Competition Law, State aid, and Regulation, part 1

As part of Professor Eleanor Fox’s comparative EU/US competition law LLM class at NYU, she asked if I would give a lecture on state aid and regulation issues and how they relate to the competition rules. Here is the text of the lecture, separated into three posts: this is Part 1; Part 2; Part 3)

Competition law, State aid, and Regulation

One of the difficulties about studying the law is that there is never a good place to start. No individual law or rule exists in isolation; if you learn about one rule, you will understand a little; if you learn about more rules you will understand a little more about that first rule. Professor Dworkin’s idealised judge, Hercules, has a perfect knowledge of all rules, and only with that knowledge can the judge form a complete understanding of any individual rule.

Fortunately, real life standards are a little lower, but it is useful to think about how any one rule fits into the overall system of laws; this is particularly useful when comparing US and EU competition law, as the EU system of “competition law” is rather different to that in the US. Rather than focused exclusively on company behaviour, the EU system looks at state action as well. The objective is, however, the same.

Creating a Single Market

When the drafters of the Treaties sat down in the 1950s, they had a specific object in mind – to create a single economic area out of the then six separate national economies (now 27 national economies). One of the major reasons to integrate the economies of the Member States, was to integrate the parts of the economies needed for war (coal, steel, nuclear), in such a way that war would become increasingly difficult and undesired: France had been invaded by Germany three times in the previous eighty years – in 1870, 1914 and 1940; the second world war had ended just a few years earlier. But there was also a more positive reason – a pragmatic efficiency argument: a larger market will typically be more efficient in terms of production and allocation than a small one, with the production efficiencies that come from Adam Smith’s specialisation, and David Ricardo’s comparative advantage, for example.

There is something particularly orderly about the way the drafters went about it; methodical, Cartesian. Every problem was identified, analysed, stripped down to its constituent parts, and then a solution, or an attempt at a solution, was found.

If you want to create a single economic market out of six separate economies, what do you need to do?

The Freedoms

At the most basic level, you need to give businesses the right to sell goods and services across borders: so we have free movement of goods and freedom to provide services. Selling goods cross border is not necessarily enough; sometimes businesses will need to set up subsidiaries in different countries so that they can sell and support their sales more directly: so we have freedom of establishment of companies, and free movement of persons so workers can also establish themselves in different Member States. Cross-border trade and investment needs cross-border flows of capital, so we have free movement of capital.

Once you have eliminated internal trade barriers through these free movement rules, you inevitably have to look at external trade barriers, because if France has lower import duties on Chinese textiles than Germany, then all imports would simply go into France and from there into the rest of the community because of the free movement provisions. So we have a common external commercial policy and a common customs tariff.

And once you eliminate government barriers to a single market, you also need a common rules set of rules as to how companies can behave.

The Competition Rules and Companies

This is where Articles 81 and 82 fit in.

Again the competition provisions of the Treaty have a dual objective – creating a single market, and promoting efficiency on that market. This dual objective is one of the reasons that EU law diverges from US law in some areas, most notably in vertical restraints under Article 81, where we tend to take a more restrictive view of what is permissible when it comes to territorial restrictions.

(One of the interesting and, I think, partly unresolved issues about EU antitrust rules is the extent to which this single market objective continues to be of relevance today. With the increasing focus on economics and consumer welfare, how do single market arguments continue to fit into that framework? There is a recent judgement of the ECJ (Joined Cases C‑501/06 P, C-513/06 P, C-515/06 P and C‑519/06 PC-501/06 P, GlaxoSmithKline v Commission, judgment of 6 October 2009, not yet reported) that might suggest a way forward – parallel trade restrictions remain restrictions of Article 81(1) by object, but we then do a full efficiency analysis under Article 81(3). The case is unlikely to be the final word on the subject.)

The single market objective is perhaps most important – and most obvious – when we look at the competition rules that apply to State action.

This continues at Part 2.

(Competition Law, State aid and Regulation:Part 1, Part 2, Part 3. Full text available as a PDF: Competition Law, State aid and Regulation)