Embracing a consumer-oriented perspective will require action on both the domestic and international planes. At the domestic level, countries should ensure that market-distorting regulations and activities-like government grants or preferential loans to certain firms-play minimal roles within national borders. Countries that do not have laws enshrining competition should create and enforce them via domestic competition agencies. These laws must be carefully crafted so that they effectively cover both private- and public-sector anti-competitive actions. If such laws are to serve their purpose, domestic competition agencies must not try to design outcomes for these markets or act as overzealous regulators. Instead, they must facilitate freely competitive markets and intervene only when there is failure.
At the international level, trade negotiators must change their tactics, as the producer-oriented method has run out of steam. For the last half-century, trade negotiators have focused on the needs of producers in reducing trade barriers, cleverly harnessing the forces of mercantilism to craft cross-cutting agreements. Now, however, the producer-oriented approach's mercantilist rhetoric cannot effectively combat the domestic anti-competitive regulations that act as barriers to trade. The stalled Doha Round negotiations-and the lack of corporate concern about its eventual outcome-demonstrate that the days of furthering trade liberalization by trading off producer interests are over.
Trade negotiators must acknowledge the reality of modern trade negotiations. They must recognize that concentrating on competition and consumer welfare will benefit their respective economies, since producers are also consumers. Negotiators must embrace a consumer-oriented dialogue in order for domestic-market impediments to trade liberalization-anti-competitive legislation and regulation, and general government interference-to be removed.
IN ORDER for the consumer-welfare orientation to inform trade negotiations, policymakers must factor notions of competition into their decisions. Yet so far, the link between competition and trade has had a checkered history at the WTO. Although competition underpins much of trade theory and is enshrined in a number of WTO agreements, developing countries rejected a formal competition-trade nexus prior to the 2001 launch of the Doha Development Round.
The developing countries' opposition to the competition-and-trade agenda stems from objections to the WTO's dispute-resolution mechanism. The WTO's dispute-resolution procedures mandate that a state accused of erecting illegal barriers to trade may face various penalties, including sanctions, for failing to uphold its WTO obligations. A product of the WTO's Uruguay Round, the current dispute-resolution process is intended to evenhandedly enforce the organization's trade-liberalization agreements in a legal and non-diplomatic manner. Yet developing countries are concerned the dispute-resolution mechanism and its associated competition rules actually favor developed countries. Developing countries allege that these competition rules represent a disguised way of achieving market access, violating their national sovereignty.
In light of developing-countries' distaste for the dispute-resolution process, other methods of promoting competition in domestic markets-and thus creating the conditions for freer trade-must be explored. WTO member states should consider public-sector restraint disciplines, in which signatory countries promise to curb anti-competitive, trade-restricting regulation and to apply the competition rules that govern private-sector firms to their state-owned companies as well. The EU's state-aid laws, which prevent certain types of government assistance to private companies, could serve as a starting point, as could more recent attempts to scale back the anti-competitive state-action exemption in U.S. anti-trust law.
To convince developing countries to approve public-sector restraint agreements, these pacts could be implemented without resorting to the current dispute-resolution process. A very limited dispute-resolution mechanism might be feasible, but, barring that, other workable alternatives exist. The General Agreement on Trade and Services-which brought trade in services under the WTO's watch-contains competition disciplines that prescribe consultations, rather than impose trade sanctions, to settle disputes. A peer-review mechanism, akin to the Trade Policy Review Mechanism (TPRM), presents another option. The TPRM allows for the monitoring of WTO members' trade practices and policies, inspiring increased observance of WTO mandates.
A new or revised dispute-resolution process could incorporate input from domestic competition agencies, giving the competition "notion" greater credibility at the domestic level.
Since the current dispute-resolution mechanism cannot be applied to these agreements, they must be self-enforcing. That is, governments must want to abide by the agreements because it would harm their reputations, domestically and internationally, to do otherwise. Self-enforcing agreements might be more viable if trade negotiations take a consumer-oriented perspective. Governments could only object to an agreement on the basis that they wanted to reserve the right to harm their own consumers. Such a position would be politically difficult to take, particularly if the country's negotiating partners used the deviation from the agreement as a bargaining chip.
In addition to formulating disciplines to deal with anti-competitive public-sector restraints, WTO member countries should attempt to bolster the credibility of domestic competition agencies. These agencies are crucial to promoting freer markets, as they can contest the consumer welfare-harming, anti-competitive regulations that function as barriers to trade. Unfortunately, in many countries, these agencies are unable to face down the powerful groups that have benefited from the lack of competition. Public-sector restraint disciplines or agreements, by eliminating certain anti-competitive domestic regulations-and therefore unlocking consumer welfare-enhancing market forces-will help build the external credibility of these agencies.
PERHAPS MORE significantly, public-sector restraint agreements enhance the credibility of competition organizations because these agreements bolster the credibility of all domestic economic institutions. In developing and emerging markets, where economic institutions are weak, these agreements could prove to be especially significant to continued economic development. Robust institutions, many scholars believe, would enable economic growth to reach a wider segment of the developing countries' populations. If economic growth touches wide swathes of the populace in the developing world, a competition and market culture could take root there. If the institutions in this part of the world are made stronger, conventional wisdom suggests the developing world might actually develop.
Currently, institution-strengthening is a top-down affair. Large amounts of development money are directed towards this effort, and much energy is expended training officials that will man these institutions in the future. Yet this approach is incorrect, as institutions cannot simply be constructed and then expected to work properly immediately.
Institutions, in the economic setting, are ways to channel the very real forces of competition and the market. There can be no strong or robust institutions unless the restrictions on the free flow of those forces are removed. Only when these forces are liberated can the resultant consumer empowerment support the building of strong institutions. In many ways these forces are at the core of building functioning liberal democracy. Elections or institutions built from the top down will not lead to the unleashing of these forces; indeed, both will simply become corrupted by the very obstacles to the proper operation of the market.
To assume that functioning markets will flow from elections is to put the cart before the horse. Institutions do not create markets. Functioning markets produce, by necessity, robust institutions. Institutions are created and strengthened by their continuous exposure to the winds of competition and the market. It is these forces that operate on man-made institutions like the wind on a rock face, giving them resilience and strength. By fortifying economic institutions, public-sector restraint agreements would also help to restore public faith in the market's ability to encourage economic progress.
THE INCREASING interplay between trade and competition has rendered the existing producer-oriented trade-liberalization dialogues obsolete. If competitive markets are to be allowed to flourish, and if regulatory reform is to occur, domestic politicians and trade negotiators must adopt a fresh, consumer-oriented perspective. This consumer-oriented approach to trade liberalization would allow a new trade dialogue to occur between those who advocate for exporters (typically trade ministries) and those who advocate for domestic consumers (typically competition agencies). Instead of a dialogue of the deaf between two opposed trade ministries arguing their own mercantilist logic, this new discussion would seek to achieve the maximization of consumer welfare. Such a discussion would be more likely to produce meaningful results and would more completely satisfy the underlying purposes of international free trade.
A consumer-oriented dialogue is more appropriate for the real world of international trade in the 21st century. Our 21st-century world is one of competing global supply chains and decreasing costs-a world where the consumer, more than ever before, is king.
Shanker A. Singham is a partner in the economic regulation group of Squire, Sanders & Dempsey, LLP and is the chairman of the International Roundtable on Trade and Competition Policy, Inc. He is the author of A General Theory of Trade and Competition: Trade Liberalization and Competitive Markets (Cameron May, 2007) on which this article is based.Essay Types: Essay