has no European turnover.

16Therefore you then have a division between insiders and outsiders.

17 This is what we're leading to in terms of the way this institutional design can

18facilitate cartels.

19Now, in addition to ETSI coming up and making a decision on a

20voluntary standard, there's also a process which is unusual from a North American

21perspective, which is the European Union can then vote and make a standard from

22ETSI or from other organizations in things outside telecommunications something

23called a European norm. A European norm becomes a mandatory standard across



2So you have here I think a double problem. The first problem is

3 within ETSI, and we'll show that in a second. But even without this government

4mandating, the process within ETSI needs redesign. But added on top of that is

5the ability of an ETSI standard to then become mandatory across Europe and

6where all work on standards not the European norm must be stopped. That is in

7the European legislation. You cannot work on a standard which is outside the

8European norm.

9Within ETSI there's something called the special mobile group,

10SMG, which is the group, the subcommittee, which is responsible for designing

11the standard for third generation. That is also the subcommittee that is

12responsible for the GSM specification or the second generation specifications. So

13this committee, then, moves from second generation to third generation.

14We argue that it is in fact run by manufacturers and not by telcos.

15 There's basically something like 1700 votes at ETSI based on turnover.

16 Manufacturers have 414 of those votes. But the telecom revolution is not done by

17telecom operators. It's done by equipment manufacturers. It's equipment which

18 makes telecommunications -- the telecommunications revolution. It's the switches

19and the hand sets for mobile, which no telecom operator manufactures, and they

20have very little information or knowledge about advances in technology.

21And they rely on equipment manufacturers. They rely on them for

22their existing equipment and for the next generation.

23Of the 414 manufacturers' votes at ETSI, four firms -- Alcatel,


1Ericsson, Siemens and Nokia -- have 60 percent of those votes.

2Ericsson has something like 68 votes, Nokia has 47. Again, U.S.

3manufacturers who are not in Europe if they join ETSI get one vote. Qualcomm

4has one vote, so it has two tenths of one percent of the voting power.

5European manufacturers also dominate mobile equipment sales at

6the moment. In 1998, the European manufacturers had 63 percent of all mobile

7equipment sales in the world. And Ericsson and Nokia depend on mobile

8equipment for their livelihood. They're much more concentrated in mobile sales

9 than other firms. 72 percent of Ericsson's revenues come from mobile equipment

10and 89 percent of Nokia revenue comes from mobile equipment.

11The way that the special mobile group works is that the

12subcommittees under this committee which look at the specific technologies, the

13key positions in those subcommittees tend to go to equipment manufacturers. And

14these subcommittees -- these individuals on subcommittees get to design the

15agenda. So there is an ability, then, for a few firms to basically dominate the

16 special mobile group. 10 percent of SC members have 71 percent of the votes and

1715 members can block anything.

18David, back to you.

19MR. SALANT: Okay. Well, as I mentioned, a couple of months

20ago Qualcomm and Ericsson signed an agreement, and I'll give you a brief recap

21of what's in that agreement. There are two standards, WCMA and CDMA2000. I

22think several dissertations in EE will be written on these standards and it's fairly

23hard to understand all the engineering specifications. But my impression, from


1what I understand in terms of the development of the standards, is that the

2CDMA2000 was on the table at ETSI discussions. Ericsson went back and made

3what seemed to be a number of inessential changes in the technology that made the

4existing basic software that Qualcomm had developed largely obsolete, adversely

5 affecting Qualcomm and other U.S. manufacturers of CDMA technology. Then

6ETSI selected WCMDA.

7That has triggered some controversy, I'm sure you're all aware.

8And the agreement basically provided for a three-mode standard, so basically this

9is an agreement to disagree or to split the baby. So the operators -- anybody

10deploying the 3G standard would be able to use WCDMA, CDMA2000 or another

11standard called TDCMA. And TD/CDMA is for mainly different type of

12applications, for indoor use let's say, and not from mobile use.

13So the two mobile components of the standard are WCDMA and

14CDMA2000. They're still competing. What basically the Ericsson-Qualcomm

15agreement sanctioned, ratified, is that it's okay for anybody to deploy either one in

16Europe, nobody would object. But the way that they're supposed to be

17 implemented is that everybody should produce multi-mode handsets, hand sets that

18work with both standards.

19That doesn't really happen in the United States, where we have four

20standards, an old analog standard and three digital standards. The only multimode

21hand sets that we have and the U.S. are between the old analog and each of the

22 individual digital. So there's CDMA-analog, TDMA-analog,

23and GSM-analog hand sets.


1So it's not clear how this standard, this agreement will work out.

2Also, in Europe it seems quite clear that, well, it's still the case that WCDMA is

3still the only ETSI-approved standard, so all the European-based technologies and

4operators using GSM European-based technology in the United States and

5elsewhere will be able to roam with their equipment much more easily than the

6ones using North American standards. So that can have a discriminatory impact

7 on European operators or European- friendly operators outside of Europe.

8The agreement also has a licensing arrangement agreement whereby

9Qualcomm will license rights to intellectual property to Ericsson. There is some

10exchange that Ericsson will license, apparently, some intellectual property to

11Qualcomm. Ericsson has announced it will not sell CDMA2000 infrastructure in

12 Europe, it has no plans to deploy it.

13The agreement does call for Ericsson to back CDMA2000 at ETSI,

14but nothing's happened yet.

15Next slide, please.

16This slide is meant to put a little bit of perspective on the market

17dynamics. This is a very rapidly changing industry, and there's these terms, 2G

18and 3G. 2G is used to refer to the first digital standard for wireless cellular and

19PCS communications. It replaced the analog, which is the 1G.

203G is supposed to be a more advanced version of 2G services, and

21the EC has mandated certain performance criteria that any 3G systems must meet.

22 However, nobody really knows what 3G will be in practice. These are new

23standards, these are new technologies. Even though the EC has mandated certain


1performance criteria, the fact that they mandated high-speed wireless Internet

2 access doesn't mean everybody will get very much of it. All it means is you'll

3have voice and some data capability.

4So really nobody knows much about the product mix that will be

5 provided and offered with this new technologies and the new bands.

6Most of the EC countries have now started the process of allocating

7spectrum for UMTS. They're starting -- UK has I think the third draft of

8 spectrum auction rules that they just issued a week or two ago. Their timetable

9has slipped a bit, but they really want to run an auction of 3G spectrum at the end

10of this year or probably now early next year. They had been mandating ETSI

11standards, which means now WCDMA.

12One of the reasons there's so much pressure in Europe is that there's

13 congestion. Spectrum's gotten very crowded and the operators want more

14 spectrum. One approach is to use more spectrum, which is what's happened in the

15 United States. But the Europeans haven't really considered very much what we

16call refarming. So in the United States, every cellular operator who had analog

17technologies converted to digital. That's not really being considered very much in

18Europe. In some places it's not allowed.

19For instance, Qualcomm has a GSM/CDMA technology which takes

20the existing infrastructure and adds a more efficient technology on the existing

21infrastructure. That as far as I can see has no ghost of being approved by ETSI or

22being deployed or even considered.

23What's gone on in the U.S. is a bit different. The FCC has issued a


1notice of inquiry. The FCC is not nearly as far advanced. The Europeans might

2offer that the U.S. is not as well organized and will be lagging behind again. Of

3course our rates are maybe a little bit lower than theirs, so there's an issue about

4whether we should have mandated standards at all.

5The U.S. -- there's some conflict between the U.S. bands and the

6European bands. However, the FCC typically facilitates refarming and the

7 business case really encourages it. The operators who have the license to the

8 spectrum decide when it's appropriate to introduce the technology. It's not decided

9 by regulators. Regulators aren't required to make lots of detailed analyses of

10when it's the right time to introduce the new technology for the public.

11That's not the European approach. The European approach

12mandates and, I would argue, overspecifies standards.

13The fourth and fifth checks on the right-hand side deal with the new

14data rates, new wireless data technologies. There are various versions of these

15new wireless data technologies that are being developed. If you go to the web

16sites, you see the usual publicity items saying there are plans to deploy them even

17 as early as this year.

18Now, this CDMA IS-95- HDR -- "HDR" is for "high data rate" --

19 offers, the promise is as high as 2.5 megabits per second, which is higher than you

20 get with a cable modem. It's higher than a digital subscriber line, DSL. That's

21 what they think they can eventually get with wireless technology using existing

22PCS bands or using these new 3G or UMTS bands.

23That cannot be approved in Europe. I know of companies that have


1interest in looking into that, but there's a major regulatory hurdle. Right now

2ETSI has no provision to even to consider that.

3There is a European standard called EDGE which may be better,

4may not be as good, may be more compatible than GSM, but who knows. That

5apparently is getting some consideration and I'm not fully up to speed on how far

6that has progressed. If you go to some, like Ericsson's web site, you will see some

7 specifications on EDGE.


9MR. WECHSLER: Thank you very much.

10Well, where do we stand? Len mentioned earlier the ETSI transition

11over the last decade. What a difference a decade makes. In 1988 there were no

12incumbents in mobile, and there was possibly a reasonable case for weighted

13voting to create scale across the very small markets of Europe.

14Now in 1998, the situation is completely different. Incumbents are

15 well-established and standards, instead of the market, are creating powerless

16 outsiders. Who are these outsiders? Well, they're the non- incumbents, those like

17Qualcomm who have no EU turnover and have just one vote, one rather

18 meaningless vote, for which they have to accede to conditions that are hardly

19acceptable. And the outsider is also new technologies which can be stopped by the

20European norm system without the test of competition on the merits.

21The outcome, if you look at who uses the technology and who has

22the votes in ETSI, is WCDMA technology without any market test of that as

23opposed to its alternatives.


1We had a similar result -- I think the committee asked us last time

2about Geotek, which is spelled wrong on the slide there; it has a k" -- a similar

3 result in SMR, where U.S. technology and Geotek were frozen out of Europe.

4So what we're seeing here that bad competition policy can make the

5full transition into bad trade policy. We have EU market access foreclosed by a

6standard setting process that isn't -- whose logic was dictated by 1988 conditions,

7not the present. And this becomes a competition for both the European Union and

8 its member states if they choose to pursue it.

9The EU market, which roughly speaking is perhaps one-third of the

10world -- one-third would be North America and one-third loosely speaking

11everything else -- that market is large enough to tip other markets. People are

12 afraid of adopting standards and buying equipment and winding up stranded as the

13 rest of the world changes.

14Even more crucial in fast changing technology is that, given the

15voting standard and the way new standards are set, existing market power

16determines follow-on technologies without market tests. This thwarts competition

17on the merits and allows the international leveraging of market power from Europe

18to elsewhere in the world, further disadvantaging any U.S. providers who have

19chosen a different standard.

20This distortion undermines trade in goods and services,

21international investment, and the national treatment of various providers. Of

22course, it will also thwart or slow technological progress to everyone's detriment,

23including the EU's.


1So what are the goals that we would propose that ICPAC support on

2standards issues? We need standards for the standard makers, the standard

3setters. We need a very general notion of what is appropriate for them to do and

4 what is not appropriate for them to do. The most basic notion is that standard

5 setters should not replace market tests to determine the best technology.

6We have to work towards limiting or stopping regulatory capture by

7 incumbents, which is exactly how ETSI has evolved over the last 10 years. We

8need to remove a weighted voting standard that favors incumbents. The case for

9weighted voting, if there ever were one, certainly no longer exists now that mobile

10telephony is an established fact.

11We need to foster the free development of technology and defend

12international competition on the merits. And to do that, I would suggest that the

13 United States has a very good model -- the promotion of voluntary standards and

14competition among alternative technologies. That is our model and we can discuss

15the costs and benefits of that model. But for a rapidly changing technology, it

16provides a superior approach.

17ICPAC should support remedies for what is turning out to be a

18 costly situation, from both the standpoints of welfare economics and of

19competitors who want equitable treatment and have a right to expect it. A

20minimum requirement would be attention to the issues of international market

21tipping and market access that are implicit in certain kinds of standard setting


23We note that 2G is still very much around; it has not been


1completely replaced yet. Therefore, not only are 3G standards important, but 2G

2licensing is also an ongoing issue.

3We endorse the idea of working towards antitrust examination of

4 these kinds of issues in both the EU and the United States. All governmental

5 authorities share the same interest here. The only reason ultimately why the EU

6would do differently is if Europe decides implicitly to go back to picking winners

7and installing an industrial policy. No one explicitly acknowledges such goals any

8 more, but they appear implicit in the pattern we are watching unfold.

9More specifically, we believe that DG-IV should take a hard look at

10 new rules. Perhaps it would be appropriate to develop a memorandum of

11understanding between the Department of Justice and DG-IV to foster more

12international comity on how to proceed.

13And finally, while we do not suggest that it is appropriate to do so

14 tomorrow, the issue we have been discussing appears to be large enough to

15warrant consideration for a separate future WTO agreement on standards setting.

16It is easy to imagine that this may become necessary as the issue grows to include

17more than just telephony.

18Thank you.

19DR. STERN: Thank you very much for that very thorough update

20 of what has become an interesting case. It raises more general concerns and

21 considerations relating to competition policy from standards setting.

22I'd like to now to open up the time for questions, comments. Jim?

23MR. RILL: Let me ask Simon. You indicated that we should start


1out with basic expectancies when we get into international cooperation. Most of

2your case studies focus on merger cooperation. What would you suggest on the

3 basis of your case studies are the appropriate expectancies that should underpin

4our recommendations with respect to trade and competition or market access

5 issues?

6MR. EVENETT: A narrow question.

7As you know, the trade and competition policy literature is

8 voluminous. I would feel very reluctant at the minute to give you any specific

9recommendations. From what we've seen in these case studies, I guess one

10question I have is how big are these international spillovers that people talk about,

11and if you don't think -- I mean, one question when I read these case studies, I

12 keep asking myself how big are these spillovers?

13And if you don't think that they're that big, then that really

14 undermines a lot of the case for coordination and cooperation. But that's a

15conjecture based on these case studies, which I mean I'd have to explore them

16much more carefully. I'm sorry to give you an unsatisfactory answer, but that's

17my sense.

18MR. RILL: There is no unsatisfactory or satisfactory answer.

19MR. EVENETT: My sense reading these case studies is that these

20so-called spillovers and their implied rationale for cooperation is much smaller

21than we've thought. But that's a conjecture.

22DR. STERN: Merit?

23MS. JANOW: I thought this was a fascinating presentation and I


1thank you so much. I have no personal sense of how this same presentation, which

2I'm sure you've presented in Europe, might be received in other audiences and I'd

3be very curious how you think -- when you give this presentation, if the European

4dominance is noted approvingly or is seen as problematic by would-be smaller

5entrants, because if subsidiaries are in effect aggregated for purposes of voting, it

6also means they can lose their voice on issues in that deliberative process.

7Also when you talk about an expanded U.S. DOJ- DG-IV

8arrangement, are you thinking specifically with respect to standards setting bodies

9or was it a broader representation?

10Finally, we do have the technical barriers to trade within the WTO

11that were set up in part because of the standards experience in other environments,

12and why wouldn't one challenge these practices, if they're discriminatory in effect

13if not intent, under current structures?

14Sorry, that's a mouthful.

15MR. WAVERMAN: Maybe I can begin and then my colleagues will

16probably have more about the trade barriers.

17In Europe generally, the perception is that they have done well by

18GSM and the U.S. in mobile is really a basket case -- this has been a great

19example of European cooperation and that setting a single standard, in fact,

20 is something that is of great benefit to Europe.

21Bob Crandall and Jerry Hausman are trying to examine that

22 argument. The problem, of course, is when you examine that argument. If you

23examined that argument four years ago I think they were probably correct,


1because they were able with one phone to roam across Europe and there were

2economies of scale in production of phones, so costs were falling. And the U.S.

3had competing standards. I can remember when I first used a mobile phone going

4across California were four different standards. It was terrible. Four different

5standards. Thank you.

6But now, the GSM is so dominant in Europe, it's very hard to move

7 to the next round of competition between technologies. And really, I think in these

8high-tech industries the competition between technologies is innovation, which in

9the longer run is really what drives prices way lower.

10If the U.S. had been in the same position as GSM, had a single GSM

11standard, CDMA would not exist anywhere in the world. CDMA was developed in

12the U.S. and able to be put in place because in a sense there was no standard.

13Standards were voluntary. If you could get an operator to use that technology,

14then you could sell the equipment. In Europe, even if there was a company

15wanting to use CDMA, they couldn't because it was frozen out.

16So you would not have had the innovation of CDMA. I think now if

17 you look across the U.S. and look at these one-rate plans where you get 1200

18 minutes for 100 dollars, which is falling, and there's no distinction between local

19and long distance prices, 10 cents or 8 cents a minute, these prices are well below

20any prices in Europe.

21So I think today if you did a comparison between the competition in

22the U.S. and the competition in Europe, which I don't think Europeans understand,

23you find that there are much lower prices in the U.S. and there's vibrant


1competition between the technologies.

2Now, Europeans keep -- and I teach in London Business School now

3and I'm a French citizen, so I can say this with my European -- and a Canadian

4 citizen -- I can say this -- half of me speaks as a European. The other half is an

5 economist.


7DR. STERN: True conflict. I don't get the fractions here.

8MR. WAVERMAN: The Europeans still, even when they look at

9third generation, they say we want to have roaming, we want to have the same

10 phone anywhere in Europe. But what I think they're misunderstanding is the

11 difference between roaming and interconnection. That is, we could take our

12present TDMA, U.S. TDMA phones to Europe, if there was one operator in a

13country that had that technology. You don't need every operator with that

14 technology.

15For example, in the U.S. from a TDMA phone you speak to someone

16 on a GSM phone because there's interconnection. For roaming you need a single

17operator with that technology. You don't need every operator with that

18technology. I think that's the fundamental thing that they don't understand in

19Europe, is that the competition -- you can have multiple technologies and it's

20competition between technologies.

21MR. WECHSLER: There is an often obscured tradeoff between a

22static and a dynamic analysis. When the pace of change is sufficiently rapid, the

23cost of making a choice based on a static view -- e.g., we want one market now --


1rise. If that choice is made and outmoded within several years, the consequence

2 may wed a significant market semipermanently to a backward technology. The

3 dynamic costs would then outweigh the short-run static benefits.

4We are not here touting a particular technology. What we are

5touting, and what we think ICPAC is all about, is competition on the merits. The

6 standard response, one presumes, is based on this notion that there would be chaos

7and stranded units if for instance, Luxembourg went with one system and another

8country chose another.

9What we are suggesting is twofold. Professor Waverman suggested

10 that confining competition to exist within one technology is not necessarily the

11consumer's best interest. The consumer's best interest lies in robust competition

12that can be provided across technologies so long as there is one provider of each

13everywhere. Then the market gets to play out the decision.

14There is another aspect of stranding: the United States now has a

15 plethora of different technology phones, and consumers undertaking new cellular

16purchases are subjected to great confusion if they're not technogeeks. Most

17 consumers consider options, but then ask themselves the question: What is the


19A new cellular phone is but a freebie with two years of service.

20 Thus, consumers are not actually stranded. If a consumer changes plans after two

21years, a new phone is obtained at a low price, and the older phone is thrown away.

22It is outmoded technology.

23Well, there are many interconnection issues, but the pace of change


1has changed. Dynamic factors reduce dramatically the incentive to enforce a

2 single standard on the market.

3MR. SALANT: Let me add a little bit about the European view.

4First of all, I've heard from European operators and I've got the impression,

5although somewhat tacit, from European regulators that if American companies

6aren't able to enter Europe, well, that's not necessarily bad, and so if there's a

7 European standard they'd much rather have a European standard winning with

8European manufacturers than having an open competition.

9It seems fairly clear that there's a lot of that sentiment and

10European operators like a PTT for whatever, BT, FT, DT, ET, FT, whatever T,

11they shouldn't care about technologies. They should only care about what

12technology provides the best service to their customers. But it's quite clear from

13what I've seen talking with people at various PTT's is that they feel somewhat

14 obliged to adhere to a European solution.

15Another issue on DG-IV versus DOJ. One of the complicating

16factors here, it is not that there's just DOJ and the DG-IV. It's not purely

17competition policy agencies being involved. And this reminds me of some of the

18 tension that happened within the FCC when they went to a market approach for

19 managing spectrum. There was a tension between the engineers and the

20economists and, for once, the economists seemed to have something that was

21viewed as being positive.

22And DG-13 is the telecom director general and they had carried the

23day on 3G, and DG-IV has stayed out of the 3G battle. And so in some sense, to


1sort of close the loop, you need -- discussion needs to be more inclusive to include

2the FCC, DG-13 coordinating with DG-IV and the FCC and DOJ in a more open

3way where all the issues get discussed.

4DR. STERN: That's very helpful. I really did want to bring your

5 presentation back into the framework of our Committee's work, and you've done a

6very good job just at the very end by making that point.

7I sit here and I'm thinking about what you're saying, and I wrote to

8 myself "Industrial policy or technology policy trumps competition policy" in the

9 way you've described the situation in Europe. Last week I was listening to the

10discussions in the context of some new policies that are being developed within the

11European Union called the precautionary principles, which have to do with science

12or when you don't have science. One could suggest that there you've got politics

13trumping science or technology.

14So these balances are very, very important, and the role of the

15government from the point of view of enhancing competition and not letting things

16be closed down either in the name of industrial policy or environmental concerns

17or non-scientific basis -- in this case this is science, but there's yet again another

18consideration, industrial policy, that has been inserted.

19So this question is extremely important, I think, ultimately, in how

20 we define our mission going forward with new technologies and new products. In

21the United States we're tackling it one way, and the EU may be tackling some of

22these another way.

23Earlier this morning we talked about cultural difference between us


1in terms of litigation and the role of litigation. But here's another cultural

2difference, and we have to be very conscious of it as we design recommendations

3for trying to harmonize or converge.

4MR. WECHSLER: What you see here is not so much a cultural as

5an historical difference with a sympathetic interpretation. Europe is slogging

6through the creation of institutions to support a single market. In essence, they

7are engaged at the analog of our Constitutional Convention. As the EC tries to

8replace in mutually advantageous places separate national bureaucracies, the

9constituent governments attempt to do what the preceding bureaucracies have done

10on an EC-wide basis.

11But all over the world, there is now a major trend towards

12 deregulation with market rules that encourage the actors to engage in socially

13beneficial outcomes, with the market determining the outcome rather than the

14regulators. The EC can in essence leapfrog. Rather than simply imitating

15old-style regulation and government directive at the member state level, the EU

16 can build Europe-wide a new model of regulation now being built everywhere else.

17DR. STERN: Right.

18May I ask if you would tell us what your timetable is for finishing

19 your report?

20MR. EVENETT: Finishing the Brookings study?

21DR. STERN: Yes.

22MR. EVENETT: We hope to have a draft ready by the end of June.

23Our chapters authors are getting the materials to us by the end of this month.


1DR. STERN: And the recommendations that you were talking

2about, including this two-track recommendation?

3MR. EVENETT: Yes, absolutely, and that can be written up

4sooner, actually, if you would prefer it.

5DR. STERN: I think Merit is shaking her head, and I agree. We

6would like very much. You ask us for our input. We want your input.

7MR. EVENETT: Okay, I'll get that to you.

8DR. STERN: I think we would like that very, very much,

9 particularly when it comes to the recommendations, including the fact that I see

10 you're a little more discouraged that you were in the very beginning as to the

11 applicability of what these case studies will mean.

12MR. EVENETT: Well, I think it's more -- I think if you're trying to

13come up with a rationale for cooperation, one has to find ways in which my

14welfare affects you and your welfare affects me. And if the spillovers aren't too

15large, then we can go along on our own way. That's one thing.

16The other observation is, do you really want to try to perfect your

17own national law before you decide to set up an international standard, which is a

18big question? Or do you want to risk locking in the wrong international standard?

19And I think my other panelists here have talked about what happened, what can be

20the detrimental consequences of locking in the wrong standards.

21DR. STERN: I hope that your study, since you talked about it as a

22 transatlantic antitrust cooperation --

23MR. EVENETT: Right.


1DR. STERN: -- that you're going to be looking at it not only from

2 an international standard, but a transatlantic standard.


4DR. STERN: You are going to be narrowing your scope.

5MR. EVENETT: Yes -- sorry.

6DR. STERN: Go ahead, I'm sorry.

7MR. EVENETT: Yes, when we devised this particular project we

8 spoke to many of the experts in town, and there was a desire for a focus on the

9transatlantic issues. When we started doing this, we faced the debris of the

10Boeing-McDonnell Douglas case, which was still on peoples minds. And I think

11 the a substantial number of transatlantic transactions really reinforces the

12 importance of this issue.

13DR. STERN: Absolutely. We have both the U.S. and the EU

14engaged in this Transatlantic Economic Partnership, where competition policy has

15been noted. We'll just see how deep and far they do go. But to the extent to which

16they are informed by your work, I think it will be extremely helpful.

17I just had one comment and then I think we have to close this panel.

18 Your observations based on these different transactions that you examined about

19 efficiency. That observation is one that I share based on my experience sitting on

20a number of corporate boards. There are efficiencies, but it is not so much in

21 manufacturing. You don't see necessarily a manufacturing plant in one country

22being closed in the name of efficiency, but you do see the back offices being really

23reduced, everything from information systems to -- you mentioned advertising.


1But there's a whole variety of services that make up where you do see these

2efficiencies, and in many cases they are much more costly than the manufacturing

3of the output of the goods. And of course many of them are just service industries

4to start with.

5I want to thank this group and now just move on to the second

6panel, which is a presentation from representatives of U.S. businesses. We have

7panelists representing Eastman Kodak, Guardian Industries, and the United Parcel

8Service. I note that there is some overlap between some of the panels, so we don't

9have to bid adieu to everyone. We can get questions, another shot at some of the

10 panelists.


12DR. STERN: Chris, you've been very patient. This will be the last

13panel, and we appreciate everybody's attendance and we're prepared to hear you.

14MR. PADILLA: Thank you very much for inviting us. I want to

15also introduce my colleague from Kodak, Patrick Sheller, sitting in the front row.

16 He's our chief antitrust counsel and particularly knowledgeable about the subjects

17I'm going to discuss.

18The Film case or, as some have called it, the Kodak-Fuji case has

19 become the poster child for discussions about trade and competition policy,

20including a great deal of discussion before this Committee. And we thought we

21would appear today to give our view, having been through this experience, of what

22the lessons are to be learned from the experience of the Film case going forward.

23I would say that there have been two sort of camps that have drawn


1broad lessons from what happened in the WTO case on film. One, primarily trade

2experts, and particularly academics, have concluded that the answer from the

3result of what happened in the Film case is that the mandate of the WTO needs to

4be broadened to cover competition policy, that if only the WTO had the mandate

5to cover competition policy matters, the case might have been decided differently

6 and a blow might have been struck for U.S. market access in Japan.

7Another camp, and I would say a great number of antitrust

8attorneys fall into this category, who say, well, the answer is this shows once and

9for all that you shouldn't mix competition policy with the WTO; we should not

10have a competition policy covered in the next round of WTO negotiations, and in

11fact we should rely on positive comity in order to accomplish results.

12We think both camps are wrong, and we would like to discuss why

13 and perhaps suggest a third way for this very unique problem.

14Our experience with the U.S. authorities and before the WTO, we

15think, demonstrates convincingly the current system we have for dealing with

16problems where trade and competition issues are mixed is a fundamentally flawed

17system and must be fixed. In our case, Kodak presented what we considered to be

18and what many outside experts consider to be very strong proof of anticompetitive

19practices in Japan that had effectively blocked Kodak's ability to sell film and

20 other consumer products in that market.

21These barriers consisted of unlawful restraints existing at the

22manufacturing, distribution, and retail levels, restraints which were both condoned

23and in fact encouraged by the Japanese government, including the Japanese


1competition enforcement authority, the JFTC. These restraints created an

2 impenetrable barrier to meaningful market access. Kodak's film market share is

3and has been slightly less than 10 percent for the last 25 years despite our

4 substantial investments in and pricing in the market.

5Because the U.S. Government today lacks a cohesive and logical

6approach to dealing with trade and competition matters, when we brought our case

7 to U.S. authorities initially in 1995, the response was that the case was broken up

8into a number of disparate pieces.

9There was one piece which was a GATT complaint brought by the

10USTR to the WTO, commonly known as the film case. This GATT case was

11 stripped of all references to private restraints of trade and consisted solely of

12actions taken by the Japanese government.

13There was a second complaint against the Japanese large store law,

14 in which a case was actually prepared to be filed under the General Agreement on

15Trade and Services, but was never filed due to doubts on our part as well USTR's

16about the WTO's ability to manage complex sets of facts, particularly regarding


18And finally, there was a submission of evidence by Kodak of private

19 anticompetitive practices to the JFTC, evidence which was ignored for two years

20until after the case at the WTO had been settled, and I'll talk more about that in a


22Not surprisingly, the dispersal of the case into many different

23components led to disappointing and fragmented results. As everyone knows, in


1December of 1997 the WTO rejected all 21 of USTR's assertions concerning the

2 participation of Japanese government authorities in anticompetitive film industry

3 practices.

4Japan did eventually phase out its large store law, but it is now in

5 the process of replacing that law with local measures similarly designed to

6 constrain large retailers. And the JFTC has issued some warnings to private

7 parties that were engaged in restrictive practices, but took no corrective or

8punitive action and has not investigated evidence of price fixing.

9From Kodak's perspective, this demonstrates the need for a better

10 approach. As I've mentioned, there have been two camps who have drawn lessons

11 from our experience and let me discuss why we think both of them are mistaken.

12First, and this is by far the majority camp, I would say, casual

13observers and trade experts have concluded that the answer to the problem is to

14expand the mandate of the WTO. This in particular has been the conclusion

15drawn by the European Union, which, not coincidentally, participated in the case

16 on the side of the United States.

17We believe that the film market access result showed that the WTO

18 is not competent to review allegations of collusion between foreign governments

19 and private industry, let alone purely private anticompetitive practices. Those

20who have drawn this lesson I think perhaps haven't read what the WTO found in

21the Film case. The WTO panel did not say that there was evidence of private or

22government-to- private collusive behavior and that they simply couldn't reach it.

23 Rather, they said they couldn't see it at all.


1They acknowledged that there was the existence of 30 years, on one

2hand, 30 years of Japanese government industrial policies designed to promote

3Japanese film makers. And they acknowledged on the other side that there was a

4situation in which competitive outcomes in the market showed Kodak could not

5break the barrier of about 9 or 10 percent. They could not find any causal

6 connection between those two things.

7Now, I would suggest to you that if the WTO cannot come to grips

8with the existence of collusion between government and industry in Japan,

9cooperation, industrial policy, and so forth, which is extensively well-documented,

10what is the likelihood that the WTO could any better deal with purely private

11collusive behavior, which is much more complex and much less well documented?

12Even if countries within the WTO could agree on a least common

13 denominator set of problems of anticompetitive practices that block private access

14-- and Eleanor Fox of your Committee has acknowledged that would be extremely

15difficult to do -- even if you could arrive on a set of principles, my guess is it

16would be a least common denominator. And in that case, what value is it if it

17takes us many years to achieve and fails to get at the heart of the problem, which

18 is that the WTO is not, in my view, institutionally capable of dealing with the

19 complex kinds of problems that we face particularly in the Japanese market?

20When you add to the experience in the Film case the institutional

21challenges that we have the WTO, I think it becomes even more obvious that this

22 is not the right solution. The WTO is being asked increasingly to serve as an

23 international court that is a tryer of fact, rather than just an interpreter of WTO


1rules, which is largely what it was set up to be and what it was for many years

2when GATT panels existed from the first creation of the GATT.

3The WTO lacks the professional expertise for this task. It has no

4 full-time judges, no rules of evidence or procedure, very little transparency, no

5 investigatory resources, and no expertise in competition law matters.

6Just as it is inappropriate to try to solve every political problem

7through the United Nations, it is equally inappropriate to try to solve every

8economic problem through the WTO just because it's the only multilateral

9institution we have to deal with trade.

10So if the WTO is not the answer, what is? Many people, including

11Assistant Attorney General Klein, have suggested in arguing against competition

12 policy in the WTO that the answer is positive comity, cooperation with foreign

13antitrust authorities to get at the kinds of problems that were evident in the Kodak

14 case.

15But with regard to positive comity agreements, they are effective

16clearly only if the other party has a viable competition authority that enforces

17laws that are at least similar to U.S. antitrust laws. A couple of weeks ago in

18hearing before the Senate Judiciary Antitrust Subcommittee, FTC Commissioner

19 Bob Pitofsky said: "Even where an antitrust agreement exists, we can never be

20certain the antitrust authority that investigates and prosecutes the case will be

21successful." He added: "Although positive comity may be a valuable tool, it is

22 important to recognize that it is a small piece in the developing mosaic."

23AAG Klein similarly has said that positive comity requires a high


1degree of confidence that the problem conduct will be adequately and promptly

2investigated by home country authorities.

3I would agree with both those standards. I would argue that Japan

4 and particularly the Japan Fair Trade Commission do not come anywhere close to

5 meeting either standard. Cartels such as those uncovered in the Kodak case and as

6 I imagine my colleague from Guardian will talk about in the flat glass industry

7 continue to thrive in Japan.

8The JFTC not only fails to enforce the antimonopoly law against

9 these practices, but in many cases actively encourages collusive behavior on the

10part of industry. Let me give you four examples.

11In the Film case, the JFTC delegated to a trade association of

12photographic retailers called the Zenren the power to devise and enforce a code of

13industry self-regulation. This was called the Retailers Fair Trade Code, in which

14 the Zenren threatened photographic stores that offered discounts or promotions.

15I have and would like to pass around to the members of the

16Committee and for others afterwards, I suppose, a cartoon that until very recently

17appeared every month in the photographic trade industry journal in Japan. It's two

18 figures, and what they're saying is translated below, two people holding up a sign.

19 One figure is holding up a sign that says "Extremely cheap cameras" and the other

20one is holding up a sign that says "Bargain, sale cameras."

21And over the sign that says "Extremely cheap cameras" there is a

22little bubble that says: "It is a violation without a doubt of the Retailers Fair

23Trade Code" -- a code set up with the acquiescence and encouragement of the


1JFTC. Then the other side says: "Well, if you see a camera on sale, it may be a

2violation." And it gives a phone number to call or a fax where you can send the

3 advertisement, and the retailer fair trade organization will crack down on the

4renegade retailer who has dared to offer a discount. This is like providing the

5number for the FBI if there's a blue light special at Kmart.

6Again, I want to emphasize this is behavior not only condoned but

7encouraged by the antitrust enforcement authority in Japan.

8Second example, the manufacturing level. In response to a

9complaint filed by Kodak, late last year the JFTC found that the four major

10 manufacturers of photographic paper in Japan were exchanging highly

11disaggregated, competitively sensitive data relating to their output and sales on

12a monthly basis. This is an obvious form of collusion and a clear violation of U.S.

13antitrust law.

14Yet the JFTC simply asked the firms to stop the practice without

15further inquiring. There was no effort made to inquire as to how this data was

16being used, in particular to determine whether it was being used in a price fixing

17scheme, and there has been no ongoing effort to ensure compliance with the

18JFTC's request.

19Third, the graphic electrodes case, a recent, somewhat famous case

20in which a clear cartel-like behavior was established among U.S., German and

21Japanese firms in the graphic electrodes industry. The Justice Department

22imposed the largest criminal fines in its history against firms in that case. The

23JFTC issued a warning.


1Fourth, look at the statistics. Between 1962 and 1994, the JFTC

2took by its own records a total of 124,045 enforcement actions, of which 683 were

3formal cease and desist orders. That's .5 percent. The rest of them were informal

4requests, administrative guidance, and warnings.

5But even of those actions that were taken, it's fair to ask, were they

6 taken to deal with antimonopoly law enforcement or other types of laws? And in

7fact, again the JFTC's records show that of the cases, and this time taken between

81977 and 1992, only 2.3 percent of all enforcement actions in Japan by JFTC or

9prefectural authorities were taken on the antimonopoly law. All the rest, 98

10percent, were enforcements of the premiums law. The premiums law is not a law

11designed to get at anticompetitive practices. It is a law which emphasizes

12 restrictions on business marketing.

13In other words, 98 percent of antitrust enforcement activity in Japan

14 over that period of time was focused on cracking down on retailers who had the

15temerity to offer discounts.

16Given these four examples, it is simply not realistic to assume that a

17 positive comity agreement with Japan would produce meaningful results. The

18 Department of Justice, as it should, has a bias toward protecting the interest of

19consumers and standing up for free market principles. But in Japan we're dealing

20with an economy that is fundamentally based on subordinating the interest of

21consumers to the interest of manufacturers and in which free market principles as

22we understand them from an antitrust context do not exist and have never existed.

23In this environment, the traditional Justice Department approach of


1relying on positive comity is in our view not likely to be very effective.

2So what's the answer? If not WTO and not positive comity, what

3other options are there? We think that, just as these issues are a mix between

4trade policy and competition law policy, so the solution must be a mix. Various

5 people, including some at these hearings, have suggested an approach to the

6market access problem that would give the U.S. Government the authority to issue

7cease and desist orders against foreign anticompetitive practices that restrict U.S.

8 commerce. In fact, you can argue that that authority exists under current law, but

9it's not being used.

10The proposal that Congressmen Sander Levin and Amo Houghton

11have suggested is to expand the authority of the U.S. Trade Representative under

12 Section 301 of the 1988 Trade Act to take action against the kind of collaboration

13 between foreign governments and private industry which the Film case saw.

14I think what's important in the area that we're talking about is to

15 find some way to inject the interests of the trade agencies into an area in which

16 traditionally they have traditionally not been involved. How do you do that in a

17way that preserves the interests of all concerned, but that also gets at the objective

18 of opening up foreign markets?

19Another example, another proposal that's been suggested, is to have

20 an independent authority like the International Trade Commission make a finding

21that foreign anticompetitive practices exist and are creating a barrier to U.S.

22commerce and have that finding create a presumption of action on the part of one

23of the existing enforcement authorities, either the Justice Department or the FTC,


1with the notion, just as you have in antidumping law, that there's a strong

2 presumption in favor of the initial finding and that that would incent the

3enforcement agencies to use the authority which they already have under existing

4law to take action against these foreign practices.

5We think both these ideas have merit and bear further study and

6 hopefully perhaps the endorsement of this Committee. But it's clear that neither

7 the WTO nor positive comity is going to work.

8I would just conclude by making one other comment. This is not

9related to trade and competition policy, but one other aspect of the Committee's

10work and that is with regard to merger review. We've recently been through some

11of these experiences, as I'm sure other witnesses before you have been, in our case

12particularly regarding a recent acquisition of some medical imaging business from

13 Imation.

14Before we could completed that acquisition we had to research filing

15 requirements and submit pretransaction filings with more than ten different

16 competition authorities, each with different information and timing requirements.

17 Procedural disparity made it necessary for us to stagger the closing of the deal,

18cost us millions of dollars, and delays in the integration of our acquired


20We think the proliferation of preclosing filing requirements is a

21significant barrier to getting business done quickly and efficiently. We urge you

22 to closely consider this problem. One method we know that's been proposed to

23resolve this situation would be the adoption of a filing common filing form for all


1international transactions that meet certain specified size and transaction

2thresholds, and we don't understand why there would be any resistance to that kind

3 of common filing requirement.

4Thank you for the opportunity to be here.

5DR. STERN: Thank you.

6We'll just go right on and hear our next guest. Steve, are you

7prepared to give us your experience at Guardian, I suspect in the Japanese market

8 as well.

9MR. FARRAR: Yes. Thank you very much. My name is Steve

10Farrar. I'm the Director of International Business at Guardian Industries, which,

11since Guardian is not quite the household name that Kodak is, I might explain is a

12manufacturer of flat glass products worldwide, primarily for use in automotive,

13construction, and furniture and related industries.

14We circulated an analytical white paper some weeks ago that

15described in some detail our experiences in the Japanese market. So I will only

16make some summary observations today.

17Before beginning, though, I would like to commend the Advisory

18Committee for its willingness to take on this difficult question of how you handle

19issues that have elements both of trade policy and competition policy. And as

20your hearings have revealed and as we've heard today, foreign anticompetitive

21conduct is a persistent and enormously costly problem for many U.S. companies

22 involved in foreign markets.

23Clearly, those markets are not really open if competition laws are


1inadequate or if the laws themselves are not being adequately enforced. In

2Guardian's view, the United States antitrust enforcement agencies must

3 aggressively investigate and prosecute persistent anticompetitive conduct abroad

4that harms U.S. exporters when foreign antitrust authorities cannot or will not rise

5on the occasion. While legal action is not always required, foreign authorities are

6much more likely to be cooperative if they understand that if they fail to act the

7United States can and will act on its own.

8Now, a few words about our experience in Japan. Despite vigorous

9efforts over more than a decade and despite the existence of bilateral trade

10agreements on flat glass signed in 1992 and 1995, Guardian has not been able to

11achieve meaningful access to the Japanese flat glass market.

12Today, as in 1992, '95, and '97, we account for barely one percent

13of Japan's flat glass market. By contrast, in most other major foreign markets

14without significant entry barriers we typically have a market share in the 10 to 20

15percent range.

16Japan's distribution system is at the heart of the problem. With

17minor exceptions, neither glass distributors nor glass fabricators will handle our

18products in significant volume, even though our products are of the same or higher

19quality as those sold domestically and our initial price quotes are typically 30 to

20 50 percent below domestic prices.

21Japan's three manufacturers of flat glass -- Asahi Glass Company Company,

22, Nippon Sheet Glass and Central Glass Company -- control the domestic

23 distribution system. This oligopoly uses its longstanding market power to block


1new entry and thereby preserve the status quo.

2This situation was described by Committee member Eleanor Fox in

3 her 1997 article entitled "Toward World Antitrust and Market Access." Professor

4Fox suggested that the Japanese flat glass market could provide an example of two

5areas of antitrust that are most relevant to blockage of markets: first, a cartel

6with an accompanying boycott; and second, a vertical agreement or collaboration

7that tends to exclude market actors.

8The conduct identified by Professor Fox in 1997 persists today.

9Japanese manufacturers continue to use similar exclusionary and coercive conduct

10to prevent distributors from making rational economic decisions about the

11 products they purchase. Among the most widespread and pernicious practices are

12the setting of sales quotas, providing disguised after-market sales rebates and

13 misusing equity holdings. Let me comment briefly on each.

14First on sales quotas, salesmen for Japanese manufacturers

15frequently impose unwritten sales quotas. Their customers, the distributors, are

16not free to buy from foreign sources until this arbitrary quota has been filled. The

17distributors who fail to meet their quotas are vulnerable to many forms of

18 retaliation. For example, a maverick distributor could find himself with greatly

19increased costs of doing business because his manufacturer has denied him a

20favorable credit reference at his affiliated keiretsu bank.

21With regard to after-sale rebates, distributors who fill their quotas

22 are still in effect given a form of preferential payment for returned steel racks,

23which are the racks used to ship the glass.


1Regarding equity positions, domestic glass producers are

2 increasingly consolidating their market by taking equity positions in the key

3distributors, particularly the larger, more efficient ones. The predictable and

4intended effect of such vertical integration is to prevent key distributors from

5accepting competitive offers from new entrants.

6The intrusion of the Japanese manufacturers into the inner workings

7of key distributors is so great that they insist on and obtain regular access to the

8financial records of their affiliated distributors. This allows them to keep a

9careful eye on procurement patterns to ensure the distributors are meeting their

10quotas and limiting purchases of non-Japanese flat glass.

11Because of these exclusionary business practices, foreign suppliers

12as a group have failed to gain a meaningful or sustainable foothold in the market.

13Nonaffiliated foreign producers account for only an estimated 5 percent of

14 Japanese consumption, and of that U.S. companies account for barely 2 percent.

15In the wake of recent Congressional hearings and expressions of

16concern from U.S. antitrust authorities, Japanese officials have begun to claim

17that their domestic industry is suddenly competitive. They point to recent price

18competition among domestic and foreign firms and some long overdue downsizing

19of excess capacity. These claims are misleading at best.

20The fact it is that domestic manufacturers continue to engage in a

21sophisticated form of price and nonprice predation to prevent new entrants from

22gaining a foothold in the market. For example, in order to retain market share

23Japanese manufacturers are using their distribution systems as information


1networks to monitor the sales calls and quotes of Guardian and other foreign

2suppliers. Having obtained competitive information about new entrants, the

3Japanese producers then selectively meet or undercut low price quotes in order to

4prevent the distributor from doing business with a new entrant.

5This so-called new competition is simply another way for the

6Japanese manufacturers to use their market power and financial leverage over

7distributors to repel meaningful competition from non-Japanese firms.

8Guardian believes that the best long-term solution to Japanese

9 market foreclosure is for the Japanese antitrust authorities to investigate and

10 prosecute the matter. To date, Japan Fair Trade Commission has been unwilling

11to act forcefully.

12As an interim step, the U.S. Government has tried to find ways to

13encourage Japan to strengthen its compliance with its own antimonopoly laws.

14 Last spring, the Justice Department's Antitrust Division and the Office of the U.S.

15 Trade Representative studied the antitrust compliance plans of the Japanese flat

16glass companies. They did so because it appeared that commitments to end

17anticompetitive practices that were made by senior management in the Japanese

18flat glass companies were not being effectively communicated down to the sales

19people in the same companies.

20As a possible remedy, Justice and USTR put forward a model

21antitrust compliance plan based on U.S. practices. It was disappointing to

22Guardian that Japan flatly refused to even discuss the model plan put forth by the

23 U.S. Government. However, Japan's stonewalling was hardly a surprise. For


1many years Japan has refused to recognize that it has a serious competition

2problem in its flat glass industry and has refused to take meaningful steps to solve

3 it.

4During the 1990s, the U.S. and Japan have negotiated two bilateral

5agreements in an attempt to open the market for competition. Trade agreements

6 are, however, blunt instruments to deal with deeply ingrained cartel business

7practices. And in this case the Japanese government and the Japanese flat glass

8 companies have used the trade agreements as an excuse to avoid dealing with the

9root cause of the market foreclosure.

10Instead, they have taken steps in compliance with the trade

11 agreements that were ineffective or were quickly reversed when the political

12 pressure to comply subsided that. That is Guardian has urged the U.S. antitrust

13agencies and the U.S. Congress to pursue the matter under antitrust laws, either

14ours of theirs.

15As this Committee knows, the U.S. has unilateral authority to act

16when U.S. exporters are harmed by anticompetitive conduct abroad. The Foreign

17 Trade Antitrust Improvements Act is a jurisdictional statute that permits the U.S.

18antitrust agencies to prosecutor foreign anticompetitive conduct in our courts.

19Guardian would like to see that statute strengthened by eliminating

20any possibility that it could be misinterpreted through guidelines or other devices

21that incorporate extrastatutory requirements such as a showing of harm to

22consumers. Legislation to do this is pending in the House of Representatives and

23is likely to be introduced in the Senate in the near future.


1Even more importantly, there is the perplexing question of what can

2be done to bolster the ability of U.S. antitrust authorities and plaintiffs to

3investigate foreign anticompetitive conduct, particularly to discover evidence

4 when it's located abroad. The problem has been talked about for many years, but

5to our knowledge no workable solutions have been proposed. We urge the

6Committee to deal prominently with it in the Committee's final report.

7Since legislation will almost certainly be part of a solution, the

8 Committee may want to consider a Congressional commission. Of course, we

9consider it important that the business community have a role in any new

10 deliberative process to address this problem that may be recommended.

11As the Committee is aware, two weeks ago during the visit of

12Japanese Prime Minister Obuchi the Department of Justice and the Japan Fair

13Trade Commission announced a joint U.S.-Japan antitrust cooperation agreement.

14 This agreement is similar in most respects to the agreement the U.S. already has in

15place with the European Union.

16At a recent hearing convened by the Senate Subcommittee on

17 Antitrust, Competition, and Business Rights, both the chairman and the ranking

18minority member expressed deep skepticism about whether Japan was up to the

19 task of being an equal partner with the U.S. under the antitrust cooperation

20agreement. They cited Japan's refusal to tackle the market access problems in its

21flat glass industry as one of the reasons for their doubts.

22Not surprisingly, Guardian shares these doubts, based on our years

23 of frustration in attempting to convince the Japanese Ministry of International


1Trade and Industry to honor its obligations under trade agreements. Guardian has

2 pledged to work with the U.S. Department to pursue the flat glass issue to a

3conclusion under the new joint commission obligation or, if necessary, through

4unilateral action on the part of the U.S. We believe that the flat glass issue will

5 test whether the Japan Fair Trade Commission is up to the challenge of

6partnership with the U.S. antitrust authorities.

7To conclude, Guardian believes that private anticompetitive

8business practices represent significant barriers to access to foreign markets to

9 U.S. firms. In removing this barriers, it is important for the U.S. to act

10 cooperatively when we can. But when we cannot, it is important to retain the

11necessary unilateral authority to act.

12Up to now, the cooperative approach with Japan has had no

13meaningful effect on a serious market access problem in flat glass. As we go

14 forward, we should be prepared to use all the statutory tools at our disposal, and

15we should consider forging new tools if those at our disposal prove to be

16 inadequate.

17Thank you, Mister and Madam Co-Chairs. I'd be happy to answer


19MR. RILL: Thank you.

20DR. STERN: Thank you very much.

21I'd like to hold the questions until we hear the whole panel. So

22we're now going to turn, I suspect, to Europe. Welcome, if you let me, Mr. Co-

23 Chair, and give me some indulgence to welcome Drew Wechsler again and to


1welcome Ray Calamaro, two very dear friends of mine who, as I think about how

2long I've known them, it's basically through the seventies and eighties I've had the

3privilege of working both with Ray on the Hill and Drew and I have worked

4together, Drew worked with me at the International Trade Commission for many,

5many long years and still collaborating. So it's a real personal, personal pleasure

6to welcome you here.

7We're very happy to have Mr. Stevenson from the United Parcel

8Service, who is going to give us the benefit of UPS's experience in the European

9market. How do you wish to proceed, Mr. Stevenson? Please. Welcome.

10MR. STEVENSON: Thank you. With the Committee's permission,

11I would like to submit a full written statement with attachments on behalf of UPS

12 and I will try to summarize that statement here today.

13On behalf of United Parcel Service, I want to express my

14appreciation for the opportunity to present a statement before this distinguished

15 Advisory Committee.

16As a way of beginning, I would like to give you a very brief

17 summary of my background. My name is Larry Stevenson. I'm the Vice President

18of International Industrial Engineering for United Parcel Service. I'm responsible

19for all industrial engineering activities outside the United States. I report to the

20President of UPS International.

21With me are Ray and Drew, as you've already introduced, and also

22Phil Larson of the same firm as Ray, who is our antitrust counsel.

23This is my -- this year I celebrate my fiftieth birthday and my


1twenty-fifth anniversary with UPS. I began my career as an unloader and then

2advanced to sorter and driver and have worked my way up to my present position

3through the ranks. This is my fourteenth year of working in international

4operations for UPS.

5I have lived twice in Germany, twice in the UK, and once in

6Brussels in that time. Today I travel to operations around the world from our

7world headquarters in Atlanta, visiting our operations and engineers in an effort to

8improve service and reduce costs, using process reengineering, improved operating

9computer systems functionality, and traditional engineering techniques, likes

10 method and measurement improvement, and so forth.

11Since I'm not a lawyer, my area of expertise is how improper

12practices by state-owned or state- sanctioned monopolies affect the day-to-day

13struggle of our people to earn a living and a reasonable profit by providing service

14excellence to our customers.

15As a way of beginning, I would also like to give you some

16 background information on UPS. The matters I would like to discuss with you

17today come within the Committee's agenda item identified as trade and competition

18interface issues. UPS itself in its day-to-day business epitomizes the combination

19of vigorous international trade and dynamic competition.

20Before addressing the subject at hand and knowing that everyone

21here is probably very familiar with UPS and its business and it's been a long day, I

22would like to provide just a few facts about UPS of which you may not be aware.

23UPS is the largest shipping company in the world. It operates in


1more than 200 countries and territories, delivering more than 12 million packages

2 each day. While some people think that international trade means fewer U.S. jobs,

3just the opposite is true for UPS, which creates one new U.S. job for every 70

4international packages that enter or leave the United States. UPS is the third

5largest employer in the U.S.

6Although everyone is familiar with UPS vehicles and delivery

7personnel, it may come as a surprise that UPS is also a high-tech company, an e-

8commerce leader, and a financial services company, as explained in my written


10With 224 jet aircraft, UPS is the tenth largest airline in the United

11States. It's no surprise, therefore, that UPS is virtually synonymous with trade.

12 UPS also means competition because not only do we compete, but our very

13 mission is to help our customers compete, assisting them with just in time

14 inventory control and advanced logistics services.

15The trade and competition issue I would like to discuss today

16involves abuse or improper practices by state-owned or state-sanctioned

17 monopolies. Virtually every government in the world, including our own, grants

18vast powers to certain monopolies. We're all accustomed to monopolies in such

19areas as energy, telecommunications, transport, and postal services.

20A significant problem arises when a monopoly abuses the very

21special power granted to it by its own government. Not only are such abuses

22inconsistent with the public policy reasons for granting the monopoly in the first

23 place, but they can also be significant distortions of competition, as with the


1specific case I would like to discuss with you in a moment.

2Besides being a distortion of competition, monopoly abuse can be a

3very serious trade barrier when it is aimed at or significantly affects a foreign

4competitor. The particular kind of monopoly abuse on which I would like to focus

5this afternoon is improper cross-subsidies or state aids. In particular, I'm

6referring to the subsidies or state aids from state-owned or state-sanctioned

7monopolies to their privatized or deregulated sibling entities or activities.

8In some instances there's no clean line between the monopoly

9activity and the non-monopoly commercial activity. It is in these case where the

10improper cross-subsidy or state aid can be particularly insidious. Although this is

11not the appropriate forum to adjudicate a specific competition or trade matter, I

12would like to discuss one actual example where the abuse is so serious and the

13potential distortion of trade is so significant that it is worthy of this Committee's


15This specific case involves the German postal service. In July of

161994, UPS filed a complaint with the EU's competition authority, DG-IV of the

17European Commission, alleging, among other things, that the German postal

18service inappropriately cross-subsidizes its nonreserved and nonmandatory

19services with funds derived from its highly profitable regulatory monopoly.

20The German post reportedly makes huge profits on its postal

21monopoly since it charges 66 cents for first class mail, twice the cost of the United

22States stamp. In fact, the German post's 66 cents is reportedly the second highest

23rate in the world.


1UPS's complaint against the German post alleges that, because of

2the cross-subsidies that German post nonreserved commercial activities are

3 offered at unjustifiably low prices. This in itself is a distortion of competition and

4a violation of Article 86 of the EC Treaty. In addition, UPS's complaint charges

5that the German post's non-reserved commercial activities benefit from

6inappropriate state aids, a violation of Article 92 of that treaty.

7Because of these subsidies and other improper benefits which the

8German post's non-reserved commercial activities receive, the German post is able

9 to do more than just compete with unjustifiably low prices. It has also gone on a

10 virtual shopping spree, acquiring companies in Europe and in the U.S. which

11expand its strength in the market and its ability to compete unfairly.

12There was a January 10th "Wall Street Journal" article that

13describes the situation graphically and we believe generally accurately. A copy of

14that article is submitted with the full text of my statement.

15UPS filed its complaint in the European Commission nearly five

16years ago and the Commission still has not acted. It is obvious to us at UPS that

17if our complaint had no or even little merit, it would have been dismissed long

18 ago.

19Another point worth mentioning is that UPS's complaint could have

20probably been even stronger if we had access to all the underlying facts.

21Unfortunately, there's a significant lack of accounting transparency in the German

22 post's activities. For that reason, the underlying accounting data are simply not

23available to the UPS in a way that would allow us to document the problem fully


1and clearly.

2I mention that because I know that transparency is a concern to this

3Committee, but also because if we did have the full picture I have no doubt that

4our case as set forth here and to the EU would be even stronger and more


6The stakes here are very significant for UPS. The German post's

7 activities threaten $800 million to $1 billion in UPS service revenues in Germany,

8not to mention our very substantial investment in that country. But UPS's German

9market is also an important part of our European operations, where billions more

10are threatened by the German post's unfair competition.

11This issue is bigger than UPS versus the German post. An

12important principle is at stake here. If unchecked, the German post's actions can

13become a dangerous precedent where state-owned or state- sanctioned monopolies

14are liberalized or deregulated or even if they just have commercial, in other words

15 non-monopoly, operations.

16We find such monopolies in key sectors of virtually every country's

17 economy, including transportation, energy, telecommunications, and of course,

18postal services. Each of these sectors is subject to potential monopoly abuse from

19cross-subsidies or from improper state aids. It is difficult to imagine how such

20 abuse would not be a very significant distortion of competition wherever it might

21 exist.

22The Deutsche Post matter is not only a competition distortion, but

23 also a serious trade issue. On one level, state monopolies raise what are


1essentially domestic questions of economic and competition policy. However,

2 where the kind of monopoly abuse described here is directed against or in a

3significant way adversely affects foreign competitors, there is the potential for a

4very serious international trade barrier, often a kind of domestic protectionism, as

5 in the case of the German post.

6UPS believes it has a strong trade case here and we have taken it up

7with the U.S. Government. However, before resorting to all the trade remedies at

8our disposal, UPS would rather ask the U.S. Government to strongly encourage

9EU authorities to enforce their own competition law. UPS also hopes that our

10government can encourage the German government to take all necessary steps to

11 end the German post's inappropriate cross- subsidies and-or state aids.

12UPS believes that the U.S. and the EU should find that they have a

13great deal in common when it comes to ending monopoly abuse. One reason for

14this is that both the U.S. and the EU are often trying to expand their markets in

15 other countries where they face barriers resulting from the very same kinds of

16monopoly abuse. In short, we want our government to encourage the EU to do the

17right thing because it is in the EU's own interest and even in Germany's interest to

18do so.

19And this leads me to why UPS is so appreciative of this Committee's

20 invitation to tell our story together. Although we believe that our government can

21 encourage the EU to do the right thing, we are realistic and we know that this will

22take a lot of encouraging. Just because it is the right thing to do doesn't mean a

23 government, whether it is the EU, U.S. or any other government, will do it.


1Everywhere in the world, including the U.S., Germany and other

2countries, there are strong parochial interests. To overcome these interests, the

3EU will need strong, high level, and consistent messages from the U.S. on this

4subject. Such messages have already begun to be issued by the U.S. Government

5and we have every hope that they will continue and become even stronger in the

6very near future.

7There is, however, a very special role which this Committee can

8play. That role is based on the June 4, 1998, agreement between the U.S. and the

9EU on positive comity in competition enforcement. I'm sure I don't need to

10explain that agreement to this Committee, but I will say only that we at UPS feel

11this is an ideal case for the U.S. to request positive comity from the EU.

12Specifically, we would believe that it would not only be appropriate but also

13urgently necessary for this Committee to recommend that the Justice Department

14 and the Federal Trade Commission immediately request that DG-IV rule promptly

15and fairly on the complaints against DPAG by UPS and others.

16We urge that such a rule should be based on a full and clear record

17 that indicates all the relevant facts. There is very little doubt that such a request

18would be in furtherance of the law and policy in the U.S. and the EU. My written

19 statement which has been submitted to this Committee contains extensive citations

20and support of the proposition that cross-subsidies by monopolies like those I have

21described today are contrary to law and policy in the U.S. and the European

22 Union.

23UPS has taken a consistent position in opposition to monopoly


1abuse and cross-subsidization right here in the United States, by the United States

2 Postal Service. We have spoken out forcefully against proposals in Congress that

3 would create an insufficient firewall between USPS's reserved monopoly activities

4and its nonreserved or commercial activities. UPS believes that the same rules it

5advocates for Germany or any other country should also apply here in the U.S.

6Although USPS's actions have also created competitive distortions,

7those distortions do not yet have as great a known effect on international trade as

8 those of the German Post.

9In closing, I thank you for your attention today and I look forward

10to answering your question. Thank you.

11DR. STERN: Thank you very much. Very, very clear.

12Is there further presentation? Yes, Drew.

13MR. WECHSLER: I have a short presentation.

14MR. RILL: Excuse me. May I just make a preliminary comment

15 that I've been hesitating to make? I think, as for all panelists, you are well aware,

16 as you indicated, that we're not in a position to adjudicate the facts of any

17particular instance, and so we really -- I mean, if the WTO has very poor fact-

18finding abilities, ours are somewhat less. So we'll certainly take what you say at

19its own face value and have a policy observation perhaps during the question

20 period, but we can't be expected to judge merits of any case.

21MR. STEVENSON: Understood.

22MR. WECHSLER: Thanks for your charming introduction earlier.

23 I hope I live up to it.


1I had the luxury and pleasure of being asked by UPS to look at the

2entry into unregulated markets by state-owned enterprises, or SOE's, and

3regulated monopolies to determine what the competitive effects were, if any, and

4to ascertain whether they constituted a threat to international competition.

5I will summarize my paper which has been submitted. As in

6Mr. Rill's caution, I did not seek to determine the facts of any particular dispute,

7just to determine the trends and the potential problems.

8There is a major worldwide trend now of corporatizing and

9privatizing SOE's. Regulated monopolies and SOE's are entering deregulated

10competitive activities. This raises several major questions. Is cross-subsidization

11a serious problem worthy of attention? Does it have significant international

12 effects? If so, what kinds of actions would be needed to promote welfare and


14Cross-subsidization is not really a very debatable issue any longer.

15 It has long been accepted as a significant issue in the regulation of industries

16based on their returns on costs and investments. Shifting of costs from

17competitive activities to regulated ones results in overconsumption and

18 underpricing of the competitive good, and overpricing and underconsumption of

19the regulated good. Consumers of the regulated good are forced to pay a hidden

20tax to underwrite a subsidy to which neither they nor their government ever

21 agreed.

22The domestic and international impact is to undermine competition

23 on the merits. We must be very careful in a competitive market to understand


1what competition does. The market forces market participants to utilize

2opportunities to respond to incentives. Cross-subsidization creates an opportunity

3 for the market to induce people to engage in bad behavior.

4Unsubsidized rivals become disadvantaged; this is also an equity

5problem. Inefficiency is rewarded, despite the basic premise of privatization often

6being claims of increased efficiency. We can work from a presumption that state-

7owned enterprises are less efficient than those in the private market. Otherwise,

8there would be little incentive to deregulate them in the first place.

9Investments are discouraged, technological change is injured, and

10predatory pricing -- long frowned upon as a concept -- can become a possibility in

11 this kind of framework.

12The problem is both serious and expanding. First, the sectors

13involved are huge -- utilities, energy, transport, communications, postal services.

14Literally millions of jobs and hundreds of billions of dollars in U.S. GDP is found

15 in these sectors.

16The fact that they provide key infrastructure to the entire economy

17 makes them politically sensitive and vulnerable for heavy-handed intervention if

18competition is mishandled. These affected sectors are currently globalizing very

19rapidly, which brings us to the international consequences. It raises the

20possibility of painful transfers among nations, which are never without political

21consequences. It spawns pressure for protection and the picking of home country

22winners in response.

23A company like UPS can fear the initial problem. But it can also


1fear the response to that problem if, for instance, its major domestic rival becomes

2the anointed standard bearer in a response. Such king making diminishes global


4The remedies lie in a proactive stance by the U.S. Government to

5recruit other governments, particularly the EU, to defend growth and equity, to

6expand an awareness of the problems and costs of cross-subsidization (not all that

7different than subsidization itself), and to take action before anticompetitive

8constituencies are created which could sustain the problem long into the future.

9This requires real transparency in accounting, adequate rules and statutes for the

10new era, and effective domestic and international enforcement. All these themes

11and examples are developed in the paper I have submitted.

12DR. STERN: Thank you very much.

13I think that then completes the testimony, which gives us the

14opportunity to ask some questions. Jim, Professor Dunlop?

15MR. RILL: I do have a number of questions.

16DR. STERN: Professor Dunlop, do you have some --

17MR. RILL: But John has been so patient and quiet, and I don't

18want to --

19MR. DUNLOP: Go ahead.

20MR. RILL: No, no. You please go ahead.

21DR. STERN: We've all been aware that we've monopolized things.

22MR. DUNLOP: Am I to come away from your testimony with the

23 notion that all cross- subsidization is inappropriate and anticompetitive, or are


1you going to tell me some kinds of it are competitive. I can say only in passing all

2health care involves an enormous cross-subsidization between people who are well

3and people who are sick. So I'm trying to figure out what your position really is.

4MR. WECHSLER: You have zoomed right in on a central issue

5which cannot be settled in 20 seconds. There is a long history of examining the

6 instances in which cross-subsidization may not be a problem. And the answer

7 changes over time as regulatory economic analysis improves. There are great

8 debates in each affected industry on how to handle fixed cost and how to distribute

9them among regulated and nonregulated entities.

10I have avoided offering any "magic bullet." But what I will say is

11 that in our regulated industries, the likelihood of tremendous problems has been

12reduced over the years by the regulatory process acting over time. At the margin,

13there may be problems one way or the other and they still matter if your firm is on

14 the wrong end of it. But the process has reduced such problems.

15Here, we have been considering a deregulatory trend begun with

16 some amnesia about the fundamentals. We must face the question again and

17 again, "If there is an opportunity and an incentive for bad behavior, are we going

18to get an anticompetitive response?" I'll give one example which goes to your

19question, Professor.

20In telephony there are various cross-subsidies that have been, in

21 effect, forced on local telephone providers in the past to provide universal service.

22The goals were worthy ones. Now, as one introduces competition, the market can

23cut in very complicated ways in two directions.


1A regulated monopolist in local service may have been forced to

2engage in this cross-subsidization, while the new competitor may not have been

3 saddle with this cost. One then gets a debate over whether to charge the new

4competitors a fee to balance out the market? Or instead, do we free the regulated

5monopolist from a burden originally imposed for social reasons?

6I think economic theory supports a general tax as more efficient

7than forced cross-subsidization to accomplish goals like universal service.

8MR. RILL: I think if we're going to get into the telecom issue it's

9going to take a lot more than 20 minutes.

10MR. DUNLOP: Well, you're not trying to sell me on the

11 proposition that any cross- subsidization is inherently either uneconomic or anti-

12public policy or something, because the case you cite, I'm perfectly prepared to

13 look at. At times it seems to me this was a universal principle and I do have

14trouble with that.

15MR. RILL: I agree with you.

16DR. STERN: Further questions? Jim?

17MR. RILL: I have a number of questions, and cut me off when I'm

18 going too long. First of all, let me congratulate the panelists for coming here and

19giving us their experiences. I think those are very enlightening experiences and

20I'm familiar with some of them at a variety of levels. But I think it is good and

21 very forthcoming of you to present your views.

22Chris, let me ask you, did Kodak apply to the Department of Justice

23 for the exercise of positive comity?



2MR. RILL: It did?

3MR. PADILLA: In the case that I referred to, in which the JFTC

4found the sharing of disaggregated data among photographic paper manufacturers,

5we did apply to the Department of Justice for referral and they declined to give us

6 one.

7Basically, the reason that was given was that they could find no

8 harm to Kodak from this scheme. Our argument that the scheme itself with the

9sharing of the data was perhaps of concern to Japanese consumers, perhaps ought

10to be of concern to the JFTC, but they could not find a harm to Kodak that would

11justify in their minds a referral.

12And that is why in my view, while I certainly wish Guardian the

13best of luck, and if they succeed, believe me, we'll be right in there behind

14them --

15MR. RILL: I don't know whether they enjoyed that comment.

16MR. PADILLA: The question, though, really revolves around what

17incentives are there to, in a sense, require the Justice Department and/or the FTC

18 to take action which they have authority to take. And in our case, despite our

19request, they refused to make a referral.

20MR. RILL: The request for positive comity was limited to the

21sharing of disaggregated data --


23MR. RILL: -- and not the other courses of conduct of which you



2MR. PADILLA: No, in fact we submitted the entire body of

3evidence to them. We focused on the disaggregated data first because we thought

4 it was the best, it offered the best hope, given that it's -- and I'm not an antitrust

5 attorney -- a pretty clear violation of what would be U.S. antitrust laws if we were

6to share disaggregated data in a trade association.

7And that was the case that we had filed with the JFTC under article

845. So we thought this was clearly the best place to start, and it was a case that

9we had filed in 1996, I believe, and we hadn't gotten any action, which is why we

10thought a referral would help.

11We didn't get one. As it turns out, the JFTC acted on its own. It

12acted last fall, shortly after the U.S. Trade Representative issued a report

13 following up on the film market access issue, this monitoring report that USTR

14promised they would do. And we think that the scrutiny of that may have incented

15 the JFTC to make public its findings.

16MR. RILL: Which leads me to the next question. Talking about the

17 Trade Representative, you suggested at least one of the possibly meritorious

18 proposals was to have findings made by the ITC, which would then become factual

19findings, which would then become binding, I suspect, on the antitrust agencies or


21MR. PADILLA: Or compelling, at least.

22MR. RILL: Yes, excuse me. You said presumptive.

23MR. PADILLA: Right.


1MR. RILL: Could you tell us how those findings by the ITC, these

2 threshold findings, would be superior to the threshold findings of the FTC or the

3 Department of Justice, and why the ITC is a better organ for making those

4findings than the Department of Justice or the FTC?

5MR. PADILLA: Because they have a trade orientation and an

6 understanding of how foreign anticompetitive practices can be used explicitly as a

7trade barrier. In our discussions with the Justice Department -- and through no

8fault of the Justice Department, let me add. They come at this from a perspective

9of the protection of interests of consumers primarily, and are not coming at this

10with a historical perspective that maybe USTR or the ITC may come at it, which

11is a perception of how individual barriers like disaggregated data, when added to

12other things, add up to a scheme that essentially conspires to keep foreign

13companies out of the market.

14It's making that jump to see the bigger picture where we, at least,

15 have felt that the Justice Department and the FTC have, perhaps because of the

16 orientation from which they come, are not as willing to go. And we think that

17perhaps the trade agencies may be more willing to do that and it would inject the

18 trade perspective into this issue, but also keep the enforcement where it belongs,

19which is with the antitrust authorities.

20MR. RILL: What I'm hearing you say, then, it's the policy litmus

21through which basic facts are passed rather than the ability to find basic facts,

22that makes you think that ITC may be a preferable organ for fact finding.

23MR. PADILLA: For fact finding of this type, yes, I think so. We


1had a tremendous amount of difficulty in outlining the overall nature of the

2scheme in the film case when we met with the Justice Department. We got

3questions back that suggested that the attorneys there were taking a look at this in

4individual pieces, in a smokestack slice of each piece, which again that's not to

5fault them. That's the way they come at these things and that's the historical way

6in which antitrust law is practiced.

7When you get into an area like Japan, though, we have found that

8that may not be fully descriptive of what's going on in the market.

9MR. RILL: Okay. I gather what you're saying is that it's not the

10 ability to find facts A through Z, it's the way that facts are looked at --

11MR. PADILLA: Are interpreted, yes.

12MR. RILL: -- that makes you think that ITC is a preferable

13agency. Well, you're certainly clear about it.

14Steve, thanks for your testimony. I think everyone would agree, I

15 think in fact the Japanese government representatives in conversation with me

16have agreed, that one of the real problems of exercising positive comity is that

17there's simply historically a different threshold, not merely to find a violation, but

18 a different threshold, a much higher threshold, for the JFTC to even initiate a

19 serious investigation, which creates a real dilemma.

20We've heard "bring us the facts and we'll start an investigation," but

21the level of facts that are required to start an investigation are the sort of facts

22that in the United States would probably start a consent negotiation. And I think

23that's conceded.


1Now, as you pointed out, there is an agreement that's been

2announced and soon to be executed. Is it possible that through the exercise of

3 positive comity under that agreement with some level of transparency that perhaps

4the Department of Justice can bring that threshold down and induce the JFTC to

5be more aggressive in conducting investigations? And isn't that agreement

6something that can be used as a tool in addition to, as I understand, your view of

7 enforcement?

8MR. FARRAR: We're very hopeful that the agreement will bring

9the threshold down. For at least two years now the Japanese government has been

10saying that to us: Bring us the facts and we'll investigate them. The catch is that

11we're not in any position to discover the facts. And it's going to take a discovery

12process that, if it doesn't equal the Antitrust Division's normal standards, at least

13 approaching them, I think, to uncover the facts in Japan.

14I'm confident that they're there, but it's not in our power to discover

15them. But I'm very hopeful that the joint agreement will produce that.

16MR. RILL: I think that both the government of the Japan and the

17government of United States have a good bit at stake in this agreement, and that

18 more transparency could be evoked under the agreement and a greater sense of

19 ability, willingness on the part of the JFTC to use what investigatory powers it

20 has.

21I certainly can't disagree with you, by the way, that footnote 159

22should have been erased. And the enforcement, the maintenance of that unilateral

23enforcement tool is quite important in the final analysis.


1Mr. Stevenson, what is the exact status of the DG-IV? Two

2questions: What is the exact status, if can tell me, of your DG-IV complaint?

3And have you asked DOJ or FTC for positive comity in support of your

4 complaint?

5MR. CALAMARO: The status, Mr. Chairman, in DG-IV is that the

6complaint was filed in July of '94, and the Commission has not yet initiated

7 an investigation, but it hasn't terminated it. It hasn't responded to the petition.

8MR. RILL: But there's no statement of objections, if you can tell

9 me?

10MR. CALAMARO: There have been -- there have actually been a

11 rather confusing number of letters from the Commission.

12MR. RILL: But no formal statement of objections at this point?

13MR. CALAMARO: Not that I'm aware of, no. But the Commission

14 has actually notified UPS several times of the grounds on which it prefers to

15proceed, and that's changed a couple of times, whether it's on articles 85 and '6, or

16articles 92 and '3.

17UPS then brought an action under the Commission's rules to compel

18the Commission to act under 175, of the EC Treaty, and that's actually pending

19 now.

20MR. RILL: I see. My second question, have you asked the

21 Department of Justice or the FTC to invoke positive comity under the 1991


23MR. CALAMARO: We'll do that tomorrow. I thought we'd come


1here first and tell you about it.

2MR. RILL: Pardon me?

3MR. CALAMARO: We'll do that tomorrow. We thought we'd come

4 here first today.

5MR. RILL: I'm not advocating it. I have some interest.

6MR. CALAMARO: That was our plan.

7MR. RILL: But the agreement's been in place since '91 and was

8updated last year, and apparently has been invoked with some lack of success by

9Kodak. But on the other hand, if you looked at the testimony before Senator

10DeWine, there have been some examples of some modest progression in that area.

11If you're asking for action, why, you might want to take a look at that. And that's

12not a recommendation. That's simply a question.

13MR. CALAMARO: Mr. Chairman, that's actually what UPS is

14considering very seriously doing. But fact is that until recently it wasn't so clear

15that the Commission wasn't going to proceed on this. They could have dismissed

16it a along time ago. They could have rejected it, but they didn't.

17We think they want to do the right thing and they will do the right

18thing. So I think that, to summarize a long story, UPS has been reluctant to try to

19 bring other remedies. But I think we're going to help the Commission by asking

20 our government to agree to invoke positive comity.

21MR. RILL: That's all I have.

22DR. STERN: Merit.

23MS. JANOW: Well, I too would like to indicate my appreciation to


1those speaking on this panel. As Committee members have reiterated, we have

2 wanted very, very much to be hearing not only from business associations but

3individual businesses that are experiencing difficulty. So I really do appreciate

4 your written and nuanced statements.

5Please take a minute to speak further on the WTO issue because

6that's a very live one also. In particular, it seems that much of the debate, at least

7between the United States and the EU, who have formally officials debate the role

8of the WTO, turn on what role for dispute settlement. And you've indicated your

9 low expectations not only coming out of WTO, that has no positions on

10competition policy, but a generalized statement about WTO's fact-finding, et

11 cetera, capabilities.

12I think, Steve, you weren't speaking so much to that issue of the

13WTO. But I wanted to at least ask you -- and I think maybe this is more directed

14at Chris. You suggested one shouldn't look to the WTO because it's there, but one

15often hears that it is the only inclusive body of the countries that have experience

16and don't have experience.

17So my question to you is would you feel differently about a

18continuation of a work program or deliberations on the role of competition policy

19 in trade, that kind of ongoing work program within the WTO, as an educative

20function separated from dispute settlement and somehow useful to development of

21a competition culture? Or do you think unilateral measures, enhanced, are going

22 to get us there?

23MR. PADILLA: Well, I think certainly we're not opposed to


1educating developing countries about competition policy. And in fact, a number

2of the academic writers on this point have said that one of the valuable points,

3 even if we get a least common denominator kind of agreement, is to bring many of

4 the developing countries up to at least a bare minimum standard with regard

5perhaps to cartel- like behavior. And certainly that's a laudable goal.

6But I have to say when we look at the issue of trade and competition

7 policy from the point of view of the economic interests of American companies,

8 we're talking principally about Europe and Japan. I don't see that it would help

9many of us very much to spend the next five to ten years in a WTO round

10 advocating a competition law for Bolivia while nothing is done about Japan.

11The problem is, in our view, Japan. We've got a positive comity

12agreement with Europe. It's had some success. You've got a DG-IV and a DOJ

13that come at this from roughly similar perspectives. In Japan you've got an

14economy that is grounded on a fundamental fear of competition. And I would

15 refer you to Michael Porter's article in the current edition of Foreign Affairs,

16which I thought was very well done.

17Competition in Japan is viewed as something to be managed and

18 constrained because it's harmful, it creates disorder. So the question is would a

19WTO negotiation do much to improve the situation of market access in Japan, and

20I think the answer is no, because we wouldn't get the high standards necessary to

21get at the very complex kind of barriers that Steve mentioned, and even if we got

22them, as we talked about the dispute settlement, how do you enforce it?

23So my view is we've got a clear problem here and the best answer is


1until something else comes along a unilateral approach that involves using existing

2 authorities under existing law, with some tinkering to compel the use of that

3 authority a little more vigorously than it's been used in the past.

4DR. STERN: Further?

5MS. JANOW: No, I just wanted to invite anyone else to speak on

6 that.

7DR. STERN: Let me follow up on the line of questioning that Jim

8was pursuing with you, Chris, about the fact finding capacity somewhere. You

9suggested the International Trade Commission and Jim was asking you about the

10Justice Department, and he was asking you what it was in terms of the capacity to

11analyze this information, was the capacity there? Yes, the capacity is there, but

12 the analytic mind set was different.

13I would suggest that there may be other reasons why maybe

14subconsciously or subliminally you might be suggesting the ITC.


16DR. STERN: Or USTR. Well, let me focus on the ITC, but then

17you can tell me how the USTR may be --

18MR. PADILLA: I put ITC first in deference to you.

19DR. STERN: Oh, I see. So, that was the reason. So that was the

20subliminal. Well, thank you. I'm flattered.

21But the ITC is nonpartisan.

22MR. PADILLA: Yes, indeed.

23DR. STERN: It is made of up of appointees who can't be removed


1from office if somebody doesn't like the decision.

2MR. PADILLA: Right.

3DR. STERN: They may get shot in the back later, but that's

4something else. And they do have a staff of approximately 450 who do analyze

5industries from a variety of perspectives. They do have hearings.

6MR. PADILLA: Indeed.

7DR. STERN: And they have hearings which are transparent, they

8have records, and they make decisions which are published and are available so

9that one knows, and they have deadlines. Those may be other factors which are

10 procedural, which might be useful cues for how the Justice Department in

11exercising its positive comity might give greater confidence to individual

12 businesses such as yours.

13MR. PADILLA: Yes. I think you've hit it right on the head. And

14many businesses have experience in dealing with the ITC from a dumping point of

15view, of course, and all of those procedures are well understood, well documented.

16 You make your case, you win, you lose, it's fairly clear. The standards are fairly


18There also is in that agency, as well of course in USTR, an

19 understanding of the historical nature of some of these things. When we go to the

20 ITC or the trade representative and we talk about exclusive distributor agreements

21 in Japan or pressure on retailers not to carry foreign products and not to discount

22 them, we get nods of understanding because not only do they understand it, they've

23 heard it, not only from the film people but from the glass people, the


1semiconductor people, the auto people, or any one of a number of industries.

2Our experience, at least, and maybe we were just the victim of bad

3 timing when we went to the Justice Department, was that we got: Okay, well, let's

4 forget about all this other stuff. Let's break it into this one piece. Show me the

5specific harm to Kodak from sharing of disaggregated data among four other


7Well, then you get into a highly legalistic question and you lose the

8overall picture, which is you've got four major Japanese companies sharing

9production data and also happening to control 90 percent of the market. So that's

10why we have suggested and others on the Hill have suggested that maybe we need

11to inject another view, not to take away the authority of the agencies to enforce

12competition laws, but to inject another view, and I think that's why we've

13 suggested that.

14DR. STERN: What I was suggesting -- and we can have this

15 discussion later; this is not a question -- was that there may be procedures that

16might be attached to existing authorities. In other words, so --

17MR. PADILLA: You may not need to do that.

18MR. RILL: I think this is one to discuss later, but the question is

19 whether an investigatory proceeding or an adjudicatory proceeding should be held

20in public, and that creates a lot of controversy. I don't think many companies

21would want have a public investigatory proceeding, domestically or foreign.

22DR. STERN: But they might want more transparency in the

23 outcome.


1MR. RILL: In the outcome, absolutely.

2DR. STERN: Right.

3MR. RILL: Absolutely. Let me suggest that -- I'm not here to

4 wear my old school hat, because I didn't wear it all that long, but if Justice was

5 asking for the effect on Kodak, it may be because of the limitations of the Foreign

6Trade Antitrust Improvement Act, which requires a showing of direct, substantial

7 and foreseeable effect on the foreign commerce of the United States.

8So they may have been bound by their statute, and I don't hear you

9saying you want to change the statute.

10MR. PADILLA: No, because I think one could look at that statute

11and interpret that a disaggregated price fixing scheme that we believe had the

12effect not only of fixing prices but of excluding price competition from Kodak, did

13impede on the foreign commerce of the United States. So I guess the question is

14 who makes that interpretation?

15We certainly felt and certainly there was a Section 301 finding in

16which the Justice Department concurred, I might add, that there was an

17 unreasonable burden on U.S. commerce. Yet when we got down to the specifics

18and it came down to an interpretation of did this disaggregated data scheme

19 impinge on the foreign commerce, they came to a determination that they couldn't

20find it or they couldn't find enough to make a referral. And that's where we

21 disagree.

22MR. RILL: Our executive director reminds me quite correctly that,

23on top of that, positive comity doesn't require each and every element of the


1Foreign Trade Antitrust Improvement Act to be in place before we, our

2government, makes a suggestion for enforcement by another government. So I will

3retreat a little bit from my point.

4MR. PADILLA: And I should say, we went to the Justice

5 Department after the WTO case had been decided, and I should think that that may

6 have had an impact as well on their willingness to throw themselves into the fire

7on this one, and perhaps that's the accident of timing. We had terrible timing

8 throughout this case --

9MR. RILL: Well, we can't address that.

10MR. PADILLA: -- from the first day it was filed. But perhaps,

11 then, our colleagues at Guardian will have better success, and I honestly hope they

12do, because their circumstances are very similar to ours, and perhaps the recent

13agreement and the profile that the Congress has put on this will wind up with a

14better result. I hope so.

15MR. RILL: And I think the agreement may be a timing issue that,

16 not specifically referring to the Guardian case, but to situations of that sort, that

17could make use of positive comity very propitiously with Japan. That's a personal

18 view, not a Committee view.

19DR. STERN: Okay. Why don't we take a break and resume at

204:00. We're running late now. Five 'til 4:00. Five 'til 4:00.


22DR. STERN: Now, shall we begin. This is the last session of the

23day, and we are honored to have representatives talking on institution building and


1competition law advocacy. We have professors -- no, I'm sorry. It has been a

2long day. We have no more professors. Yes, we have no professors. I suspect

3they come in and out. Ex-professors. Yes, right, revolving door. How could I

4tell? Excuse me.


6We shall hear from Richard Gordon and Mr. Khemani and Ms.

7Simmons, in that order. Would you wish to begin, Mr. Gordon?

8MR. GORDON: Sure. I'll probably be fairly brief.

9DR. STERN: Representing the International Monetary Fund.

10MR. GORDON: And particularly with respect to saying

11 representing the International Monetary Fund, I represent, I suppose, only myself

12here. We have quite a thing at the Fund where you have the Fund itself, and only

13the Executive Board -- through decisions -- can speak for the Fund, and then you

14have staff opinion and that opinion has to be cleared by very many different

15departments etcetera. And then you have an individual staff member like myself

16who's giving his views.

17I'm from the legal department of the Fund, which is quite small. We

18have I think probably 26 lawyers right now. Before I get into talking about the

19 specifics of the Fund's role in competition law, I might just say that over even the

20 past four years, which is as long as I have been at the Fund, the requests to the

21Fund to assist, shall we say, in legal development in various countries of the world

22 has grown more than exponentially.

23I think, something that can be seen most recently with the Asian


1financial crisis, that there has been a correct perception that one of the big

2 difficulties in that particular crisis was not just typical macroeconomic errors, put

3 it that way -- deficit spending, for example -- and that there have been some very

4serious fundamental problems or structural problems in laws and in legal

5 institutions that carry out laws. And as that, as I say, correct perception has

6developed and really been shown to be the case in Korea and Indonesia and in

7Thailand, etcetera, and I guess in Brazil as well, and certainly in Russia, the Fund

8has been called upon to play a greater role in these areas.

9The Fund has been traditionally involved in macroeconomic policy.

10As I was just saying to Professor Dunlop, the Fund is a very large collection

11primarily of macroeconomists, whose training involves macroeconomic policy and

12spreadsheets. Turning to the development of laws or the review of,

13recommendations of and development of laws and institutions to implement those

14laws, is a fairly new thing and very difficult for macroeconomists.

15If I can go back to my first statement, I think we have 25 or 26

16lawyers in our department, although we do have consultants who come in. That is

17a long way of saying that much of the specifics we do we turn over to the World

18Bank, where there are considerably more staff of a great variety of expertises and

19a very large legal department that is more used to doing this kind of more specific

20detailed work on laws and legal development and institutional development.

21That being said, let me just give a quick overview of what the Fund

22does with respect to, say, policy advice. One is that every member of the Fund -- I

23think it's now 183 or 184 countries -- goes every year, pretty much, through


1something called the Article IV consultation. An Article IV consultation is where

2 a team of economists go off to the country and they review the books, basically.

3They look at what's going on at the central bank, what's going on with respect to

4the central budgetary policy, and they come up with a report. It's the Article IV

5consultation report.

6Going back to the few number of staff, the large number of

7countries doing this every year, what can be examined in this annual review

8 process for every country is pretty limited. And since they're all

9macroeconomists, pretty much who do this work, review of legal issues is

10 necessarily somewhat -- I don't want to say superficial, but it is limited because of

11 resources.

12The second thing that the Fund does, which is much more popular --

13 in the popular imagination, is to lend money to countries, which it does under the

14rubric of conditionality. The Fund creates conditions which the country must

15fulfill before they can get their loan, in essence. Of course, the system at the

16Bank is similar, but I'll leave my colleague to describe that.

17In the area of Fund conditionality, I think that this is probably what

18most people here would be primarily concerned about. At least that has been my

19experience in speaking with people in the past on not just competition law, but in

20other areas of the law, e.g. bankruptcy law, as I was discussing earlier, where it

21seems that the Fund has some sort of cudgel that it can beat members over the

22head with and say: Only if you adopt these appropriate policies will you get

23money. And whereas certain countries can jawbone with other countries about


1adopting appropriate policies -- the Fund can as well during this Article IV

2consultation procedure -- it is only through conditionality that there is really a

3 lever, a way of influencing countries quite directly to adopt particular policies,

4 including competition policies, for example.

5However, again given the limited staff and the general nature of the

6training of staff, which is macroeconomists, even in the area of Fund

7conditionality, there is a limited amount that the Fund can do with respect to

8 something as complex as competition law.

9Now, if you look at competition policy broadly defined, which

10 would be looking at sort of broad-based macroeconomic structural changes such

11as free trade, privatization, to a certain extent foreign direct investment --

12although the Fund's Articles limit its conditionality with respect to foreign direct

13investment, in that freedom to impose capital controls is a right guaranteed by the

14Fund's Articles - - the Fund has traditionally played quite a role.

15But in recent times where aspects such as the enactment of a

16appropriate antitrust or competition law become more and more important, it

17would be very difficult for the Fund to design with any kind of great detail

18policies with respect to something like competition law. It is really not something

19that the Fund has had a tremendous amount of experience with, although it is one

20of many things that countries are interested in, that the Fund's shareholders are

21interested in, of which the U.S. is the largest and most influential.

22The U.S. has recently, in the latest amendments to the Bretton

23Woods Act, that provides for the most recent increase in the U.S. quota to the


1Fund, listed a number of areas that the U.S. Congress was interested in the Fund

2 becoming increasingly involved in with respect to conditionality. Again,

3bankruptcy I think was the most prominent. But it's very difficult for the Fund to

4be involved in any great detail.

5Now, I would step back, and I'll speak for only two more minutes.

6 Prior to coming to the Fund, I was at Harvard Law School and I had worked with

7 the Harvard Institute for International Development in working on a competition

8law for a particular country whose name I will not mention, with a broad group of

9 consultants. Over the years we had, I think, perhaps 11 or 12 people working on


11I spent the better part of four summers and some other times in

12Jakarta, getting to know the language, the laws, pretty much everything, and to

13draft a competition law for a large country that had a complex, shall we say, legal

14and social environment was extremely difficult.

15In fact, one of the things we were most concerned about was that we

16 would create a law that would be actually be used to suppress competition or

17 against a particular dominant cultural or religious minority, and that became a

18 very difficult thing. But we had lots of staff, lots of time, lots of expertise.

19Later on there was a condition, I think probably appropriate, in the

20Fund-supported program for this country that involved the adoption of an

21appropriate competition law. I think that was relying on the general view that a

22competition law was needed.

23Frankly, I think that there was some word from some of the


1shareholders at the Fund that there were political constituencies that were very

2 interested in a competition law. And finally, our colleagues at the World Bank,

3 who had greater specific expertise in this area, wanted to play a role with the Fund

4in designing the conditions. And eventually a competition law was adopted, and I

5hope it was an appropriate one.

6But that's just a brief overview. I hope I haven't said so much that I

7will get in trouble with my management. Let me turn it over to my colleague from

8 the Bank.

9MR. KHEMANI: Thank you.

10Like my colleague, I speak in my personal capacity. However, my

11lead responsibility in the World Bank is related to private sector development and

12 of that competition law policy and competitiveness policies is one of the

13cornerstones. So while I'm speaking in my personal capacity, with all modesty I

14 can say that the approach that I'm going to describe is basically the approach that

15the World Bank Group has taken into account as part of its policies.

16Let me just backstep a bit and remind people that the objective or

17the primary goals of the World Bank are poverty reduction and sustainable

18economic development. What our experience over the last few decades has shown

19 is that private sector-led economic growth is much more sustainable, much more

20rapid, than when you have the public sector playing the lead role in an economy.

21And indeed the events of the 1990's has proven that to be the case even more so.

22The Bank likes to identify sets of policies as first and second

23 generation. The first generation policies relate to macroeconomic policies, fiscal


1and monetary along with the IMF, but also trade and investment liberalization.

2But the second generation of policies now relate to the way more

3 markets work, and competition and regulatory policies in particular. Now, in the

4Bank/Fund division of labor, the Bank does take lead responsibility in the area of

5competition law-policy, but also in a number of other related areas, including

6 bankruptcy and corporate governance as well, though the Fund has recently done

7some very commendable work in that area in the context of fostering economic

8restructuring in economies that are financially dispaired.

9The Bank is a bank. Many times people tend to forget that the Bank

10 is a bank. They think that it's a foundation, a university, a grant-giving authority.

11 But actually the Bank is a bank and it makes loans. Indeed, most of our income

12and our sustenance as an institution come from the interest income that we earn

13from our loans.

14However, we attach conditionalities to those loans and sometimes

15 the conditionalities relate to the provision of structural assistance. So like any

16other good banker, if you're making a loan to a corporation you might want to

17 have either a seat on the board of that corporation or you may want to have an

18oversight committee to see that that corporation is using the funds appropriately.

19That's our analogy or parallel with respect to the conditionalities that are put in.

20We do not have an Article IV country-by-country review like the

21IMF, but we are now are embarking upon what is called a Comprehensive

22Development Framework, where we will be systematically assessing the market,

23 but also other elements of the development framework that an economy has, and


1help those countries to try to formulate a strategy. And of those, the area of

2 market support institutions and competition law-policy are very critical elements.

3Well, our approach to competition law-policy. Well, firstly we

4 view that as a framework policy. Increasingly we are arguing that it should be

5viewed as the fourth cornerstone of government framework policies, the other

6three cornerstones being monetary, fiscal, and trade, and so competition should be

7viewed as the fourth cornerstone.

8We think that a competition law-policy should be one where it's a

9general law or general policy of general application which applies to state

10 enterprises as well as to the private sector. Hence, the submission that UPS made

11 earlier regarding to, albeit in Germany rather than in a developing country, about

12state enterprises using their position to undermine competition is very relevant to

13the work that we do in developing countries in the context of competition law-


15The objective there is, of course, to foster mobility of resources.

16 We believe that competition would lead to more flexible, adaptable dynamic

17markets. I think the proof of the pudding is somewhat evident from the East Asian

18crisis. Economies which have had more flexible and open markets have tended to

19 fare much better in their recent economic crises than those that have had fairly

20closed or restrictive types of business arrangements.

21Hong Kong, Singapore, Taiwan, for example -- being flexible, open

22economies where they foster a lot of competition in their domestic markets -- have

23 fared much better than Thailand, Indonesia, or Korea and, indeed, Japan, though


1that's not one of our crisis countries, as such.

2However, I want to point out that one can have competition and

3competitive markets without having a competition law. Passing a competition law

4does not necessarily guarantee competition. However, what we do find is that

5those economies that are evolving and fostering more competitive markets, we try

6to remind them that having a competition law safeguards the competitive process.

7And of the flexible economies that I just mentioned, Hong Kong and

8Singapore, for example, do not have any competition laws. Of course in the

9English common law tradition, they do have various clauses that can get at

10competition problems. Taiwan has an effective and very vigorously applied

11competition law. What is interesting is that, oh, about six or eight weeks ago the

12Herald Tribune carried an article about the financial-industrial complexes that are

13 emerging in Hong Kong and are engaging in various kinds of restrictive practices,

14particularly in the areas of non-tradables. So when you're in industrial

15 development and you don't have access to capital but are competing with an

16integrated financial industrial company, you find that you're at a disadvantage.

17 So, hence, the Hong Kong Consumer Council has been advocating a competition

18law for that jurisdiction.

19Again, to prove the point that by having a competition law does not

20necessarily guarantee competition, one has only to look at Latin America. Indeed,

21 many of the Latin American countries have an à la Sherman Act type provision

22embodied in their national constitutions and have had so since the turn of the

23century. But only recently have they started embracing competition policy in a


1more serious way.

2Well, the objectives of the competition law policy that we try to

3 foster is that it should be an efficiency, consumer welfare oriented law, mainly on

4the argument that, even though many developing economies have to balance a wide

5 range of socio-economic-political issues, we feel that it's not that those socio-

6political issues are not important, but that it's better to have those issues

7addressed by separate instruments and to have competition law address, primarily,

8 issues of market efficiency and consumer welfare.

9So if one is interested in regional development or maintaining

10 employment, enact separate policies, have separate instruments, rather than have a

11competition agency pursue -- like many industrial jurisdictions -- the UK, the

12 European Union in particular -- which pursue a public benefit or public interest

13 approach. And that often requires a balancing of various objectives which often

14lead to inconsistencies in policy application or lead to other types of conflicts.

15Most of the laws that we have actually worked on are sort of

16 mainstream laws which have provisions dealing with structure, namely those of

17 abuse of dominant market position, monopolization or monopoly, as well as

18 mergers and acquisitions. And then of course they have conduct-oriented

19 provisions dealing with price fixing, various kinds of anticompetitive practices

20that emanate, like exclusive dealing, et cetera.

21We recognize that the institutional capacity, in terms of the way the

22institutions are structured but also the way they're staffed, is a major challenge

23 for many developing countries. And it's going to take them quite a while before


1they can achieve the level of competence and sophistication that effective

2implementation of competition law requires.

3We're also dealing with economies where competition is not

4necessarily widely understood or there's no popular support for competition. So

5we generally try to suggest that the new agencies or government ministries or

6parliamentarians who are trying to push forward this type of agenda engage a lot

7 on what we call competition advocacy. Particularly in educating the general

8population about the merits of competition, the fact that competition is not

9something that is culturally alien.

10Indeed, many times in many economies we hear the argument, well,

11this is an à la western industrial developed country approach. It is culturally alien

12 to us. For example, in Indonesia some of the senior ministers that I met would

13say, "We are not a litigious society; we are a consensus-oriented society, a

14 cooperative society."

15Well, since I'm speaking in my personal capacity I can just say that

16most of this is really excuses for corruption and bribery and hiding or maintaining

17their rents. I do not know of any cultures, and having grown up in five continents

18and then traveled in I don't know how many countries throughout my life before

19even joining the World Bank, I don't know of any culture which says that engaging

20in price fixing, monopolization, et cetera, is to be looked upon favorably.

21 Whether it is Judaism or Christianity or Buddhism or any kind of religious

22following, I do not know of anybody saying monopolistic exploitation is good.

23So that gets me to: How do we then try to foster this kind of


1understanding? Well, one of the arguments that I've increasingly been adopting is:

2 Why not just have competition in your domestic market to start off with? When

3one looks at the evolution of U.S. or Canadian or most industrial country

4competition laws, this was in an era before international trade was really taking

5 place extensively. It was the fostering, maintenance and encouragement of

6 competition in the domestic market which was the focal point of most antitrust


8So the argument that I advance is: Just foster competition in your

9 own market. Give your own young people -- the young Indonesians, the young

10Thais -- an ability to participate in the market, to be able to benefit from their own

11 entrepreneurship and risk-taking. Why would you want to erect various kinds of

12 barriers on the argument this is a western industrial development country ideology

13and we don't need to apply it over here, or that we are such a cooperative society,

14don't worry, big brother will look after you, which doesn't happen to be the case.

15The critical area of the interface between competition law policy

16and other government policies certainly lies in the area of trade and investment

17policy. For example in Korea. Notwithstanding the fact that Korea did have prior

18 to the crisis low tariff rates and allegedly open policies of various kinds, when one

19did a detailed analysis one found that there were various non-tariff barriers to

20trade. But in addition to that, there were various investment restrictions. So it

21 made barriers to entry very high for new investors to come in.

22During the crisis, of course, there was a change of regime and Kim

23 Dae Jung understood and appreciated the merits of fostering a more open and truly


1effective competitive market environment, and one can see that the Korean

2economy is reviving much more rapidly than many of the other economies.

3The other area of interface between competition law policy is in the

4area of regulatory reforms, especially privatization of utilities, power, telecom,

5water, sanitation. This also very much fosters market development. When one

6 looks at the market capitalization of many of the newly emerging capital markets,

7one finds that more than 50, 60, even as high as 70 percent of the total market

8 capitalization lies in newly privatized utilities and telephone companies, et cetera.

9So this is a way of widening ownership in an economy, and also

10fostering capital market development. Of course, this also means that one has to

11have an effective regulatory framework in place, one which fosters competition.

12And indeed the developments in industrial organization theory and in technology

13make this much more possible, that the old arguments for having natural

14monopolies and having the heavy-hand-of-government ownership or regulation

15become less tenable these days.

16In our work on competition law policy, we face a number of

17 challenges. Notwithstanding the fact that my colleague thinks that in the World

18Bank we have many more resources, I would like to point out that my unit consists

19of 12 people. And there are only 2 of us who have actually had hands-on

20experience in competition law-policy, having worked in antitrust agencies or have

21done consulting and advisory work in that area.

22In the past six years that I've been at the Bank, we have been

23 involved in more than 20 countries in actually helping them draft and develop


1competition laws. Many times we do look to U.S.A.I.D. funding, but I must

2confess that we have not be been able to find a focal point in U.S.A.I.D. on

3competition law.

4MS. SIMMONS: Here's my card.

5MR. KHEMANI: Maybe today when I meet Ms. Simmons I will

6now have a number to call on. So that is -- we try to do bilateral twining

7arrangements with the Germans, we try to do that with the Canadians, the

8Australians and whoever we can, including Harvard University.

9But it is an uphill battle. And resources are constrained. And the

10only way one can foster this policy, which I think is ultimately -- notwithstanding

11 what the gentleman from Kodak said earlier, that he did not see this as being high

12priority on their agenda, that really Europe and Japan were their issue, I think

13that's a very myopic opinion. Because if you don't address these issues in the

14context of China and India, for example, then you're denying yourself access to

15 major, huge markets.

16And indeed, this kind of argument I heard from Ford Motor

17Corporation when I was advising them on their Ford 2000 initiative. Subsequently

18they changed that, because they found a tremendous potential for U.S. trade and

19investment. And I'm not a proponent for U.S. trade and investment, but I think

20that by adopting competition law-policy one is fostering greater accountability,

21transparency, and also promoting market access.

22So competition, trade and investment really go hand in hand. Thank

23 you.


1MS. SIMMONS: Thank you. I too am pleased to have been asked

2 to join this hearing of the International Competition Policy Advisory Committee,

3and I'd like to speak about the U.S. Agency for International Development. I'm

4going to call it "USAID," which is kind of the acronym that we use to make "U.S.

5Agency for International Development" slightly less of a mouthful.

6So USAID, or U.S.A.I.D., is in fact the bilateral agency which

7 provides U.S. government assistance to developing countries and transitional

8countries. We now have operations in slightly over 70 countries around the world.

9 We are principally a grant-making organization, that is that the resources that we

10expend in partnership with universities, with private sector business companies

11and so forth, are made on a grant basis.

12I'd like to address four points in my brief remarks and I think they

13 respond to the Committee's questions that were asked in the letter, but simplify it

14slightly. And I'd be glad to answer any follow-up questions either now or after the

15hearing if you'd like.

16But I'd like to address: first, how support for developing

17competition policy and law relates to U.S.A.I.D.'s strategic goals and objectives;

18 second, how U.S.A.I.D. makes its specific decisions to provide support to the

19development of competition policy and law; third, what have been the impacts of

20this assistance so far; and fourth, some of the future activities that are envisioned

21by our agency.

22Returning to the first point, how competition policy relates to

23 U.S.A.I.D.'s strategic goals and objectives: Obviously, as an independent agency


1of the U.S. Government these days, we are bound by the rules of GPRA, as is, I'm

2sure, the Department of Justice. And we have identified our six strategic goals

3and committed ourselves to their pursuit through the expenditure of both financial

4resources and personnel resources.

5The six goals are: the promotion of broad-based, sustainable

6 economic growth in developing and transitional countries; the strengthening of

7democracy and good governance; the development of human capacity through

8education and training; the stabilization of world population and protection of

9human health; the protection of the world's environment for long-term

10sustainability; and saving lives in the event of natural and man-made disasters.

11Clearly, it is the first of these goals that I'm going to address. The

12agency as a whole is principally organized across geographic lines. However, The

13Global Bureau (in which the Center that I direct, the Center for Economic Growth

14and Agricultural Development is located) is organized in a way which reflects the

15goals of the agency.

16We have prepared a strategic plan which says that one of the keys to

17such broad- based sustainable economic growth is a policy environment that

18promotes efficiency and economic opportunities for all members of society. To

19 us, this kind of policy environment is one that is market-oriented and open to

20external investment. It is also one in which there is a rule of law, substantial

21transparency in both public and private transactions, and the governors are

22 accountable to the governed for decisions made on their behalf.

23So competition policy is clearly one element of the kind of policy


1environment that we seek to promote. Competitive private markets are the most

2efficient way that we know of to protect both producers and consumers' rights, and

3the establishment and growth of competitive, successful enterprises is the best

4way that we know to ensure sustainable increases in economic opportunity.

5So it is no surprise that U.S.A.I.D.'s programs and activities

6frequently support policy, legal, and, I would emphasize, institutional reforms

7 focused on removing the impediments to the expansion of competitive trade and

8investment as well as in the strengthening of the private sector.

9The kinds of activities that we support range from short term

10technical assistance -- in which, for example, American legal experts work as

11 consultants to a host country counterpart to draft new laws for a period of two

12weeks, three weeks -- to something which we call training and capacity building,

13which may be implemented over a period of months or years to enable local

14 experts to acquire the specific expertise that they themselves need to develop local

15policies and laws, perhaps along the lines that Richard Gordon was remarking

16 about in Indonesia. And then, thirdly, we support more complex programs in

17 which we try to address a range of issues and utilize a range of advisors with

18different backgrounds and expertise. In these programs, policy development,

19 training, analysis, institutional development, legal and regulatory work are carried

20out by a mix of individual consultants, institutional consultants, other experts

21from the U.S. government, and so forth.

22With that background, then, how do we in U.S.A.I.D. decide to

23 support such policy and legal reform activities, particularly with regard to


1competition policy? We who work in U.S.A.I.D.'s Washington offices do some

2 program development and management. But the most important program

3development work in all areas is done in partnership with people in developing or

4transitional countries in which the agency has resident offices, which we call

5 missions, which is very unlike the World Bank, in which temporary touring groups

6of macroeconomists are called missions. We call our permanent groups in

7countries missions.

8Similarly, unlike the IMF and the World Bank, most of our program

9 staff in fact is resident overseas, not in Washington, which explains why it's

10difficult often to find the point of contact in Washington for specific activities. In

11 general, USAID's programming decisions are made at the country level, taking

12 into the account the overall strategic goals of the agency and even larger foreign

13policy considerations, but specifically taking into account the particular situation

14in that country at that time.

15Strategic plans for the provision of U.S.A.I.D. assistance are

16prepared every three to five years for every country in which we have a mission

17 and generally involve five factors: extensive consultation with the government of

18the host country; extensive consultation with various stakeholder groups in the

19country, including the private sector; sector or problem-specific analysis;

20 discussion with other donors; and discussion with American groups both in that

21 country and in the U.S. who may be interested in that country, for example, the

22large group of Armenian-Americans who are very concerned about what happens

23in Armenia.


1Of the approximately 70 country assistance programs that

2 U.S.A.I.D. manages, nearly 100 percent have identified the development of

3competitive markets, the privatization of state enterprises, or other areas of

4economic growth as a strategic objective for that country assistance program.

5And fully half of these programs have also identified legal and institutional reform

6as an important element of their program to meet the strategic objective they've

7identified. Of these legal and institutional reform programs, approximately half

8have specifically noted increasing competition as an important expected outcome

9of the legal reform programs that are being supported.

10Over the last few years, we estimate that U.S.A.I.D. has invested

11 about $80 million a year in grants in providing support for legal and institution

12reform in developing countries.

13Examples of USAID mission programs supporting the development

14of competition policy, law, and related institutions are perhaps the easiest to find

15in Eastern Europe and the former Soviet Union as, prior to the collapse of the

16Soviet Union, competition simply wasn't an issue. They didn't have it, so

17therefore there wasn't any law to deal with it.

18These programs illustrate well, though, I think, how U.S.A.I.D.

19responds to local requests and the local situation with fairly complex sets of

20activities. Since I personally spent '95, '96, and most of '97 in Russia working on

21the program there, I would like to use an example from that country to illustrate

22how, in fact, we tried to provide support broadly to legal and institutional reform

23 within the context of economic growth and the conversion of the economy from a


1state-owned, state-directed economy into a market economy, and specifically

2within that, some of the areas of competition policy, law, and institutional

3development that we supported.

4The stated commitments of the governments of both Russia and

5Ukraine, (although I'm just going to just deal with Russia in the interests of time

6 today) to convert their directed, state-owned economies into market economies led

7us and U.S.A.I.D. missions in these countries to develop a range of activities that

8could establish the building blocks for a privately owned and managed market

9economy as quickly as possible.

10So in Russia, for example, we supported the privatization and often

11the breakup of state-owned enterprises, the development of competitive private

12business and financial sectors, and the establishment of a rule of law essential for

13markets and private enterprises to function.

14Competition policy or antimonopoly policy and its implementation

15were an important element of these programs. Our U.S.A.I.D. mission in Russia

16 worked with a range of government institutions in a number of sectors to define

17areas where technical assistance, training, and sustained support could develop

18public sector entities that would regulate, rather than own and operate, the

19economy. The magnitude of this sort of change should not be underestimated.

20Support to the Ministry of Economy and the Antimonopoly

21Committee resulted in the skills needed to draft and lobby for a Law on Natural

22 Monopoly, which passed the Duma and became law in 1995. The major

23significance of this law was that it narrowed the range of legitimate state


1intervention in the regulation and control of prices over the enterprise sector of the

2economy for the very first time.

3So as a result of that law, in the power distribution sector, it was

4 considered to be okay to fix prices and control them; bakeries, no. Prior to that

5 time, every single loaf of bread had a fixed price.

6This work complemented and accelerated the completion of the

7 privatization process for many industries which had previously been state

8monopolies. Sometimes progress was made by preventing the enactment of laws.

9 In 1995, for example, we funded a two-week seminar for policymakers and others

10which focused on a draft price control law which was then under control in the

11Duma. The seminar illuminated the costs of such anticompetitive action for

12specific parties and the economy. And the results of the workshop were so

13persuasive that the bill's authors did not go forward with the anticipated

14legislation: action through inaction.

15U.S.A.I.D. also supported efforts in a program on natural

16monopolies carried out by IRIS, which is a think tank-consulting group at the

17University of Maryland, between 1995 and 1997 documented, quantified and

18analyzed the efficiencies and inefficiencies and the financial management

19misconduct in the railroad sector. This was communicated officially. We actually

20 told the Russians this.

21While U.S.A.I.D. did not provide major support to the government

22 to implement these proposed reforms, this analysis had a substantial influence on

23efforts in 1996 and 1997 by First Deputy Prime Minister Boris Nemtsov in his


1role as head of the reform Commission on Competition. He set performance

2targets for and began restructuring of the railway sector based upon these

3 analyses provided by IRIS.

4Support to various organizations in the energy sector was launched

5in 1994. It began the painstaking process of moving that entire sector onto a

6market-based footing with competition rather than monopoly characterizing the

7generation and distribution subsectors. U.S.A.I.D. helped the Federal Energy

8Commission to set up shop as independent regulatory authority with responsibility

9 both for electric power and gas pipelines.

10Long-term contracts with consulting firms, U.S. universities, short-

11term and long-term training mechanisms, partnership grants with the U.S. Energy

12Association, and other kinds of interventions, including that of our own technical

13personnel, were used to increase Russians' awareness of the options available to

14them in reforming the energy sector and, not coincidentally, to open it up to

15foreign investment.

16Unlike the World Bank, we in fact can promote U.S. investment.

17 We are a bilateral agency.

18Initially, U.S.A.I.D. advisors contributed to drafting the federal

19commission's charter, regulations and procedures, and in 1996 and 1997 similar

20technical assistance and training was extended to several of the regional energy

21commissions which had ratemaking and regulatory access responsibility over the

22local energo's.

23Reportedly, progress in institutionalization of the Federal Energy


1Commission and a number of the regional energy commissions has progressed to

2the point that, when the Primakov government at the end of December 1998,

3January 1999, attempted to abolish these agencies, it failed.

4The plan was to turn their functions over to a communist-led

5Ministry of Antimonopoly Policy, certainly an oxymoron, and it failed. The effort

6failed in part because, with U.S.A.I.D. technical assistance, the Federal Energy

7Commission and regional commissions had established themselves as credible

8 regulators whose demise would have represented a real loss of that expertise and

9 transparency to the economy.

10I could go on with more examples from Ukraine, but again in the

11interests of time, I will not. But I do want to share with you an example from

12Sub-Saharan Africa, where we now have a research activity under way which is

13analyzing the appropriateness of western-style competition law for the economies

14 of Sub-Saharan Africa. The region-wide study, which is at this point being

15carried out on a case study basis in Madagascar, Senegal, and Benin, attempts to

16assess empirically the relative importance of various anticompetitive features of

17each economy.

18This will permit testing of the hypothesis that restrictive business

19practices adopted by private sector actors, which are the issues most often

20addressed by western-style antitrust laws, may actually be relatively

21inconsequential in Africa when they're compared to the barriers to entry and

22 growth stemming from the lack of market-augmenting laws and institutions. The

23findings of this analysis should help to define priorities for U.S.A.I.D. assistance


1in supporting legal and institutional activities to enhance trade and investment

2opportunities in the region.

3One might in fact generalize that U.S.A.I.D.'s competition policy

4work emerges from its general assistance strategies and programs, that it

5complements a variety of private sector development initiatives. And it tends to

6focus on legal and institutional changes to modernize, harmonize, standardize, and

7regularize competitive business environments in developing and transitional


9But I should also note that USAID responds to requests for support

10on a limited basis in what we call our "non-presence countries," that is, the

11countries which are not yet considered to be developed, but in which we do not

12have a mission. In 1996, for example, the Department of Justice and the Federal

13Trade Commission approached us with a proposal to provide assistance to

14Argentina and Brazil. The DOJ and FTC presented a convincing case for support

15by arguing that competition policy assistance in these countries would have a

16demonstration effect, and would create pressure for smaller economies in the

17region to take steps toward bringing their policies into line with the Mercosur

18 protocol.

19To accomplish this, we utilized something which some of you may

20 be familiar with but others may not, called the 632A and 632B mechanisms.

21These mechanisms permit U.S.A.I.D. to enter into an interagency agreement with

22 other U.S. Government agencies and departments and enable them to manage the

23technical assistance process, either with their own staff or with hired consultants.


1Both the Latin American and Eastern Europe-New Independent

2States Bureaus have frequently used such mechanisms with DOJ and the FTC to

3support technical assistance and training activities relating to competition policy,

4law, and institutional development.

5Just briefly, let me outline some examples of the impacts which

6we've had. I will not talk about Indonesia, where in fact we've had a long program

7of support to competition policy, which until the financial crisis really set in, had

8 been very hard sledding, I think you will agree, but where we have found a

9renewed interest in, in fact, installing competition policy and elaborating it in

10areas of the government action which had previously been.

11But let me give an example from Nepal and another one from

12Morocco, just to show how U.S.A.I.D.'s commitment to this effort has been

13longstanding, and in fact our approach permits us to take a gradual approach to

14developing the kind of local expertise which we feel is fundamentally the basis for

15the government or the country itself being able to undertake, to articulate, and to

16 regulate and to implement competition policy and competitive practices.

17In Nepal, in the early 1990s, U.S.A.I.D. provided technical

18assistance and channeled support for a wide array of reform activities under

19something called the Economic Liberalization Project. There have already been

20several accomplishments in the area of competition policy, but they were

21implemented in a sequential fashion. A first step assisted the government to

22 analyze the domestic airline industry and carry out its deregulation. And this has

23already increased competition sharply.


1Follow-on activities helped the government to deregulate the

2petroleum industry and to eliminate fertilizer subsidies. A consumer protection

3law and a new streamlined business registration policy were the next targets. The

4latter reduced the time necessary to register a new business from as much as three

5 years to a few days, and resulted in the substantial creation of small enterprises.

6Finally, U.S.A.I.D. support facilitated privatization of a number of

7 firms as well as the design and finance of a next round of privatization which will

8include the national dairy company and some public utilities. So it's been a

9gradual process across sectors with sort of step-by-step progression to an

10increasing influence of competition in the economy.

11In Morocco the story is similar. We began in 1992 when the

12 Ministry of Economic Incentives of the Government of Morocco requested our

13assistance for its initiative to draft, enact, and implement a competition law. A

14team from the Harvard Institute for International Development, funded by us,

15analyzed the legal and economic environment for competition policy, reviewed the

16existing draft statute, made recommendations for amendments, and outlined a

17 strategy for the development of an implementation agency.

18The team also identified a number of existing public and private

19restraints on competition. Private restraints ranged from agreements to fix prices

20and share markets to tying sales and mergers to dominant inter-monopoly market

21positions. Public restraints included price regulations, licensing requirements,

22and provisions in a variety of peripheral laws, such as the labor code.

23In September 1995 a team from IRIS -- again, the University of


1Maryland -- had extensive discussions with counterparts in the same Ministry, on

2a draft law that reflected many of the earlier recommendations. After a one-day

3seminar in Rabat in November of 1995, it was determined to go ahead.

4This year, 1999, four years later, the government of Morocco

5 finally enacted a law which will serve as the driving force for competition and

6 protection of the consumer. Development of the law involved all ministries,

7professional chambers, private sector representatives and universities. The

8 orientation of this legislation complies with the government's commitment in

9 international treaties and agreements, the free trade zone agreement with the EU,

10UNCTAD agreements on restrictive business practices, and the WTO agreements

11on transparency, competition, and nondiscrimination. We feel this is an important

12advance for that country.

13To generalize, the impacts of assistance depends very much on the

14country's own initiatives and complementary actions. USAID can help to draft

15competition policy; we can't apply it. Our consultants can help to draft laws and

16 promote discussion of them; they don't pass them.

17Our technical assistance and training teams can help to develop the

18 local human capacity, design organizational structures such as regulatory

19commissions, and even equip them with databases, communications equipment,

20 and the like, and we do. But when the U.S.A.I.D.-funded teams go home, it is up

21to the local government to make the new structures work.

22What are we looking at in the future of competition policy? As I

23 said before, approximately a quarter of our missions right now are undertaking


1some activity in the area of promoting competition policy, and about half are

2doing broader legal and institutional reforms. As long as our commitment to

3achieving our strategic goal of promoting broad-based sustainable economic

4growth in developing and transitional countries remains firm, and we receive

5funds, it is likely that USAID will continue to include this kind of support in its

6 portfolio.

7We are looking to develop more tools, such as tools that we've

8called "Investors' Roadmaps" and "Commercial Policy Tool Kits," which enable

9countries themselves to apply somewhat of a checklist principle to their own

10environments, undertake the analysis empirically themselves to determine where it

11 is that there is restraint of trade, and where it is that increased competition would

12improve the situation.

13We are also looking at coordination with others. Coordination with

14the Department of Justice and the Federal Trade Commission has already been

15mentioned. We also cooperate very closely with the State Department in terms of

16 their legal reform program. We expect this to continue.

17We also coordinate closely with multilateral organizations such as

18 IBRD and FIAS in helping to prioritize, shape, and inform the agenda. USAID

19and FIAS, for example, jointly sponsor the development and application of this

20one tool that we've found very helpful in more than 20 countries, so far, called the

21"Investors' Roadmap," because application of this diagnostic tool has led to the

22adoption of several reforms which have already helped to reduce corruption and

23 reduce anticompetitive behaviors.


1Finally, as noted, the majority of our legal and institutional reform

2activities are undertaken with private sector or university contractors: IRIS; the

3 Harvard Institute for International Development; a number of other individuals

4from other universities. These have been very, very loyal partners in this effort.

5We are also looking to work increasingly with NGO's and PVO's

6such as the International Development Law Institute, currently based in Rome,

7which trains developing country lawyers in competition policy.

8Then, finally, we work with the regional development banks who

9 have some interest in this area.

10We are looking in the future to focusing a bit more on Africa,

11because Africa is currently undergoing a major political and economic transition,

12 the outcome of which we feel will be very important to the future interests of the

13 U.S. The Africa trade and investment policy program is a major component of

14USAID's implementation of President Clinton's Partnership for Economic Growth

15and Opportunity in Africa.

16This program, like others, provides training, technical assistance,

17 and consulting advice to countries in Africa. Funded in 1998 at an initial level of

18 $5 million, in 1999 and FY 2000 we plan to spend about $30 million a year in

19 support of this Africa trade and investment initiative. So within this pot of

20 funding, there should be a substantial amount of resources available for African

21countries wishing to, in fact, increase their emphasis on competition policy, law,

22 and institution building.

23I could give a number of other examples of future program


1possibilities, but I think that in the interests of time, I will cut it short here. We

2plan to continue working with developing countries even when the U.S. is not

3perceived at this point as a very fair partner -- in large part because our

4competitiveness on the global marketplace is so much stronger than theirs.

5We in U.S.A.I.D. don't believe that the infant industries argument

6 often cited -- that somehow "we should be protected against the U.S. predation

7until we grow up" -- is valid. We feel that open economies and positive trade and

8a focus on fairness and transparency will be to the advantage of all sides in the

9 trade bargain.

10But we also feel that it is important to make sure that the human

11capacity development, the institutional development, and just the understanding

12that goes into writing up laws that people really truly can implement is an

13important part of our mandate. And so we look forward to working with the

14Department of Justice, our colleagues in the World Bank and IMF, and to

15continuing this kind of work in the near future.

16Thank you.

17DR. STERN: Thank you very much for your very thorough

18 response to our questions.

19Are there any questions for this panel?

20MR. RILL: Actually, yes. We're tasked, of course, to advise the

21Department of Justice, and anyone else who might want to listen to us, with regard

22 to competition policy within the United States. I certainly think that the

23development of competition policy throughout the world is, personally, a very


1salutary effort that could be encouraged by the United States.

2A couple of thoughts for both IMF and World Bank. One, the

3 notion that the more free market countries are faring better in the Asian crisis than

4the more command and control economies. Can that be documented in some way

5and can we correlate free market to, broadly speaking, competition policy and


7And then the next question I would have is: In conditioning financial

8assistance to the development of competition policies, whether it be laws or not,

9what kind of assistance, what kind of review, do your organizations give to both

10 the existence and implementation of competition policy?

11And then, third: What kind of coordination is there between your

12 agencies and the competition authorities, and for our particular purposes, the

13Antitrust Division of the Department of Justice and the Federal Trade

14Commission? And you can answer that in 30 seconds.

15MR. KHEMANI: About documenting that free markets and

16competitive processes have led to better withstanding of economic crisis, I think

17one has to look at that in two levels. One is at the broad level, which is the

18economies that I've mentioned, Hong Kong, Singapore, and China-Taipei, as it is

19referred to to be politically correct. I think that there one can find that the

20stability of their currency relatively speaking, but also the entry and exit

21 processes for their business firms. For example, The Economist carried an article

22based on a Brookings discussion paper, and I may add by one of my staff

23 members, on what was called a "Flexible Tiger". It mentioned the fact that if you


1look at a three-year period in China-Taipei something like 40 percent of the firms

2did not exist three years earlier. So there was a fair amount of churning and there

3was a significant amount of productivity notwithstanding this churning in the

4number of firms.

5So I think those are some sort of the broad brush documents that

6one could point to.

7However, whenever in developing countries people question the

8merits of having competition, one needs to just simply point out the record of the

9performance of newly privatized state enterprises in terms of their productivity, in

10 terms of their revenue generation, and so on. Or one has to point out the

11 performance of newly deregulated sectors. So for example in a country like India,

12the deregulated automobile sector, the deregulated domestic airline sector, the

13deregulated airline sector of Nepal which was mentioned, clearly indicate lower

14 prices, increased traffic volume, increased purchasing power of people.

15So I don't think one needs to belabor that point too much. There are

16 some sectoral-specific as well as broad-based economy pieces of evidence.

17In terms of what kind of assistance, when the World Bank helps

18countries draft or strengthen competition laws and policies, we've had a variety of

19 approaches. We've organized workshops and seminars where we relied on the

20staff from the U.S. Antitrust and Federal Trade Commission, from the Canadian

21Bureau of Competition, as well as from the competition bureaus of newly

22developed economies, those that have recently adopted competition law policies.

23So when we organized training sessions in Vienna we made sure that


1we had officials from not only the Slovak and the Czech Republics and Poland,

2but also Russia, etcetera, participating and indicating the difficulties that they

3 have been encountering in implementing competition law and policy.

4But these are one-shot affairs. They are not -- they don't really

5build institutional capacity. What one needs is a bit more long-term advisors,

6 those who are either willing to take leaves of absence -- and I'm aware of Federal

7Trade Commission officials and Justice Department officials who have done that

8in the Czech, Slovak and Ukraine -- or to find retired executives who may be

9interested in spending six months to eight months in helping countries get their

10 system up and running.

11We certainly tap on a lot of the private law and economic consulting

12firms. But the transaction costs involved in all this are very, very high, and what

13I'm very keen to explore in the Bank is to see whether we could not create a

14 multidonor trust fund so that we're not looking for funding each time we have a

15program in a particular country, but that we have this trust fund with an Advisory

16 Committee drawn from the antitrust officials, agencies of the various contributors,

17and trying to enlist the staff in sort of short term assignments or getting private

18sector consultants using this trust fund so that one can have quick response and

19 more sustainable assistance. This is something that we are still talking about.

20Coordination. We coordinate a lot with the U.S., Canadian,

21 Australian, and other antitrust authorities. However, one recommendation that I

22would like to make is that the OECD committee which deals with international

23 cooperation makes it as a standing item of their proceedings on a quarterly basis


1of reports from the various member countries as to what technical assistance is

2 being provided, for two reasons: to avoid duplication and to get greater

3 coordination.

4Now, Indonesia, curiously, is an interesting example, because in

5 Indonesia we had the Germans, we had the Australians, the Canadians, the U.S.,

6all providing assistance. Finally what the Indonesian authorities did was they

7 asked the World Bank to be the coordinator of all technical assistance to Indonesia

8 in the implementation of their new law. Their new law is not perfect, it's got lots

9of warts, but it at least is not as bad as the one that my colleague, Richard, was

10alluding to. That was about six or seven months ago we did manage to do some

11damage control there.

12But however, in implementation of that law what we've done is

13 we've signed a formal agreement where the representatives of the various countries

14have said that they will coordinate all their technical assistance through the World

15 Bank, so as to avoid duplication. Not that we want to be in the driver's seat. As I

16said, our resources are scarce as well.

17But it certainly avoids situations like in Russia, where five different

18countries were advising it initially on competition laws. They actually ended up

19 with three securities law drafts from three different countries and jurisdictions.

20 We want to avoid that wasteful duplication.

21MR. GORDON: I'll just add a couple things. With respect to proof

22as to the superiority of free and open markets, the entire Fund is premised on that

23view. In fact, if you look at the foundation of the building you'll find that those


1words are inscribed somewhere.

2MR. RILL: I wasn't asking about objectives. I was asking about


4MR. GORDON: I think I would only add that probably pretty much

5 every publication that comes out of the Fund at least tries to make that argument

6 and to support that with as much empirical evidence as they can. With respect to

7 the effect of competition policies, that's another thing.

8I might step back again and say that another difference between the

9 Fund and the Bank is you guys have three buildings. I just want to point that out.

10MR. KHEMANI: Nine.

11MR. GORDON: In D.C.?

12MR. KHEMANI: We have nine buildings.

13MR. GORDON: Nine buildings. We have one, a much smaller

14 staff.

15But also the Fund often does deal in crisis situations. Perhaps it

16shouldn't, it should anticipate crises better than it does. And often it is very

17difficult, for example in Indonesia, where I had worked, for a flying mission to

18wind up in Jakarta and to say: Okay, what's wrong that needs to be fixed? We've

19 got 24 hours: We have to have a list of prior actions before the Indonesian

20government is going to get money.

21Now, you can imagine how impossible that is. Think of

22competition, not only in terms of competition policy in economies, but also

23competition among different objectives for achieving overall economic recovery. I


1was just jotting down a few. We used to think that the most important things were

2budget reform, then tax. I used to do tax technical assistance when I was teaching

3law before I joined the Fund.

4Then banking supervision became the big thing because in Korea,

5there was this terrible banking trouble. Then bankruptcy, because when you went

6to Indonesia it turned out it wasn't banks that were borrowing, but it was private

7companies. Then it turns out that all the private companies were in difficulty with

8respect to corporate governance and that became a major thing, and on and on and

9 on.

10I think in the Korean program there were a list of 96 -- I could be

11wrong -- prior actions having to do with passing laws and enacting new policies.

12It's going to be very, very difficult.

13So when providing either policy advice or technical assistance,

14competition law is only one of many, many things that need to be done. Think of

15chaos theory, where one little change can result in enormous unintended

16consequences. This is one of the concerns that we had had in Indonesia, where

17very minor aspects of the draft competition law could have helped shut down

18 competition, that perhaps the issue was not necessarily that what we needed was a

19competition law to break up the conglomerates. Perhaps the conglomerates were

20actually competing with each other very effectively. The principal problem with

21economic sclerosis was corporate governance, related party lending.

22I'm not saying that was the conclusion, but these are issues that

23came up, with a very brief period of time to try to figure out what to do, which is


1an advantage of having the World Bank and U.S.A.I.D. and other bilateral donors,

2 multilateral banks, who can probably have greater in-depth, prolonged

3 examination of these issues and help sort out what the priorities are, because when

4 you have limited resources, and I mean limited intellectual resources, particularly

5 on the part of governments, they have to know what do we need to do now and

6what's the most important of the things we need to do now if we're going to

7straighten out a particular crisis. And the Fund is more crisis-oriented.

8MR. RILL: As Shyam has had a great deal of experience in this

9 area, I've had some experience in the 1990, 1991 period with AID programs in

10Eastern and Central Europe. And we found that the two or three week visit was

11generally viewed by the Central and Eastern European authorities that we were

12sending people to visit as, while I think I'm overstating a little bit, tourist trips.

13 And that to be useful, long-term, six, eight-month or longer assignments of U.S.

14 Department of Justice and FTC personnel under AID funding were, to the

15contrary, quite useful.

16I'm not familiar now with how many of those longer term programs

17 using Department of Justice and FTC personnel are extant with USAID. So I

18wonder if you could tell me? Or at least supply that information if you don't have

19 it off the top of your head.

20MS. SIMMONS: I don't have it on the top of my head. We do have

21a number of agreements with the Department of Justice to provide those kinds of

22assistance. I'm not sure that in most cases we've overcome the short term

23consultant problem for the reason that my colleagues said, which is that DOJ


1people don't often want to spend the whole year.

2MR. RILL: I didn't have a lot of trouble finding people --

3MS. SIMMONS: Oh, really?

4MR. RILL: -- who wanted to go to, well, Prague.

5MS. SIMMONS: But we can find that, we can find that data out for

6 you if you're interested in knowing how many there are right now.

7MR. RILL: I'd like to know how many over the recent past, say the

8 last two years, how many of these longer term, six month plus, programs are

9 underway. And I'd also like to ask you now if you think those have been useful


11MS. SIMMONS: Oh, yes. As I was trying to say in my remarks, I

12think that the institution building side of U.S.A.I.D.'s program is the side that we

13provide that's somewhat unique compared to the World Bank and IMF. We are

14 actually able to get a contract team or a university team to spend three years, five

15years, six years, doing a range of activities both providing actual product, such as

16 laws, but also training and actually setting up and helping a new organization,

17such as the federal energy commission in Russia, to learn how to work.

18MR. RILL: I was really asking -- you're going more broadly than I

19wanted. I was just asking the efficacy of the Department of Justice and FTC long-

20term training programs, whether there's been an evaluation and what are the

21 results of those evaluations, because anecdotally I found from the heads of the

22agencies that I talked to that those were the programs in the area of competition

23policy that were particularly useful. And I'm wondering if they're continuing and


1whether you also find them -- currently and formerly -- to be useful?

2MS. SIMMONS: I will check. I don't actually know right now.

3MS. JANOW: It's sometimes said that the budget of the WTO is

4less than the travel budget of the World Bank.

5MR. KHEMANI: Possibly.

6MS. JANOW: And yet you have a lot of institution building,

7 capacity building obligations embedded in WTO commitments, some of those of a

8 legal nature, whether it's IPR enforcement, competition dimensions in telecom

9agreements, et cetera.

10So my question to you is -- I think this idea you've raised, Shyam,

11 of a trust fund for competition policy purposes is fascinating. Can we imagine a

12circumstance where the Bank and the Fund and U.S.A.I.D. is actually

13systematically collaborating in areas of shared objective, possibly when those

14overlap with objectives that we have in, say, the WTO? Can you imagine a

15meaningful ongoing collaborative scheme being designed? Is there a way of doing

16that? Should we be thinking along these lines or are the bureaucratics of that just

17pulling in too many different directions? Because it seems that there's an

18 opportunity here for pulling these resources together, at least collaborating in the

19design or the implementation of capacity building exercises while retaining the

20 autonomy of agency action.

21Is there more scope for this or is this just an Advisory Committee's


23MR. RILL: Or Shyam's dream.



2MR. KHEMANI: Can I give you an actual concrete example?

3MS. JANOW: Yes.

4MR. KHEMANI: We have a $32 million trust fund -- we expect it

5to grow to $50 million in another year or so -- which deals only with privatization

6of infrastructure services. Now, this trust fund has been predominantly

7 contributed to by the UK.

8And my -- and since I'm speaking in my personal capacity here, I

9think that there are two incentives that drive this. One is of course that

10ownership, state ownership or control of infrastructure facilities represents

11 potentially a huge revenue source for addressing the deficits, not just the current

12deficits but the running deficits of many developing countries because they don't

13 run these facilities on an efficient basis. But also, water, sanitation, power, are

14 basic fundamental areas that are lacking in many developing countries. So I think

15that the trust fund is motivated by helping to alleviate poverty by increasing health

16 standards through more effective water and sanitation facilities while giving

17 electrification to villages and communicating and connecting them to the world.

18In tangent I could mention that the cocoa farmers in Cote d'Ivoire,

19 once they got more effective market-driven telecommunication services, they were

20 able to check what the stock market price of cocoa was in London without being

21 cheated by the middlemen who previously used to deny them that information. So

22this is empowerment as we see it.

23On the other hand, I may also say that there's no doubt that the UK


1is a leader in terms of selling its privatization services, and so this trust fund

2could also pave the way for UK companies' access in providing advisory as well as

3 engineering and other services in the countries where this type of regulatory

4system is being put into place.

5So this is an actual example and it's developed on competition

6 principles.

7MS. SIMMONS: Could I just perhaps remark that it's very unlikely

8the United States will put its bilateral assistance money into this trust fund.

9MS. JANOW: But can you imagine a collaborative effort on a case-

10by-case basis --

11MS. SIMMONS: Certainly --

12MS. JANOW: -- what are you doing in country X and how can we

13supplement that, or where are we in conflict?

14MS. SIMMONS: In virtually all countries in which the World Bank

15and U.S.A.I.D. work together, there is some mechanism for donor collaboration,

16often, as Shyam mentioned, under the leadership of the World Bank in something

17called a CG, or consultative group, in which there are regular meetings, regular

18exchanges of information.

19The success of these is somewhat based upon personality, but it also

20 is based upon the fact that people realize that it's inefficient for everybody to go

21 full-bore at the same problem from seven different directions. That's not to say

22that in all cases we agree, and that indeed there are not differences of opinion as

23 to the appropriate way to proceed or not proceed.


1We in U.S.A.I.D. have spent a great deal of time on donor

2 coordination, and I think most staff people would have a kind of mixed reaction

3 that, yes, it's something that's essential to do, but no, it's not fun, because you

4have your own institutional background, you have your own, in our case, our own

5 government's perspective and our own government's policy, and it's difficult often

6 to sort of make that same policy and that same perspective link with that of the

7UK or EU or whoever.

8So I think it's important to be realistic about the level of

9collaboration that one can achieve, but I think it's also important to note that we

10 all do it, that we totally agree with you that it makes sense to do, and that to the

11extent that we can actually program our money either in a trust fund joint activity

12or whether we do it in what we call parallel financing, where everybody sort of

13lines up their financing next to each other, we think that it's an important thing to

14 do.

15MS. JANOW: Thank you.

16DR. STERN: Further questions?

17MR. RILL: No, thanks.

18DR. STERN: My question, just very briefly, is if you have any idea

19either within the Bank or U.S.A.I.D. how much funding resources are spent on

20developing antidumping laws versus competition policy laws? From my personal

21experience, I know quite a bit of work has been done in a number of different

22countries. We've been hearing, of course, about the proliferation of competition

23policy laws, but there's also a proliferation of antidumping laws. I wanted to


1know if you had any general statement or if you could provide something later that

2 would document that differential.

3MS. SIMMONS: I can look for some examples, but I can't

4immediately cite anything regarding antidumping policy. The database that I have

5right now does not make a distinction between what sort of competition policy and

6 general trade policies are being supported.

7DR. STERN: Right.

8MS. SIMMONS: -- the antidumping area.

9DR. STERN: Right. Well, in fact one of my questions is whether

10 the competition -- the breakouts for the resources for competition policy includes

11 the work and training for new trade laws.

12MS. SIMMONS: Yes, it does.

13DR. STERN: So the data that we would get on competition policy

14would then be both in setting up something that would be dealing with mergers and

15cartel enforcement as well as the trade laws? It's agglomerated.


17MS. JANOW: Is it all legal development or is it trade,

18 bankruptcy --

19MS. SIMMONS: We've consulted with the missions who actually

20 manage these programs and -- as I tried to emphasize, these are often fairly

21 complicated programs -- and what folks are focusing on this six months may be

22quite different from what they're focusing on in the next six months. I'd actually

23 have to talk with some of the people who are implementing those programs and try


1to figure out what the balance is. But I could do that if you're interested.

2MS. JANOW: Could you take a stab at that? Based on what we

3were hearing from the Department of Justice staff on competition development,

4could we get your reactions to our draft memo that we have shared with you?


6MS. JANOW: And I'm sure you can sort it out for us. It would be



9MS. JANOW: Thank you.

10MR. KHEMANI: Six and a half years ago when I joined the World

11Bank, I was shocked to learn that as one of the World Bank's conditionality to a

12loan in Venezuela said you should pass an antidumping law.

13DR. STERN: Yes.

14MR. KHEMANI: So I quickly met with the economist, who was a

15macroeconomist, and corrected his basic economics about competition. So I can

16say now with a great degree of confidence that since that time the Bank has not

17assisted any country in drafting an antidumping law, and we would not devote any

18resources towards that.

19However, in a country like Jordan, for example, we did help them

20 draft a safeguard law. And we certainly do not mind in assisting countries with

21 respect to safeguard laws, because Jordan was suffering from transitory dumping

22or a transitory increase in supply -- one shouldn't use the term "dumping" in that

23 context, but increase in supply -- of basic steel rods coming from the Ukraine, and


1it was disrupting their own market in that regard. So basically their producers, a

2 few of them, were suffering a bit.

3In any case, that's our position with respect to that particular area.

4Now, in terms of how much resources do we actually expend on

5competition law Bank-wide, I would have to canvas my colleagues, but I think I

6can say with also a fair degree of confidence that we spend less than, I would say,

7$700, $800,000 a year in providing technical assistance or some assistance to

8 countries globally -- this is 184 member countries -- in the area of competition

9policy. Which is grossly inadequate.

10DR. STERN: I have another line that I'd like to pursue a little

11 deeper: Merit's on coordination with the WTO. I suspect that much of the

12outcome of the debate between the U.S. and the EU on what the future role of the

13WTO shall be with regard to competition policy will yield a lot of pledges for

14greater education and the educational role of the WTO.

15And, as Merit pointed out, the WTO's resources are extraordinarily

16limited, which gets to the whole question of the coordination with the other

17Bretton Woods institutions, such as the World Bank and the IMF, in carrying out

18such a goal. You've talked about your limited resources. Do you anticipate that

19the World Bank and the IMF, either through pressure from the WTO Secretariat or

20pressure from the bigger countries like the U.S. and the EU, will start to develop a

21new budget that will work with the WTO on this "educational role" in competition

22 policy?

23MR. KHEMANI: Well, first I'd like to point out that the WTO has


1had three symposiums on the interface between competition and trade policy.

2DR. STERN: Yes.

3MR. KHEMANI: All three have been cosponsored with the World

4Bank, albeit on a very limited budget. For the future, I do not know, really. I do

5not have a good enough crystal ball in that regard. There's a lot of internal

6pressure, pressure generated by Joe Stiglitz and myself and others, that the Bank

7 needs to do more in the area of competition policy. So certainly recommendations

8or views expressed by committees like yours will buttress that cause.

9DR. STERN: Well, that's good to know.

10MS. JANOW: I think we've made a contribution simply by

11introducing Ms. Simmons and Mr. Gordon and Khemani today.

12DR. STERN: That's right.

13Well, I don't hear any other questions for now and I hope that -- I

14 have heard a lot of statements of pledges to cooperate after the hearing in trying to

15provide some more information on how to make this a more efficacious going-


17I can't help but to close this panel with my memories of going to the

18World Bank in the very early seventies with my husband, who had just published a

19book on the role of merchants in rural development in India, and was talking about

20this word that was called "privatization." And it was as if he had horns, because

21at that time -- it may be the fundamental tenet today of the World Bank, but at

22that time there was tremendous support for state-run cooperatives and other such

23statused activities.


1MR. RILL: Antitrust was different in the seventies, too, Paula.

2DR. STERN: So we have to remember that we have to keep on

3 keeping on. That sometimes the pendulum may swing back again. So we're

4 hopeful that this work that we're doing today will have an impact, not only

5medium term, but in the long-term, in the event that the pendulum swings again.

6MS. JANOW: Thank you very much.

7DR. STERN: Any other questions? Gratuitous comments, besides

8 mine?

9Thank you very, very much for your time and your energy. Thank


11This meeting is now adjourned.

12(Whereupon, at 5:30 p.m., the meeting was adjourned.)





Updated June 25, 2015

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