ANTITRUST IN AN OPEN WORLD ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R001003870075-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 15
• Document Creation Date: December 20, 2016
• Document Release Date: March 7, 2007
• Sequence Number: 75
• Content Type: REPORT

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ANTITRUST IN AN OPEN WORLD ECONOMY
Kenneth W. Dam
The 1970's were a decade in which received principles of
economic policy were shown to be wrong, indeed dangerous. for
the public interest. Whether the now forming economic policy
consensus, with.its emphasis on monetary policy and on the
supply side, will restore productivity and prosperity in the
1980's remains to be seen. But our old ways. of looking at the
.economy, focusing almost.solely on maintenance of effective
demand,. have surely. been relegated to the policy trash heap.
These changes in emphasis from fiscal to monetary policy
from-the demand-to the supply side are well known. I'd
this morning-to call your attention to an equally important
change in economic policy: thinking that has received much less
public attention. From World War II until the early 1970's
almnst all macroeconomic analysis, particuarly in the United
States, assumed a closed economy. 'The,-United States was the
policy unit and the outside world would normally be taken into
Delivered at the plenary session of the annual
antitrust conference of The Conference Board on March 5, 1981,
at the Plaza Hotel, New York City.
Kenneth W. Dam is the Provost of the University of Chicago
and the Green Professor in its law school. He is the author,
with George P.*Shultz, of Economic Policy Beyond the Headlines
(Norton, 1978). His latest book, The Rules of the Game: Reform
and Evolution in the International Monetary_System, is now in
press. He has written a number of articles on antitrust law and
economics.
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account, if at all, only as a complication. If exports exceeded
imports, then one might adjust one's .estimates to account for
what was called "net exports." And in discussions of monetary
policy the term "Eurodollars" might occasionally be uttered.
But by and large these were matters'left to the experts and did
not intrude into most policy discussions, whether in government
or in the press.
..Today it, is far more common to think of the United States
as an open economy. Any policy measure is now seen to have an
immediate impact'on money and.trade flows, an impact that may
either reinforce or, more often, vitiate the original policy
move. In part, our, shift of focus from a closed to an open
economy reflects the far greater trade. interpenetration of the
advanced countries. More important is probably the financial
side ,: the elimination of exchange controls on current-
transactions in-Europe and of capital controls on investment
transactions both'here_and in Europe have opened up the major
developed economies to a far-greater extent than yet fully
appreciated.
The rapid growth of offshore banking in the
1970's has created a world-wide market`=in credit to which U_S.
domestic regulation is only now belatedly adjusting.
As a result of.these changes most economic policy participants
now realize that it is no good analyzing monetary and fiscal
policy measures in terms of a closed U.S. economy. It is, for
example, now more fully appreciated that any. additional monetary
or fiscal stimulus will have little effect on employment but
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will have an immediate effect on the position of the United
States in the world economy. In particular, the immediate
effect of attempting through macroeconomic means to stimulate
the economy is likely to be an immediate depreciation of the
exchange rate. Britain learned this lesson when sterling
fell from $2.03 to $1.56 in a period of 8 months in 1976. we
learned the same lesson in the early Carter years when the
attempts to pump up the U.S.. economy led to a decline of the
dollar-from 2.6 marks to.the dollar to under 2 marks in two'
years..These..effects of domestic monetary and fiscal policy
are so-:strong that they swamp attempts to stabilize exchange
rates through exchange market intervention. With an open
economy perspective-we now see the. limits of the closed economy.
assumptionthat.dominated both the Keynesian approach and the
narrow'-monetarism
postulated a one-to-one-relationship
between Federal reserve actions and domestic economic activity.
Another= implication
of an open economy perspective is -
that we now realize that -depreciation of the exchange rate
is highly inflationary.* Continental bankers and finance
probabiy..always believed this, but our fascination
with floating'-rates-,'which textbooks taught us isolated an
economy from the world, obscured this feedback effect on the
domestic economy. Pure floating might isolate monetary policy
from the outside world, but there is always sufficient exchange
market intervention to translate world disturbances to us.
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t e
We certainly learned the lesson. Take two conscious
devaluations of the dollar in the early 1970's. There were
few U.S. economists or economic policymakers who believed at
the time that they would be an independent engine of inflation.
Attention was all too focussed on what those devaluations were
supposed to do for our exports. The normal way of thinking was
that since imports were only, say, 10 percent of GNP, a 5 percent
devaluation could only increase the rate of inflation by 1/2
percent. The poverty of that line of thinking is demonstrated.
by the explosion of inflation in the 1972-75 period and again
in the last.few years following the more recent Carter-period
. depreciation of the dollar:
This modified closed economy perspective, which takes into
account imports and exports but neglects feedbacks, overlooks
the effect of higher:prices for imported goods on domestically.
produced import-substitutes.. These substitutes also rise in price
the-reduction. of "competition from imports. This modified
closed economy perspective_also overlooks the effect-of the
depreciation-induced stimulus to exported goods on the domestic
markets for those same. goods.. If we export more- because.. of : deprecia--
tion.of the dollar, then.
domestic price
there are fewer goods at home, and the
is bid up. A clear case is grain. If depreciation of
the dollar causes. more grain to be exported, food prices must rise
.
at home to bid the grail away from foreigners. So depreciation
causes higher prices for both imports and import substitutes and
for all exportables, whether they are exported or not. Higher
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prices throughout the economy are the result. To be sure, the
causation runs both ways, with inflation causing the initial
depreciation and with depreciation tending to cause further
inflation, unless offsetting domestic policy adjustments are made.
Whatever the pure economics of the matter, there is more than
a kernel of policy truth to the European view that inflation
to inflation, which leads to depreciation of-the currency,
creates ai"vicious circle" in which macroeconomic stimulus leads
which leads to.even greater inflation.
My purpose here is not to talk about macroeconomic policy.
Rather it is to show how transformed economic policy issues
become when we.postulate an open economy. One economic policy
area that is'.still_not.often viewed from an open economy
perspective is`antitrust policy.
:In..preparing:=these remarks I wondered whether it was.
necessary to emphasize before this audience that antitrust
policy is- -a branch of"economic policy.. Some people invest
antitrust.wit:h.quasi-religious qualities. ror some who lean
to ideology,.: antitrust is a way of bashing big business. For
others who specialize -in'interestgroup politics, antitrust-.is a
way of using enforcement agencies and treble damage actions
to protect small companies from the rigors of competition.
For still others, and this was a view popular in the Watergate
period, antitrust is a branch of the criminal law in which
economic policy officials concerned with the impact of antitrust
on the efficiency and competitiveness of the U.S. economy
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o
venture gingerly or fear of being accused obstruction of
justice.
Yet is not antitrust par excellence economic policy?
By concerning itself with price-fixing and with monopoly,
antitrust policy goes to the heart of the allocation-of-resources,
problem and hence to productivity and even, though in a minor
way, to the inflation problem. Why should those issues be the.
exclusive province. of enforcement officials and, in particular,
of lawyers with'a.prosecutionmentality?_A view of antitrust
as acoordinate branch of economic policy is particularly-
-justified in the formative months of a new Administration that
won an election on the promise of a new approach to economic
policy.
A great.deah- of.new thinking will be required in the
Antitrust Division
and it cannot be.limited-to.that Division
or even to:-the Justice. Department if antitrust policy is to
make economic sense.
aspects
Rather than dwell on the organizational
of-:antitrust economic policymaking, I'd like.to return
to luy theme that--that thinking should take place within an open
rather.than a closed economy context. Only in that way can it-
be brought out of the "dark ages" of the formative decades
of the 4Q's and 50's when the fascination with concentration,
barriers to.entry, and similar constructs came to dominate the
analysis.
How would an open economy perspective change things?
Let me take one industry to illustrate. In the automobile
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industry it. is taken for granted that the four-firm concentration
ratio is upwards of 90 or 95 percent. Four firms, it is said,
"dominate" the industry. (I find it hard, I must say, to think
of Chrysler as a dominant firm, even a "jointly" dominant firm.)
Yet when one looks-out the window one sees that one-quarter,
perhaps even more, of the new cars on the street are produced
by firms outside these four.. Nearly all of these additional
cars are,. of course, imported. The conventional way of expressing
this anomaly is seriously misleading. In public policy discussions
we tend to talk about the percentage of the market accounted for
by imports- Thus, to take a simplified example,-if four firms-
account for .100 percent of domestic production and. if. imports
account. for one- quarter-of.domestic consumption,. we tend to say
that four firms
high figure.
have.75-percent of the market -- still a rather
This wa'
wrongheaded..;;.-The objective situation is really not that there
are four firms-and some faceless imports in the market. - On
the. contrary, :there are eight or ten important firms in the
market and.they:include such powerful and vital firms as
Volkswagen,--Toyota,.-Nissan, Renault, and Peugeot-Citroen-
And there are also effective competitors in particular product
lines such as Daimler-Benz, Volvo, and Honda. The reason
why Chrysler seems so out of place in a list of dominant firms
is precisely that it is unable to compete effectively in this
world market and in fact has been withdrawing from it, a step
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(1
at a time, by selling off foreign plants. It is now retreating
even in the United States much like a formerly dominant military
power reduced to a house-bv-house defense of its capital city.
In a world perspective American Motors too begins to look even
less imposing than concentration statistics imply. Whereas
in 1959 it was fifth in the world, it had dropped below fifteenth
by 1978. Indeed, its recent arrangements with Renault make it
look more like a Renault affiliate than a jointly dominant firm.
The market in.automobiles has clearly become the world. -
.In that market GM had. only 28 percent in 1979 and probably less
today..'-Ford had only 19 percent. Volkswagen and Daimler-Benz
together had 12 percent.: Toyota and Nissan together had another
10 percent r?and-probably. even more today. Renault and Peugeot-
Citroentogether.had`still another 10 percent.* Although GM
and Ford are-large--.they hardly dominate the real market, as
opposed t o the antitrust construct of a market. Using number
of'-cars- and trucks- produced, rather than volume of sales,: to
eliminate exchange rate factors, J. Fred Weston calculated that
.the top'four-in_the world automobile market have only 50"percent
Percentages are overestimated for all companies because they
take account, due to data limitations, of the sales of only the
.fifteen principal manufacturers. Source: General Motors study
based on The Fortune Directory of the 500 Largest Industrial
COrporations and The Fortune Directory of the 500 Largest
Industrial Corporations Outside the U.S., Fortune, 1960 and
1979.
**
Taken from an unpublished paper by J. Fred Weston, Domestic
Competition and International Markets (Jan. 15, 1981).
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An open economy approach reflects economic reality in many
ways. Any attempt to increase U.S. prices above those of imports
leads to a great increase of imports and even fewer exports.
Moreover, the strong companies act in both manufacturing and
sales as if the market were worldwide. The well-advertised
push of General Motors for a "world car," with component manu
facture and assembly strategically sited to reach all consuming
centers, is simply the manufacturing and marketing reflection
of the economics of the matter.
When one.looks'at.other major industries, world concen-
tration ratios
are even lower. Weston's calculations for
steel, for example,. -show _a four-firm concentration ratio of
The dissolution.:of the U.S. domestic market into a larger
world - market. is: proceeding apace not merely in consumer goods,
such as cameras. and electronic products, where it has long
since been-accomplished fact, but also in-basic industries,
such as automobiles-
and. steel.
What is happening in this larger world market?_ What is
happening is-unfortunately, that the position of U_S_.firms is
slipping badly-*. In chemicals, for example, DuPont has dropped'
from first in 1959 to fourth in 1979, with Union Carbide falling
from second to seventh. In 1959.the United States accounted for
seven of the top ten.firms, in 1979 for only three.
*The following review is taken from New Research Findings,
The Relative-Sizes of U.S. and'Foreign-Based Multinational ,__.;_/;
Corporations, in Mergers and Economic Concentration, Hearings
before the Senate Antitrust Subcommittee on S.600, Part-1, --
pp. 725-733 (1979) updated using data from annual Fortune.surveys.:_
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In electronics and appliances, six of the top eight firms
in 1959 were American. In 1979 only three were still in that
group.
In industrial and agricultural machinery, Caterpillar
slipped from first to second and Deere from fourth to sixth.
Allis-Chalmers, fifth in 1959, had disaooeared from the top ten.
In metal manufacturing, U.S. Steel fell from first to
second and Bethlehem Steel from second to fifth. In 1959
the.United States accounted for. nine of the ten top companies,
in 1979 for only,two.
In pharmaceuticals American Home Products slipped from
third to fifth, Johnson & Johnson stayed in fourth place and
Pfizer dropped from fifth to ninth. In 1959 seven of,the ten
top companies were American,
in 1979 only five.
Many reasons-can-be advanced for the slippage of U.S
fi.rms_in world markets.-`;Surely the general productivity.
problem is one, but-exactly what the components of the pro-
ductivity decline in the United States may be is not an
.easy question on_-which-to obtain informed agreement.. So
too the inexorable workings of the principle'of comparative
advantage play- a role.--The United States now has a
comparative advantage in agriculture, services, and, though
the advantage is slipping, in specialized manufactures such
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as wide-bodied aircraft and computers. The iron law of
comparative advantage dictates that we must have a comparative
disadvantage in something, and that something appears to be
increasingly the so-called "basic" industries. To be sure,
some of the slippage in the reported sales statistics simply
reflects exchange rate changes rather than unit output changes,
yet one can also ask whether the decline of U.S. industry did
not in fact lead to the decline of the dollar.
The point-here is not simply that U.S. antitrust policy
does not recognize the new environment in which U.S. companies
must operate..-.The point is also that antitrust policy as it
has been administered. has placed large impediments in the
necessary adjustment of the U.S. economy to the new international
conditions.'-,-.'.", Today many-antitrust rules make it difficult for
.U.S. companies to rearrange their affairs in a way that reduces
costs and increases
productivity in order to permit them to
compete both'_here and.abroad on equal terms with their foreign
competitors.
.What might the new. administration do. to help place anti-
trust policy in an open world economy context? Many useful
changes might be made,":even without legislation. For starters,
the Antitrust Division might throw out the Merger Guidelines
and start afresh with a merger law enforcement policy that
recognized the U.S. place in an open world economy. Joel
Davidow, speaking for the Antitrust Division, has argued that
world market shares should be ignored if there is an anticompetitive
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effect in "any section of the country." That may still be
**
standard judicial doctrine. But it is head-in-the-sand economic
policy for the 1980's. Surely the "any section of the country"
language in Section 7 does not require enforcement officials to.
ignore the actual competitive situation in an industry.. When
a market extends from,where China ends to where Russia begins --
in short, a.world market in which products and resources flow
freely -- it makeslittle sense to limit the inquiry to a 3000
mile sector between the Pacific and Atlantic oceans simply
because the writ of enforcement officials is geographically
defined. -:In such a larger perspective the relevant market
shares are world market shares. Though one could still debate
whether-General--Motors could acquire say Chrysler in view of
their world market shares,the solution should not have to
depend upon the interpretation of the -failing -company m a i n - on merger policy of a world market
perspective would not
lie, however, in horizontal mergers:
but -rather -i.n-'the--vertical nd conglomerate area. I doubt
.that the prohibitions'against vertical mergers can be
defended on'economic grounds at all.. But even if they can
be, it surely makes no sense to judge whether unintegrated
U.S. firms may merge vertically to gain the efficiency.advantages
of integration and thereby to compete more effectively with
*
Joel Davidow, "Antitrust, International Policy, and Merger
Control," remarks before the Federal Bar Association Conference
on Antitrust and International Mergers and Acquisitions (Aug. 28,
1980).
a*
But see United States v. General Dynamics Corp.,-415 U.S.
486_(1974).
***
Ibid.
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07_1CIIA-RDP88B,00443 0 .003870075-4.
foreign firms primarily on the basis, as the Guidelines call
for, of their shares in the U.S. market. If we take such a
short-sighted approach, the alternative is likely to be either
a resort to protectionism to shore up the less-competitive
domestic firms or a fall in their market share to the point
where they end up being
competitors.,
acquired by more powerful foreign
The economic case against conglomerate mergers makes even
less sense (I would say nonsense) where U.S. firms compete
against foreign competitors who are subsidized by their govern-
ments. In industry after industry, in country after country,
there is no need for the competitors of U.S. firms to.diversify
or to merge:. to acquire a stable source of capital because
those competitors
a direct claim: on
are owned by their governments and.thus have
the public treasury. . We ought to
conglomerate , mergers
important means
of competition against state-owned and-state
subsidized companies.
Many other useful-.changes- in antitrust policy could be
made but most of them. would. require legislation. Just as
vertical mergers are pro-competitive in an open world economy
context, so too an open economy perspective casts even graver
doubt on many of the vertical rules than the new antitrust
See Kenneth D. Walters and R. Joseph Monsen, State-
owned Business Abroad: New Competitive Threat, 57 Harvard
Business Review 160 (March-April 1979).
see
not-merely as a lesser evil but as an
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learning reflected in the Sylvania. case would suggest.
Various long-term contractual arrangements should be seen as
desirable, not merely saved from the per se rule by legal
radiations. from Sylvania. So long as private treble-damage
actions can be brought, U.S..industry is unlikely to undertake
the optimum degree of contractual vertical integration. To
be-less than optimally vertically integrated is to be more
vulnerable in contexts where foreign companies are-not subject
to similar inhibitions. Thus, an open economic perspective
suggests that either substantive law should be clarified by
legislation or the treble damage remedy. should be seriously
restricted.
Other.kinds-:of.,-antitrust legislative initiatives become
possibilities once one adopts an open economy perspective.
For e ample, :a host: of proposals have been made to. exempt U.S.
firms fromr_.the. antitrust laws
when they engage in exporting
and in foreign. joint--ventures. Some of these proposals make
sense,--butI believe that they should be approached with
Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36
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caution -FTe_ certainly need not encourage U.S. firms to engage
in-"price-fixing in foreign markets in order to make-them more
competitive. ..Horizontal price-fixing rarely improves efficiency.
On the contrary, we ought to encourage U.S. firms to restructure
themselves,, particularly in their vertical arrangements, in
order to make themselves more efficient world market competitors.
 Such an approach would be-beading from strength- And it
would have the priorities right. Though we all have an'
interes-It in pro.-noting US _ exports and -foreign i nvestraen
we have an even greater interest, particularly as consumers,
_-:-Antitrust policy has an important role in this respect,.
in promoting the efficiency of the U.S. economy.
responses of :U:S .`firms: to increased foreign competition in
ay.-of -the natural competitive
eform of antitrust policy may be. less
of tax__disincentives' and 'the conquering of the cancer of -inflation..
of:~_labar' is necessary ' inpolicy matters too.
Those