In July 2001, the European Commission acted on the recommendation of its antitrust arm to block a proposed merger between General Electric (GE) and Honeywell. The U.S. Department of Justice had already approved the fusion of these two American firms, which together boast annual sales of more than $150 billion. The opposition of the European Union (EU) therefore shocked the two companies and most business analysts, who had predicted that the move would make Honeywell a stronger, more efficient company. What made the rejection of the deal even more striking was that Europe and the United States had bragged about their close cooperation and convergent approaches to antitrust policy for several years. Instead, the Honeywell case underscored the profound transcontinental differences on this issue.

European antitrust regulation could become an unexpected stumbling block on the road toward a more integrated global economy. U.S. antitrust authorities presume that markets work; hence government intervenes only when there is clear evidence that business practices are harming consumers. In contrast, EU competition officials seem to seek the "right" market structure, sometimes placing the interests of competitors over those of consumers. In the GE-Honeywell case, both sides agreed the merger would result in lower prices for consumers. But whereas the Americans saw the price reduction as an unmitigated benefit, the Europeans viewed it as a detriment, because they speculated that it would make it harder for other firms to compete and perhaps allow GE and Honeywell to raise prices in the future. In the words of Charles James, antitrust chief at the U.S. Department of Justice, "What led the United States to clear the transaction -- the prospect that it would make the combined firm a more effective competitor -- was the very reason the EU opposed it."

The EU's opposition to the merger has highlighted the risks that multinational corporations face as antitrust laws proliferate around the globe. Some analysts have argued that the time has come to harmonize antitrust policy internationally to reduce potential conflicts. That goal is laudable -- but not if it means yielding on U.S. antitrust principles, which protect consumers and resist propping up inefficient businesses.

NEW RULES OF THE GAME

During the second half of the twentieth century, many countries opened up their economies to market forces and limited the role of central planning. But even as free markets became the primary way of organizing production, governments also developed "competition policy" to establish the rules of the game. This policy usually took shape in laws enforced by a regulatory body, often with appeal to a judicial body. By 2000, more than 80 countries, accounting for nearly 80 percent of world production, had enacted such laws. Many of these countries modeled competition policies and their implementation on the antitrust laws of the United States, which are grounded in the 1890 Sherman Antitrust Act.

In general, strong competition policies, based on sound economics, help prevent clear instances of monopolistic behavior such as price fixing. In many cases, antitrust laws also help challenge institutional arrangements that impede competition from foreign countries in domestic markets. For example, the European Commission recently ruled that Deutsche Post, the state-sponsored German postal service, must separate its competitive parcel-delivery service from its monopoly mail-delivery service. That decision has helped United Parcel Service, an American company, better compete for German parcel deliveries.

But the international diffusion of antitrust laws has proved a mixed blessing for globally minded companies. Differences in the application of competition rules across various countries have increased the amount of uncertainty for firms. Mergers are a case in point. Companies that want to merge want to do so quickly. But they have to receive permission from the antitrust authorities in the countries in which they do business. According to the U.S. Council for International Business, a typical multinational corporation needs to file in 20 to 30 jurisdictions to propose a merger. An objection by any country in which either firm does significant business can kill a deal. In 2000, GE and Honeywell together had European sales of $28.5 billion, 18 percent of their global sales. Getting out of Europe was not an option for saving that merger.

Although global companies need to worry about competition cops everywhere, their biggest concerns lie in the United States and the EU. Foreign companies doing business with Americans have always had to clear numerous hurdles: tough antitrust scrutiny by the Department of Justice and the Federal Trade Commission, increasingly active state attorneys general, and lawsuits from private parties in which the plaintiffs get three times their damages if they win ("treble damage" suits). Those who have been found to violate U.S. antitrust laws have faced serious consequences and even fines and imprisonment. For example, two executives at Archer Daniels Midland were recently sentenced to nearly three years in prison and fined $350,000 each for fixing the prices of lysine.

Only recently, however, have U.S. companies in Europe faced a similar degree of antitrust scrutiny. The 1957 Treaty of Rome, which established the European Economic Community, created a competition-policy system for dealing with cross-border antitrust issues. Yet Brussels did not act to enforce the system for many years. Businesses generally did not need to get approval for mergers and acquisitions, and the European Commission left much antitrust enforcement to national authorities. But in 1990, Brussels implemented a merger review policy that heralded a more rigorous enforcement of its antitrust laws. The next years found the top European competition-policy position occupied by a succession of appointees who believed in a highly professional and engaged competition authority. Multinationals suddenly had another set of eyes on their business practices.

Although regulators in Brussels often agree with those in Washington -- especially when it comes to price fixing and other egregious violations -- sometimes they do not. These differences seldom get public airing, however, because companies that have their business practices challenged, or that are seeking to merge, usually reach a quiet accommodation with the commission. Most businesses have little choice. For example, there is no way to dispute a commission decision in sufficient time to complete a merger. The GE-Honeywell case was unusual because GE publicly challenged the commission's objections, leading to intense media coverage.

THE CUSTOMER IS ALWAYS RIGHT

Thanks to its long history of antitrust laws, the United States has had more time to adjudicate and analyze competition issues than almost any other country. Although formally based on legislation, U.S. antitrust policy has generally followed the common-law method, built on more than 100 years of precedent generated by federal and private lawsuits. This approach has enabled U.S. courts to permit significant changes in laws in response to economic learning and industry evolution, since cases and their circumstances change constantly. Importantly, the prospect of treble damages under U.S. antitrust laws, together with the opportunity for class-action litigation, has resulted in many private antitrust suits.

The Department of Justice and the Federal Trade Commission share responsibility for enforcing federal antitrust laws. In addition to challenging anticompetitive business practices, these agencies review proposed mergers. Since the development of federal merger guidelines in 1982, merger review has focused on the impact of business combinations on consumer welfare. The agencies consider the claims of merging parties -- namely, whether the fusion will result in enough economic efficiencies to offset any tendency to raise prices as a result of increased market power. Both agencies have sizable staffs of well-trained economists who examine the effects of business practices on consumers by using highly advanced theoretical and empirical tools.

In the last quarter-century, U.S. courts have agreed on several core principles. The first dictates that the singular purpose of antitrust law is to serve consumers. The courts have completely abandoned efforts to use antitrust laws to preserve small businesses or to prevent the emergence of large businesses. For example, a district court recently rejected the federal government's argument that American Airlines had engaged in predatory pricing. Although the court acknowledged that some low-cost rivals failed after the defendant lowered its prices to match theirs, it concluded that this development did not justify a liability finding against American.

A second and related principle is that antitrust laws are not meant to protect businesses from competition. The courts accept that aggressive competition produces winners and losers. The loss of market share that a business experiences as a result of brutal competition is not a sufficient trigger for antitrust enforcement. Indeed, the courts have narrowed considerably the range of business practices that are deemed anticompetitive.

The third principle, more inchoate, is that unfettered competition among businesses generally benefits consumers -- even if a single firm captures most or all of the market. Hence the plaintiff usually must demonstrate that the challenged business practice harms consumers. Because of this high burden of proof, the courts have been quite circumspect in condemning business practices.

The practical result of all these principles is that plaintiffs in the United States are much less likely to win antitrust suits than most other kinds of suits. This approach contrasts starkly with that of Europe. Although the Treaty of Rome's language resembles that of the Sherman Act and addresses the same core principles, European competition policy has always lacked the consumer focus of U.S. policy. Somewhat like American courts in the early part of the twentieth century, Brussels sees competition policy as serving multiple objectives -- including protecting small businesses and ensuring "fair" competition -- but it will not consider the efficiencies created from combining businesses in judging merger requests. Although EU officials have recently emphasized the importance of the consumer, various statements and decisions reveal a different view. For example, when discussing a recent investigation of Intel's marketing practices, a commission spokesperson explained that "[Intel] must make sure what it is doing is not intended to run small companies out of business."

Moreover, European courts hold less influence over the evolution of competition policy than do their U.S. counterparts. The European Court of Justice, the highest judicial body for the EU, has rendered few decisions that can establish precedents, in part because EU competition enforcement is relatively new and in part because few defendants appeal. European courts issued only a fifth as many competition-policy decisions as their American counterparts did between 1998 and 2000, and their judges defer less to precedent anyway, thereby making it harder to create bedrock principles.

A further source of difference between the U.S. and European approaches is the role of economists. In the United States, microeconomic analysis is central to antitrust enforcement and legal proceedings. Economists play substantial roles in the enforcement agencies. Furthermore, several key judges are first-rate economists: Supreme Court Justice Stephen Breyer and Judges Frank Easterbrook and Richard Posner on the Seventh Circuit Court of Appeals are among the most noteworthy. In contrast, even though the EU's current commissioner of competition, Mario Monti, is a highly regarded expert on monetary economics, the EU competition authority has no chief economist and relatively few staff economists.

SURVIVAL OF THE FITTEST

When GE and Honeywell made their deal, they did not anticipate much difficulty in getting approval from the competition authorities in the countries in which they did business. Their activities did not overlap much, so the usual merger concern of increasing concentration in certain lines of business did not appear. Both companies compete in the airline industry but do not compete with each other: GE makes engines and provides airlines with long-term financing for purchasing planes; Honeywell makes aviation equipment such as navigational systems and flight recorders. With a few minor exceptions, these companies do not sell the same products or services.

The merger proposal sailed through the U.S. Department of Justice, which concluded that the plan did not raise competitive concerns because of the lack of overlapping markets. The department also found that the merged company would likely offer bundles of products (e.g., engines and radar systems) for less than what the companies already charged for the products separately -- hence customers would clearly benefit. When the proposal came to Brussels, the EU competition directorate shared this view on the economic effects of the merger. But it then conjectured that the lower prices would eventually drive GE-Honeywell rivals from the market -- and that this outcome could lead to an increase in prices in the future.

Besides being based on a speculative forecasting model, the competition directorate's analysis assumed that these rivals could not counteract GE-Honeywell's prices through increasing efficiency or attempting mergers on their own, which could give them the same ability to bundle products and lower prices. It also assumed that no other rival could enter the industry if GE-Honeywell eventually raised prices. This approach reflected the commission's tendency to enforce its own views on how markets should be structured rather than to allow vigorous competition among firms to permit the fittest to survive. Even though the commission claimed that it had the interests of consumers at heart, its approach gives firms a shield from the rigors of competition and effectively denies consumers the opportunity to buy GE-Honeywell's bundled products at lower prices.

Not surprisingly, Brussels has become a magnet for companies seeking protection from more efficient or innovative rivals. Indeed, representatives of GE and Honeywell's chief competitors, such as United Technologies and Rolls Royce, were reported to have argued strenuously before the commission that the merger should be blocked. That development poses a special concern for companies in the new economy. As the gale of creative destruction knocks over incumbent firms or creates opportunities for the most ambitious ones to seize a larger market share, weaker and slower firms naturally seek protection from friendly competition authorities. The complaining companies in these cases are indeed right about one thing: rapidly advancing technology and large, cross-border mergers can significantly disrupt the balance of power among competitors in a given market. U.S. authorities have concluded that these shakeups are best handled by the market. The EU, in contrast, sees such tumultuous shifts on the playing field as potentially harmful, regardless of consumers' immediate interests.

Significant procedural flaws in the EU antitrust process have magnified its bias by propping up competitors at the expense of EU consumers and international firms that do business in Europe. As in the United States, competitors can lodge complaints with the European Commission and persuade antitrust officials to undertake an investigation, which is then conducted internally with the defendant knowing only limited details of the charges and the evidence. But the endgame is different. If U.S. antitrust authorities want to block a merger, they have to go to court and seek an injunction; the government then bears the burden of demonstrating that the merger is anticompetitive. The courts will expedite these hearings to reach resolutions in a matter of months, which is long enough to make many companies drop the merger rather than go to court. But U.S. antitrust authorities do face a significant risk that a court will review their analysis and evidence in a short period of time, allowing the merger to proceed.

In Europe, however, the competition authority acts as prosecutor and judge. It collects the evidence, conducts a hearing, and makes its recommendation to the European Commission. The commission almost always accepts the competition directorate's recommendation with little additional process. The public part of this process consists of a brief oral hearing (often completed within a day), with little opportunity to cross-examine witnesses. It usually takes two years or more before companies can appeal a merger denial to the European Court of First Instance. Companies are rarely willing to wait that long for a merger; the few appeals filed have been by companies venting their anger. Thus the competition directorate seldom has to subject its analysis and evidence to outside review, reducing its incentives to conduct careful, fair, and scientific analyses of competition problems. This process also limits the competition directorate's ability to learn from outside scrutiny.

OVERPROTECTION

The EU now seeks global negotiations, perhaps through the World Trade Organization, to create a binding set of multilateral competition rules that could be administered through a supranational agency. Under President Bill Clinton, the Justice Department opposed this idea. It advocated instead a wiser approach: an international dialogue over antitrust policy and practice to promote "soft" convergence among national approaches. The Bush administration has followed this policy, although it has expressed its disagreement with the commission's analysis in the GE-Honeywell case more vigorously than the Clinton administration would have done.

In carrying out this dialogue, the United States must recognize two key points. First, the conflicts between U.S. and EU antitrust law are not fundamentally about the protection of national interests, even though at times these interests may color an authority's decision. An impulse to protect competitors makes it easy for the commission to justify antitrust interventions that happen to prop up EU firms. But those interventions are the exception; EU antitrust law has in fact hurt many European companies that have found deals blocked and consumer-friendly business practices condemned.

The second point is that the commission's competition directorate, for all its flaws, has been a progressive force in the EU. It has generally promoted the development of free markets and has helped dismantle cartels and nationalistic practices that restrain competition. Monti deserves much credit for keeping European politics out of the decision making and pushing hard for competitive European markets. Europe is a more open market for European and American companies because of Brussels' efforts. (It goes without saying that the EU has the right to regulate competition within its borders just as the United States does -- a point that many agitated American commentators and politicians missed during the GE-Honeywell brouhaha.)

Nonetheless, the transatlantic divergences in antitrust enforcement are likely to become more persistent and prominent. After years of relative passivity, the commission's leadership has now established a more aggressive and confident profile, extending its reach into industries never before examined for antitrust infractions. Although these actions have ruÛed

the feathers of some European leaders, the commission enjoys broad political support for its actions.

The question about whether antitrust law should protect consumers or competitors lies at the heart of the global economy, which is increasingly shaped by dramatic industry consolidations and market-changing technological revolutions. In such an economy, traditional and less aggressive competitors are bound to suffer most. Absent evidence of price fixing or other corporate practices that clearly harm consumers, the U.S. approach to such situations is to use roiling competition to serve the public interest -- even if that means a dominant firm emerges from the fray. No such confidence exists in the EU. So long as European regulators look warily at competition, the ability of companies to consummate mergers or to enter new markets -- even when doing so will result in lower prices and expanded customer benefits -- remains compromised.

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