Does Exposure to International Trade Justify Relaxed Antitrust Treatment of Mergers

Northwestern Journal of International Law & Business, Dec 1989

When industries are exposed to foreign competition, relaxation of antitrust law in general, and of antimerger law in particular, may be justified in two ways. First, it may be argued that the ability to compete with foreigners requires possession of market power. One variant of this argument stresses the desirability of market power itself. Domestic enterprises must neutralize restrictive practices abroad -- whether they are inspired by foreign governments or merely tolerated by them -- if such enterprises are to enjoy their "natural

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Does Exposure to International Trade Justify Relaxed Antitrust Treatment of Mergers

International Trade and Antitrust Does Exposure to International Trade Justif y Relaxed Antitrust Treatment of Mergers William James Adams 0 0 This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons Part of the Antitrust and Trade Regulation Commons, and the International Trade Commons Recommended Citation - Does Exposure to International Trade Justify Relaxed Antitrust Treatment of Mergers? William James Adams* When industries are exposed to foreign competition, relaxation of antitrust law in general, and of antimerger law in particular, may be justified in two ways. First, it may be argued that the ability to compete with foreigners requires possession of market power. One variant of this argument stresses the desirability of market power itself. Domestic enterprises must neutralize restrictive practices abroad-whether they are inspired by foreign governments or merely tolerated by them-if such enterprises are to enjoy their "natural" comparative advantages. A second variant of the argument emphasizes the growth of minimum efficient scale in manufacturing, due in no small measure to the rising importance of invention and innovation. In this variant, the market power acquired by domestic firms, through merger or restrictive practices, is thought to be an unfortunate, but necessary, by-product of achieving productive and dynamic efficiency. Several recent studies,1 including one published in this Journal,2 have questioned the wisdom of this first argument, and * Professor of Economics and Adjunct Professor ofLaw, The University of Michigan; author of RESTRUCTURING THE FRENCH ECONOMY: GOVERNMENT AND THE RISE OF MARKET COMPETITION SINCE WORLD WAR II (1989). 1 See Caves, Effects of Mergers and Acquistions on the Economy: An IndustrialOrganization Perspective,in THE MERGER BOOM (L. Browne & E. Rosengren eds. 1988); W. ADAMS & J. BROCK, THE BIGNESS COMPLEX (1987). 2 Adams & Brock, The Bigness Mystique and the Merger PolicyDebatea An InternationalPerspective, 9 Nw. J. INT'L L. & Bus. 1 (1988). Adams and Brock argue as follows: the governments of several rich market economies have tolerated and even promoted major mergers since World War II; retrospective evidence suggests that these mergers failed to augment the profitability or the productivity ofthe combining enterprises; as a result, the foreign experience does not contradict the wisdom of restoring stringency to American regulation of mergers-of returning to the treatment that existed before the implementation of the Reagan guidelines. Northwestern Journal of International Law & Business consequently I shall ignore it here. Instead, I shall focus on a second argument: that the existence of foreign competition eliminates both actual and potential reduction of competition that might otherwise result from market conduct, or from market positions, challenged by antitrust authorities. In this view, competition remains a desirable policy objective; yet it is achieved not through antitrust intervention but through the market mechanism of international trade. To what extent does failure to take account of foreign competition result in overestimation of the anticompetitive consequences of domestic mergers? Many studies suggest that across manufacturing industries, market power (measured by long-run profitability) varies negatively with exposure to imports.3 Studies of particular industries also suggest that across industrialized nations, seller-concentration varies negatively with exposure to imports.4 As a result, the thoughtful framer of antitrust policy must ascertain whether foreign sellers account for major fractions of American markets, and whether American producers sell considerable fractions of their output in foreign markets which they fail to dominate. If the findings in each case are affirmative, then American levels of producer-concentration may systematically and substantially overestimate the levels of seller-concentration in markets supplied by American enterprises. For this and other reasons, they may overestimate the anticompetitive consequences of mergers. To calibrate the exposure of American industries to foreign trade, I shall compare the American situation with the situation in France. Among industrialized nations, France is often considered to be relatively protectionist in matters of international trade. Hence, my interest is in determining how exposed American enterprises are to international trade in comparison with their French counterparts. Using information gathered by the Organization for Economic Cooperation and Development ("OECD"),5 it is possible to examine the ratio of imports to consumption, and the ratio of exports to output, in identically-defined French and American industries. The information reported herein relates to 1982, the year the first Reagan merger guidelines took effect.6 In manufacturing as a whole, the ratio of imports to domestic consumption ("import ratio") was 25% in France and 9% in the United States. The ratio of exports to production ("export ratio") was 26% in France and 8% in the United States. In other words, the incidence of international trade on domestic manufacturers was three times as great in France as in the United States. The importance of trade can vary, of course, among industries within the manufacturing sector. To what extent do figures on the entire manufacturing sector represent accurately the situation in particular industries? The OECD data permit decomposition of manufacturing into twenty-eight industries, a level of aggregation lying between the two- and three-digit levels of the United States Standard Industrial Classification ("SIC",). 7 Looking first at imports, in twenty-seven of the twenty-eight industries,8 the French import ratio exceeds its American counterpart. The average gap between the two ratios is eighteen percentage points.9 Table 1 shows the distribution of value-added among manufacturing industries classified according to import-exposure. Nearly two-thirds of American value-added, but less than one-tenth of French value-added, is generated in industries with import ratios below 10%. On the other hand, nearly half of French value-added, but only one-hundredth of American valueadded, is generated in industries with import ratios of 30% or more. Clearly, the French exposure to imports is as pervasive as it is intense. Turning to exports, the French export ratio exceeds that of the 6 During 1982, the United States dollar tended to be strong, while the French franc tended to be weak. As a result, ratios of imports to consumption may be abnormally high in the United States. Similarly, ratios of exports to output may be abnormally low in France and abnormally high in France and abnormally low in the United States. The Merger Guidelines adopted by the Department of Justice in 1982 and 1984 are set forth in 4 Trade Reg. Rep. (CCH) 13,102-13,103. 7 In order to facilitate the classification ofestablishments by economic activity, and to promote the collection, presentation and comparability of data from those establishments, the SIC was formulated as the statistical classification standard underlying all establishment-based economic statistics classified by industry in the United States. The SIC covers the entire field ofeconomic activity and defines industries according to the composition and structure of the economy, and it is used to promote the comparability of establishment data describing various facets of the United States economy. See OFFICE OF MANAGEMENT & BUDGET, STANDARD INDUSTRIAL CLASSIFICATION MANUAL (1987). Similarly, the International Standard Industrial Classification of All Economic Activities ("ISIC") was adopted by the United Nations to provide a framework for the international comparison of national statistics classifying establishments based upon economic activity. See U.N. DEP'T OF ECONOMIC & SOCIAL AFFAIRS, INTERNATIONAL STANDARD INDUSTRIAL CLASSIFICATION OF ALL ECONOMIC ACTIVITIES, U.N. Doc. ST/STAT/SER.M/4/Rev. 2, U.N. Sales No. E. 68, XVII.8 (1968). 8 All save footwear (ISIC 324). 9 The average import ratio was 28% in France and 11% in the United States. The gap differs positively from 0 at the .001 level of statistical significance in a two-tail t-test. Northwestern Journal of International Law & Business United States in twenty-seven of the twenty-eight industries. 0 On average, the export ratio is 26% in France but only 7% in the United States.1 1 Table 2 shows the distribution of value-added among manufacturing industries, classified according to export-exposure. Only one French industry, but twelve American industries, display export ratios of less than 5%. On the other hand, eighteen French industries, but only one American industry, display export ratios of 20% or more. Unlike their French counterparts, most American industries sell the overwhelming bulk of their output at home. Even if foreign markets function competitively, their relevance to American enterprises is too tenuous to affect the degree of competitive pressure they experience. French industries are heavily exposed to international trade, while American industries are not. Nevertheless, it is interesting to note that industries with relatively high import ratios in France (by French standards) tend also to show relatively high import ratios in the United States (by American standards). For example, the printing and publishing industry (International Standard Industrial Classification ["ISIC"] 342) exhibits a relatively low import ratio in both countries, while the footwear industry (ISIC 324) exhibits a relatively high import ratio in both countries. Exceptions to this synchrony do exist-the textile industry (ISIC 321) shows relatively great exposure to imports in France but not in the United States-but, statistically speaking, French and American import ratios are positively correlated. 2 French and American export ratios are also positively correlated. 13 Furniture and fixtures (ISIC 332) illustrates a relatively low export ratio in both countries; machinery (ISIC 382) illustrates a relatively high export ratio in both countries; and miscellaneous petroleum and coal products (ISIC 354) illustrates the occasional discrepancy of ratios (relatively high in France, average to low in the United States). In Tables 1 and 2, industries are defined very broadly. Each industry contains many economically distinct lines of business. If industries are defined more narrowly, does one observe greater variation among industries in import and export ratios? To answer this question, one must rely on data reported at the national level. The disadvantage of these data is the incongruity of French and American schemes of industrial classification. Unlike the OECD information, reported according to ISIC for both countries, the national information cannot be compared at 10 All save tobacco (ISIC 314). 11 The gap differs positively from 0 at the .001 level of statistical significance in a two-tail t-test. 12 At the .05 level of statistical significance in a one-tail t-test. 13 At the .01 level of statistical significance in a one-tail t-test. the industry level. On the other hand, the OECD's information is derived from these national data; the national figures are certainly of higher quality. Table 3 shows the distribution of American manufacturing industries, narrowly defined, by exposure to imports and exports. Although several such industries are heavily exposed to imports (see Table 4), and others sell heavily in foreign markets (see Table 5), the numbers in each case are small in relation to the total number of industries observed. Furthermore, the industries included in these tables are not, by and large, the targets of strict merger regulation; 14 nor would they be under the preReagan guidelines. International trade does not obviously tend to impinge heavily on industries especially prone to major mergers. In most instances, recalculation of concentration ratios to account for foreign competition, at home and abroad, would not alter the apparent wisdom of curbing a major American merger. 5 If international trade should be taken into account in the regulation of mergers, the place to do it is in countries like France where exports and imports impinge heavily and pervasively on manufacturing industries.16 In fact, it is more than possible that the failure of major mergers in Europe can be attributed to the persistent impact of market forces, transmitted through international trade, on European producers. After all, productive inefficiency would not have resulted in negative profits had the European national champions enjoyed substantial amounts of market power. It is precisely because so many American producers are 14 It is beyond the scope of this article to correlate across American four-digit manufacturing industries the frequency of merger activity and the exposure to either imports or exports. On the other hand, it is interesting to examine the number of indictments for criminal violation of the Sherman Act in industries heavily exposed to international trade, as identified in Tables 4 and 5. (Data on indictments taken from . CLABAULT & M. BLOCH, I & 2 SHERMAN ACT INDICTMENTS 1955-1980, at 688, 1053-70 (1981). Between 1955 and 1980, 617 such cases were brought. Of these, just seven concerned the 23 industries of Table 4; and just another seven concerned the 12 industries of Table 5. These results are not surprising: most Sherman Act indictments involve conspiracies to fix prices in a domestic market, and such conspiracies are unlikely to develop where potential conspirators face substantial import competition in the domestic market or sell large fractions of their output in foreign markets. 15 Although it involved prosecution for monopolization rather than for merger, United States v. Aluminum Co. of America (Alcoa), 148 F.2d 416 (1945), illustrates the point. Assuming the relevant product market was primary aluminum ingot, Alcoa was a literal monopolist if imports were excluded by definition from the market; with imports included, Alcoa's market share remained above 90 percent. 16 Import and export ratios for narrowly defined French industries, confirming the broad impact of international trade on French manufacturing, appear in W. ADAMS, RESTRUCTURING THE FRENCH ECONOMY: GOVERNMENT AND THE RISE OF MARKET COMPETITION SINCE WORLD WAR II ch. 4 (1989). naturally or artificially protected from competition through international trade that vigor must be restored to United States regulation of mergers. 0 or more 28 28 100.0 100.0 Source: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, INDUSTRIAL STRUCTURE STATISTICS, 1984 (1986). Note: Import ratio is (100)(M)/(Q-X+M), where M is imports, Q is production, and X is exports. Distribution of Value-Added in Manufacturing by Exposure to Exports, France and the United States, 1982 Distribution of American Manufacturing Industries by Exposure to International Trade, 1982 Source: U.S. Department of Commerce, Bureau of the Census. U.S. Commodity Exports and Imports as Related to Output: 1982 and 1981, tables 1A and lB. Note: Four-digit manufacturing industries importing (column 1) or exporting (column 2) $10 million or more of merchandise during 1982. Import ratio is imports c.i.f. as percent of new supply (domestic output plus imports). Export ratio is exports f.o.b. as percent of domestic output. American Manufacturing Industries Heavily Exposed to Source: U.S. Department of Commerce, Bureau of the Census. U.S. Commodity Exports and Imports as Related to Output: 1982 and 1981, table lB. Notes: Four-digit manufacturing industries for which (1) the import ratio (imports c.i.f. as percent of new supply, where new supply is domestic output plus imports) was 30 percent or more, and (2) imports were $10 million or more. As in source, some listed industries contain parts of certain unlisted industries. American Manufacturing Industries Especially Prone to Exports, 1982 Code Industry Turbines and turbine generator sets Lace and net goods Medicinals and botanicals Aircraft Pulp mill products Aircraft parts and auxiliary equipment Construction machinery Sewing machines and parts Measuring and controlling devices nec Petroleum and coal products nec Milled rice and by-products Oil-field machinery 33 34 34 34 41 41 46 47 47 51 52 54 3 See Jacquemin, de Ghellinck & Huveneers, Concentrationand Profitabilityin a Small Open Economy, 29 J. INDUS . ECON. 131 ( 1980 ) ; Pugel, Foreign Tradeand US Market Performance,29 J. INDUS . ECON. 119 ( 1980 ) ; and Jenny & Weber, Profit Rates and Structural Variables in French ManufacturingIndustries,7 EUR. ECON . REV. 187 ( 1976 ). 4 See Adams , Producer-Concentrationas a Proxyfor Seller-Concentration:Some Evidencefrom the World Automotive Industry, 29 J. INDUS. EON . 185 ( 1980 ). 5 ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT , INDUSTRIAL STRUCTURE STATISTICS, 1984 ( 1986 ). Source : U.S. Department of Commerce, Bureau of the Census. U.S. Commodity Exports and Imports as Related to Output: 1982 and 1981 , table 1A . Notes: Four-digit manufacturing industries for which (1) the export ratio (exports f.o.b. as percent of domestic output) was 30 percent or more, and (2) exports were $10 million or more . Industry 3829 includes industry 38244 . 9: 589 ( 1989 )


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William James Adams. Does Exposure to International Trade Justify Relaxed Antitrust Treatment of Mergers, Northwestern Journal of International Law & Business, 1989,