A Tale of Three Cartels

2003 Forum on InternationalCompetition Law

ABA Section of Antitrust Law

New York, February 7 2003

Frédéric Jenny Professor of Economics (ESSEC)

Chairman WTO Working Group on the Interaction betweenTrade and Competition Policy

Part I

The International Electrical Association

The International Heavy Electrical Equipment Cartel

Membership: over 50 European and Japanese firms

Duration: from 1930 until , at least, the middle of the 1980s (current status of the cartel unknown)

Products covered: all heavy electrical equipment ( turbines, generators, condensers, switchgear, rectifiers, rolling mills)

Under the auspices of « The International Electrical Association », a seemingly innocuous trade association incorporated in 1945

The International Heavy Electrical Equipment Cartel: geographical coverage

« The known agreements (…) cover «  all countries of the world » except where otherwise specified. After considering the exclusions, however, the cartel members mainly the developing countries (…). The territories excluded or exempted from the agreements are usually home territories of the member companies, plus those regions in their traditional sphere of influence.(…) Not coincidentally these same developed countries commonly have passed antitrust legislation prohibiting such practices when they prejudice national interests. » (report p. 75)

« Most of the importing countries are developing countries with little or no domestic manufacturing capacity for heavy electrical equipment. These countries typically are engaged in ambitious programs of industrialization and development. As a group, the developing countries thus represent the fastest growing segment of world demand in the industry and hold the greatest potential for future growth. No leading manufacturer can afford to be foreclosed from these markets and still expect to retain its long-term position of technological leadership. » (report p. 133)

The cartel membership

. The largest contingents are from the UK (General Electric UK and 16 other firms), Italy ( Marelli, ANSALDO etc..), France ( Alsthom, CGE, Merlin Gerin, etc…), Germany (AEG, Siemens etc…), Switzerland ( Brown Boveri etc..), Sweden ( with ASEA etc..)

In 1947 the US Federal Trade Commission charged the U.S. participants ( International General Electric, Westinghouse, IngersollRand, Ohio Brass Cny) with violating the Sherman Act by illegallyconspiring to restrain international trade. The US firms were enjoined from further participating in any international cartel.

Japanese manufacturers (Hitachi, Mitsubishi, Fuji Electric) become important players in the late sixties. After having failed to eliminatethe Japanese firms through predatory pricing, the cartel members convince them to join the cartel in the mid seventies. They becameassociate members.

The practices (I)

Notification system: members must notify the cartel secretary if theyreceive an enquiry or intend to submit a tender. The secretary advises all members who have notified that enquiry. Consultations between the firms submitting a bid will follow.

Price fixing: ex. agreement for steam turbines and generators: « any party…shall…quote not lower than the price determined from and in accordance with the Price and Heat Consumption Manual multiplied by the factor stated in Appendix 1 hereto »

Market allocation : the parties agree on a market shares allocation, on an initial sequencing of orders and a procedure for the subsequent period « upon notification of an enquiry from one or more members, the Secretary assesses the value of the project according to the Price Appendix. Orders are then allocated to the member whose total allocation Value was lowest prior to the tender. »

The practices (II)

Compensation payments: the unsuccessful participants in a (rigged) tender are compensated for the cost incurred in preparing their bids with a flat sum of money paid through the IEA. The successful tendering party pays a percentage of his bid ( between 1% and 7%) to allow for this compensation.

Limitation of transfers of technology to developing countries: Some agreements ( ex. water generators) have special provisions applying tolicensees in developing countries and joint ventures with local manufacturers. Technological cooperation with independent, uncontrolled manufacturers in developing countries is foreclosed by the fact that parties collectively agree never to tender in collaboration with such firms ( exception for Communist countries where access to the market could be obtained only through joint ventures).

Penalties: non compliance with respect to pricing or market allocation leads to severe fines.

The practices (III)Exceptions: The members of the cartel are not to cooperate with non cartel members. When confronted with outside competition and if aqualified majority of members involved in a transaction agree «  allMembers concerned shall meet in an effort to conclude a special arrangement, which may, inter alia, suspend or modify the effect of the agreement in respect to that particular transaction ».

Predatory practices: The cartel members are known to have used their profits to engage in predatory pricing against newcomers, particularlyfrom developing countries. According to the FTC, in 1948 : «  The fund (made of the members’ contributions) could be used to supportcut-throat competition against a non member competitor in any territorycoming within the scope of operation of the agreement ». Such tactics were employed in the early seventies unsucessfully to prevent the rise of the Japanese heavy electrical equipment industry. Subsequently, predatorypricing was used successfully in Brazil to drive the independent local manufacturers to bankrupcy. ( see B Epstein and K Mirow « Impact on developing countries of restrictive business practices of

transnational corporations in the electrical equipment industry: a study of Brazil, Unctad, 1977) .

The effects of the cartel on importing countries

« From the cartel’s documents, it is seen that the IEA annually covers almost US$ 2 billion of sales of heavy electrical , including nuclear power equipment »

« These cartel arrangements directly harm importing countries because of the onerous mark-up on cartellized sales as well as common policies among members restricting technology transfers to nonproducing countries. On the basis of data from one product section, it is estimated that succesful collusive agreements may raise prices 15 to 25 percent above the competitive rate. If this rate held for all sales made under the IEA agreements, the amount of overcharges on IEA sales would rangefrom US$ 300 to 500 million per year, which ultimately would be reflected in the cost of electric power and all products dependent on electricity »

The Scope of the Heavy Electrical Equipment International Cartel

Published records concerning transactions recorded by the « transformers » section of the cartel suggest that the following countries were victims of bid rigging by the cartel members:

Australia, New Zealand, India, Pakistan, South Africa, Zambia, Nigeria, Ivory Coast, Hong Kong, Malaysia, Jamaica, Ireland, Cyprus, Brazil, Paraguay, Chile,Columbia, Venezuela, Panama,Chinese Taipei, China, Korea, Iran, Kuwait, Iraq, Spain, Denmark,Greece, Romania, Yougoslavia, Turkey, Philippines, Indonesia,Israel, Saudi Arabia, Syria, Lebanon, Morocco

Developing countries are victims of price discrimination

Part II

The « East of Burma » Agreement

------------------1) Based on a presentation made by Alan Wm Wolff to the Trade and Competition committees of OECD in 1994; See « The problems of market access in the global economy: trade and competition policy » by Alan Wm Wolff, OECD, 1993

The international steel cartel

Geographical coverage: Eastern Hemisphere

Products coverage: all flat-rolled steel products

Scope: market allocation price fixing punishment of violators

Period: at least from the 80s to present

The international steel cartel: the core agreements

1) Agreement between Japanese steeel mills and Koreansteel mills not to invade each other’s market. Korean exports to Japan are limited to 2.2 million tons a year.

3) EU steel mills and Asian steel mills of Japan and Korea agree to divide the Eastern Hemisphere into two territories ( border: East of Burma(Myanmar))-each group to restrict its exports to the other’s territory (quotas per year, per product, per country of export, per mill) -quarterly meetings to fix export prices-violators punished by dumping of twice the amount of the violation on their domestic market at the worst time

2) Agreement between EU steel mills and eastern europeansteel mills

The international steel cartel: a global view

Japan

Canada

N Z

AustraliaTaiwanIndonesia

Korea

East of Burma

E U

Hungary

Czech Rep

Slovakia

Romania

CIS

Bulgaria

Less than 400.000

Less th

an 400.000

Algeria

Tunisia

Lybia

Egypt

Turkey

Oman

Iran

Pakistan

India

Sri lanka

Bangladesh

Thailand

Indonesia

Malaysia

Philippines

Singapore

China

Norway

Other europ.

Brazil

The international steel cartel and dumping

-Second, when global demand in the Eastern Hemisphere is weak, the parties to the agreement can only dispose of their surplus stock outside of the region. Some dumping, for Example, takes place in the U.S.

This agreement leads to dumping (and antidumping proceedings) in two ways:

-First, dumping as a retaliatory device in the country of the offenders when steel mills party to the agreement cheat.

« In addition we are aware of the informal andformal arrangements other nations have used todivert the global steel problems to our shores »

Part III

The Aluminum Cartel

------------------1) Based on « Foiled Competition: Don’t Call it a Cartel but World Aluminum Has Forged New Order » by E. Norton and M. du Bois, Wall Street Journal, June 9,1994 and Joseph E. Stiglitz «  Globalization and its Discontents ».

The aluminum glut

When the Soviet Union collapsed, the demand for aluminum from the former Soviet « military complex » decreased considerably:

Price per pound went from : 93 US cents in Sept 1990 to : 58 US cents in Sept 1993 Inventories went from : 58.000 tons at the end of 1989 to : 2.5 mil metric tons ( end of 1993)

Alcan lost US$ 112 millions in 1992Pechiney lost US$ 36 millions in 1992Alcoa profits were down 50%/1st quarter 1993

Alcoa chief executive Paul O’Neill asks Washington to create « a global industry cartel »; in Sept 1993, the US Aluminum Associationcalls for antidumping measures against Russia or negotiations between the governments of the US and Russia

The trade-off between trade measures and cartellisation

The US government, and in particular the State Department, did not want to impose anti-dumping duties against Russian aluminum for a variety of reasons:

- it would send the wrong signal to Russia which was trying to move to a market economy and for which market access was important;

-Russia badly needed hard currencies to be able to repay its hugedebt ( contracted with Western Europe and North American banks);

-it was fairly obvious that even though Russia was not really dumping aluminum , an antidumping action against Russia in the US would succeed. The international price of aluminum would remain depressed and US export sales would suffer.

Working out a cartel agreement

The US administration, pushed by Alcoa, and with the help of the EU commission decided to facilitate an international agreement between most of the major western producers ( in the US, the EU, Norway, Canada, Australia) to cut their production by 1.5 to 2 million tons over the next two years. Under this scheme US producers were to reduce their production by 20%, West European producers by 25%. In return for Russia’s 500.000 ton production cut, Deputy Secretary of State, Strobe Talbott, promised Moscow a $250 million equity investment guaranteed by the Overseas Private Investment Corp to modernize its industry and develop its domestic demand. The agreement also provided for participants to meet to monitor world aluminum supplies and prices.

The Alcoa chief executive made clear that Alcoa would initiate antidumping proceedings if the cartel agreement was not respected.

The consequences (I)

« At least for a while, the cartel did work. Prices were raised1.The profits of Alcoa and other producers were enhanced. The American consumers- and consumers throughout the world- lost, and indeed the basic principles of economics which teach the valueof competitive markets and show that the losses to consumers outweigh the gains to producers »

(J. Stiglitz, Globalization and its Discontent, p 176)

--------1) Between November 1993 and June 1994 prices rose by 30% helped, among other things,

by improving economic conditions

The consequences (II)

No international cooperation has ever been offered by the US or by the EU to Senegal, a developing country which imports aluminum for its canneries and has long complained that it is a victim of thealuminum cartel.

Anne Bingaman, then Assistant Attorney General in chargeof the Antitrust Division, who attended some the negotiation meetings of the aluminum cartel in 1992, and « was livid » according to J. Stiglitz who also attended those meetings, declared to the Wall Street Journal: « The guts of this in our view is that to date, from all we know, these are individual decisions by producers.(…) No one has brought any evidence to us of any coordinated agreement. If somebody has something to tell us to the contrary we’re open for business »

The consequences for selected developing countries in Asia: China

1990 1990 1995 1995 1999 1999

Imp. 53345 100% 129113 100% 165788 100%

Alu. 283 0.53% 1059 0.82% 1741 1.05%

Steel 1814 3.40% 4054 3.14% 5206 3.14%

Elec.

Equip.

683 1.28% 3344 2.59% 6366 3.84%

Total 2780 5.21% 8457 6.55% 13313 8.03%

millionUS $

The consequences for selected developing countries in Asia:India

1990 1990 1995 1995 1999 1999

Imp. 23580 100% 34707 100% 44889 100%

Alu. 59 0.25% 208 0.6% 112 0.25%

Steel 500 2.12% 781 2.25% 476 1.06%

Elec.

Equip.

233 0.99% 371 1.07% 395 0.88%

Total 792 3.36% 1360 3.92% 983 2.19%

millionUS $

The consequences for selected developing countries in Asia:Malaysia

1990 1990 1995 1995 1999 1999

Imp. 29258 100% 77691 100% 64966 100%

Alu. 181 0.62% 614 0.79% 520 0.8%

Steel 749 2.56% 2036 2.62% 1137 1.75%

Elec.

Equip.

1255 4.29% 3923 5.05% 3677 5.66%

Total 2185 7.47% 6573 8.46% 5334 8.21%

millionUS $

The consequences for selected developing countries in Asia:

Philippines1990 1990 1995 1995 1999 1999

Imp. 13042 100% 28341 100% 32568 100%

Alu. 80 0.61% 156 0.55% 163 0.5%

Steel 325 2.49% 666 2.35% 505 1.55%

Elec.

Equip.

275 2.11% 731 2.58% 1042 3.20%

Total 680 5.21% 1553 5.48% 1710 5.25%

millionUS $

The consequences for selected countries (I)

millionUS $

Frederic Jenny

Rough estimate of the overcharge due to the heavy electrical equipment the steel and the aluminum international cartels (Imports x .25 to .30)

1990 1995 1999

Algeria 190-250 190-250 170-220

Egypt 250-330 190-250 210-280

Jordan 15-20 45-55 45-55

Kuwait 50-60 90-120 80-100

Morocco 75-100 125-170 100-130

S Arabia 250-340 400-550 370-500

Syrian AR 30-45 140-190 55-70

The consequences for selected countries (II)

millionUS $

Frederic Jenny

Rough estimate of the overcharge due to the heavy electrical equipment the steel and the aluminum international cartels (Imports x .25 to .30)

1990 1995 1999

China 650-900 2100-2800 3300-4400

Hg-Kg 800-1100 2500-3300 2500-3300

India 200-250 350-450 250-300

Korea 800-1150 1500-2400 1250-2000

Malaysia 500-700 1600-2100 1250-1700

Nepal 10-13 5-7 2-1

The consequences for selected countries (III)

millionUS $

Frederic Jenny

Rough estimate of the overcharge due to the heavy electrical equipment the steel and the aluminum international cartels (Imports x .25 to .30)

1990 1995 1999

Pakistan 70-100 130-180 85-120

Philippines 170-230 380-500 410-550

Singapore 850-1100 2050-2700 1600-2100

Chin.Taipei 850-1100 1600-2200 1400-1800

Where to go from here ?

Excerpt from a U.S. State Department document, part of the preparatory work for the ITO in 1945:«  Goods can surmount a tariff if they pay the duty: they can enter despite a quota if they are within it. But when a private agreement divides the markets of the world among the members of a cartel, none of those goods can move between the zones while the contract is in force »

1944 letter from Franklin Roosevelt to Cordell Hull:« Cartel practices which restrict the free flow of goods in foreign commerce will have to be curbed ».

Why ? Because such practices either prevent trade liberalization negotiated by governement from taking place or deprive trading nations from the benefits of trade

Where to go from here ?

1)Revert to protectionism ? ( but huge cost in terms of economic developmen that nobody is willing to face)

2) Create a supranational body of law and a supranationalinstitution to enforce it like the European model ? (but this means a level of economic integration which is hardlyfeasible and a huge abandonment of national sovereignty)

3) Do nothing ? ( but this reinforces the critics of globalizationand of the WTO who argue that the trade liberalization Movement is mostly driven by the commercial interest of the large multinational corporations which are not disciplined and exploit developing countries.

4) Develop a cooperation protocole at the multilateral level ?(see next slides)

The parameters of the discussion (I)

What the discussion in the WTO Working Group on Trade and Competition Policy is not about :

The discussion is not about creating a supranational antitrust law or agency

The discussion is not about the harmonization of national antitrust laws

The discussion is not about subjecting individual decisions of national Competition authorities to the Dispute Settlement Mechanism

The discussion is not about changing antidumping laws

The discussion is not a negotiation and does not cover the modalities of negotiation

The discussion is not about all aspects of antitrust law

Frederic Jenny

The parameters of the discussion (II)

The discussion is about how to address the issue of transnational cartels which defeat the purpose of trade liberalizationor deprive trading nations of the benefits of trade liberalization

The main elements of the EU proposal, which is the focus of the discussion, are:

Every country would be covered by a competition law regime

All antitrust ( national or regional) laws would include a provision prohibiting hard core cartels but each country would remain free to include other provisions (on vertical restraints,abuse of dominance, merger control, exemptions etc…).

Competition laws would meet the WTO standards of transparency, non discrimination, procedural fairness.

Frederic Jenny

The parameters of the discussion (III)

A mechanism of consultation and voluntary cooperation on transnational hard core cartels between countries parties to the agreement would be established

A WTO competition committee would be established to monitor the agreement and facilitate cooperation between countries ( for ex through peer reviews)

Technical assistance would be offered to countries which do not have extensive experience in competition law

Frederic Jenny