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Foreign Affairs
The New Trustbusters: Brussels and Washington May Part Ways
By David S. Evans
David S. Evans is Senior Vice President at National Economic Research Associates.
In July 2001, the European Commission acted on the recommendation of its antitrust arm to block a proposed merger between General Electric (GE) and Honeywell. The U.S. Department of Justice had already approved the fusion of these two American firms, which together boast annual sales of more than $150 billion. The opposition of the European Union (EU) therefore shocked the two companies and most business analysts, who had predicted that the move would make Honeywell a stronger, more efficient company. What made the rejection of the deal even more striking was that Europe and the United States had bragged about their close cooperation and convergent approaches to antitrust policy for several years. Instead, the Honeywell case underscored the profound transcontinental differences on this issue.
European antitrust regulation could become an unexpected stumbling block on the road toward a more integrated global economy. U.S. antitrust authorities presume that markets work; hence government intervenes only when there is clear evidence that business practices are harming consumers. In contrast, EU competition officials seem to seek the "right" market structure, sometimes placing the interests of competitors over those of consumers. In the GE-Honeywell case, both sides agreed the merger would result in lower prices for consumers. But whereas the Americans saw the price reduction as an unmitigated benefit, the Europeans viewed it as a detriment, because they speculated that it would make it harder for other firms to compete and perhaps allow GE and Honeywell to raise prices in the future. In the words of Charles James, antitrust chief at the U.S. Department of Justice, "What led the United States to clear the transaction — the prospect that it would make the combined firm a more effective competitor — was the very reason the EU opposed it."
The EU's opposition to the merger has highlighted the risks that multinational corporations face as antitrust laws proliferate around the globe. Some analysts have argued that the time has come to harmonize antitrust policy internationally to reduce potential conflicts. That goal is laudable — but not if it means yielding on U.S. antitrust principles, which protect consumers and resist propping up inefficient businesses.
New Rules of the Game
During the second half of the twentieth century, many countries opened up their economies to market forces and limited the role of central planning. But even as free markets became the primary way of organizing production, governments also developed "competition policy" to establish the rules of the game. This policy usually took shape in laws enforced by a regulatory body, often with appeal to a judicial body. By 2000, more than 80 countries, accounting for nearly 80 percent of world production, had enacted such laws. Many of these countries modeled competition policies and their implementation on the antitrust laws of the United States, which are grounded in the 1890 Sherman Antitrust Act.
In general, strong competition policies, based on sound economics, help prevent clear instances of monopolistic behavior such as price fixing. In many cases, antitrust laws also help challenge institutional arrangements that impede . . .