GLC TREATY APPRECIATION COMPETITION 2017

THEME:

INTERNATIONAL COMPETITION LAW AND

POLICY EUROPEAN CONVENTION ON
COMPETITION LAW AND POLICY ARTICLES 101
-109 OF THE TREATY ON THE FUNCTIONING OF
THE EUROPEAN UNION

TABLE OF CONTENTS
S YNOPSIS.................................................................................................................................................................2
 GLC TREATY APPRECIATION COMPETITION 2017

ISSUE I: WHETHER OR NOT UNDER ARTICLE 101, THE POINT OF FOCUS SHOULD BE ON THE MODE AND

MANNER IN WHICH A HARMONY CAN BE STRUCK BETWEEN THE MEMBER STATES AND THE EU LEVEL?..3

[B]VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE 101(1) 1................4

ISSUE II: WHETHER THE PROCESS OF EXPLOITATION OF PATENTS AND OTHER INTELLECTUAL

PROPERTY RIGHTS INTER SE TWO MEMBER STATE ENTITIES PURSUANT TO AN AGREEMENT (WHILE

GIVING A FAIR SHARE OF BENEFITS TO THE PUBLIC AND CONSUMERS , BY DETERMINING A REDUCED

APPLICABLE PRICE ) AMOUNTS TO THE IMPOSITION OF RESTRICTIONS ON EITHER ONE OF THE MEMBER

STATE ENTITIES AGAINST THE PROVISIONS MENTIONED IN ARTICLE 101(3) ( A) AND ( B ) ?.........................5

[A] The safe harbour of Regulation 772/2004.............................................................................................6

[B] Assessment of licensing agreements outside the TTBER.....................................................................7

[C] Expiry of the TTBER in 2014 and review of the current regime.........................................................7

[D] Pay-for-delay patent settlements in the pharmaceutical sector.............................................................7

[E] Article 102 TFEU: refusal to grant IP licences and compulsory licensing...........................................8

ISSUE III: WHERE ANY PARTICULAR ENTITY OF M EMBER STATE HAVING DOMINANCE OVER A

PARTICULAR BUSINESS IN THE INTERNAL MARKET , PURCHASES GOODS / EXCLUSIVE RAW MATERIALS

FROM OUTSIDE THE INTERNAL MARKET FOR E. G. AFRICA, ON ACCOUNT OF AN ELEVATED OFFER PRICE

OFFERED ONLY BY SUCH DOMINANT ENTITY ; AND WHEN THIS WOULD RESULT IN EXCLUDING THE

POSSIBILITY OF PURCHASE BY SMALLER ENTITIES OF SUCH RAW MATERIALS , WOULD THE SAME ATTRACT

THE PROVISIONS PERTAINING TO ABUSE OF DOMINANCE ?. WOULD THIS INVOLVE THE JURISDICTION OF

THE COUNTRY FROM WHICH THE RAW MATERIALS ARE PROCURED (AFRICA)?.............................................9

ISSUE IV: WHAT ARE THE LIMITS ON STATE AIDS AND PUBLIC PROCUREMENT LAWS AND POLICIES

WHEN READ TOGETHER SO THAT EVEN THE INTEREST OF M EMBER STATE ENTITIES IS NOT

SIGNIFICANTLY PREJUDICED / TO AN UNFAIR EXTENT ?.................................................................................10

[F] Market Barriers...................................................................................................................................11

[G] Procurement Policies Related Issues...................................................................................................13

SYNOPSIS

The administrative process for applying the law is adapting in order to strengthen

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investigative powers and better incorporate economic evidence in decision-making, and thus
convince the courts while maintaining policy consistency in a system of decentralised
enforcement. Member State competition agencies and courts can apply Community
substantive law, and the informal European Competition Network (ECN) is the medium for
facilitating inter-agency co-ordination. Modernisation of the enforcement process, by
eliminating notification and prior approval of exemptions while sharing enforcement
responsibility with national agencies, is designed, among other things, to redirect resources so
that DG Comp can concentrate on complex, Community-wide issues and investigations. A
high priority here is to clarify the relationships among the leniency programmes of the
Community and the national enforcement agencies. Coverage of Community competition law
is broad and generally consistent, with no sectoral exclusions and few provisions for special
enforcement processes. Treaty provisions that prohibit Member State measures contrary to
Treaty rules about public undertakings and undertakings with special or exclusive rights have
been the foundation for the long-term liberalisation program to reform traditional
infrastructure monopolies. Treaty principles about controlling State aid try to prevent
competitiondistorting actions by national public authorities. The Commissions new program
for impact analysis of EU legislative proposals that might affect competition in the internal
market is turning attention to avoiding unnecessary and disproportionate restrictions on
competition in the legislation of the EU.

The view that competition law should aim to promote some form of economic welfare is
intrinsically linked to the influence of economics and in particular welfare economics,
consumer theory and related fields in competition law analysis. This influence may be
explained by the more economics-oriented approach that has been gradually introduced in EU
competition law with the implementation of the EU merger regulation in the 1990s, the
reform of the law on vertical restraints and cooperation agreements in the late 1990s and
early 2000s, and most recently the discussion over a more effects-based economic approach
in the implementation of the abuse of dominance provisions of EU competition law9 .

ISSUE I: WHETHER OR NOT UNDER ARTICLE 101, THE POINT OF FOCUS SHOULD
BE ON THE MODE AND MANNER IN WHICH A HARMONY CAN BE STRUCK

BETWEEN THE MEMBER STATES AND THE EU LEVEL?

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The Block Exemption Regulation and Guidelines do not apply to agreements with final
consumers where the latter are not undertakings, since Article 101 only applies to agreements
between undertakings.

[A] APPLICABILITY OF ARTICLE 101 TO VERTICAL AGREEMENTS :

Article 101 applies to vertical agreements that may affect trade between Member States and
that prevent, restrict or distort competition ("vertical restraints") . Article 101 provides a legal
framework for the assessment of vertical restraints, which takes into consideration the
distinction between anti-competitive and pro-competitive effects. Article 101(1) prohibits
those agreements which appreciably restrict or distort competition, while Article 101(3)
exempts those agreements which confer sufficient benefits to outweigh the anti-competitive
effects.4 (6) For most vertical restraints, competition concerns can only arise if there is
insufficient competition at one or more levels of trade, i.e. if there is some degree of market
power at the level of the supplier or the buyer or at both levels. Vertical restraints are
generally less harmful than horizontal restraints and may provide substantial scope for
efficiencies. (7) The objective of Article 101 is to ensure that undertakings do not use
agreements in this context, vertical agreements to restrict competition on the market to the
detriment of consumers. Assessing vertical restraints is also important in the context of the
wider objective of achieving an integrated internal market. Market integration enhances
competition in the European Union. Companies should not be allowed to recreate private
barriers between Member States where State barriers have been successfully abolished.1

[B]VERTICAL AGREEMENTS WHICH GENERALLY FALL OUTSIDE ARTICLE

1 Article 11(2) of Regulation 1/2003 and Article 14(3) of Commission Regulation (EC) No
773/2004 of 7 April 2004 relating to the conduct of proceedings by the Commission pursuant
to Articles 81 and 82 of the EC Treaty (OJ L 123, 27.4.2004, p. 18), as amended by
Commission Regulation (EC) No 622/2008 of 30 June 2008 amending Regulation (EC) No
773/2004, as regards the conduct of settlement procedures in cartel cases (OJ L 171,
1.7.2008, p. 3).

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101(1) 1 Agreements of minor importance and SMEs (8) Agreements that are not capable of
appreciably affecting trade between Member States or of appreciably restricting competition
by object or effect are not caught by Article 101(1). The Block Exemption Regulation applies
only to agreements falling within the scope of application of Article 101(1). These Guidelines
are without prejudice to the application of the present or any future "de minimis" notice2 .

(9) Subject to the conditions set out in the "de minimis" notice concerning hardcore
restrictions and cumulative effect issues, vertical agreements entered into by non-competing
undertakings whose individual market share on the relevant market does not exceed 15% are
generally considered to fall outside the scope of Article 101(1)6 . There is no presumption
that vertical agreements concluded by undertakings having more than 15% market share
automatically infringe Article 101(1). Agreements between undertakings whose market share
exceeds the 15% threshold may still not have an appreciable effect on trade between Member
States or may not constitute an appreciable restriction of competition7 . Such agreements
need to be assessed in their legal and economic context. The criteria for the assessment of
individual agreements are set out in paragraphs 96 to 229. (10) As regards hardcore
restrictions referred to in the "de minimis" notice, Article 101(1) may apply below the 15%
threshold, provided that there is an appreciable effect on trade between Member States and on
competition.

The applicable case-law of the Court of Justice and the General Court is relevant in this
respect.8 Reference is also made to the possible need to assess positive and negative effects
of hard core restrictions as described in particular in paragraph 47 of the Guidelines. (11) In
addition, the Commission considers that, subject to cumulative effect and hard core
restrictions, vertical agreements between small and medium-sized undertakings as defined in
the Annex to Commission Recommendation 2003/361/EC9 are rarely capable of appreciably
affecting trade between Member States or of appreciably restricting competition within the
meaning of Article 101(1), and therefore generally fall outside the scope of Article 101(1). In
cases where such agreements nonetheless meet the conditions for the application of Article
101(1), the Commission will normally refrain from opening proceedings for lack of sufficient
interest for the European Union unless those undertakings collectively or individually hold a

2 Helen Disney, A more subtle anti-trust regime for Europe, Fin. Times (London), Oct. 13,
2004, at 21

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dominant position in a substantial part of the internal market.3

Companies can of course dispute the duration of the infringement and the possible
aggravating and mitigating factors taken into account by the Commission when determining
the fine. But if the starting point for the fines calculation is solely within the discretion of the
Commission, such arguments are unlikely to reduce the fines substantially. Moreover, these
arguments have rarely succeeded. Since 1998, the Commission only accepted the presence of
mitigating circumstances in three cases, namely, Michelin, Deutsche Telekom AG, and
Wanadoo Espana v Telefnica.4

ISSUE II: WHETHER THE PROCESS OF EXPLOITATION OF PATENTS AND OTHER

INTELLECTUAL PROPERTY RIGHTS INTER SE TWO MEMBER STATE ENTITIES

PURSUANT TO AN AGREEMENT (WHILE GIVING A FAIR SHARE OF BENEFITS TO

THE PUBLIC AND CONSUMERS , BY DETERMINING A REDUCED APPLICABLE

PRICE ) AMOUNTS TO THE IMPOSITION OF RESTRICTIONS ON EITHER ONE OF

THE MEMBER STATE ENTITIES AGAINST THE PROVISIONS MENTIONED IN

ARTICLE 101(3) (A) AND (B).

In recent years there has been a remarkable expansion of antitrust enforcement in the area of
intellectual property (IP). This trend is illustrated by an increasing willingness of the
European Commission (the Commission) and other antitrust enforcement agencies to
challenge IP-related transactions, often on the basis of novel theories of competitive harm.
This is particularly true where intellectual property rights (IPRs) are of strategic importance,
as is the case in the high-tech and pharmaceutical sectors.5

The fact that IP laws grant exclusive rights of exploitation does not imply that IPRs are
immune from competition law intervention. On the contrary, articles 101 and 102 of the
3 Council Regulation 139/2004 on The Control of Concentrations Between Undertakings (the
EC Merger Regulation), art. 1, 2004 O.J. (L 24) 1, 6

4 Philip Shishkin, European Regulators Spark Controversy with Dawn Raids, Wall St. J.,
Mar. 1, 2002, at A1

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Treaty on the Functioning of the European Union (TFEU), as well as equivalent provisions in
national competition law, are fully applicable to unilateral conduct of IP owners and
agreements whereby the holder of IP licenses another firm to use its IPRs. In fact, over the
past few years, the use of IPRs has given rise to an increasing number of highly visible and
hotly debated cases in EU competition law.6

For instance, in the Microsoft case, the Commission concluded that Microsoft had abused its
dominant position by deliberately refusing to provide interoperability information to
competitors. As a result, the Commission imposed a fine of 497 million and obliged
Microsoft to disclose complete and accurate interface information to allow developers to
compete efficiently. However, as Microsoft did not comply with the Commissions 2004
decision, the Commission imposed additional periodic penalties on Microsoft, which, in June
2012, the General Court eventually fixed at 860 million.7

Similarly in AstraZeneca, in December 2012 the European Court of Justice upheld the
judgment of the General Court, which found that AstraZeneca had abused its dominant
position by misleading patent offices and misusing the patent system in order to prevent
generic competition against its anti-ulcer medicine, Losec. In that case the Commission had
established that AstraZeneca had provided misleading information to several national patent
offices in the EU resulting in AstraZeneca gaining extended patent protection for Losec, and
that it had selectively deregistered market authorisations for Losec capsules in certain
member states, in violation of article 102 TFEU. The Commission imposed a fine of 52.5
million.8

5 Blaug, M. (2007) The Fundamental Theorems of Modern Welfare Economics, Historically

Contemplated, History of Political Economy 39(2) 185-207.

6 J. Rawls (1971), A Theory of Justice, Harvard University Press

7 McDonnel, B. & D.A. Farber (2003) Are Efficient Antitrust Rules Always Optimal?
Antitrust Bulletin Fall 2003 807-835, p. 825.

8 Cowen, T. (1993) The Scope and Limits of Preference Sovereignty Economics and
Philosophy 9 253-269, spec. pp. 254-258.

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[A] THE SAFE HARBOUR OF REGULATION 772/2004

While many technology licensing agreements are of minor importance, or can be deemed not
to be capable of affecting trade to an appreciable extent and are therefore not caught by the
prohibition of article 101(1) TFEU, many other licensing agreements are quite likely to fall
under article 101 TFEU.9 This applies both to agreements that may restrict intra-technology
competition and inter-technology competition. Inter-technology competition refers to
competition between firms that license or produce on the basis of substitutable technologies,
whereas intra-technology competition relates to competition between firms that produce on
the basis of the same technology. Restrictive licence agreements that fall within the terms of
the TTBER are automatically exempted from the article 101(1) TFEU prohibition.10

[B] ASSESSMENT OF LICENSING AGREEMENTS OUTSIDE THE TTBER

Agreements that fall outside the exemption because the market share thresholds are exceeded
are not necessarily illegal; they may, upon individual assessment, be in compliance with
article 101(1) and (3) TFEU. In contrast, the Commission takes the view that the hard-core
restrictions of article 4 are almost always anti-competitive. As a result, it considers that in the
context of individual assessment those restrictions will only exceptionally fulfil the
conditions of article 101(3) TFEU and, on balance, not be restrictive of competition.11

The individual assessment of licensing agreements under article 101(1) and (3) TFEU outside
the safe harbour of the TTBER is to be conducted on the basis of the Technology Transfer
Guidelines (2004) (the TT Guidelines) and the Commission Notice on Article 101(3) (2004).

[C] EXPIRY OF THE TTBER IN 2014 AND REVIEW OF THE CURRENT REGIME

The TTBER and the TT Guidelines will expire in April 2014. As part of its evaluation of the
current regime, the Commission commissioned an economic study by Pierre Rgibeau and
Katherine Rockett of the 2004 Technology Transfer Guidelines.

The November 2011 report by Rgibeau and Rockett identifies a number of relevant

9 Tversky, A. & Kahneman, D. (1986), Rational Choice and the Framing of Decisions,
Journal of Business Studies 59 251-278

10

11 Hausman D.M. (2012), Preference, Value, Choice, and Welfare, Cambridge University
Press.

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developments, in particular the growth of patent thickets. Patent thickets refer to situations
where access to a large number of IPRs are required in order to manufacture a non-infringing
product, and these IPRs are owned by a significant number of different firms. 12 The report
discusses the main effects generally associated with patent thickets royalty stacking and
increased transaction costs for prospective licensees together with industry responses to
alleviate those negative effects, in particular cross-licensing and patent pools, which may,
however, themselves give rise to anti-competitive issues. It also suggests a number of
changes to the current TTBER and TT Guidelines.13

[D] PAY-FOR-DELAY PATENT SETTLEMENTS IN THE PHARMACEUTICAL SECTOR

The Commissions competition inquiry into the pharmaceutical sector revealed a number of
structural issues and problems in companies practices that potentially lead to distortions of
competition. The anti-competitive practices highlighted by the Commission in its 2009 report
included, inter alia, patent clusters, interventions before national authorities with regard to
regulatory approvals, and pay-for-delay arrangements between originators and generics.

In the pharmaceutical sector, the Commission now specifically focuses on reverse payment
settlements, whereby brand firms typically pay generic firms not to challenge the validity of
the IP owners patents and keep the generic version of the drug out of the market for some
period of time. At the root of the Commissions argument is the concern that pay-for-delay
settlements amount to anti-competitive market sharing. The Commission is concerned that
these types of settlements can be an anti-competitive pay-off for an otherwise eligible
competitor not to enter the market. The brand companies argue that pay-for-delay and
reverse payments are a legitimate means to protect and maintain their lawful patent terms
and avoid lengthy and costly litigation.14

[E] ARTICLE 102 TFEU: REFUSAL TO GRANT IP LICENCES AND COMPULSORY

LICENSING

The mere refusal to license IPRs is not in itself objectionable under EU competition law.
12 Adler M.D. and E.A. Posner (2006), New Foundations of Cost Benefit Analysis, Harvard
University Press, p. 33

13 Ibid.

14 Joined Cases C-468/06 to 478/06, Sot Lelos kai Sia v GlaxoSmithKline [2008] ECR I-
7139, para. 54

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However, in exceptional circumstances the refusal by a dominant company to grant a licence

under its IPRs can be considered to be an abuse under Article 102 TFEU. The community
courts have considered this question in a number of cases, in particular Magill (1992),
Microsoft (2007) and IMS Health (2004). In Magill, the ECJ held that the refusal by
copyright holders in the United Kingdom and Ireland to grant licences to third parties to
provide a new comprehensive television listings magazine was abusive under article 102
TFEU. In Microsoft, Microsoft abused its dominant position by refusing to license the
specifications required to ensure interoperability between its operating system and work
group server operating systems of competitors, and IMS Health concerned the refusal to
license a copyright-protected data analysis structure in Germany that is used in the
pharmaceutical sector.15

Recently, in the 2012 Microsoft judgment, the ECJ confirmed that a refusal by a dominant
company to license its IPR that is indispensable for carrying on a particular business, is an
abuse under article 102 TFEU where three cumulative conditions are satisfied, namely: (i)
that the refusal is preventing the emergence of a new product for which there is a potential
consumer demand; (ii) that it is unjustified; and (iii) that it is such as to exclude any
competition on a secondary market.16

ISSUE III: WHERE ANY PARTICULAR ENTITY OF MEMBER STATE HAVING

DOMINANCE OVER A PARTICULAR BUSINESS IN THE INTERNAL MARKET ,

PURCHASES GOODS / EXCLUSIVE RAW MATERIALS FROM OUTSIDE THE

INTERNAL MARKET FOR E. G. AFRICA, ON ACCOUNT OF AN ELEVATED OFFER

PRICE OFFERED ONLY BY SUCH DOMINANT ENTITY ; AND WHEN THIS WOULD

RESULT IN EXCLUDING THE POSSIBILITY OF PURCHASE BY SMALLER ENTITIES

OF SUCH RAW MATERIALS , WOULD THE SAME ATTRACT THE PROVISIONS

15 Nazzini, R (2011), The Foundations of European Union Competition Law The Objective
and Principles of Article 102, Oxford University Press, p. 49.

16 Ibid

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PERTAINING TO ABUSE OF DOMINANCE ?. WOULD THIS INVOLVE THE

JURISDICTION OF THE COUNTRY FROM WHICH THE RAW MATERIALS ARE

PROCURED (AFRICA)?

Any abuse by one or more undertakings of a dominant position within the internal market or
in a substantial part of it shall be prohibited as incompatible with the internal market in so far
as it may affect trade between Member States. Any entity engaged in an economic activity,
regardless of its legal status of the entity and the way in which it is financed (Hofner Elser v.
Macrotron GmbH)Economic activity: any activity consisting in offering goods or services on
a given market is an economic activity (Pavlov). The dominant position referred to in this
article relates to a position of economic strength enjoyed by an undertaking which enables it
to prevent effective competition being maintained on the relevant market by giving it the
power to behave to an appreciable extent independently of its competitors, customers and
ultimately of its consumers.17

Hoffman-la Roche

Such a position does not preclude some competition, which it does where there is a
monopoly or a quasi-monopoly, but enables the undertaking which profits by it, if not to
determine, at least to have an appreciable influence on the conditions under which that
competition will develop, and in any case to act largely in disregard of it so long as such
conduct does not operate to its detriment.18

To the extent that a full-function joint venture has as its object or effect the co-ordination of
the competitive behaviour of its parents outside the joint venture (sometimes referred to as
"spill over" effects), such co-ordination will also be examined in accordance with the criteria
of Article 101 of the TFEU in order to establish whether the operation is compatible with the
internal market (Article 2(4), Merger Regulation; see Assessment under Article 101). Joint
ventures falling into this category are therefore subject to a double test: first, whether the

17 Hausman D.M. (2012), Preference, Value, Choice, and Welfare, Cambridge University
Press, pp. 31-33

18 Judgment of the Court of Justice of 28 February 1991 in Case C-234/89, Stergios

Delimitis v Henninger Bru AG

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establishment of the joint venture itself would significantly impede effective competition,
and, second, whether the co-ordination between its parents is contrary to Article 101(1) (see
box, An assessment under the Merger Regulation and Article 101).19

The possibility of co-ordination of the parties' competitive behaviour arises if two or more of
the parents participate, actively or potentially, in the same, similar or related product markets,
and on the same or potentially the same geographic markets, as the joint venture. Article 101
comes into play where such co-ordination is the object or likely effect of the joint venture.

In applying the Article 101(1) test, the Commission must in particular ascertain:

Whether two or more parent companies retain significant activities in the same market
as the joint venture, or in a market which is downstream or upstream from that of the
joint venture, or in a neighbouring market closely related to this market, so that it is
likely that they will co-ordinate their behaviour on the market(s) concerned; and

Whether the co-ordination which is the direct consequence of the creation of the joint
venture (there must therefore be a direct causal link between the creation of the joint
venture and any co-ordination of the parties' behaviour) affords the parties the
possibility of eliminating competition in respect of a substantial part of the products
or services in question (Article 2(4), Merger Regulation). For example, the
Commission decided in BSkyB/Kirch Pay TV (Case COMP/JV.37, 21 March, 2000)
that although there was some incentive for the parties to co-ordinate their behaviour
(in an effort to reduce 20

ISSUE IV: WHAT ARE THE LIMITS ON STATE AIDS AND PUBLIC PROCUREMENT LAWS

AND POLICIES WHEN READ TOGETHER SO THAT EVEN THE INTEREST OF

19 1994 in Tetra Pak International SA v Commission of the European Communities (T-83/91)

[1994] E.C.R. II-755; [1997] 4 C.M.L.R. 726 at [236].

20 Ibid

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MEMBER STATE ENTITIES IS NOT SIGNIFICANTLY PREJUDICED / TO AN UNFAIR

EXTENT ?

If free trade is in principle considered beneficial by governments that are party to free trade
agreements, this raises the question of why these governments do not simply unilaterally
open up their markets, and why it is necessary to conclude international agreements on free
trade to assist in this process. One reason, of course, can be that national governments do not
accept the basic value of wealth maximisation on which free trade is based or for the
various reasons above do not consider that it is in general a suitable strategy for their own
country (for example, they may consider that they are acting in exceptional circumstances in
which the economic benefits of protection outweigh the costs (such as to promote infant
industries)). They may participate in free trade agreements because of various external
pressures, rather than from a belief in the value of free trade for example, pressure from
international financing institutions, such as the EU, or fear of being excluded from trade
altogether if they do not open their markets in ways required by their trading partners.
However, even governments that do accept the desirability of significant free trade in
principle often do not unilaterally open their markets. A large part of the explanation for this
lies in the fact that, even for governments that accept the benefits of free trade, it is often
difficult to achieve within the political system.21

To a large extent, this is because as noted above the costs of free trade are more visible to
the general public than the benefits, and are also concentrated in their impact on specific
individuals or communities who have an incentive to act politically (whether through the
exercise of a vote or other means). Removing protection from an industry, for example, will
lead to immediate job losses that can significantly affect behaviour. On the other hand, the
costs of protection in terms of higher prices are broadly distributed across the consumer and
business community, and are often too hidden, and too limited in their impact on individuals,
to affect their political behaviour. Trade agreements are useful instruments to help overcome
the domestic political constraints in achieving open markets for governments that consider
free trade to be beneficial. In particular: 1. Under trade agreements some domestic
constituencies will gain, by obtaining access to foreign market for their own goods and

21 1999 in Irish Sugar Plc v Commission of the European Communities (T-228/97) [1999]
E.C.R II-2969; [1999] 5 C.M.L.R. 1300 at [291].

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services, and these will offer political support to government that can offset any political
opposition from the immediate losers from free trade (such as those who will lose jobs in an
industry that is opened up to foreign competition).22

[F] MARKET BARRIERS

Once markets have been opened the existence of international commitments to that effect
can help guard against backsliding, including as a result of a change of government or
economic crisis. The global free trade system under the General Agreement on Tariffs and
Trade (GATT), now administered through the World Trade Organisation (WTO), was
instituted largely from a desire to avoid the erection of trade barriers as a response to
economic crisis, something which had happened after the Wall Street Crash of 1929 and was
considered to have played a large part in the subsequent economic crisis known as the Great
Depression. The more recent global economic crisis has, as such crises generally do,
precipitated 48 calls for protection, and so far the existing free trade agreements have assisted
in maintaining open markets (including in the area of public procurement).23

It is also sometimes said that international organisations or free trade agreements can provide
a scapegoat that can deflect criticism from national governments governments can blame
Brussels or Geneva for job losses etc that result from opening up particular markets. Of
course, in a world of free trade agreements, governments may also hold off from opening
their markets unilaterally even if they are able and willing to do so, in the expectation that
greater benefits can be achieved by using the opening of their own markets as a bargaining
chip to motivate trading partners to open markets to them in return, than by purely unilateral
market opening.24

Protection of potentially competitive industries Another justification for discriminatory

procurement is to support industries which are potentially competitive but are held back by

22 Supra f.n. 12

23 Ibid

24 A. Tepperman and M. Sanderson, Innovation and Dynamic Efficiencies in Merger Review (Canada,
Competition Bureau, 2007), available at
http://www.competitionbureau.gc.ca/eic/site/cbbc.nsf/eng/02378.html#key_concepts , pp. 6-7

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market imperfections such as inadequate access to capital, or to create a comparative

advantage in industries which themselves are affected by market imperfections such as high
entry barriers (infant industry arguments). The use of procurement to develop competitive
national supply markets in this way may be particularly important in developing countries
and economies in transition. From a global perspective, such policies are often
unobjectionable in principle as they do not go against the principle of comparative advantage,
and from a national point of view they may produce economic benefits if implemented
successfully.25

However, the practical problems of putting such policies into effect mean that often the
anticipated results do not materialise, and the costs involved (which, as in (1) above, are
higher prices paid by government, diversion of resources to less productive uses and
inefficiency from lack of competition) outweigh any benefits. These problems include the
difficulties of selecting the correct industries for protection; the challenge of providing
incentives for the protected industry to operate in an efficient manner; and the distorting
effects of lobbying by industry. Even where such policies do produce net benefits, it must
always be considered whether preferential procurement is the most effective method of
achieving the governments objectives when compared with possible alternatives such as
state loan guarantees, training, direct financial aid etc.26

Support for social and environmental objectives Another reason why government
procurement operates as a barrier to trade is that it is frequently used as a tool for promoting
social, political and environmental objectives, such as the economic participation of women,
the handicapped or disadvantaged ethnic groups, or the development of poor regions of a
country. This may involve, inter alia, setting aside some government requirements for these
groups; giving them price preferences; requiring subcontracting to such groups; or requiring
all government contractors to demonstrate that their own businesses are conducted in
accordance with antidiscrimination or affirmative action policies.27

25Perry, S. (2000), On the Relationship between Corrective and Distributive Justice in

Horder, J. (eds.), Oxford Essays in Jurisprudence, Oxford: OUP, 237, p.238

26 Ibid

27 Nazzini, R (2011) The Foundations of European Union Competition Law The Objective
and Principles of Article 102, Oxford University Press, chapter 2.

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Many of these policies have the effect of excluding or limiting foreign competition as an
inevitable by-product of advancing the interests of the national group. For example, a price
preference of 5% given to a national ethnic group disadvantages foreign firms as well as
national firms that are not owned by the relevant group. In some cases governments accept
that the policies concerned are not efficient in the sense of maximising economic welfare,
from either a global or national viewpoint, but accept the inefficiencies as a justifiable cost of
other goals, such as social or regional equality or political harmony. In addition, however,
these policies may be compatible with both national and international goals of economic
efficiency if they bring into the economy those who have previously been relatively inactive
because of market imperfections. As with other procurement policies there is, however, a
danger that the anticompetitive effects of the policies may outweigh the benefits. A first
condition for avoiding this is, of course, that the policies should achieve their purported
objectives, and this is not always easy to ensure or to measure.28

[G] PROCUREMENT POLICIES RELATED ISSUES

For example, programmes to improve the position of ethnic groups must ensure that firms 50
benefiting from the programme provide a genuine, and not merely a token involvement, of
the targeted group. Striking a balance between the benefits of trade and the legitimate
objectives of government in using procurement to promote social and environmental goals is
one of the most difficult problems for systems that seek to open up markets in procurement
and will be considered in detail in chapter 11. National security National security concerns
are another common reason for placing contracts with national industry, particularly in the
defence sector. For example, defence contracts may be given to national firms in order to
ensure that spare parts and maintenance are easily available in time of conflict, or to ensure
that the country retains its own capability to manufacture, say, tanks or radar systems. As with
social goals, where national security goals are concerned any adverse economic effects are
accepted on the basis that they are secondary to other objectives.29

However, as with other procurement policy measures, there are potential problems in
ensuring that decisions are taken on genuine security grounds rather than being influenced by
the economic interests of lobby groups. This is a particular problem with defence because the
28 Vanberg, V.J. (2009) Consumer Welfare, Total Welfare and Economic Freedom On the
Normative Foundations of Competition Policy, 09/3, Walter Eucken Institut, p. 24.

29 Ibid

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 GLC TREATY APPRECIATION COMPETITION 2017

industries involved often support a large number of jobs. The special problem of opening up
defence procurement markets in the EU is considered in detail in chapter 9. 5. Corruption and
patronage Another barrier to trade is the influence of corruption and patronage. For example,
contracts may be awarded to firms that have paid bribes or to firms in which politicians,
purchasers or their families have a financial interest, or which have contributed to an election
campaign. Exploitation of comparative advantage requires that purchasing decisions should
be based on commercial criteria. Such policies can also have a discriminatory effect in favour
of national industry (for example, when contracts are awarded to firms with personal
connections to politicians) and can distort trade patterns as between foreign firms (since some
countries have stricter rules than others on bribing foreign officials to obtain contracts). 30

Absence of commercial pressures Barriers to trade in government markets may also be

presented by the nature of government purchasing. In general, government procurement as
compared with private sector procurement is characterised by an absence of market pressures
to seek value for money. Thus there is a danger that public contracts may be placed with
traditional (national) suppliers as a result of inertia factors: for example, purchasers may
feel more comfortable dealing with familiar faces; there may be resistance to new
technology; or purchasers may lack the resources to evaluate products made to unfamiliar
specifications. The natural tendency of purchasers to behave in this way will be counteracted
in the private sector by market pressures, but in the public sector other mechanisms are
needed to achieve a commercial approach. Like corruption, such inefficient practices may
affect both foreign and domestic suppliers, but will have a disproportionate effect on foreign
suppliers.31

30 Tribe, K. (1995) Strategies of Economic Order German Economic Discourse 1750-1950,

Cambridge: Cambridge University Press, pp. 203-240

31 Vanberg, V.J. (2004) The Freiburg School: Walter Eucken and Ordoliberalism, op. cit., p. 2

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