Cartels: the Hidden Enemy Behind Rising Prices and What Can we do About it Internationally? - UNCTAD Report on Extraterritoriality of Competition Law in Developing Economies
by Marek Martyniszyn
Declining purchasing power—what consumers can afford with their after-tax income—is frequently attributed to rising costs and stagnating incomes. In the fight against inflation, central banks are the most visible actor. However competition agencies are also playing an important anti-inflationary role by protecting consumers from monopolists and cartels. While big tech monopolies receive visibility in media, cartels often go unnoticed despite their harmful nature. Recent empirical research highlights the broad reach of competition agencies, which is good news for consumers in an era of global trade—and global cartels.
Anticompetitive practices, such as price-fixing cartels, are an invisible thief. Consumers bear the cost when competitors strike illegal agreements to sell their products at inflated prices. We are worse off by paying more than a fair market price or by facing less choice. As nicely put on an FBI tape by an executive working for a cartelist: “competitors are our friends, customers the enemy.”
National competition agencies (such as the UK’s Competition and Markets Authority or the German Federal Cartel Office) protect us by uncovering and investigating such illegal practices and bringing culprits to justice. However, in a globalized economy many such unlawful schemes reach beyond a single country. They are transnational, sometimes even global. The harm they cause is significant. It is estimated that between 1990 and 2016 international cartels alone caused overcharges exceeding $1.5 trillion.
To reach such a mind-numbing figure, one must understand that cartels can inflate prices of components or ingredients of finished products that are universally purchased by consumers. One of the recently discovered and sanctioned international cartels inflated prices of refrigeration compressors—an essential part of every refrigerator, freezer and air-conditioning unit. Actions against this cartel were brought in the US, EU, New Zealand, Chile, Brazil and Mexico. The cartel was truly global, with buyers of such finished products overpaying pretty much everywhere.
Despite the global reach of cartels, there is no world competition agency, not even a binding international agreement in this area. Such matters have not been incorporated into the World Trade Organization, which facilitates trade and has competence to resolve disputes between states. Similarly, neither the International Monetary Fund nor the World Bank can come to rescue of consumers facing global price fixing.
In effect, as illustrated by the above example, domestic competition agencies are left to apply national competition laws to foreign offenders that undertake illegal cross-border practices, also known as extraterritorial application of domestic law. This approach has been spearheaded by the United States and followed by numerous agencies from the developed world (for example, the EU and Japan) to protect their consumers and businesses from being exploited. However, chasing after foreign violators has proven controversial, as it can be seen as a challenge to national sovereignty (for example, leading to direct interventions before courts or to introduction of so-called blocking legislation by states whose firms were affected). Moreover, agencies face a variety of challenges when bringing such actions, not least due to evidence, because the global regulatory framework has not been set up to facilitate them.
Despite these hurdles, extraterritorial pursuit of offenders has become increasingly widespread among competition agencies globally. A recent study, published by the United Nations Conference on Trade and Development (UNCTAD), for the first time investigated the experience of competition regulation in developing countries. Anticompetitive agreements are particularly destructive in less developed regions, where they undermine development assistance. To put it bluntly, they make the poor and vulnerable poorer. In terms of the UN Sustainable Development Goals, they undermine economic growth (SDG8) and foster inequalities (SDG10). The findings are encouraging. Domestic competition laws enable competition agencies to pursue foreign violators in the majority of the 40 countries participating in the research. Moreover, some agencies in developing countries have already pursued foreign violators, including the most harmful and difficult to deal with price-fixing cartels. These findings are also empowering. They demonstrate that, despite an inadequate international regulatory framework, consumers in developing countries need not be left at mercy of foreign culprits.
The study as well as a related journal article helped to identify a number of areas where further progress can be made. Some of the challenges facing competition agencies can be overcome by relatively simple adjustments in domestic laws (for example, in relation to relevant legal procedures or rules on gathering and sharing of information or evidence). Other hurdles call for action at the international level. It is important to note that UNCTAD has already signaled its willingness to incorporate the report’s recommendations in the commentaries on the Model Law on Competition—a leading international benchmark and a source of good practices. The report, which stressed that trust is the cornerstone of international cooperation, also calls for more sharing of knowhow and experience among competition agencies.
The increasingly widespread practice of pursuing foreign cartelists is good news for consumers facing budget pressures. Competition watchdogs around the world are on the job even if their work does not get the visibility it deserves.
February 2022