6  Trade, investment and competition policies

There is a growing body of literature that concludes that open trade and investment policies are relatively more important for small countries.[61] Levinsohn (1993) found that imports were a source of domestic market discipline in Turkey. Other researchers report similar results for the Ivory Coast and Mexico. Hoekman, Kee and Olarreaga (2001) show that in a simple symmetric Cournot model with a fixed cost of entry, import penetration reduces domestic markups whereas entry regulations have the opposite effect. Their empirical work utilising data on 41 countries shows that imports have a relatively greater impact on competition in small economies whereas domestic entry regulation (achieved through competition law and/or regulatory policies) have a relatively greater impact on competition in large economies.[62] In an allied study, Hoekman and Kee (2003) confirm that low barriers to imports discipline markups and find that the introduction of competition law had no discernable direct effect on mark-ups. They contend it may have some indirect effect because numbers of firms were 7.2% higher in the presence of competition law, all else held constant.

We note that distance related costs will affect the discipline of imports on domestic activity, although low import barriers can be expected to remain very important. At a minimum it sets a threshold of competition for domestic firms. Returning to our earlier discussion, we note that for tradable goods and services we would not expect there to be a problem of excess entry since the fixed costs of imported goods have already been incurred in the country of origin.

As trade and investment policies of all countries have liberalised, there has been considerable convergence of competition and regulatory policies; fostered in part by international organisations such as the OECD and WTO. For this reason, and because the issues are similar, central elements of competition law are common across different countries. However, while the law is similar and techniques for its application almost identical, its application does materially differ across countries. An obvious example of the communality of approach is the rules of thumb used to screen merger proposals in countries such as the USA and the UK: they utilise to some degree some function of market shares and number of firms in the market – eg, the Herfindahl-Hirschman Index (HHI). The resultant communality of regulatory approaches can lower the costs faced by firms operating across countries, and regulations and case law from other jurisdictions can in principle be usefully utilised by the courts and competition authorities.

The efficiency of such harmonisation can easily be overstated. First there is the choice of which jurisdiction to harmonise with, and secondly outcomes from common application of competition precepts may be quite different depending upon legal systems—eg, the presence of common or civil law—and the state of any system.[63] Even under the same systems outcomes depend as much on the implementation of law and regulation as they do on the statutes themselves.

To the extent that there are substantive differences between countries on the basis of their size and location it is likely that implementation would and should be different even for the same statute. An obvious example is the HHI which is used in the USA as a prima facie indicator of the anti-competitive effects of a merger that, when tested against thresholds, will determine legality.[64] As Gal (2001) points out, the level of the US thresholds are simply not appropriate for small economies as they would create barriers to efficient mergers in those economies. That operative rules of thumb have been entirely different in New Zealand and the USA is pointed out in Arnold et al (2003), and an example relating to the electricity industry is given in Evans (1999). Indeed, accepting the thesis of this paper that small isolated economies are different from large economies in their absence of economies of scale and necessarily more concentrated markets implies that, at a minimum, implementation of competition law would differ across countries. This seems to have been the basis for Canada to deliberately emphasise the efficiencies defence relatively more than is the situation in the USA.[65] [66] Emphasising the efficiency defence relatively more in small economies is likely to admit consideration of more restrictive competition law conditions of larger economies, which would likely lower transactions cost for firms seeking to operate in small economies.

We also note that extent of isolation may be a critical factor both in harmonisation and competition law. For those countries whose location is such that their (domestic) markets coincide geographically with those markets of larger economies were it not for trade and other institutional restrictions, close harmonisation of all aspects of competition law would seem appropriate, particularly if barriers to trade are low. Indeed, in the absence of these barriers economies of scale and scope will be available by low-cost exporting as will market discipline effects of imports. The small economy problem may not apply for countries geographically and institutionally close to much larger economies, no matter how small the economy. A small European country might efficiently harmonise its law closely with the competition law of large neighbours (and ultimately even be embedded in the European Union) whereas New Zealand and Australia face some disjunction between their domestic and export markets due to costs associated with distance and for them close harmonisation with other countries may be less efficient.

Certain small economies—New Zealand being an example—have extensive competition law whereas other small economies—eg, Singapore, Hong Kong and the Philippines—have negligible competition law. Part of the difference may be explained by New Zealand’s isolation, which can mute the domestic advantages of trade in some areas, but it will also reflect the history of the country’s institutions. The Singapore and Hong Kong situation may reflect their positions adjacent to much larger economies which in effect provide competition and markets for many of their firms. Competition law is currently being proposed in both countries as the non-tradable sector—particularly that of services—becomes relatively more important. The Philippines exemplifies the very considerable numbers of countries for which consistent credible contract law is of much higher priority than the precepts of competition law.

It would seem efficient for small and geographically remote economies to have their own approach to the specification and implementation of competition and regulatory policies. The appropriate approach will desirably depend upon a country’s legal and political-governance structures. For all of these countries low institutional barriers to trade and investment are likely to enhance welfare. For those small economies for which competition law will improve welfare, mimicking the competition law and implementation practices of larger economies is very unlikely to be optimal. It is preferable that small economies place particular emphasis on efficiencies of practices and mergers and the removal of barriers to entry, rather than preconceived rules about competition; in which case arrangements that satisfy the competition law of larger economies will not be constrained in smaller economies thereby enabling lower cost foreign and domestic firm activity in the smaller countries. As common low barriers to trade across countries are likely to benefit the performance of domestic industries in these countries, there is no case for the promulgation of identical competition rules across economies.[67]