TCS Daily


Goodwill Begets Goodwill

By Pejman Yousefzadeh - May 2, 2002 12:00 AM

"Goodwill begets goodwill." That is a line out of the Inaugural Address of President George Bush the Elder, in 1989. President George Bush the Younger would do well to remember the wisdom of his father's statement in crafting his Administration's trade and antitrust policies.

Last year, the European Union rejected a long-planned merger between General Electric and Honeywell, based on antitrust concerns, despite the fact that the U.S. Justice Department approved the merger. GE chairman Jack Welch wanted the deal to give GE a presence in the aircraft-engine industry, particularly in avionics. The EU was concerned about "portfolio bundling," which it believed would allow GE to gain an advantage by offering a "mixed bundle" of engine and avionics products at a lower price than if the products were sold separately.

What's wrong with that? The EU feared that this mixed bundle would harm the business prospects of European companies engaged in aviation services. That finding was directly contradictory to the American ruling that competition in the industry would not be adversely affected. Still, the EU stated that it would only support the deal if GE sold off some of its services in the aviation field -- which GE declined to do.

Anticompetitive Antitrust

What caused this divergence in antitrust policy? The answer is that EU and American antitrust laws are focused on different policy goals. American antitrust law is designed to ensure that after a merger or acquisition ("vertical integration" in antitrust terms), consumers continue to receive a fair price for the goods or services sold by the newly formed company, and that there will be a wide variety of those goods or services available. By contrast, the EU focuses on whether vertical integration will have an inordinately negative impact on rival companies within the same industry by preventing them from competing in a post-integration environment.

The American position pays greater respect to traditional free market principles, and sets those principles as the cornerstone of U.S. antitrust policy. So long as a proposed vertical integration does not constrict the choice of consumers, or present consumers with inequitable pricing structures, it is approved. The EU's position, on the other hand, goes against free market principles by shielding companies from having to offer superior products and services at lower prices should vertical integration take place.

The nixing of the GE-Honeywell merger was not an isolated incident. When given the opportunity to rule on the AOL-Time Warner merger, EU Competition Commissioner Mario Monti approved only on the condition that AOL divest itself of any association with the German media company Bertelsmann. And in 2000, Monti vetoed the Sprint-WorldCom merger, despite the fact that as in the case of GE, the merger won approval in the United States.

The European Union's antitrust crackdowns on American firms have continued. Recently, Monti has threatened to impose a fine on Microsoft totaling in the billions of dollars, for allegedly elbowing out competition for the media software and server software markets.

The EU's antitrust policy is poorly constructed. If a company cannot compete, it does not deserve to be propped up by favorable antitrust rulings that prevent competitors from vertically integrating and enhancing their business operations by offering consumers better and more varied products and services at lower prices. Instead of sheltering companies, EU antitrust laws should give them every incentive to adapt to changing market conditions by making themselves more competitive and innovative.

Moreover, even assuming that the EU's antitrust laws are centered on the proper policy goals, the laws themselves are replete with contradictions and incompleteness. As The Economist pointed out in discussing the GE-Honeywell merger, it was entirely theoretical at best to posit that a "mixed bundle" of engine and avionics offered by GE-Honeywell would drive out competition, since the evidence weighed against a reduction in competition. Rolls Royce, Pratt & Whitney, and other aircraft-engine makers were consistently able to make competitive bids for aviation contracts, and there was no reason to think that they would be prevented from doing so in the future. Additionally, there appears to be no objective legal test codified in EU antitrust regulations that provide an insight as to when bundling might be harmful to competition.

Anticompetitive Tariffs

Unfortunately, despite the poverty of policy rationales for the EU's antitrust decisions, and despite the harm that those decisions ultimately do to consumers, the Bush administration is not in much of a position to liberalize the EU's antitrust decisions. The administration, through its ill-advised imposition of tariffs on steel and lumber, would look patently hypocritical if it were to lecture the Europeans on the need for competition and the preservation of free-market principles.

The tariffs have aroused deep anger and resentment in Europe, and have likely hardened the EU's resolve to protect European businesses by continuing to impose antitrust policies that differ in form and substance from those imposed by the United States.

Thus, if the Bush administration were to have any credibility in seeking to persuade the EU to harmonize its antitrust policies with those followed in the United States, it would be well advised to reconsider its steel and lumber tariffs.

The liberalization of American tariff policies would help bring about an easier rapport with the EU over economic policy. It is good policy, in and of itself, for the United States to avoid protectionism, and instead favor free trade policies that serve the economic interests of America and her European allies in the long run. Additionally, the firm adoption of free trade principles would allow the United States to be consistent when it seeks to liberalize the economic policies of its allies, and thus lead to more successful campaigns for economic liberalization.

The practice of free trade and the implementation of free-market policies are a positive and desired contagion. It's time to let them spread. Virulently.
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