Calls for a ‘joined-up approach’ linking competition, trade and industrial policy have finally been heard in Europe. This second in a two-column series looks at what such an approach might mean in practice and identifies a number of major problems with competition policy practice and enforcement that remain to be addressed.
The first column in this two-part series set out a number of ‘foundational principles’ for a joined-up approach linking competition, trade and industrial policy in Europe arising from CEPR’s Competition RPN webinar of 28 October, “New Commission, New Mission: Modernizing Competition Policy – How?”. As Adlc President Cœuré said, “[i]t’s time to move from first principles and high level discussions, and go one step down into the nuts and bolts of what we’re discussing, and we’re starting to do it tonight”. This column takes a step towards operationalising the discussion, but serious investment in policy R&D is needed.
What implications for industrial policy and trade?
The obvious implication of a ‘joined up approach’ from the perspective of industrial policy and trade is that both need to explicitly embed competition values. This means that – as much as competition policy needs to be schooled on macro developments – industrial policy and trade need to be informed by competition expertise.
For industrial policy, the first-order issue remains that there is no coordinated effort at EU level, and there is the big question of funding instruments (points made both by Cœuré and Redeker). This is the major obstacle any EU-level industrial policy would need to overcome. But as a first principle, ‘joining up with competition’ must mean not indulging national fantasies for local champions but designing the combination of levers taking into account the need to foster/preserve competition. As noted by Redeker, “competition policy matters to ensure policy coherence. (…) We know from research that industrial policy works best if you target competitive sectors. There’s both theoretical reasons for that, and also empirical research on cases like South Korea showing that when industrial policy worked, it worked because it targeted sectors where there was fierce competition and firms were really competing. (…) Second, we should really prioritise firm-neutral instruments, and that’s regulation and public procurement. (…) I would like experts on competition policy to be in the room where these kinds of instruments are designed in order to make sure that they are working on a competitive basis”.
In trade, Europe remains a ‘WTO faithful’ committed to WTO principles and the neoliberal myth that open economies and globalisation can deliver competitive markets. As mentioned, this consensus has come under much pressure as it is recognised that the pursuit of efficiencies has led to incumbents being able to exploit lower input prices and scale economies to become more profitable and keep others out. In the US, alongside tariffs to protect domestic workers and re-onshore production, there has been explicit recognition that trade policy in the original Bretton Wood conference 80 years ago had ‘antimonopoly’ as an important guiding principle to protect the future from the antidemocratic tendencies of oligarchs (following Germany in the 1930s). Trade Ambassador Tai has talked about protecting jobs and “growing the middle class from the bottom up and the middle out” as explicit joint objectives of the Biden administration’s trade and industrial policies. Competition is regarded as a key component of this – involving rejection of national champions and consistency with antimonopoly enforcement.
Now let’s get specific on competition policy
Now let’s turn to competition policy practice and enforcement. What would a more ‘joined up’ approach mean here? How do we map these principles into practice? European antitrust agencies have been extremely protective of their patch. There has been little appetite or effort to engage with, let alone drive, a reflection on goals, values and methods. In the US in the early days of the Biden administration, noted legal scholar Tim Wu, an advisor to the White House, circulated a memo on “The Grand Unified Theory of Antitrust Revival (And a Plan for Action)”, which was the basis for the 2021 Biden Executive Order stating boldly that fighting corporate concentration was a goal of the administration. In contrast, Europe has contemplated no revival and no rethink. The end of the neoliberal consensus is not something anyone mentioned or reflected upon in competition circles (I tried, no takers). Instead of working on waking up the ‘sleeping giants’ (how Wu described the underutilised enforcement powers of the federal antitrust agencies), we have had extremely marginal rewrites of guidelines – Market Definition, Art 102. A total waste of time. These produce excitement in the Brussels ‘antitrust bubble’ and academic legal circles, but truly no have no impact on the ground.
So to start with, we were already in a situation where – Draghi or not – antitrust enforcement in Brussels and much of Europe has been weak, obsolete and ineffectual. There is a number of major problems that – Draghi or not – remain to be addressed. To name but a few:
Inapt ‘theories of harm’
We are stuck between tremendous lack of imagination, on the one hand, and lack of courage on the other. In mergers, ‘theories of harm’ are always about narrow effects on specific markets and involve either loss of competition between existing assets, or ‘foreclosure’ of rivals arising from integration of assets in some sort of vertical or conglomerate relationship. That’s pretty much it, with frequent contortions to articulate ‘leveraging mechanisms’ including little toy models with silly ‘calibrations’ based on three data points. We are just beginning to recognise power arises in ‘ecosystems’, not just from being big in a narrow market – but we don’t know how to deal with it. The Booking/etraveli prohibition was mostly a political statement (let’s block a non-Big Tech, old-style conglomerate digital merger – who remembers one-stop shopping in Guinness/GranMet?) but not a blueprint for anything. Conversely, we waste time making up a preposterous foreclosure story (of rival robot cleaners from Amazon’s marketplace) instead of articulating a story on data collection in Amazon/iRobot. Theories of harm in conduct cases are also majorly wonky: the Amazon and Apple abuse of dominance cases, for instance, were framed bizarrely as ‘exclusionary’ cases when they were all about extraction and exploitation. Such a waste of time.
Just cannot deal with incipiency
Antitrust remains terrible at dealing with incipiency. Because the concern is “creating or strengthening dominance”, the requirement is there needs to be material increment from something we can measure with something else we can measure. But the whole history of lack of any enforcement in digital mergers demonstrates our total inability to deal with a potential issue which is now small but can grow very fast. The cases are countless – in Microsoft/Activision, the improbable theory of harm was console foreclosure, instead of cloud gaming advantage. Agencies have more or less accepted by now the idea of ‘killer acquisitions’ (or their ‘reverse’ version) in digital (Caffarra et al. 2020) (see Adobe/Figma, though the deal was withdrawn). But the whole of AI lack of enforcement to date is in the same category – instead of pursuing “aggressively weaponizing scaled assets to gain first-mover advantage” as our theory of harm, we wring hands and admire the problem, then conclude “there is no creation of market power in any relevant market to date”. Really?
Persistence of the ‘efficiency’ myth
Notwithstanding the comprehensive takedown of ‘efficiency’ as a pursuable goal, it remains pervasive in our language and posture. Dubious practices are defended on grounds they are ‘efficiency enhancing’, state aid is allowed if it demonstrably ‘enhances efficiency’ in dealing with ‘market failures’. We are still stuck there.
Again, and to be clear, all of these issues (and more) require urgent fixes but they pre-date Draghi. Then in came Draghi, and he layered on top the issue that Europe has serious problems of growth, productivity, innovation, and our firms are sub-scale in terms of size, they don’t invest enough, innovate enough, and are just not large enough to compete internationally. But instead of engaging constructively with this hypothesis, the response of the antitrust community has been to close ranks even further and persist in the cry that “competition matters!” “This is the slippery slope to national champions!”. It’s easier to travel the road of “competition matters, don’t give up on competition” (which no one is seriously suggesting aside from loony fringes) instead of thinking seriously about what policy R&D one needs to initiate.
So, what does Draghi’s exhortation that we join competition with industrial policy and trade mean for how we should think of antitrust enforcement in practice – on top of the existing issues?
I believe the need for ‘size and scale’ is important and real for Europe, but of course being laggards depends on a host of structural issues and not on merger control in most industries, or relaxing enforcement. Indeed, Draghi’s suggestion that the telco sector in Europe is overly fragmented and could do with some consolidation has attracted almost universal pushback (Duso et al. 2024). Of course, one cannot ‘magic up’ a European market where there isn’t one, just to fabricate lower market shares and pass a merger. True. That said, while I do agree that both merger control and enforcement against abuse are almost comatose in Europe already, and cannot be relaxed further (4,000 deals approved in Brussels in the last ten years, only 9 prohibitions overall! 10 Article 102 decision in the last five years, with no impact on the ground!), I also think we should be a lot more selective in our approach – in terms of how we identify markets and industries in which to intervene – and more creative in our conditionalities.
Specifically, and linking to the discussion above as well as Benoît Cœuré’s “questions for reflection”, I believe we should adopt a more sector-specific approach in which we coordinate competition enforcement more closely with industrial strategies at the sector level, and trade developments. The impact of asset reallocations through mergers depends on how a sector or market is exposed to global changes in competitive advantages and macro stance turnarounds. Yet, this is almost never discussed in cases. There is formulaic market definition analysis which uses a cookie-cutter approach (simple price tests, shock analyses, some internal documents on perceived competitive threats), there is a perfunctory discussion of ‘barriers to entry’ – yes in principle the analysis is ‘case by case’, but the understanding of the broader landscape is very shallow. Even less is the understanding of investment and innovation dynamics. And critically, we don’t know how to place deals in context with the kind of macro reality, technology and competitive advantages discussed in the first section. I have been involved in countless deals in which all that mattered was market share increments in 172 individual national product markets, even though the industry was global and China was looming all over.
This is anathema in terms of today’s competition rules, when case review is mostly initiated as a routine exercise with mechanistic thresholds based on observables (revenue) applied across the board. But this means resources are scattered across ‘undeserving’ cases. We need a selective focus: designate sectors, firms, and markets as more or less strategic and view priorities through this lens. If we saddle an agency with a lot of routine work, this goes at the expense of resources going to critical cases. Choose sectors which deserve close scrutiny in terms of their ‘strategic’ importance. This is not a ‘free for all for other mergers’. Use presumptions to filter cases and reverse the burden of proof, as suggested (for a long time) by Tommaso Valletti. Of course, firms which want to consolidate via mergers will be quick in labelling themselves as strategic sectors, so care is needed.
Second, we need to work through trade-offs much more explicitly. We tend to be focused on short-term effects, that’s the antitrust bias, but we need much more substantive work to understand the nature of trade-offs over time – with investment, with sustainability.
Third, we need to consider what conditionalities may be acceptable, and what mix of instruments. Do we want to be ‘lighter touch’ and leave more discipline to ex-post enforcement? Draghi suggests this may be better than stopping some mergers outright. Again, hard to make generic cases. We allow too many mergers through, we are a merger factory, merger enforcement is comatose today. Do we want more mergers for which we then have to unscramble eggs? And conduct enforcement is notoriously slow and ineffectual. Again, we would need serious work on a selective sectoral approach to consider the mix of instrument in different sectors. Benoît Cœuré: “the question is about the kind of safeguards that we want to see in place if we want to make it work. And maybe some of us will say there are no possible safeguards and it’s never going to be possible. But we have to look in good faith at these safeguards and see if it can if it can work”. Exactly. By the same token, can we accept undertakings on investments as a quid pro quo for allowing a merger through? This has so far been anathema to the competition community, and Tomaso Duso explained clearly why, but perhaps needs thinking through. Let’s put together serious multidisciplinary working groups, and be creative.
As put by Benoît Cœuré at the event, “there is no effective industrial policy without competition”, and certainly “competition policy should not yield before other policy imperatives”. At the same time, “yes competition enforcers can ignore industrial policy, but industrial policy will not ignore them”. We need “a change of paradigm in the design of European economic policy: moving away from the traditional silo approach of competition and trade and industrial policy towards a unified approach”, “stakes are extremely high, and competition enforcers should play their part to meet the challenges”, instead of “sticking to a strict interpretation of their mandate, for fear of a return to what they see as the old competition policy driven by politics and by national interest”. And boom: “competition policy is industrial policy” (echoing Tim Wu); “we have an existential task in making industrial policy work and be pro-competitive; if we’re not part of that discussion, we won’t like the results”. Could not be clearer. I am not a one-woman think tank, and no one has ready-made answers. Of course, there is scope for major derailment into politicisation – a point everyone agreed on (see Tommaso Valletti’s account of his own experience with state aid and IPCEIs). But that said, it is unacceptable for the competition community to hide behind the usual excuse that “proposals for change are not specific enough”. Get to work, not in silos. Because doing nothing is a policy choice, but not one we can afford.
Source : VOXeu
