international cartel enforcement: lessons from the 1990smaggiel/files/worldeconomy.pdf ·...

International Cartel Enforcement:

Lessons from the 1990s

Simon J. Evenett, Margaret C. Levenstein and Valerie Y. Suslow

1. INTRODUCTION

I N its 1997 Annual Report, the World Trade Organisation (WTO) high-lighted the growing significance of international cartels for policymakers,

noting ‘there are some indications that a growing proportion of cartel agreementsare international in scope.’1 Increasing trade liberalisation may, by increasingcompetition in formerly protected national markets, have increased firms’incentive to participate in cartels. These cartels undermine international inte-gration and decrease the benefits of liberalisation to consumers. Internationalcartels may also undermine political support for liberalisation if citizens believethat private barriers to trade will simply replace government-created ones.

Recent investigations and prosecutions of international cartels make clear twoimportant points. First, cartels are neither relics of the past nor do they always fallquickly under the weight of their own incentive problems. Even where cheatingeventually undermines collusion, consumers may have been burdened by years ofincreased prices, and barriers to entry may have been created by strategic cartelbehaviour. Second, aggressive prosecution of cartels can deter collusion, but onlywhere sufficient international cooperation exists to gather evidence and establishjurisdiction so that cartel participants actually have something to fear.

A more comprehensive approach to promoting competition is necessary toaddress the emerging issues of the international marketplace. Prevailing national

ß Blackwell Publishers Ltd 2001, 108 Cowley Road, Oxford OX4 1JF, UKand 350 Main Street, Malden, MA 02148, USA. 1221

SIMON J. EVENETT is an Economist in the Development Economics Research Group, The WorldBank; Moderator of the Brookings Roundtable on Trade and Investment Policy; and ResearchAffiliate of the CEPR. MARGARET C. LEVENSTEIN is Associate Professor of Economics at theUniversity of Massachusetts and Albion College; Adjunct Associate Professor of BusinessEconomics at the University of Michigan; and Faculty Research Fellow at the National Bureau ofEconomic Research. VALERIE Y. SUSLOW is Associate Professor of Business Economics at theUniversity of Michigan. The views expressed in this paper are personal and do not represent thoseof any of the institutions with which the authors are affiliated. They wish to thank GabrielCasteneda, Peter Holmes, Mirvat Sewadah, and especially Spencer Weber Waller for theirconstructive comments and suggestions.

1 World Trade Organisation (1997).

competition policies are oriented towards addressingharm done in domesticmarkets, and in some casesmerely prohibit cartels without taking strongenforcementmeasures.In this paperwe proposereformsto nationalpoliciesandto international cooperativearrangementsthat will strengthenthe deterrentsagainstinternationalcartelsandreducethe strategiccreationof entry deterrents.

Section2 of this paperdiscussesthreetypesof internationalcartels.Section3examinestwo typesof internationalcartelsthatwereactiveover the lastdecade:illegal ‘hard core’ cartelsandlegalexportcartels.We provideanoverviewof theprevalenceandcharacteristicsof thesecartelsanddiscussthelong-termeffectsofcartel-createdbarriersto entry. In Section4 we examinethe deterrenteffect ofcurrent national competition laws, and in Section 5 we assessthe recentexperiencewith bilateral cooperation in international cartel investigations.Finally, in Section6 we addressthe role that the WTO (or other internationalregulatory body) might play in promoting competition. We discuss othermodifications to national and multi-lateral competition policies to the sameeffect. We argue that criminalisation of price-fixing is critical to deterringprospectiveinternationalcartels and gatheringevidenceto prosecuteexistingones.Furthermore,we arguethat the aggressiveprosecutionof cartelsmust becomplemented by vigilancein otherareasof competitionpolicy, suchasmergerenforcement and investigations of collaborative ventures between firms.Otherwise firms will respondto the enhanceddeterrentsto cartelisationbycombining with or acquiring rivals or by taking other measuresthat lessencompetitivepressures.

2. TAXONOMY OF INTERNATIONAL CARTELS

a. ThreeTypesof InternationalCartel

Therearea wide variety of organisationsthat could plausiblybe describedasinternationalcartels,and to structurethe analysisin this paperwe distinguishbetweenthree types: Type 1 are the so-called‘hard core’ cartelsmadeup ofprivateproducersfrom at leasttwo countrieswho cooperateto control pricesorallocate sharesin world markets. Type 2 are private export cartels whereindependent, non-state-relatedproducersfrom onecountrytakestepsto fix pricesor engagein market allocation in export markets,but not in their domesticmarket.2 Type 3 arestate-run,exportcartels.

2 Note,however,thatnot all exportassociationsallocatemarketsharesor fix prices.In his studyof US firms which formedexportassociationsthat werereportedunderthe Webb-PomereneAct,Dick (1996) found that about20 per centengagedin neitherof theseactivities; their cooperationwaslimited to promotionandmarketing.

1222 S.J. EVENETT, M. C. LEVENSTEIN AND V. Y. SUSLOW

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Althoughwebriefly commentonpoliciestowardexportcartels,we restrictthegreaterpart of our analysisto Type 1 cartels.3

b. TheBasicsof Cartel Performanceand Implicationsfor Anti-trust Policy

Theeconomictheoryof cartelshastwo main implicationsfor anti-trustpolicy.First, economictheory identifies the incentive to sell aboveagreedquotas,orbelow cartel prices, as a sourceof instability underlying all cartels.This hasimplications for how governmentsmight allocatescarceanti-trustresources,sincewe might want to identify which firms aremostlikely to beableto overcometheincentiveto cheatand direct anti-trustresourcesthere.Unfortunately,economictheory does not identify deterministic relationshipsbetweenindustry or firmstructureandcartelsuccess.Rather,theoreticaladvanceshaveestablishedthat aninfinite number of outcomesare possible,ranging from perfectly competitivepricesto perfectcollusion.Furthermore,theactualsuccessor failure of a cartelinanyindustrydependsonahostof factors,suchasthelegalenvironment,economicconditions, the terms of the cartel agreement,managerialskill, and industryhistory.Someof thesevariablesare inherentlyunobservable.

Sutton(1998)suggestsa ‘bounds’approachto this problemwhich recognisesthattherearecertainnecessarybut not sufficientconditionsfor cartelsuccess.4 Inother words, there is a broad range of industry and firm characteristicsorconditionsthat supporta rangeof cartel outcomes.Outsideof the boundsoffeasiblecollusion entry may be ‘too easy’ or coordination‘too difficult’ for acartel to survivein a particularindustry.Insidethe boundsof feasiblecollusion,cartels may succeed.On this view, anti-trust enforcementshould focus itsresourceson industriesinsidethesebounds.

All else equal, internationalprice-fixing agreementsare more likely to fallinside the boundsof successfulcollusion.The existenceof commonlyacceptedmarket borders facilitates collusion. International agreementsoften dividemarketsalongnationalborders,which neednot bedrawnor negotiatedby cartelmembersthemselves.Theability to monitorcompetitorsincreasesthe likelihoodof cartel success– and firms in an internationalcartel canmonitor exportsandimports,usingpublishedtradeandcustomsdata,aspartof their efforts to policeagreements.If thesefeaturesof internationalcartels outweigh any increaseddifficulty associatedwith differencesin cultureor language,thenthereis a strongargumentfor focusinganti-trustresourceson internationalcartels.

3 State-runexport cartels (Type 3 cartels) are motivated by a range of political as well aseconomic factors that distinguishestheir behaviour and effects from the profit-maximisingcorporationswho form private internationalcartels(Type 1 cartels),which areanalysedhere.

4 SeealsoEvenettandSuslow(2000)andLevensteinandSuslow(2002).

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The secondimplication of cartel theory for anti-trustpolicy also stemsfromcartels’ underlyingfragility. A successfulcartelmust takeactionsto counteractthe incentiveto defect.Suchactionsincludemechanismsto increasethe costtodefection:makingcheatingmoreobservable;makingcheatingmoredifficult toundertake; creating mechanisms to punish cheating. They also includemechanismsthat increasethe returns to cooperation,such as the creation ofbarriersto entry. Therefore,in addition to the classic(static)deadweightlossescreatedby acartel,cartelbehaviouris likely to createfurthercostsovertime.Thelongera carteloperatesthemorelikely that it will establishindustrypracticesorbarriersthat facilitate collusion in the future. Barriers to entry createdby thecartel, either through tariffs, patentpools, or distribution agreementswill notnecessarilydisappearwith thecartel’sdemiseandmaywell limit futureentryandstifle innovation. Firms may move beyondcollusion to merger,achieving, inessence,a morestableandconsolidatedcartel.

Effective anti-trust policy should take advantageof the cartel incentiveproblem. It can do this by increasingfirms’ incentivesto defect, limiting themechanismsby whichcartelscanpunishdefection,andpreventingthecreationofbarriers to entry. As we shall see in Section3, strategicbehaviourby cartelmembers(duringandevenaftera conspiracyhasbeenterminatedby competitionauthorities)suggeststhata moreencompassingapproachto tacklinginternationalcartelsis required.

3. CONTEMPORARYINTERNATIONAL CARTELS

a. `Type1' InternationalCartels

(i) Internationalcartels: prevalence,formation,and durationTherehavebeennumerousrecentinternationalprice-fixing prosecutionsby

the US JusticeDepartmentandthe EuropeanCommission.From these,we havecreateda samplethatwebelieveincludesnearlyall internationalcartelsthathavebeensuccessfullyprosecutedby the US or the EC for fixing pricesduring the1990s.5 Thesecartelsoperatedin a variety of industries,including chemicals,metals,paper products,transportation, and services.Their membersincludedsomeof the largestcorporationsin the world. The marketsaffectedby thesecartelshaveannualsalesof well over $30 billion.6

There are forty cartels in the sample, with participants from over thirtycountries(Table1). The typical internationalcartelof the 1990shadfirms from

5 In order to be includedin the sample,a cartelmust: involve more thanoneproducer;includefirms from morethanonecountry;haveattemptedto setpricesor divide marketsin morethanonecountry;andbeginor end in the 1990s.

6 Dueto lack of data,this figure includesrevenuesfor only abouthalf of theindustriesin Table1.



TABLE 1Countrieswith FirmsConvictedof PriceFixing by theUnitedStatesor theEuropeanCommission

During the 1990s

Country Cartel

Angola ShippingAustria Cartonboard,citric acid, newsprint,steelheatingpipesBelgium Ship construction,stainlesssteel,steelbeamsBrazil Aluminium phosphideBritain Aircraft, steelbeamsCanada Cartonboard,pigments,plasticdinnerware,vitaminsDenmark Shipping,steelheatingpipes,sugarFinland Cartonboard,newsprint,steelheatingpipesFrance Aircraft, cable-stayedbridges, cartonboard,citric acid, ferry operators,

methionine, newsprint,plasterboard, shipping,sodium gluconate,stainlesssteel,steelbeams,seamlesssteeltubes

Germany Aircraft, graphiteelectrodes,cartonboard,citric acid, aluminiumphosphide,lysine, methionine, newsprint,pigments,plasterboard, steel heatingpipes,seamlesssteeltubes,vitamins

Greece Ferry operatorsIndia Aluminium phosphideIreland Shipping,sugarIsrael BromineItaly Cartonboard,ferry operators,newsprint,stainlesssteel,steelheatingpipes,

seamlesssteeltubesJapan Graphiteelectrodes,lysine,methionine, shiptransportation,shipping,sodium

gluconate,sorbates,seamlesssteeltubes,thermalfax paper,vitaminsLuxembourg SteelbeamsMalaysia ShippingMexico TampicofibreNetherlands Cartonboard,citric acid,ferry operators,shipconstruction,sodiumgluconate,

tampicofibreNorway Cartonboard,explosives,ferrosiliconSingapore ShippingSouthAfrica Diamonds,newsprintSouthKorea Lysine, methionine, ship transportation,shippingSpain Aircraft, cartonboard,stainlesssteel,steelbeamsSweden Cartonboard,ferry operators,newsprint,stainlesssteelSwitzerland Citric acid, laminatedplastic tubes,steelheatingpipes,vitaminsTaiwan ShippingUK Cartonboard,explosives,ferry operators,newsprint,pigments,plasterboard,

shipping,stainlesssteel,seamlesssteeltubes,sugarUS Aircraft, aluminium phosphide,bromine,cable-stayedbridges,cartonboard,

citric acid, diamonds,ferrosilicon, graphite electrodes,isostatic graphite,laminated plastic tubes, lysine, maltol, methionine, pigments, plasticdinnerware,ship construction,ship transportation,sorbates,tampico fibre,thermalfax paper,vitamins

Zaire Shipping

Source: Levenstein andSuslow(2001,Table1). Note: Productsin italics arecurrentlyunderinvestigation.



two or threecountries.Somecartelsincludedfirms from four or five countries,and, in the casesof shippingcartels,as many as thirty countries.As expected,giventhattheseareDOJandEC cases,mostareEuropeanandUSfirms. It is notunusual,however,to find Japaneseor SouthKoreanparticipation.

Cartels, being secretive organisations,rarely announce their formation.Empirical researchon cartel formation is thereforelimited to evidencegatheredfrom cartels operatingin a legal (or tolerant) environmentor from evidencecollectedin anti-trustprosecutions.Theoreticalresearchon the timing of cartelformationhasfocusedon the effectsof businesscycleson cartel formation.Theavailableevidenceon the formation of the 1990sinternationalcartelssuggeststhat thesecartelsoften were formed following a periodof declining prices,butthese price declines were not generally associatedwith macroeconomicfluctuations (Levenstein and Suslow, 2001). Anecdotal industry evidencesuggeststhat they were the result of increasing competition and marketintegration.7

Figure 1 showsthe patternin durationfor the 1990ssampleof internationalcartels.The averageduration of cartels in the 1990ssampleof DOJ and ECprosecutions is six years.8 Someof thesecartelslastedfor two decadesbeforeanti-trustintervention.Othercartelslastedlessthana year.Twenty-fourof theseforty cartelslastedfor at least four years,certainly long enoughto havehad asignificant impact on consumers.This finding is consistentwith conclusionsdrawnfrom othersamplesof cartels.Averagedurationis generallyin years,notdecades;thereare cartelsthat do survive decades,othersthat can’t get started,andmany in between.

Levensteinand Suslow’s(2001) surveyof cross-sectionstudiesof historicalinternationalcartels comesto a similar conclusion.The mean cartel episodelengthin thesestudiesvariesfrom four to eightyears,with a rangefrom oneyearto severaldecades.This high varianceundoubtedlyreflectsbothtruevariationincartellongevityandscholars’selectionbiasfor eithervery successful,long-livedcartels or those with an interesting history of on-again off-again episodes.Whateverthebiasesinvolved,it is clearthatcartelsarenot ‘short’ or ‘long’ lived;theyareboth.Therearealsoindustriesthat followed thepatternof theCanadianoil industry,in which the failure to sustaincollusion led to consolidationof the

7 LevensteinandSuslow(2002)comesto a similar conclusionanalysinga different sample.Thecasestudiestheysurveymostoftenreportcartelformationduringa periodof falling prices,but thisis not always,or evenusually,associatedwith falling demand.

8 This measureprobablyunderstatesthe durationof thesecartelsas it reflectsthe public, legalrecordof theyearsfor which thememberfirms werefoundor pleadguilty to colluding.If collusionprecededthe legal allegation, but the relevant authority did not have evidence to convictparticipantsof collusion earlier or chosenot to bring that evidenceto court as part of a pleaarrangement,our measurewould understatethe duration of collusion. SeeSuslow(2001) for afuller discussionof measuringdurationandthe patternor durationin internationalcartels.



industry(GrantandThille, 2001).In thenextsection,we look at this issueanditsanti-trustimplicationsmoreclosely.

(ii) Strategiesfor survival: building barriers to entryThe potential profits associatedwith successfulcollusion createan enormous

incentive for cartel membersto devise tools to overcomethe difficulties ofcolluding. A variety of tools have beenusedby contemporarycartels to blockentry, prevent and detect cheating, and prevent detection by competitionauthorities.Some cartels have turned to governmentpolicies to achieve theirends,employinganti-dumpinglaws,quotas,regulations,or import surveillanceandotherformsof statisticalreporting.Cartelshavealsoemployeda varietyof privatemeasures,including vertical restraintsor the useof a commonsalesagent,patentpooling, joint ventures,andmergers(eitherduringor after the conspiracyperiod).

For the most part, the public record on 1990sprice-fixing casesdoesnotdiscussactivities to block entry. Suchevidenceis not necessaryfor a criminalconviction,at leastin theUS,wherepricefixing is per seillegal. However,thereare many examplesof activities that may havebeenattemptsto deteror blockentry in theseandother industries(Table2).

Somecartelsturnedto governmentrestrictionsto block entry by outsiders.9

For example,Chinahaspresentedvigorouscompetitionin the world citric acid

FIGURE 1InternationalCartelDuration in the 1990s

Source: Levenstein andSuslow(2001,Table1).

9 This sectiondraws on researchby the authorson a few casesselectedfrom Table 2. SeeLevensteinandSuslow(2001).



TABLE 2Evidencefrom Historical CaseStudiesandfrom Recently ProsecutedCartels:Are CartelMembersAttempting to CreateBarriersto Entry?

Industry ConspiracyDates(approximatedatesfor recentcartels,first yearof cartel forhistorical studies)

Doesanecdotalevidencepoint to firms accommodatingentry or creatingbarriers to entry?If so,how?

Bromine 1885 Raisingpharmaceuticalstandards;vertical rent sharing/exclusivecontracts.Bromine 1995–98 Appearto beaccommodatingentryof developingcountryproducers.Establishingjoint ventures.Cement 1922 Vertical integration.Diamonds 1870s Vertical integration.Citric Acid 1991–95 Firmstried to blockentryby twice requestinganti-dumpingdutiesto protecttheUSmarketfrom

Chinesecitric acid imports.Onceduring the conspiracy(in 1995),andonceafter (1999).bothtimesthe petition wasdenied.

Ferrosilicon 1989–91 Five of the six major US manufacturerspleadedguilty andwerefined. Thesesamemanufacturersaskedfor anti-dumpingdutiesto beplacedon Brazil, China,andothercountriesaswell. Thesetariffs wereapprovedandlevied in 1993–94.Whenthe InternationalTradeCommissionfoundout abouttheprice-fixing conviction,however,theyreversedthetariffs. TheCommissionsaidthat industry leadershadbeenfixing pricesduring the very time period thatthey hadtestified that therewasintenseprice-basedcompetition(CharlestonGazette, 28August,2000).

GraphiteElectrodes 1992–97 Cartelagreementspecifiedthat firms agreedto restrictnon-conspiratorcompanies’accesstocertaingraphiteelectrodemanufacturingtechnology.

OceanShipping 1870s Deferredrebatesfor customersconditionedon cooperationwith cartel; predatorypricing.Oil 1871 Tariff.ParcelPost 1851 Vertical rent sharing;networkeconomies;1st moverreputation.Railroad/Oil 1871 Vertical rent sharing.SeamlessSteelTubes(Oil CountryTubularGoods)

1990–95 Appearto be accommodatingentry. Severalcartelparticipantshave,sincethe breakupof thecartelby theEuropeanCommission,enteredinto joint ventureswith firms basedin developingcountries.

SteelBeams 1988–94 Restrictedflow of information in order to freezeout any new competitors.Vitamins 1990–99 No direct evidenceof creatingbarriersto entry,otherthana requestfor anti-dumpingdutiesin

1999.After thebreakupof thecartel,mergersof cartelmemberswereapprovedby competitionauthorities.

Source: Historical casestudiesbasedon Levenstein andSuslow(2002, Table 16). Recent cartel evidencebasedon Levenstein andSuslow(2001).

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industry,which is otherwisehighly concentrated.US producerstwice tried to useanti-dumpingduties to insulatethe US market from Chineseimports of citricacid, once during the conspiracyand once after. Both times the petition wasdenied.Producersin theferrosiliconcartelpursuedsimilar tactics,usingUS anti-dumpingdutiesto protectthe cartel from Chineseandother imports(Table2).

Technologicalrestrictionsarealsousedto maintaincartelmarketpower.Forexample,steel producerswho were colluding to fix the price of steel beams‘restrict[ed] the flow of information . . . in order to freezeout any new com-petitors’,accordingto Karl Van Miert, a formerEC competitioncommissioner.10

In anotherrecentcase,membersof a graphiteelectrodecartel ‘agreedto restrictnon-conspirator companies’accessto certain graphiteelectrodemanufacturingtechnology.’ 11 These casesbuild on a history of cartel attempts to restrictinformationabouttechnologyto createbarriersto entry.12

Finally, thereis case-specific evidenceof theuseof strategicalliancesandjointventuresto limit or control entry.Oneof the moststriking examplesis in the OilCountryTubularGoods(OCTG) market.Theseareseamlesssteelpipesusedintheoil andgasindustry.In December1999,theEC convictedfour Europeanandfour Japanesesteel manufacturersof price fixing. No evidence was foundindicating that they blocked entry or potential entry into the OCTG market.However,sincethe breakupof the cartel,everymemberof the cartel hasjoinedoneof threeinternationalalliances.Thelargestof these,with a 25 percentmarketshareof world OCTG is led by Techint. Techint controls Dalmine, the Italianmemberof thecartel,Tamsa,a Mexicantubeproducer,andSiderca,anArgentinesteel producer.They are known jointly as the DST group. Tamsais currentlyunderinvestigation by theMexicanFederalCompetitionCommissionfor abuseofmonopolypower (in a casethat appearsunconnectedto the EC charges).NKK,anotherleadingproducerandformer cartelmember,hasformedan alliancewithDST, as has a Canadianproducer.Three of the Japaneseex-conspiratorshaveformedanalliancein which theyusea singlejoint salesagency.MannesmannandVallourec,theGermanandFrenchcartelmembers,haveformeda joint venturetowhich theyhavetransferredall their OCTGproduction.Theyarealsoengagedinsteeltubejoint ventureswith Corus(formerly British Steel),anotherformercartelmemberthat hasexited the OCTG market.

Thesekindsof activitiesmight beparticularlyeffectivein limiting entry fromdeveloping country producers. In several commodity chemicals markets,incumbentfirms have been willing to accommodateChineseentry since thebreak-upof a cartel,but theyhavedonesoby establishingjoint venturesbetween

10 ‘EuropeanCommissionFinesSteelMakers$116.7Million’, Wall StreetJournal Europe (17February,1994).11 ‘JapaneseSubsidiary Charged with International Conspiracy to Fix Prices for GraphiteElectrodesin the US’, US DOJ PressRelease(23 February,1998).12 See,for example,Reich(1992).



former cartel participantsand their Chinesecompetitors.Thesearrangementsgive Chineseproducersaccessto theworld market,but maydo soat somecosttocompetition.Of course,bothentrantsandestablishedproducerscouldhaveother,welfare-enhancing motivesfor joint ventures,suchassharingtechnology,localmarket expertise,or capital. These explanationsfor joint ventures are notmutuallyexclusive,but joint ventures(andmergers)in industriesknownto havea history of international price fixing should be carefully scrutinised byregulatoryauthorities.13

We have presentedevidence of anti-competitive actions taken by con-temporaryinternationalcartelsto createbarriersto entry throughmergersandjoint ventures,and to manipulatecertain governmentalpolicy tools, such asprotectivetariffs and anti-dumpingduties,either during or after a conspiracy.While someof theseactivities may be appropriateundercertaincircumstances,their appearancein anindustrythathasrecentlyattemptedto colludeshouldraiseconcernaboutpossibleanti-competitive effects.

b. ‘Type 2’ Export Cartels

(i) Legal statusExport cartelsare associationsof firms that cooperatein the marketingand

distributionof their productto foreignmarkets.Thecompetitionlawsof virtuallyall countriesexemptsuchexportcartelsfrom prosecutionby domesticauthorities.A summaryof theseexemptionsis provided in Table 3. In somelegislation,exemptionsfor exportcartelsareexplicitly motivatedby mercantilism:adesiretoincreasenationalexportsandgivenationalfirms acompetitiveadvantagerelativeto firms basedin other countries.In most cases,however, this exemptionisimplicit in nationalcompetitionlaws,which coveronly thoseactivitiesaffectingthe domesticmarket.Export activities are presumednot to affect the domesticmarket,andarethereforeexempt.Severalcountriesdo,however,providespecificexemptionfrom domesticlaws for cartelsthat would otherwiseviolate domesticlaws as long as their activities are restrictedto export markets.Japan,Mexico,and the United Statesall havesuch legislation.Japanand the US require thatexport cartels register with a governmentalagency to receive an anti-trustexemption.In mostcases,however,no registrationis required,so thereis verylimited informationregardingthe numberor activitiesof exportassociations.

When the US passedthe Webb-Pomerene Act in 1918 most of its tradingpartnersdid not prohibit cartels.The US wasa relatively small player in manyinternationalmarkets,and thosemarketswere effectively controlled by legalinternationalcartelsdominatedby largeEuropeanproducers.Foreigncartelstook

13 Thereareseveralindustries,including bromineandsteel,that appearin both the 1990scartelsampleandthe historicalsampleof a centurybefore.SeeLevenstein(1997).



actionsto barentryfrom non-members,butUSfirms werenotallowedby USlawto join these international cartels. US firms were therefore blocked fromexportingto thesemarkets.In suchanenvironment,exemptionsfor exportcartelswere most likely export-promoting, even if they did not necessarilyincreasecompetitionin foreign markets.

The internationallegal environmenthasundergonedramaticchangesincetheearly 1900s. Virtually all participants in international markets have laws

TABLE 3NationalExemptionsto CompetitionLaw for Exportersa

Country Exemption ReportingRequirement

Canada Exportactivitiesthat do not affect Nonedomesticcompetition

Estonia Activities that do not affect the Nonedomesticmarket

Germany Repealedby 1999amendmentsto theAct AgainstRestraintsof Competition

Hungary Activities that do not affect the Nonedomesticmarket

Japan Agreementsregardingexportsor among Notification andapprovaldomesticexporters of industryadministrator

required

Latvia Activities that do not affect thedomesticmarket None

Lithuania Activities that do not affect thedomesticmarket None

Mexico Associationsandcooperativesthat export None

Portugal Activities that do not affect thedomesticmarket None

Sweden Activities that do not affect thedomesticmarket None

United Apparentlyremovedby 1998CompetitionLaw Formerly,agreements hadKingdom to be furnishedto Director

Generalof Fair Trading

UnitedStates Webb-PomereneAct: Activities that do not affect Webb-PomereneAct:domesticcompetition Agreementsmustbe filed

with FTC

ExportTradingCo. Act: Exemptionsimilar ExportTradingCo. Act:to W-P Certificateof Review

providedby CommerceDept.

ForeignTradeAntitrust ImprovementAct:Exemptionfrom ShermanandFTC Acts

Notes:Information aboveis drawnfrom OECD (1996)andAmericanBar Association(1991).



prohibitingprice-fixing.Exportcartelexemptionsdo not allow firms to join legalinternationalcartels,becausethosecartelsno longer exist. The effect of theselaws in the current environment is to make it more difficult for nationalgovernments,all of which ban internationalcartelsin their domesticmarket,toexchangeinformationandevidenceregardingillegal internationalcartelactivitybecausesomeof thatactivity hasbeenexemptedfrom prosecutionin a particularcountry.

Recent reforms of competition law in EC countries have restricted oreliminatedexportcartelexemptionsin somecountries.For example,Germany’snew competition law explicitly omits its earlier provision for exemptionandregistrationof exportcartels.The UK’s 1998competitionlaw omits mentionofthe Fair Trading Law’s provisions for exemption and registration of exportcartels.

Wherecountrieshaveprovidedexplicit exemptionsthesedo not appearto bewidely usedby internationalcartels.For example,there is no mention of theexistenceof a Webb-PomereneAssociationin any of the recent internationalcartel convictions obtainedby the US JusticeDepartment.14 The registrationrequirementmay deter cartel participants from availing themselvesof theexemption. Firms engagedin price-fixing may prefer secrecy to a limitedimmunity that might bring themto the attentionof competitionofficials.

(ii) Prevalenceof exportcartelsFew countriesrequire that firms organisingan export associationformally

registerwith thegovernment(Table3). It is thereforealmostimpossibleto trackthe numberof theseassociationsinternationally.In the US, however,the Webb-PomereneAct requiresregistrationwith the FederalTrade Commission.Thenumberof registeredWebb-Pomereneassociationsin the US hit a peakof 62 in1930,andhasdeclinedfairly steadilythroughthe years.By 1989the numberofregisteredassociationshaddeclinedto twenty-four.Put into context,this numberis quite small andrepresentsonly a fraction of US trade.Dick reportsthat theseassociationscovered2.3percentof USexportsin 1962andamere1.5percentin1976.15 The limited informationavailablefrom othercountriesshowsa similarpattern.TheOECDreportedin 1984thatbetween1972and1982,thenumberofexportcartelsin theUK heldconstant,thenumberin Germanydeclinedslightly,andthe numberin Japandeclinedmarkedly.16

14 However,the EuropeanCommissiontook action againsta cartel of US wood pulp producers,whosecartelwasregisteredin the US underthe Webb-PomereneAct.15 Dick (1992,p. 97).16 OECD,CompetitionandTradePolicies:Their Interaction(1984,p. 24,at http://www.oecd.org/daf/clp/Publications/COMPTRA.pdf).



(iii) Activitiesof exportcartelsIn somecases,exportingfirms cooperateby engagingin price fixing: either

agreeingto sell their exportsat the sameprice or to sell themthrougha single,joint salesagencythat will accomplishthe samething. Firms may also usecooperativeexportorganisationsto jointly marketproducts.While the latter typeof activity may lessencompetition,it may alsoallow firms to achievesufficientscaleto participatein foreignmarkets.In manycases,this outcomeis morepro-competitivethan the mergersor joint venturesto which firms might otherwiseturn to achievethenecessaryscalefor globalcompetition.Policiestowardexportcartelsshoulddistinguishbetweenthevariousmotivationsfor cooperativeexportorganisations.

Where countriesdo require reporting or registrationof cooperativeexportorganisations,it maybepossibleto determinewhich activitiessuchorganisationsengagein. Several studies by Andrew Dick find that US Webb-PomereneAssociations hadlittle anti-competitiveeffect in partbecausetheyalsoservedtolower the costof exporting.Onereasonfor the limited useof theseassociationsby recentinternationalcartelsmaybethattheyconsistonly of USexporters,withlittle ability to control international markets. Exemptions from nationalcompetition laws that permit firms to form national export associationsbutexcludeforeign producersfrom membershipmight allow firms the cost-savingbenefits of export associationswhile limiting their potential anti-competitiveimpact.

(iv) Anti-competitiveeffectsof exportcartelsTheanti-competitive impactof exportcartelsmaybemoresignificantin some

marketsor countriesthanothers.For example,at a recentmeetingof competitionpolicy-makersat the OECD,somecountriesvoicedconcern

thatexportor import cartelscould inflict [harm] on tradeandmarketaccess. . . andarguedthatsuchcartelsshouldloseanyexemptiontheymight enjoyfrom nationalcompetitionlaw. Others. . . questionedthe importanceof such casesand argued that . . . such exemptionsdo notimmunizesuchcartelsfrom prosecutionby theaffectedcountry.Otherspointedout thataffectedcountriesmight havedifficulty obtainingthe necessaryevidencelocatedabroad. . .17

A recentarticle in the Journal of CompetitionLaw and Policy madea similarpoint, arguing that Mexico has beenharmedby the activities of legal exportcartelsbasedin othercountries.While prosecutionof thesecartelsis possible,inprinciple, under Mexican law, the lack of cooperationfrom home countriesmeansthat informationgatheringis difficult andprosecutionimpossible.18

17 ‘Summary’, OECD Journal of CompetitionLaw and Policy 1:4 (1999,p. 10).18 Wise (1999,p. 67).



Thereis little mentionof legalexportcartelsin recentreportson internationalanti-trustfrom theOECDandtheUS InternationalCompetitionPolicy AdvisoryCommittee.19 This suggeststhat the leadingmembersof the Americananti-trustcommunitydo not feel that this is an issuethat severelyaffectsconsumersorthosedomesticproducerswho competewith foreignexportcartels.TheOECD’sreporton Hard Core Cartels:

urges. . . reviewsby competitionauthoritiesof [export cartel] exclusions[but] doesnot regardfurtheractionin thisareato bea priority in connectionwith its programfor bringingaboutmoreeffectiveactionagainsthardcorecartels(OECD,2000,p. 28).

Having laid out the main featuresof contemporaryinternationalcartels,andconveyed a senseof their prevalencein the 1990s, we now examine theeffectivenessof currentanti-cartelenforcementregimes.

4. THE DETERRENCEAPPROACHTO INTERNATIONAL CARTEL ENFORCEMENT

Before assessingthe recentincreasein internationalcartel investigations,itwill be useful to lay out – from a traditional ‘law andeconomics’perspective–the incentives supplied by national anti-cartel enforcement regimes andpenalties.20 This analysiswill thenmotivatea discussionof the inadequaciesofnationalanti-cartelenforcementin a world of many legal jurisdictions.

From the law and economicsperspectivethe objective of anti-cartel lawsshould be to deter, and where necessarypunish, firms who engagein thisundesirableact.21 Threecharacteristics of cartelsare germaneto understandingtheincentivessuppliedby anti-cartelenforcement.First, cartelstypically involvesecretagreementsbetweenfirms. Second,theobjectiveof theseagreementsis tosecurepecuniarygainsfor cartel members.Third, sustainingthe cartel requirescarefulattentionto crafting incentivecompatibleagreementsbetweenfirms.

A group of firms will be collectively deterredfrom cartelising a nation’smarketsif that countries’anti-trustauthority is expectedto fine themmorethanthegainsfrom participatingin thecartel.Assumingthatthefirms arerisk neutral;thereareno coststo the firms in defendingthemselvesbeforea fine is imposed;

19 ICPAC (2000)andOECD (1999).20 For a recentexhaustivesurveyof the law and economicsliterature seeKaplow and Shavell(1998).Our discussionfocuseson the incentivessuppliedby public enforcementpractices.Theseincentivesmay be reinforcedby private suits– broughtfor damagesby cartel victims – that arepermittedin somejurisdictions.21 As a testamentto the influence of this perspectiveit is worth noting that the Ministry ofCommercein New Zealandrecently publisheda report on the effectivenessof the deterrenceprovidedby thatnation’senforcementpracticesandcourtswhichwasexplicitly built on thelinesofreasoningdiscussedin this section.SeeMinistry of Commerce,Governmentof New Zealand(1998).



the pecuniarygain from cartelisationequalsG; and the probability of the anti-trust authoritydetectingandpunishingthe cartelequalsp, thena fine f equalto(G/p) will providethenecessarycollectivedeterrent.An importantinsight is thateven thoughcartel agreementsare typically secret– and so the probability ofdetectionandpunishmentp is low – solongasp is positivethereexistsa fine thatwill collectively deter cartelisation.Secrecymay impede investigations,butdeterrenceis still in principle feasible.Theseargumentsmay also provide arationale for why some nations, such as the United States,Germany, andSwitzerland,havemadethe maximumfines of cartelmembersa function of thepecuniarygain from their illicit activity.

Anti-trust officials haveexploitedthe‘incentivecompatibility’ problemsfacedby cartels through the introduction of corporateleniency programmes.Theseprogrammes – which offer reducedpenaltiesto qualifying firms that comeforwardwith evidenceof cartelconduct– inducemembersto ‘defect’ from cartelagreements.Theseprogrammeshavealsobeenmotivatedby theobservationthatthe successfulprosecutionof cartelstypically requiresevidencesuppliedby atleastoneco-conspirator.

The US corporate leniency programme, last revised in 1993, can berationalisedin theseterms.Currently only the first firm to comeforward withevidenceabout a currently uninvestigatedcartel is automatically grantedanamnestyfrom all US criminal penalties.This encouragesa ‘winner takesall’dynamic, where membersof an otherwise successfulcartel each have anincentiveto bethefirst to provideevidenceto US authorities.22 A secondfeatureis thatevenif a firm is not thefirst to approachtheUSauthorities,sucha firm cangain a substantialreductionin penaltiesby admittingto cartelpracticesin othermarketsthatare(at the time of theapplicationfor leniency)uninvestigated.Thisprovisionhassetoff a ‘domino’ effectin whichonecartelinvestigationcanresultin evidencefor subsequentinvestigations.Sincethesechanges,andothers,wereintroducedthe US hasreceivedon averageoneamnestyapplicationper month,approximatelytwelve timesthe previousrate.

Jurisdictionsdiffer considerablyin whetherthey imposecriminal penaltiesincartel cases.In particular,few jurisdictionspermit the incarcerationof businessexecutivesresponsiblefor cartelisation.23 US officials strongly believe thatcriminal penaltiesincluding the threatof incarcerationareessentialdeterrentsto

22 The German Bundeskartellant(Federal Cartel Office) revised their corporate leniencyprogrammein April 2000 to include such a provision too. Dr. Ulf Boge, Presidentof theBundeskartellant,arguedin explicitly economictermsasfollows: ‘By grantinga total exemptionfrom fines to the first firm that approachesus we want to inducethe cartel membersto competewith eachother to defectfrom the cartel.’ SeeBundeskartellant(2000).23 Although the criminality of cartel behaviourhas considerableimplications for internationalcooperationand evidencesharing,the role of thesesanctionsas a deterrentis what concernsuspresently.



cartelisation.24 How doesa law andeconomicsapproachassessthis claim? First,incarcerationinvolves costly lossesin and re-allocation of output: managers’productivity is less during their period of incarceration,and resourcesmust bedevoted to the constructionand operation of prisons. If these were the soleconsiderations, then incarcerationwould be a lessdesirablealternativeto fines.However,giventhelow probabilityof punishingacartelandthesizeablegainsfromengagingin suchbehaviour,theminimumfine thatwoulddeteracartelmayin factbankruptafirm or its seniorexecutives.Bankruptingafirm thathasbeenengagedincartelbehaviourcouldactuallyreducethenumberof suppliersto amarket,resultingperverselyin lesscompetitionandhigherprices.Furthermore,personalbankruptcylaws bound from below what corporateexecutivescan lose from anti-cartelenforcement. Incarcerationmayprovide– throughthe lossof freedom,reputation,socialstanding,andearnings– theonly remainingmeansto alter the incentivesofcorporateexecutives.This argumentis particularly importantbecausethe useofstockoptionsin executivecompensationpackagesprovideverystrongincentivestoseniorexecutivesto maximisefirm earningsandstockmarketvalue.

The second‘law andeconomics’argumentis that incarcerationis neededtoreduceor eliminatethe expectedharmcausedby repeatoffences.Theremay belegitimate concern that executiveswho have successfullyarrangedexplicitagreementsto carveup a marketwill, after thecartel is brokenup, attemptmoresubtleformsof collusion(suchaspriceleadership).Theimpositionof finesalonemay not induce a firm’s shareholders to replace the offending executives,especiallyif thelattercanconvinceshareholdersthatthefine wasa ‘costof doingbusiness’and that the benefits from implicit collusion (which they expect tosecurein amarketthatis well knownto them)will soonflow. Here,acleanbreakwith the pastmay be needed,with incarceration simultaneouslyremoving therelevantexecutivesfrom their postsand acting as a threat to incoming seniorexecutivesnot to attemptre-cartelisation.Anti-trust officials mustalsoweighthestrongerdeterrenteffectof incarcerationagainstthehigherlevelsof evidencethatare required to secure criminal convictions. The threat of incarcerationexacerbatesthe difficulties that national anti-trust officials face in securingevidenceandtestimonyfrom cartelparticipants,which in termsof theframeworkoutlinedaboveeffectively lowersthe probability of detectionandpunishmentp.

24 See,for example,Hammond(2000)who argues:‘basedon our experience,thereis no greaterdeterrentto thecommissionof cartelactivity thanthe risk of imprisonmentfor corporateofficials.Corporatefinesaresimply not sufficient to deterwould-beoffenders.For example,in somecartels,suchasthegraphicelectrodescartel,individualspersonallypocketedmillions of dollarsasa resultof their criminal activity. A corporatefine, no matter how punitive, is unlikely to deter suchindividuals.’Mr. ScottHammondis theDirectorof Criminal Enforcementat theUSDepartmentofJustice.In interpretinghis remarksit is worth bearingin mind thatthemaximumfine underUS lawfor individualsconvictedin engagingin cartelbehaviouris $350,000which given recenttrendsinexecutivecompensationis likely to be much lessthan the potentialstock-optionand other gainspaid to an executivewhosefirm’s profits haveincreaseddueto participatingin a cartel.



The law and economics perspective explains why national anti-trustenforcement may be particularly ineffective in deterring internationalcartels.First, theability of executivesto organisecartels(includingmeeting,writing andstoring agreements)in locationsoutsidethe direct jurisdiction of the nationalanti-trustauthority wherethe cartel’s effectsare felt can effectively reducetheprobability of punishmentp to zero.For example,in 1994 the US caseagainstGeneralElectric, which along with De Beersand severalEuropeanfirms werethoughtto be cartelisingthe marketfor industrial diamonds,collapsedwith thetrial judge citing the inability of US enforcementauthorities to securethenecessaryevidencefrom abroad.Second,constraintson the ability to collectevidenceand to interview witnessesabroad implies that the probability ofpunishmentp is lower thanit might otherwisebe.Increasingthe fines f imposedmay not, given the substantial reduction in p and the limits imposed bybankruptcy,besufficient to detercollusion.In sum,supplyingtheright deterrentis moredifficult whenconspiratorscanhatchtheir plansabroad.

Third, in a world of multiple markets the gain from cartelising a singleadditionalmarketmay well exceedthe cartelprofits from that marketalone.Asthe numberof marketsin which a carteloperatesincreases,eachcartelmembercanbe moresuccessfullydeterredfrom cheatingon the cartelagreementin anyone marketby the threatof retaliationby other membersin all the marketsinwhich thecarteloperates.This ‘multi-marketeffect’ impliesthat theextensionofan internationalcartel into a new market can heightencollusion in all of thecartel’smarkets.Therefore,the fine that will detercollusion in the new marketmustincludetheincreasein thecartel’stotal profits,not only on theextraprofitsbeing earnedin the newly cartelisedmarket.At present,even thoseanti-trustauthoritiesthat basetheir fines on the illicit gains from cartelisationdo notconsiderthe harm done outsidetheir jurisdiction and so current practicesareunlikely to determulti-marketcartels.

Finally, theeffectivenessof nationalleniencyprogrammesis compromisedbyfirms’ participationin cartelactivities in manynations.A firm may be reluctant(to saythe least)to apply for leniencyin a singlejurisdiction if that leavesthempotentiallyexposedto penaltiesin otherjurisdictions.Furthermore,eventhoughafirm may be willing to offer evidenceon cartel activities in many nations,anationalanti-trustauthority will only value information on activities within itsjurisdiction. Both factorsreducethe benefitsof seekingleniency.

5. RECENTTRENDSIN INTERNATIONAL CARTEL ENFORCEMENT

The1990ssawaseachangein official attitudestowardscartelenforcement.Atthestartof thedecade,only oneindustrialnation– theUnitedStates– wastakingaggressiveaction againstinternationalcartels,and theseactionswere criticised



by othergovernmentsasanimproperextraterritorialapplicationof domesticanti-trust law.25 By decade’send, severalhigh profile enforcementactions haveconvinced policymakers in other industrial countries that stronger measuresagainstinternationalcartelsoughtto be taken.Consequently,corporateleniencyprogrammes havebeenrevisedor introducedin severalcountries,internationalnormsfor andreformsof cartelenforcementhavebeenproposedat the OECD,andbilateral cooperationdevelopedbetweenselectedjurisdictions.

Much of this changehadits origins in theeventsthat followed the revisionoftheUS corporateleniencyprogrammein 1993.As notedabove,this revisionledto a dramatic increase in international cartel prosecutions.Although USenforcementactions were motivated by their effects within US borders,thepotential cross-bordereffects of these cartels and the substantialevidenceprofferedduring leniencyrequestsdid not go unnoticedin othernations.26 TheEuropeanCommissionintroducedits owncorporateleniencyprogramme– but itssuccesshas been less impressive than its US counterpart in part becauseautomaticamnestyis not assuredto the first firm that reportscartelbehaviour.27

Although cartel enforcementhas increasedin both the EU and in Japan,investigationsremainhamperedin bothjurisdictions,albeit for differentreasons.Ithasprovedtoo difficult to reconcilethe underlying tenetsof the Japaneselegalcodewith the introductionof a corporateleniencyprogramme.This restrictstheflow of information on cartel behaviourto the JapaneseFair TradeCommission(JFTC),andis a sourceof considerableconcern,astheJFTCappearsto devotefewresourcesto othermeansof uncoveringcartels.That said,Japan(andKorea)haverecentlyreducedthe numberof permittedexceptionsto their anti-cartellaws.

More vigorousenforcement in the EU hasbeenimpededby the inability ofEuropeanCommission(EC) officials to searchthe private homesof businessexecutivesresidentin Europe for evidenceof cartel agreements.Worse still,EuropeanCommunityLaw only allows civil sanctionson undertakings(suchasfirms). Individualscannotbesanctionedfor anti-trustoffencesunderCommunityLaw but canbesubjectto penaltiesundertheappropriatenationallaws.Evenso,sincethe late1980stheEC hasprosecutedover twenty internationalcartelswithrising fines to above100 million ECUsin recentyears.

25 Concernsabout extraterritorialapplicationsof theseUS laws reacheda point where severalindustrialcountriesactuallypassed‘blocking statutes,’whoseintent wasto preventtheir anti-trustauthorities,police andothernationalinvestigativeagencies,and firms from cooperatingwith USenforcementactionsoutsideAmericanborders.26 US officials have,throughspeeches,interviews,andwritten articles,extensivelydiscussedtheirenforcementrecordin this area.In part,this effort is motivatedby theview that thedeterrenteffectof theUS enforcementregimedependssomewhaton its public profile. Many of thesespeechescanbe downloadedfrom the web site of the Antitrust Division of the US Departmentof Justice(www.usdoj.gov/atr).27 It is noteworthyin this respectthat the GermanandBritish competitionpolicy authoritieshavechosento revisetheir corporateleniencyprogrammesalongUS, not EC, lines.



Recognition of the difficulties faced by national anti-cartel authorities ininvestigating international cartels has led to several initiatives betweengovernmentsand within the OECD. Recentexperiencesuggeststhat therearetwo circumstanceswhere bilateral cooperationoffers the most promise (byraising the probability of an international cartel being punished).First, if anation’s laws makecartelisationor conspiraciesto cartelisecriminal offences,then that nation may be able to invoke the provisions of any Mutual LegalAssistanceTreaties(MLATs) that it hassignedwith othernations.Thesetreatiesdiffer in scope(includingcoverageof anti-trustoffences)andin thecommitmentto extendbilateral cooperation.The US-CanadianMLAT, signed in 1985, isperhapsthe best exampleof how this form of bilateral cooperationhas beeneffective in prosecutinginternational cartels (Waller, 2000). Of course, thismechanismis only availableto thosejurisdictionsthat havesignedMLATs thatcoveranti-trustmatters.

Thesecondrouteby which cooperationbetweennationalanti-trustofficials iseffectedis throughexplicit bilateralagreementson anti-trustmatters.This routeis very much in its infancy, and is best characterisedby the 1999 agreementbetweenAustralia and the US. This agreementprovidesfor eachparty to theagreementto requestassistancefrom the otherparty irrespectiveof whetherthealleged corporateactions in question are criminal acts under the requestednation’s law. The bilateral assistanceenvisagedat the time of signing includesproviding, disclosing,exchanging,and discussingevidenceas well as takingvariousstepsto secureevidencefrom persons,undertakings,andotherentities.Even more recently, a working group of officials from competition policyauthoritiesin theNordiccountriesproposedenactinglegislationto enablethemtoexchangepertinentinformation in cartelcases(OECD,2000).

A critical stumblingblock in mostbilateralcooperativeeffortsis theexchangeof businessinformationor whatmanylegalpractitionersreferto as‘confidentialbusinessinformation.’ 28 Thefear thatcorporatesecretsandfutureplanningwill,if sharedwith a foreignanti-trustauthority,beusedinappropriatelyor leakedtorival firms haslong resultedin manybilateral cooperationagreementson anti-trust matters containing very restrictive provisions for the exchange ofconfidential businessinformation and very broad understandingsof whatinformationis consideredconfidential.But cartelinvestigationstypically refertoprior (and occasionallycurrent) corporatepractices;the evidencerequired islargely documentationof meetings and agreementsbetween conspirators;prosecutions generally do not require reference to firms’ forward-lookingstrategicplans.Thus,the fear that legal future planswill be exposedappearsto

28 In the view of somethis stumblingblock hasseriouslycircumscribedcooperationbetweentheEC andUS in cartel investigations,seeStark(2000)andWaller (2000).



beexaggerated.29 Finally, existinginternationalcooperationon tax andfinancialsecuritiespermits for far more exchangeof businessinformation than underbilateralanti-trustagreements,especiallywhenthereis the suspicionthat fraudor someother illegal act hastakenplace.The extensionof cooperationto anti-trust matterscaneasilybuild on theseexistingpractices.

Many of the recentreformsin nationalanti-cartelenforcementandin bilateralcooperationmust be seen against the backdrop of significant and ongoingdiscussionsat the OECD.In 1998thesediscussionsculminatedin the Council ofthe OECD adopting a ‘Recommendation. . . Concerningthe Effective ActionAgainstHardCoreCartels.’30 Theessenceof this recommendation is two-fold: tocall upon membernations to enact anti-cartel laws that can effectively detercartelisationandto lay out commonprinciplesto guidecooperationbetweenanti-trust authorities– cooperationwhich the Recommendationclearly endorsesasinOECDmembers’interests.In 2000,theOECDissuedanotherreportdocumentingthe stepstakensince the Recommendationwas adopted.This report noted thatwhile some nations had eliminated exemptionsto their cartel laws, revisedcorporate leniency programmes,or allowed greater exchange of businessinformation, lessprogresshasbeenmadeon facilitating bilateral cooperationoncartel investigations than had beenhoped.Nevertheless,theseOECD initiativesdemonstratean emergingconsensuson the undesirabilityof internationalcartels.

Taking together the conceptualconcerns(raised in Section 4) about theeffectivenessof nationalenforcementmeasuresagainstinternationalcartels,andthepromisingyetnascentbilateralcooperationdescribedabove,weconcludethatat presentthe cumulativeeffect of nationalenforcement systemsis unlikely toprovidesufficient deterrenceto internationalcartels.Severaloptionsfor reformareconsideredin the next section.

6. OPTIONSFOR REFORM

Any proposedreformto internationalcartelenforcementshouldbeassessed,inlarge part, on the deterrentit providesto firms to cartelisemarketsin the firstplace. That deterrent’s strength dependson the firms’ perceptionsof theprobabilityof gettingpunishedandthesizeof anyexpectedpenalty.Althoughthepecuniarygainsfrom cartelisationmayresultfrom raisingpricesacrosstheglobe,recentenforcementexperiencesuggeststhat muchof the evidenceandmanyofthe peopleresponsiblefor cartelisationare to be found in the nationswheretheheadquartersof globally-orientedfirms are located.Table 1 showsthat those

29 A recentdetailedanalysisof the argumentsadvancedin supportof restrictingthe exchangeofbusinessinformationin cartelinvestigationby theOECDcameto a similar conclusion,seeOECD(2000).30 This recommendationis reproducedin an appendixto OECD (2000).



headquarters tendto besituatedprimarily in industrialnations.This suggeststhatalthoughcalculationsof the pecuniaryharm should in principle shift from thenational to the global, reformsto the ‘investigative technology’probablyneedonly focuson cooperationbetweenthe industrialnations.

It is temptingto advocatecreatinga globalenforcementauthoritywith powersto collect evidence,conductinterviews,andthencomputethe global gainsfromcartelisationand levy the appropriatefines. In principle sucha proposalcouldovercomethe deficienciesof the current systemof national enforcementandbilateral cooperation.However,at this junctureno nationappearsreadyto poolsovereigntyin suchanaggressivemanner,or to allow its citizensandfirms to bepunishedby sucha body.The EC’s relatively weakenforcementpowersagainstcartelsarea testamentto the reluctanceof EU members,who havebeenpoolingsovereigntyin other areasfor decades,to cedepowersin cartel cases– eventhoughthe distortionsto the free flow of goodsand servicesacrossEuropeanbordersthatcartelscanengenderarewidely acknowledged.Without denyingtheintellectualappealof sucha far-reachingsolution,we turn our attentionto moremodestandperhapsmore likely reform options.

The first andleastambitiousreform option would involve extendingthe US-Canadaor US-Australia bilateral cooperationagreementson anti-trust to allindustrial countries.Sucha reform would go someway to remedythe currentdeficiencies in evidence collection and information sharing, increasing theprobabilityof cartelmembersbeingcaughtandpunished.To ensuresomedegreeof uniformity in the agreedforms of bilateral cooperation,this reform wouldprobablybebesteffectedthroughthesigningof a plurilateralagreementbetweentheseindustrialnations,ratherthanthroughmultiple bilateralagreements.31

Thesecondoptionbuildson thefirst andtriesto addressthedeficienciesof thecurrent system of national corporate leniency programmes.The plurilateralagreement(discussedabove)would be amendedin two ways.First, a provisionshould be introducedso that firms can simultaneouslyapply for leniency inmultiple jurisdictionsandhavethoseapplicationsevaluatedon the totality of theevidenceof cartelisationpresented.Second,to reducetheuncertaintyfacedby the‘first’ firm to come forward with evidenceabout a currently uninvestigatedinternationalcartel,corporateleniencyprogrammesshouldstateminimumdegreesof relief from penalties.Sucha reformwould further increasetheincentiveof anycartelmemberto ‘defect’, makingcartelisationharderto sustain.32

31 However, such an agreementwould require considerablechangesto the EC’s anti-cartelenforcementsystem.32 Thesefirst two reform optionsdo not rule out expandingthe agreementto allow oneanti-trustagency to take the lead in a cartel investigation that might have ramifications for multiplejurisdictions,with otherpartiesto the agreementproviding whateverassistanceis necessary.Thismight economiseon enforcementresources,potentially enablingmoreactionsto be takenwithingiven budgets.



Although these two reform options can be thought of as improving theinvestigative technology,the pecuniarygains from cartelisationwould still becalculatedon a nation-by-nation basis.The third option takes initial stepstoremedying this deficiency. Once the investigation turns to the matter ofcalculatingpecuniarygain,this inevitablycontroversialstepcouldbeturnedoverto a pre-selectedpanelof qualified and independentexperts,who residein thesignatoriesto theplurilateralagreement.Thispanelwouldpresentestimates(withassociatedestimatedstandarddeviations)of the cartel’s gains acrossall theaffectednationsthatarepartiesto this agreement.33 Thepanelwould breakdownits estimateof the total gains to the cartel from eachnation’s markets,whichenforcementauthoritieswould takeinto accountwhenpenalisingcartelmembers.

The obvious disadvantageof this latter reform option is that gains fromcartelisingnon-signatories’ marketsare not takeninto account.Given the non-trivial amountsof information requiredto comeup with a sensibleestimateofcartel’specuniarygains,it is naı̈ve to blithely insist thatanysupranationalpanelestimatethe global consequencesof a cartel.Instead,this plurilateralagreementshouldhaveopenaccessionclausesto enablenon-membersthat havedevelopedboth nationalenforcementcapabilitiesand which haveattaineda pre-specifieddegreeof internationalanti-cartelcooperationto join. Furthermore,thoughtcouldbe given to informing non-signatories that their interestsareaffectedby a cartelin return for a commitment to treat leniently any firm that has volunteeredinformationduring the investigation.34

Furthermore,a reform processcould unfold over time in which industrialcountriesmovefrom their currentarrangementsto thefirst throughthird options.Strengthening nationalanti-cartel laws and commitmentsto enforcementare anecessaryprerequisite.The enhancedcooperationwill foster trust betweenanti-trustagencies,which is essentialif agenciesareto haveanyfaith in theintentandcapacityof othersto usethe amplediscretionbuilt into mostanti-cartellaws tosuccessfully conduct international cartel investigations. Admittedly such aprocesswould not lead to the creationof a supra-national anti-cartelagency,but it does not prevent such an agency from being created eventually.Furthermore,the experienceof mutual cooperationand assistance,combined

33 Thepanelwould haveaccessonly to thatevidencewhich is requiredto computetheseestimatesandwould be supportedby qualified staff.34 Even thoughthe gain calculationwould take into accountthe cartel’s effects in a numberofsignatories’markets,the fines andpenaltiesin this third reform option would still be imposedbynationalauthorities.This doesnot violate the apparentunwillingnessof nationsonly to penalisecartel membersfor the harm donein their own jurisdictions.Requestingthat signatoriesimposefines on the worldwide pecuniarygain – which includes the cartel’s gains in non-signatoriesmarkets– flies in the faceof this establishedpractice.Countriesthat allow privatecivil suits fordamagescould also expandtheir jurisdiction in internationalcartel casesto allow consumersincountriesthatwerenot party to plurilateralagreementsto seekredressin thehomecountriesof thecartelmembers.



with increasingharmonisationof anti-trust laws would provide the basis fornationsto createsuchan agencyif they shouldchoosedo so.

An alternative to these three reform options might be a plurilateral ormultilateral agreementat the World Trade Organisation (WTO). Such anagreementcould involve commitmentsto enactand enforcean anti-cartellaw,and to cooperatewith investigationslaunchedabroad.As thereis lessthan tenyearsof experiencewith internationalanti-cartelinvestigations,it is doubtfulthatbestpracticesin enforcementhaveevolved to sucha stagethat they could becodified in an agreement.Investigativeandprosecutorialdiscretionarelikely toremainand it is not obvioushow a WTO disputepanelmight assesswhetheragovernmentused that discretion in a manner entirely consistentwith theagreement.The likely outcomeis that only thoseanti-trustauthoritiesthat havenot followed certainminimal proceduralstepswould be found in violation, anoutcomethat is unlikely to result in significant increasesin the probability thatcartelmemberswill bepunished.Finally, sucha WTO agreementwould still notensurethat the penaltiesfor cartelisationarebasedon the worldwide pecuniarygains.

A WTO agreementcould be crafted (or the GATT agreementamended)toexplicitly addresstwo formsof privately-orchestratedandtrade-relatedcartels.35

First, laws which permit recessioncartels, where firms under considerablecompetitivepressure– potentially from imports– to engagein marketdivision,could be bannedon the groundsthat the WTO has already well-establishedsafeguardmechanisms.36 Second, disciplines could be placed on legally-sanctionedexportcartels.Given the discussionin Section3 thereappearsto bea justification for letting small firms share the considerablefixed costs ofmarketingandexporting;the objectiveshouldbe to preventsucharrangementsfrom resultingin consumerwelfarelosses.Two disciplinescouldbe imposedonlaws grantingexemptionsfor export cartels:notification and unimpededentry.Notification would involve the publicationof the namesof the membersof suchcartels,which will facilitate monitoring by anti-trustofficials in the importingcountry.A requirementthatentryto sucharrangementsbeunimpededwouldhelpboth reduceany marketpower that is enjoyedby existing members,and makecoordinatingany restrictivebusinesspracticesmoredifficult.

35 It is a separate,andimportant,matterwhetherWTO-disciplinesshouldbe imposedon state-runexport cartels.Arguably thesecartelscandistort tradeflows and the allocationof resources,justlike privately-runcartels.Furthermore,sincegovernments(andnot firms) aresignatoriesto WTOagreementsthen it could be arguedthat disciplinesagainststate-runcartelswould be easiertoenforcethanthoserequiringgovernmentsto takeactionagainstdomesticprivately-runcartels.36 For anoverviewof thelegalstatuteson recessioncartelsin industrialnationsseeWaller (1996).



7. CONCLUSION

Internationalcartelsare a non-trivial impedimentto the flow of goodsandservicesacrossborders.Recentenforcementexperiencesuggeststhatwidespreadcartelisationin someindustrieshasaffectedmanynations’markets.This mightnot be a concernif national anti-trust laws provided a sufficient deterrenttointernationalcartels – however,both a priori reasoningand the fragmentaryrecordof internationalcooperationin thisareasuggeststhatthis is not thecase.Inparticular,threeaspectsof cartelenforcementneedreform.First, the probabilityof a cartel beingpunishedis considerablyreducedby the currentpatchworkofbilateralcooperationagreementson evidencecollectionandsharingwith foreignjurisdictions.Second,penaltiesbasedon nationalassessmentsof the pecuniarygainsto cartelisationareunlikely to detercartelsthatoperatein manycountries’markets.Third, vigilance shouldnot end with a cartels’ punishment,as formerprice-fixersoften try to effectively restorethe statusquo anteby mergingor bytakingotherstepsthatlessencompetitivepressuresandraiseprices.Unlessapro-efficiency approachdrives all competition policy enforcement,the benefitscreated by keen international cartel enforcement will be eroded by laxenforcementin otherareas.

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