In his report on European competitiveness, Mario Draghi argued that “industrial, competition and trade policies interact closely, and must be aligned as part of an overall strategy”, a position that is reflected in the design of the new European Commission. This first in a two-column series sets out some foundational principles for a joined-up approach linking competition, trade and industrial policy in Europe.
The “loud calls for a joined-up approach linking competition, trade and industrial policy” have finally been heard in Europe, albeit with diffidence (Myers 2024). For the few of us making these calls for some time, 1 this was a fundamental necessity in the wake of a huge shift in the political economy: post-financial crisis, post-Covid, as the faults of neoliberal trickle-down efficiency-led vision became clear and the wisdom of an ‘all of government’ approach became obvious. But no one cared or listened, as DG Competition remained wedded to the ‘one instrument, one goal’ mantra, unresponsive and persistent in its elitist posture – at once unadventurous, intellectually unambitious, and unwilling to engage. Sycophancy from the Brussels ‘antitrust Bubble’ (the circle of lawyers, economists, journalists, companies, and their lobbyists who would do anything to get their case through) is the culture broth which produces statements such as “competition is just a side dish relative to the big issues of our times” (Sisco 2024). It is no surprise competition enforcement in Europe has been indeed on the way to becoming a ‘side dish’ – increasingly irrelevant to the economy at large.
But these same calls can no longer be ignored when the big vector for change coming from the political economy gets supercharged by the Draghi Report (Draghi 2024), with a devastating diagnosis of Europe’s ailments, and the prescription that “industrial, competition and trade policies interact closely, and must be aligned as part of an overall strategy” (p. 9). President Von Der Leyen designed her new Commission indeed by distributing competences across Commissioners in a way which would have been unthinkable five years ago, in an effort to implement Draghi’s blueprint. Europeans don’t like to call it an ‘all of government approach’, too American, but that’s what it is.
What can the ‘calls’ mean in practice? We started exploring the question “in a grown-up discussion” (as described by Jan De Loecker) at CEPR’s Competition Research Policy Network online on 28 October. This column summarises my thoughts, as informed by that very rich discussion. Part 1 sets out the foundational principles we need to agree on. Part 2 will turn to what ‘joined-up thinking’ means for trade and industrial policy, and more specifically for competition policy.
Four foundational principles we need to agree on
No one in this debate is seriously arguing for competition policy being upended and made subordinate to other goals. This is a misrepresentation. As Jan De Loecker (Leuven) put it at the event, the common overarching goal remains “how do we facilitate a pro-competitive environment that can meet global challenges without harming our consumers”. Surely this is a goal we all recognise. We are not talking about directly pursuing, say, reduction of inequality or decarbonisation through competition enforcement. However, operating a ‘joined up approach’ as suggested by Draghi (and welcomed by many) involves establishing some foundational principles.
- First, it is essential there is a common understanding of the macro landscape. We cannot begin to analyse markets, even locally, without being cognizant of the broader reality staring at us in the face, how we got here, and what it may well mean. Sander Tordoir (CER) gave a strong summary of the major turnaround of the Chinese economy, the “second China shock” (overcapacity and low household consumption as the real estate bubble also burst), which created conditions for a massive manufacturing surplus (around 10% of China’s overall GDP; Setser 2024) being exported to the rest of the world. What does this mean for the competitiveness of Europe at home and abroad, our prospects for reshoring versus offshoring production, implications for labour markets, exports, profitability and investment – in short, our competitiveness? Europe is more reliant than ever on China for imports in key sectors, and the US for exports. And China is poised to take a dominant share of global markets in an expanding number of sectors. As Tordoir said, “if we do not pursue our own industrial strategy, we will import China’s imbalances, shrinking the EU’s manufacturing base, which is more productive than services, and innovation”. No one has the faintest idea about any of this in the competition world. As competition experts, we do cookie-cutting market definition and competitive assessment with our little bag of tools, using backward-looking historic sparse data, oblivious to big transformative changes. Another one: what does anyone in competition know today about comparative technology advantages – for instance clean tech, in a world where greentech competition between blocks will be the name of the game? Any idea? Europe is actually strong in this area apart from solar panels and batteries, including green innovation and patents. Does anyone know?
Constantly updating knowledge of this broader reality should be mandatory for officials in competition as well as in industrial policy and trade. The analysis of markets for purposes of antitrust assessment cannot be ignorant of the macro landscape and its evolution, and of shifts in competitive advantage which affect competitive constraints. Yet it is. - The second foundational principle: understanding the interplay of policy tools in the pursuit of common goals. Tools are sometimes complements, sometimes substitutes and sometimes also in conflict, and all of that needs to be explicitly worked through. As Nils Redeker (Delors Institute) put it: “Industrial policy is about subsidies but in many instances, levers like trade policy, regulation, public procurement are much more important. This also means that if you are committed to supporting a sector for strategic reasons, you need to make sure that different policy levers are all pulling in the same direction”. While trade and competition policy have been operated as independent goods for as long as one can remember both in the US and Europe, it is now understood at least in the US that the ‘Washington consensus’ of efficiency, free and open borders which made cheaper goods available to people as consumers also disadvantaged and disenfranchised them as workers, as production was offshored and whole communities were left behind. This had a significant distributional impact, but critically it also did not help competition at home, because (a point well made again by Jan De Loecker at the event) free trade that lowers input costs when there are barriers to entry into markets and economies of scale means incomplete pass through of those lower input costs by incumbents with scale advantages, and disproportionate margin increases which are not dissipated by entry. “What you’ve then done with trade policy is you just empowered the incumbent”, which you then try to tame through competition enforcement; “not integrating the two policies will not deliver procompetitive effects”.
Another example is digital trade: free trade in digital goods (originally intended to ‘oil the machine’ around trade in physical goods, but now mostly signifying trade in data) has been a pillar of digital giants’ world domination; but this is in direct contrast with initiatives to curb their power at home through antitrust – again, liberal trade policy running counter to competition policy.
Tordoir (referencing Michael Pettis) also said at the event: “Tariffs, wage moderation policies, and competition policy all to a degree represent trade-offs and transfers from consumers to producers. Doing such transfers only makes sense in areas where we have a real shot of regaining competitiveness”. To expand: “we have to think about to what extent do we support our producers. You don’t want to do so across the board, there may be areas where you just want to accept cheap imports because we have no industry like solar panels like Draghi says; but in other areas you may want to make sure that we regain or retain competitiveness”. - Which takes me to the third foundational principle: selective approach. Draghi identified ten strategic sectors for discussion in his report, and for each of them he sets out an industrial strategy for Europe to recover ground. This requires agreement on the objectives, the combination of tools and the funding – not as a generic endeavour, but as a specific effort for specific sectors. Redeker: “the key question is not whether we will have industrial policy in Europe or not, but whether we will have a coherent joint EU-wide industrial strategy, or we’ll end up with 27 national industrial policies… We need to make a decision on what sectors we want industrial policy for, and why. Industrial policy comes with trade-offs, and we need a good understanding of what we’re doing and why…but the EU is not there yet… only in the last term, I counted more than 50 technologies and industries deemed to be strategic, ranging from heat pumps and solar panels to robotics and biomonitors…. This mixes together industries with very different objectives – on solar panels the objective is to diversify supply, reduce dependence on China, but this requires a very different tool set than supporting an infant industry like hydrogen where we want to build a dynamic competitive advantage in Europe. Yet this is all mixed together in the Net Zero Industry Act”.
Tordoir also mentioned the need for ‘shades of grey’: “the EU should shift away from a yes-or-no debate on industrial policy to a nuanced when-and-how discussion considering the characteristics of each industry, its prospects and its strategic value”. And “(it) should focus its subsidies on sectors where short-term assistance is needed to help infant European industries, such as hydrogen, achieve scale, or employment-rich sectors like cars, where we have a real shot at making the transition to electric vehicles (The EU is already a net exporter of EVs). It should also prioritise support to markets for goods, like wind turbines, in which a global oligopoly or duopoly is likely to arise, and in which a dependence on China would be risky. That way, the EU will help new businesses to grow while minimising handouts to those that do not need them”) (Springford and Tordoir 2023).
Competition policy comes into this in two ways: one, as a fundamental value in the design of the strategy for each sector – not to cement incumbents into place and favour national champions, but to foster competitive structures; and two – and this is the most controversial part – competition policy has been historically a ‘cross-sectional tool’, by which I mean the toolkit has developed as an industry-agnostic kit: market definition based around a prescribed hypothetical 5-10% price increase whatever the sector; market power proxied by current ‘share of revenue’ whatever the sector; limited interest for other indicators of power (from data to capital intensity); vertical deals presumptively benign; and so on. I will return to this below, but it is time to accept that the analysis of competitive conditions, asset re-combinations, and incentive effects may well require sectoral differences. - The fourth foundational principle: acknowledging and working through trade-offs. There are inevitable trade-offs when pursuing competition, investment, and growth. The commonly accepted wisdom is that competition is the ‘engine’ for investment and growth. That said, in practice there are trade-offs between short term and long term, price effects and investment effects, consumers and producers. This is something competition policy never fully acknowledges because it is premised still in the main on a neoliberal neoclassical view in which productive efficiency is the goal, and economic ‘tools’ are designed (crudely) to ‘maximise’ a notion of ‘consumer welfare’. There is a strong presumption that ‘competition delivers’ – low prices and innovation and the right amount of competitive investment – but there is limited interrogation of whether this is true, for what sectors, type of investment, or innovation. The persistent dispute around telco mergers (also a hot topic following the Draghi Report) is evidence of this (Duso et al. 2024).
In summary, “we need to make sure that we don’t only look at the European market in isolation, but think of the European market within this globally changing landscape. And for markets that are tending towards oligopolies globally, we may, in fact, be better off as Europe creating larger firms of your own that can compete. Airbus is the classic example… that’s probably safer to do so in markets that are already Europeanised like the goods market, which is more integrated than services markets, so there’s less of a risk of creating a shark in a small pond. You can create a larger shark, and it will face competition from firms in other European countries and from the rest of the globe” (Tordoir).
Source : VOXeu
