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INDUSTRIAL POLICY AFTER MAASTRICHT: WHAT IS POSSIBLE? Peter Holmes and Paul Seabright Introduction This study is about what the European Union can reasonably hope to achieve in the field of industrial policy. Much has been written about what the state can and should do in a modern industrial economy to influence the outcome of competition between producers of goods and services, but although we shall make reference to a small part of this vast literature it is not the main focus of our concern. The European Union does not and could not have carte blanche to fashion an ideal industrial policy out of nothing and according to the latest wisdom. It is constrained by its constitution, its framework of law and the operation of its institutions, as well as by various political limits to the likely actions and decisions of its Member States. We shall explore the way in which these constraints alter what is possible in the domain of industrial policy. In many respects they make an EU policy less coherent and effective than it would be in their absence. But the strategic perspective of game theory in recent years has warned us to be wary of the conclusion that constraints on one's actions must necessarily be harmful. Pre-commitment by the state may be valuable in influencing the actions of other agents in the economy. We shall therefore also explore ways in which the limitations on industrial policy in the EU, although in some cases taking their present form inadvertently and as a by-product of a complex and myopic political evolution, may even enhance its effectiveness in certain other respects. Our task is therefore twofold: first and primarily, an exercise in positive political economy, to explain how the various EU policies that affect industry arise out of comprehensible actions by the main actors in EU policy making, who face constraints inherited from the past. Secondly, a normative exercise, to assess the extent to which these policies fall short of what might be achieved by policies it would be reasonable to expect from the EU at its current stage of evolution. In some respects these two tasks will appear to be in tension, in that we shall point to a large number of confusions and inconsistencies to which EU policies currently give rise, while remaining (in the eyes of some readers) surprisingly disinclined to damn the whole ensemble as a mess. To understand our argument it is important to appreciate the extent to which the EU’s current stage of evolution constrains the degree of coherence in industrial intervention that it is reasonable to expect. Even at the level of objectives, it is inadequate and potentially misleading to consider only aggregate welfare considerations, as though the EU had attained the political maturity that would enable compromises to be reached between economic interest even to the imperfect degree this is possible in a modern industrial state. For example, if the EU had all the attributes of a conventional state – even one as decentralized as the U.S. – it would be reasonable to pose the question: what policy towards industry should be adopted in order to maximize economic growth of the area as a whole (or some comparable objective function, such as sustainable growth)? The EU is different in many ways from the U.S. It cannot be conceived as an actor with a single objective function. Even in the U.S. it is often unwise to abstract from the differences between Congress and the Administration, but in the EU analogous differences are crucial. The EU is composed of multiple principals and actors whose aims cannot be seen as conflated into a singe compromise. There are major divisions of power and interest between EU and national agencies and between different actors at the EU level. The nature of constraints put on the actions of decision-makers is critical to the outcomes chosen. The EU is a rule-based system, with something in common with the U.S. in that respect, and is much more so than the individual Member States that make it up. This means that policies are legitimated in the eyes of those they affect by the process that generates them. If there was ever a time in which the Commission was able to see itself as a technocratic body proposing technically correct decisions according to criteria that are independent of the interests of the EU’s component bodies, this has now been largely superseded by a decision making process in which the outcomes of actions are known to be hard to predict. The ultimate arbiter, the Court of Justice (ECJ), will judge decisions not by comparing the Commission or the Council’s view of the facts with its own but principally by asking if a decision has been taken according to the rules of the game, including the implicit ones. The decision in any one case will depend therefore on the prescribed procedures for that category of action. This is particularly important for industrial policy. As we shall see there is no such thing as industrial policy per se, but a range of policies affecting industry. The nature of policies adopted will depend on the policy process the decision goes through, such as whether we are dealing with legislation that has to be adopted under unanimity or one of the forms of majority voting. Certain kinds of policy are legally excluded under normal decision rules (Article 236 of the Rome Treaty allows the Council of Ministers acting unanimously to take any measures it wishes to further the aims of the Treaty). Most subsidy policies are therefore ruled out. As we shall see, the system requires that many objectives that could be dealt with by industrial policy are in fact dealt with by the exercise of discretion in trade and competition policy, each of which has different rules. One further feature of the EU system that is worth noting is that the rules and procedures, though seemingly arbitrary at times and capable of generating apparently irrational solutions, have all been chosen by the Member States relatively recently. It is not an arbitrary set of rules externally imposed on Member States. This framework of rules can be interpreted precisely as a set of self-chosen constraints designed by the Member States to pre-commit themselves to reciprocal market opening and the avoidance of mutually self- defeating intervention in the market. The main constraints on EU policy we consider can be summarized under the following headings: fiscal (the EU has extremely limited powers of taxation, and the overwhelming proportion of its expenditure is pre-committed to agriculture and the Social Funds)1; legal (actions by the EU institutions are subject to review by the Court of Justice and tend in consequence to be determined as much by procedural as by substantive criteria); constitutional (the Council and the Commission control different components of policy, and the powers of the EU to undertake industrial policy in the traditional sense of the term are limited); political (voting rules in the Council and Commission determine possibilities for trading agreements in certain areas of policy against agreements elsewhere; current practice and expectations likewise determine what agreements Member States are likely to endorse). 1 The European Coal and Steel Community is an exception to this, in that it has powers to impose duties that can then be spent on programs in these sectors. We shall conclude that these constraints make for an industrial policy that is on balance less interventionist, and less coordinated in its interventions, than if one were to compare with a hypothetical case of the EU having a single government. There are more hurdles that have to be cleared before a policy can be accepted. This has the effect, in the long run, of diminishing the influence of the EU on its own economy both for good and for ill. In the short run this phenomenon creates a form of conservatism, so that policies once in place are not easy to remove. In arguing for this conclusion it will be important to state clearly both what we define industrial policy to be and the nature of the problems with which industrial policy in the EU needs, and is perceived to need, to respond. For the purposes of this study we shall use the term “industrial policy” fairly broadly, to cover all policies decided at the EU level that primarily affect the industrial sector of the economy. The term encompasses competition policy, trade policy, technology policy and those regulatory policies that are not directly linked to competition - in short, all policies that influence industrial outcomes, whether or not they fall under the traditional rubric of “industrial policy” as it is familiarly known. It is time to consider who are the agents in such a situation, what are their goals, the precise strategies that are available to them and the constraints they face. Actors, Goals, Strategies, and Constraints Actors So who are the actors in industrial policy at the EU level? When we speak of the EU taking actions, to whom are we referring and what are the presumed aims of action by this agent? In effect the actions we describe in this study are ones that fall within the mandate of the Commission or the Council. When analyzing the motives of these agents from a positive point of view, we shall need to bear in mind that in the Council the agents are Member States, and the actions of the Council therefore reflect the interests of the Member States (governments) as these are mediated by the rules of voting and the habits of political bargaining. The Commission should not be thought of as representing a single “European” interest group, since differences of perspective between its individual Directorates-General (DG) are both well known and important; however, it does not represent a compromise of national interests in quite the same way as the Council. When we analyze industrial policy from a normative perspective, we shall in contrast think in terms of benefits to European citizens as a whole in some sense. Even if we recognize as we must that the agents of industrial policy are not the citizens themselves but delegated political representatives and civil servants acting on their behalf, we can still ask to what extent their actions are conducive to the interests of the citizens they represent. However, there is one important difference between a normative analysis of industrial policy in the European Union and one undertaken in an ordinary nation-state. Economists are used to the idea of using the enhancement of economic efficiency as the dominant criterion for evaluating industrial policy. This is not because efficiency is the only criterion relevant for economic policy in general but because of the presumption (given theoretical backing by the Diamond-Mirrlees principle of optimum taxation) that distributive questions should normally be considered the province of the tax and benefit system, and industrial policy should aim at removing obstacles to productive efficiency. In a political institution like the EU which enjoys very limited powers of fiscal redistribution, such a presumption is no longer warranted. Efficiency therefore, though an important - perhaps the most important - criterion for evaluating industrial policy, cannot be the only one; other more explicitly distributive criteria (such as the EU emphasis on “cohesion”) both can and should play a part. Goals So what might European industrial policy be reasonably thought to be trying to achieve? What efficiency or distributive benefits could it realistically hope to produce? This is not a question about the benefits of an industrial policy tout court; it is about the benefits of a specifically European-level approach to the involvement of the state in industry, rather than one left to the initiative of individual Member States (whose own continuing involvement can be more or less taken for granted). The alternative to involvement by the European Union in the regulation of industry is not and has never been laissez-faire: it is the involvement of the governments of its Member States, in competition with each other or engaged in ad hoc intergovernmental co-operation, and restrained only by the rules of the world trading system. Recognition of this fact was integral to the philosophy of the Single Market program launched by the Member States of the European Community in the mid 1980's. Although this was not explicit in the Cockfield White Paper, Emerson et al. (1988) make it clear that the program was based on an acceptance of the view that there were important economic and other gains to be reaped from an increase in the intensity of competition between firms in the Community. There was an important area of exception to this general principle insofar as co-operation between firms in certain knowledge-intensive fields was to be encouraged, but in general more rather than less competition was acknowledged to be desirable. At the same time it was no less explicitly accepted that, in order to realize the gains, Member States should engage in less competition and more co-operation among themselves – whether in the field of standard setting, competition policy or public intervention in the economy more generally. Again there were areas of exception (notably those highlighted in the debate over subsidiarity) but broadly speaking collaboration rather than competition was the aim for governments, in sharp distinction to the aim for firms. These two prescriptions were intimately related to each other: a degree of collaboration between governments was viewed as a necessary condition for bringing about greater competition between firms, since in the absence of co- operation governments would tend to shield their own firms from competition. Indeed, any kinds of market failure – not just inadequate competition – were thought to require a co-operative solution; governments pursuing independent objectives would inevitably bring about an outcome that was worse for them all. Why was it thought that firms and governments needed different prescriptions in this way? Was it because firms and governments were thought to be radically different kinds of creature, so that the competition, which was good for one, would be harmful to the other? Or was it simply an empirical judgement that competition had gone far enough for governments, but hardly far enough for firms? In all the massive literature on European integration it is hard to discern a clear answer to this question. The consequence is not just intellectual confusion but sometimes also severe confusion in policy. EU policy towards state aid, for example, has had to develop a coherent response to the many actions that member state governments take in support of the competitive efforts of their national firms, but it has had to do so in the absence of any clear idea of what differentiates actions taken by governments in relation to firms, from similar actions taken by firms in relation to each other. If a private Spanish bank makes a loan to a Spanish firm, it has no need to notify the European Commission, let alone submit to detailed inquiries about whether the terms on which it does so are different from the terms on which it has made a loan to some other firm of different nationality. If one of Spain’s regional governments does the same thing its actions may very well be illegal under European law. In assessing the acceptability of such intervention the Commission must decide whether it distorts competition, but it must do so without any clear theory of why and when governments’ involvement in the competitive process is more to be feared than that of firms. Different intellectual traditions have viewed state involvement in the process of competition between firms in strikingly different ways. First there are traditions that view with grave distrust state intervention that favors particular firms (whether directly in the form of subsidies, or indirectly through trade policy or a favorable application of regulatory policy). In the language of traditional anti-trust this has been seen as preventing a “level playing field,” and therefore intrinsically unfair as well as probably inefficient. In the perspective of micro-economic trade theory the inefficiency has been stressed more than the unfairness. In recent years, it is true, the concept of the level playing field has been re-examined. Recent findings, for example, that price discrimination can have beneficial welfare consequences, especially when it enables markets to be served that would not be under uniform pricing have tended somewhat to prise apart the fairness and efficiency objections. Nevertheless, hostility from both trade theory and anti-trust analysis to discriminatory state intervention of any kind remains strong. It has, if anything, been reinforced by the recent literature on strategic trade policy, which while offering a case for intervention from the point of view of individual countries, has stressed that national strategic trade policy interventions are typically bad for global welfare, and has underlined the information requirements for such policies to bring more benefits than costs. A quite different tradition is in public finance, where there has long been a relatively benign view of the process whereby local or regional governments compete in the provision of local public goods and services, as in the famous Tiebout (1956) model. Here there are positive benefits to inter-governmental competition, since regions and localities can differentiate the kinds of good or service they provide to match them more closely to the differing preferences of populations than could be achieved by any centralized policy. Such competition can of course give rise to externalities between governments, but in the absence of reasons to the contrary this tradition has generally presumed that competing provision is desirable. So long as the provision consists of consumer goods and services this presumption is not strictly inconsistent with that of the anti-trust tradition. But in fact it is readily apparent that many of the goods and services (in the broad sense of the term, including a regulatory environment) that are provided by governments consist of intermediate inputs into the productive activities of firms. As a result inconsistencies abound: why should it be distortionary for a government to provide preferential credit to a particular firm, but quite acceptable for it to provide high quality infrastructure in the form of airport facilities or access roads? One possible reconciliation of these two perspectives might arise from distinguishing generic from specific interventions. A generic intervention might be defined as one that affects the strategies open to any firms that fulfil a set of general criteria that are grounded in an account of the appropriate state response to market failure. A specific intervention affects the strategies of particular identified firms, either assisting or penalizing them in their efforts to compete with others. It is tempting to think that the interventions to which the anti-trust and trade theory perspectives are hostile are particular interventions, while those to which the public finance perspective is receptive are generic ones. Preferential credit is bad - according to this view - because it is particular, whereas infrastructure is acceptable because it is generic: any firm in the appropriate location may benefit from it. A little reflection, however, suggests that this neat resolution of the problem is hardly satisfactory. Interventions that appear generic almost always benefit certain firms more than others, and when these firms are in competition with each other the intervention “tilts the playing field” as surely as if the intervention were particular. The fundamental question remains whether the interventions concerned are anti-competitive or not, and this is a matter to be resolved by substantial economic argument rather than taxonomy. Many activities of governments consist not of the provision of goods and services directly to citizen-consumers, but of intermediate inputs to the productive activities of firms; this means that a coherent account of when such activities may be anti-competitive (in the sense of having negative welfare effects overall including spillover effects on other producers) arises as a natural corollary to a more general theory of the competitive consequences of vertical relations between upstream and downstream production. Can we understand under what general circumstances the actions of an upstream entity (be it a firm or a government) in its relations with a downstream firm likely to be anti- competitive? And secondly, are there particular reasons to think that these actions are more likely to meet the criteria for being anti-competitive when the upstream entities are governments rather than other firms? To answer this second question it is necessary to explore in greater detail the ways in which it is reasonable to suppose that governments in their actions to provide goods and services (including regulatory services) behave in a systematically different way from firms. Four ways in particular suggest themselves: 1. The objectives of governments may differ systematically from those of firms, and may be less oriented towards economic efficiency. In particular, the political system will fail to deliver public goods and services in a productively efficient manner. Nevertheless, two caveats should be entered. First, there is some dispute about the extent to which even firms achieve productive efficiency, especially when they enjoy market power. Secondly, even if there is a systematic difference between firms and governments in this respect, it is still important to know why and how it makes government actions intrinsically more anti-competitive than those of firms, and why there is any reason to think that the solution to the inefficiencies of competition between national governments should be the intervention of yet another government, this time at a supra-national level. 2. Because governments occupy different territories, costs linked to distance (and therefore to market access) will create intrinsic market power when they compete with each other. Two private banks may lend to firms that compete very closely, but two governments competing through rival approaches to regulation, or through the provision of state aids are likely to face more muted competition. 3. Governments may (through their control of the tax system) have deeper pockets than those of firms. This fact may tempt them to engage in strategic manipulation of entry and exit decisions in particular markets by exploiting financial constraints faced by competitor firms. 4. Finally, the upstream goods and services provided by governments may be much more often naturally monopolistic than those provided by firms (though this has undoubtedly become less true since privatization of naturally monopolistic industries began in the 1980’s in parts of the EU). In particular, many of the natural activities of government are subject to significant scale economies, which means that the marginal tax revenue yielded by those most mobile factors of production usually significantly exceeds the marginal cost of providing them with access to public goods and services. This in turn has the implication that competition between governments to attract mobile factors can significantly distort not only tax systems but also regulatory activity, as the literature on fiscal competition has recognized (see Oates and Schwab, 1988). Accordingly, therefore, an account of industrial policy in a political system such as the European Union has to include not only the actions taken by the Union to influence directly the activities of firms, but also the actions it takes to influence the activities of Member States that in turn influence the activities of firms. This means that the array of instruments we must include in our analysis of industrial policy is remarkably wide. And when we consider an instrument employed to bring about some particular desired outcome (improved environmental protection, for instance), we must ask not simply whether such instruments are appropriate for the desired end but more specifically whether such instruments are more likely to be deployed effectively to that end by the EU’s own institutions than by the Member States themselves. To summarize, EU industrial policy is best understood and evaluated not as seeking to improve upon laissez-faire competition, but as moderating the outcome of a large range of potential economic interventions that would otherwise be undertaken by Member States. It is the fact that these interventions, if uncoordinated, have the potential to be positively damaging to the interests of these Member States, that makes the task of policy-making at EU level so challenging and so difficult. Strategies and Constraints What then are the precise instruments available to the EU, and the constraints upon their utilization? Bourgeois and Demaret (1995) provide a valuable discussion of this question. In Part One (“Principles”) of the EC Treaty, Articles 3(b), 3(g) and 3(l) refer respectively to “a common commercial policy,” “a system ensuring that competition in the internal market is not distorted,” and “the strengthening of the competitiveness of Community industry.” This last, which is the closest reference to industrial policy as such, is given substance by a new provision introduced in the Maastricht Treaty, namely Article 130. Unanimity in the Council is required to make use of this provision, a constraint that significantly limits both the likelihood and the nature of any policy interventions undertaken. The text refers to co-ordination of action by Member States rather than collective action at an EU level and it also rules against measures which might “distort competition.” Bourgeois and Demaret show convincingly that from a legal and constitutional point of view, such measures that the Council may introduce with this purpose in mind must be clearly consistent with competition policy, which therefore emerges as a dominant and regulative principle determining the limits of application of the other two (arguably with less restrictive force in the field of trade policy). Remarkably, they point out that the more specific terms of Article 130 if anything appear to narrow the scope for industrial interventions which might otherwise have been justifiable with unanimity under the catch all Article 235. There is thus a powerful institutional safeguard against interventionist policies so long as even a single member state willing to use a veto is opposed. It is very difficult to speak of an industrial policy per se in the sense that this has been used in the past, i.e. the support for particular firms or industries as such. France argued strongly for inclusion of an industrial component in the Maastricht Treaty, and even under conservative governments there has been a consistent voice from Paris urging a re-balancing of what is seen as the dominance of “competition” as opposed to “industrial policy objectives.” The terms in which industrial policy is defined in the Maastricht Treaty permit very little traditional interventionism: the language of the Treaty, which echoes the White Paper of 1990, emphasizes the need for non sector specific policies and the language indicates that within any industrial policy the concepts which govern competition policy must also be held to be paramount. Moreover by giving the EU competence in industrial policy, political if not exactly legal ammunition is provided for those who wish to see individual national initiatives restrained. The Maastricht Treaty industry chapter therefore is based on four principles (Marchipont, 1994, p. 21) which are reproduced in the Commission’s 1994 White Paper (European Commission, (94) 319): 1. a policy aimed at competitiveness is envisaged, not a traditional French- style industrial policy per se; 2. the policy must not be sector specific; 3. co-ordination and concentration rather than a common policy is envisaged; 4. the policy is to be based on competitive markets. Paradoxically, as we shall see, there is much more room for industrial policy by the selective discretion by which competition policy and trade policy are applied than there is under the heading of industrial policy per se. It is arguable that the relative scale of national and EU level interventions in the field of technology policy, for example, consign this to a very secondary role. The Commission’s own figures indicate that Community Framework program funding for R&D and Eureka funding together account for only about 5% of total public support for R&D inside the EU. The way the merger regulation is applied, the rules on R&D joint ventures and the actual application to cases of this and Article 85(3) powers in general, the use of regulatory powers in telecommunications, sectorally differentiated application of state aids policy: these are all ways in which competition policy is a powerful framework for industrial policy. At the same time trade policy – especially in the form of anti-dumping policy – has created an implicit industrial policy for certain sectors. What is common to all these areas is that they are ones in which the Commission has discretion apply rules governing the behavior of firms or of governments without having to seek prior consensus between Member States in Council. If the EU were a unitary state, one might expect to see industry, trade and competition policies targeted fairly precisely according to the nature of the market failures each instrument is best designed to correct, (Gual, 1995). Specifically: competition policy: eliminating distortions due to market power or barriers to entry exercised or created inside the EU by firms or governments; trade policy: eliminating distortions coming from the exercise of market power by firms or governments outside the EU; industrial policy: internalising externalities where private or national transactions costs of doing so are too high; broader regulatory and harmonisation issues where asymmetries of information or coordination problems are at issue. In fact what we observe – as we discuss below – is a compromise allocation of instruments to targets determined by 1. the allocation of rule-making powers to institutions (specifically to the Council or the Commission); 2. the procedural rules determining how such decisions may be taken; 3. the scope for judicial review of the decisions taken. One might expect that the powers that have been ceded to the Commission, or subject to relatively undemanding voting requirements in Council, are those for which the exercise of discretion can be relatively tightly constrained by judicial review (specifically the application of competition rules). Areas in which much more discretionary judgement is required (such as the evaluation of externalities) have by and large been retained under the control of Member States. Although there is some element of truth in this view, it is tempered by the fact that the constraints imposed by the possibility of judicial review are always limited, not only by the scope of procedural criteria to determine substantive judgements, but also by the difficulties faced by affected parties in Table 1: Needs a title MEMBER STATES COMMUNITY Individually Ad hoc Council Commission Co-operation Competition U.K. Regulations MAIN Monopolies & approved; Bloc Merger Advisory exemptions; Commission committee 85(1),85(3) BKA chooses priorities; monitors subsidies Trade Residual powers BLEU Legal power, delegated majority powers, e.g. but consensus anti-dumping; elusive negotiates Industry and MAIN Eureka, Airbus Unanimity Legislative regulation ACTORS under initiation; Maastricht; Coordination QMV for 100a making use of the judicial review process. This is particularly significant in respect of trade policy, as will be seen below. Table 1 is a simple matrix representation of the main respects in which EU action can be taken in each of the three fields under consideration. We discuss more detailed aspects in section 3. Fields of Intervention Competition Competition policy can be said to have a dominant role among the instruments of industrial policy in the EU in at least two senses. First, as we have seen the language of the Treaty requires both trade policy and policy towards competitiveness to be compatible with competition policy. Secondly, the fact that the Commission has the power to take decisions in this field removes one of the intrinsic obstacles to coherent policy making that characterize the other domains. Although even the Commission is to some extent a coalition of interests, it has the capacity to behave more like a unitary agent in this field than in others. So much for theory, at least: in practice the Community’s competition policy has been influenced to different degrees by the extent to which it can reconcile tensions between different aims of policy, by the degree to which it can resist the lobbying pressures of Member States and sometimes of firms themselves, and by the constraints of the jurisprudence according to which it operates. Roughly speaking the overall coherence of policy has been greatest in the field of merger control, least in the control of state aids and the liberalization of the so-called “excluded sectors,” with the remainder of anti-trust policy (control of abuse of dominance and regulation of agreements between firms) occupying something of an intermediate position. As we have emphasized, this should not be taken to imply that Community action is most “successful” in the areas where it is also most coherent, since the value added of Community involvement should be understood in terms of the policies that would otherwise have been undertaken by Member States on their own. Merger policy is perhaps the simplest to evaluate, and is also highly revealing of the aims that Community policy has been established to pursue. When the Council passed the Merger Regulation in late 1989 this represented the final achievement of an effort to establish a Community merger policy that had taken over a decade and a half to come to fruition. Although Commission initiatives to review mergers during the previous two or three years may have accelerated this process (as when the Commission imposed conditions on the British Airways take-over of British Caledonian in 1986), the dominant explanation for the development was undoubtedly a growing political consensus among Member States that the objectives of the Single Market Program required Community-level policing of merger activity. This was partly because of a general belief (as expressed in Emerson et al., 1988) that the objectives of the SEM risked being undermined if individual firms were allowed to erect market entry barriers to replace the remaining trade barriers which it was the purpose of the SEM program to remove. It was also due to the fact that capital market liberalization made it likely that corporate restructuring via mergers and acquisitions would increasingly supplement competition purely in product markets: in that sense a policy specifically directed towards mergers was more necessary than it had been before. The actual terms of the Regulation reveal that, in return for persuading the more reluctant Member States to cede sovereignty over an important area of policy, the Council found it necessary to circumscribe quite tightly the criteria according to which this sovereignty could be exercised. First, mergers that create or strengthen a dominant position are to be forbidden, and there is no formal scope for offsetting any efficiency gains of a merger against an adverse judgement on competition grounds. Secondly, in determining the criteria for allocating jurisdiction between the Commission and the competition authorities of Member States, the Regulation adopted a formula based both on the absolute size of the firms involved and on the magnitude of cross-border spillovers - a formula that represents in many ways the most systematic and impressive application yet of the principles of subsidiarity to the allocation of power within the EU. In practice, of course, the boundaries of jurisdiction were bound to be controversial, and there have been a number of disputes over particular cases. More importantly, there has been some reason to doubt whether the actual application of merger policy has been as austerely tied to dominance criteria as the text of the Regulation requires. The Commission’s record in evaluating mergers has not been particularly restrictive, and Neven et al. (1993) have suggested some reasons why the Commission remains vulnerable to pressures to approve deals that have managed to appeal to Member States on other than dominance grounds. They also suggest that, paradoxically, the validity of arguments purporting to outweigh dominance might be more rigorously assessed if there were explicit scope within the Regulation for them to be taken into account. The fact that it was the Single Market Program that expanded the activity of the Commission in competition policy reminds us that the goals of competition policy cannot simply be summed up as the promotion of economic efficiency in the neo-classical economists’ sense of the term. Market integration is and has always been a distinct and independent goal. In the first Report on Competition Policy in 1971 the Commission states that “competition policy has to pursue objectives specifically related to the creation and the good functioning of the Common Market,” an aim that is restated in the 9th report in 1979 as one of the major goals of competition policy. Nowhere is this clearer than in the Commission’s policy towards vertical restraints, where block exemptions for various kinds of exclusive and selective distribution agreement have refused to countenance any provisions that block parallel imports between Member States; indeed, the case law of the last few years suggests there is no surer way to bring down the wrath of the Commission on a distribution agreement than to seek to prevent cross-border trade (see Seabright, 1996). From an efficiency point of view such a rigid emphasis is bizarre: selective and exclusive distribution agreements are all about segmenting markets, and are usually justified in terms of giving retailers various kinds of incentive to undertake complementary investments. There is no intrinsic justification for allowing segmentation that happens not to lie along national boundaries, while punishing segmentation that does. The only way to rationalize such a policy is in terms of the value of market integration independently of narrow efficiency concerns. Even here there is some reason to doubt whether the policy achieves its own aims: ensuring the possibility of parallel imports prevents price discrimination between markets, and it is well known that in the absence of the ability to undertake price discrimination certain markets may simply not be served. So it is ironic that certain vertical restraints that might contribute to helping firms break into new markets in other Member States are made harder by a policy that appeals to the desideratum of market integration. But from the point of view of the present argument what the case of vertical restraints illustrates is this: some of the incoherence in competition policy arises not from the fragmentation of agency between different institutions in the EU, but from the fact that the goals even a relatively unitary agency such as the Commission may pursue are themselves multiple and in tension. More generally, the application of Article 85 of the Treaty (which covers both horizontal and vertical agreements between firms) illustrates two broader points. First, the importance of jurisprudential constraints. As many commentators have pointed out (see Bright, 1994, for example), owing to earlier decisions of the ECJ - especially the much-cited Consten & Grundig decision from the early 1960s - a great many agreements between firms that have no adverse effect on competition nevertheless fall under the anathema of Article 85(1) and have to be retrospectively legitimated through the application of Article 85(3). It is as though the fishermen of DG 4 catch in their nets vast numbers of fish they subsequently return to the sea. The mechanism of block exemptions moderates but does not adequately undo the adverse impact of this procedure, particularly since block exemptions - with the “white list” and “black list” of clauses - create a strong bias towards form-based rather than effects- based evaluation of agreements. One result of this judicial inheritance is that the growing activism of the Commission in competition matters has been perceived quite differently in the Article 85 field from the field of mergers. The assertion of a Community role in mergers has been broadly perceived as having a deregulatory impact, as leading to less state intervention than would otherwise take place; in the Article 85 sphere the business community has quite the opposite perception. The second – and related – point illustrated by the case law under Article 85 is that the Commission enjoys quite wide discretion in allowing agreements that have already been deemed anti-competitive. There is a sense in which industrial policy implemented under the umbrella of competition policy is given wide rein under Article 85 for a quite opposite reason from the one that explains its appearance in the field of mergers. In merger policy industrial policy is ruled out ab initio, so it has a tendency to creep in by the back door, unannounced and unmonitored. Under Article 85 so many agreements have to be salvaged by an appeal to industrial policy considerations that it is hard to know how systematically the justificatory criteria are applied. Certainly, agreements that make an appeal to technology or R&D considerations have a high chance of being waved through by the Commission. This is an explicit part of policy: the 16th Report on Competition Policy in 1986 stated that “under the condition that some level of effective competition is maintained, it [competition policy] allows for agreements between firms when these are likely to promote technological or economic progress, an in particular those that favor R&D or technology transfers.” Furthermore, the language of Article 130 was actually prefigured in Commission Competition Reports as early as 1987, where more competition is said to promote “a greater competitiveness of EC firms both inside the EC, and in third country markets;” a point reiterated more strongly in 1992 where it is stated that “the Commission is willing to facilitate ...cooperative operations that allow firms to adapt and improve their competitiveness in a global context.” None of this is to imply that the Commission is wrong to act in this way, merely that there is a risk of significant inconsistency between the application of different instruments of policy, the more so as the distinction between certain arrangements that are dealt with under Article 85 and those that fall under the Merger Regulation can seem highly arcane (see Neven et al., 1993, pp. 84-90). Although pointing out inconsistencies is perhaps easy sport in this field, the two areas of competition policy we have so far cited are ones in which procedural criteria nevertheless visibly constrain the substance of policy. The same cannot be said for policy toward market liberalization in the excluded sectors, nor for policy towards state aids. Here the Commission faces much more explicitly the political limitations on its power of maneuver with respect to Member States, since it is usually the actions of Member States themselves that are under the scrutiny of competition policy. In both of these domains the actions in question involve the granting of rents to favored firms by the Member States’ governments, in the former case by the protection of markets from competition and in the latter by explicit subsidies funded through the tax system. The two kinds of case differ only in that, when state aids are granted, the economic distortion in consumption necessary to fund the rents is spread over the entire tax base, whereas when specific markets are protected the distortion is concentrated in the market in question. Conventional analysis suggests the damage done by specific market protection is greater (at least in deadweight loss terms) than that due to state aids, although it may be less transparent; however, the additional damage is suffered directly by domestic citizens, so the case for a specific Community-level involvement is no stronger than in the case of state aids. The rationale for such involvement is essentially identical in the two cases: firms whose activities in the market are underwritten by governments (whether through subsidies or protection is immaterial) impose an externality on others, by making it harder for more efficient but less publicly-favored firms to survive and prosper. In addition to the externality argument there is also one based on the commitment potential of a centralized policy: governments may find that the presence of such a policy is the only credible way for them to resist domestic lobbying by powerful firms (see Winters, 1988; Gatsios and Seabright, 1989). The goals of Community-level policy in these two fields have been much less precisely spelled out than in the more conventional areas of anti-trust activity. This is partly because, as we argued in the introduction, neither the traditions of public policy nor of academia have been able to clarify exactly what an optimal relation between firms and governments in a world of rival nation-states would look like. The aims of EU policy, as expressed in the rhetoric of successive Competition Policy Reports and of decisions and other public statements, have been expressed in terms of the need for more competition and less state aid: without knowing precisely where the optimum lies one may feel confident about the direction we need to move from here. The lack of clarity over the goals of policy may also owe something to the highly politicized nature of decisions, to which we referred above: if you are doubtful about your ability to take decisions that antagonize powerful interest groups it may be prudent not to spell out in too much detail exactly what the goals of your policy are, and to rely instead on your ability to construct a rationale after the event. However, the lack of clarity has its costs, particularly where competition policy finds itself also trying to take account of cohesion objectives. For example, Ashcroft and Wishlade (1995), in their study of regional investment aids, argue that “The revealed practice of the Commission suggests that an appropriate award level is one that satisfies the regional cohesion objectives without damage to sectoral competitiveness and economic efficiency within the EU... if evidence is found of likely damage to competitiveness then it will be prepared to rule that an award of state aid should not be made. But in practice this rarely seems to happen because when certain elements of competitive damage are found the Commission appears frequently to be able to find other more positive competitive effects which are used to negate the initial finding of damage... the process gives the impression of being largely ad hoc.” The comparative lack of coherence of liberalization and state aids policies in comparison to those of traditional anti-trust should not, however, be taken to imply that EU activity in these fields has been less desirable or beneficial than in the others. Once again it is important to be realistic about the counterfactual comparison: what would Member States do if entirely unconstrained by the EU? It is quite conceivable that a completely uncoordinated set of anti-trust policies, though less efficient and coherent than the current regime, would inflict significantly less damage in the long run on the EU’s economies than a complete lack of co-ordination in the liberalization and state aids spheres. Such a comparison must inevitably be speculative, and should in any case not imply that efforts to improve the coherence of EU policies can be relaxed. Trade Policy The Rome Treaty laid down that there should be a Common Commercial Policy (CCP) by 1969 (Article 113). A Customs Union was created in the sense that tariffs were aligned but national non-tariff barriers formally existed until 1993 and some informal measures may still survive. In trade policy, discretion is much wider than in competition policy. The ultimate decision taking body - the Council - is free to adopt any objectives it wishes that it can reconcile with its obligations to GATT/WTO. Nevertheless, there are still quite strict legal rules, such that the borderline between “policy” and application of rules is fuzzy. Bourgeois and Demaret (1995) argue that the principles of competition policy do set a legal limit on the extent to which trade policy (or any other policy towards industry): so “competition may not be eliminated in a substantial part of the Common Market” (p. 84). Despite this trade policy can fill a gap that other components of industrial policy cannot do. In both procedure and substance it is subject to fewer constraints than competition policy and industrial policy in terms of Article 130. And yet it would be wrong to suppose that either the Commission or the Council can run in a freely mercantilist direction. The EU component of trade policy should be seen as replacing whatever measures Member States would have imposed in its absence. Critics of the EU have invariably observed that policy measures are generally in a protectionist direction. This is potentially misleading however: the EU trade regime is undoubtedly more protectionist than welfare economics would recommend, but it is debatable whether it is clearly more protectionist than what would otherwise be adopted by the Member States. Articles 9 and 10 of the Treaty state that duty paid third country goods must be given free circulation throughout the Common Market. But Article 115 of the Rome Treaty allowed the Commission to authorize measures taken by Member States to control the free flow of third country goods in exceptional cases during the transition to the full common market (scheduled for 1969). Article 115 continued to be used after 1969 and was an indirect target of the White Paper. Non-tariff measures were not and are still not finally harmonized on an EU wide basis. There were two types of gap in the CCP. In some areas the Community acknowledged that there were formal derogations from the principle of a CCP. The most obvious examples were the Multi-Fibre Agreement where national quotas were agreed at GATT, a number of individual quotas grandfathered into the Rome Treaty (notably the Italian quota on Japanese cars) and a number of national restrictions on imports from state trading nations. For these measures, the Commission was prepared until 1993 allow the use of article 115. At the same time there were a number of unofficial national measures, such as the U.K. and French restrictions on Japanese cars (the former an industry-to-industry VER which violated almost every relevant rule of GATT and the Rome Treaty, the latter an administrative measure also almost certainly illegal). In the case of unofficial measures the Commission would not allow Article 115 to be used. An unspoken aim of the 1992 plan was to generate a truly common commercial policy. The 1995 Cockfield White Paper acknowledged that the removal of all internal frontier controls would make traditional customs checks unusable as a means of allowing segmentation of markets where Member States had quota regimes of varying degrees of tightness. It fell short of pointing out the obvious conclusion that after 1993 there had to be a common external trade regime if the internal market was to make sense, and it avoided all hints that a collective decision would have to be taken on the degree of liberalism involved. The Commission aimed to end the use of Article 115 after 1993 and in fact succeeded in refusing all applications for 115 measures (except a temporary application for bananas) after 1993. However Article 115 was revised rather than deleted by Maastricht: the new version requires pre-authorization of any national controls on intra-community trade in third country goods, authorization which the Commission is determined not to give. The trade policy of the EU is a striking example of the effects of “federalism” on decision taking: Article 113 of the Rome Treaty gives ultimate decision making power by qualified majority vote (QMV) to the Council of Ministers, but the Commission’s right to propose together with additional powers of implementation transferred by delegation have led to a gradual transfer of authority to the Commission. In principle the Council has the final say on trade measures by QMV, and on anti-dumping by simple majority of states. Formal use of measures – like any change in policy – is restricted by the difficulty of getting through all the hurdles involved. In the case of anti-dumping policy, the firms involved must establish legal standing for a complaint, which is a modest but not a trivial matter. They must then persuade trade policy officials that all conditions for action are satisfied and the officials must not believe there is a strong overall Community interest against action. Then the Trade Commissioner must approve; then the full Commission must agree to propose the measures to the Council of Ministers, which must approve. Finally the Court must agree that procedural rules have not been violated. What makes the system appear protectionist is that we only see evidence of trade policy action once a proposal has passed most of the earlier filters. The Commission will put off complaints that it cannot support or persuade the Council of Ministers to support. In terms of incentives to intervene, the Commission has a clear mandate to take overall European Union welfare into account, and risks being subjected to criticism if it seen to back particular interests that do not command general political support. Meanwhile within the Council of Ministers a new tendency is emerging. It is harder to persuade Member States to vote for protection for industries not present in their own territory. Usually evidence for this is not visible, but we have recently seen examples of measures being proposed by the Commission turned down by the Council, for no recorded reason other than that the MS’s did not think it in their interest to offer protection. The complexity of this can be illustrated by looking at the way anti-dumping policy works. Here we have a system in which an essentially economic instrument is used in a political manner on the basis of tight legal rules. Although intended to curb “unfair competition,” anti-dumping differs from competition policy in procedure and substance. Despite the superficial resemblance to the criteria for predatory pricing, the legal definition of dumping since the CATT 1947 covers all cases where export prices are lower than home prices. The CATT allows signatories to impose anti-dumping duties whenever this occurs and if it can be shown that injury to domestic producers has been caused or is threatened. The legal rationale for this in cases where foreign producers are not in a position to create and abuse a position of monopolistic dominance may be termed the “market asymmetry principle:” If non-EU firms enjoy some form of sheltered market condition at home which EU firms cannot profit from and which allows the foreign firms to injure EU firms without reciprocity being possible, then we can apply anti-dumping duties under WTO and EU law. Economists like to point out that it may not always be in our interests to do so, and that if there is an economic rationale for anti-dumping it can only lie in a sub-set of the cases in retaliation is legally sanctioned. The kind of behavior referred to above includes much of what would be covered by strategic trade policy; this is in many cases likely to be globally inefficient, although it is not always evident that retaliation may make things better. There may, it is true, be circumstances in which a credible threat of anti-dumping action can deter strategic policy and behavior, even when actual use of the instrument ex post may be unwise (see Dornbusch (1990)). Realistically, though, such circumstances will be rare. However, the EU is unusual among jurisdictions in including in its legislation, most forcefully since 1994, a “Community Interest” test, in addition to the need to establish dumping injury and causation. The quasi-federal nature of the EU system reveals itself at its most complex here. “Community Interest” is ultimately a political concept and it would be impossible to define it in any more than loose terms (as Article 21 of the anti-dumping regulation does – listing the factors that must be weighed up without establishing exact priorities). In principle it is the only element in an anti-dumping decision which allows for political judgement to enter. Up to the time of writing virtually no explicit use has been made of this provision to refuse measures (though in the case of Gum Rosin, it is evident that an overwhelming majority of Member States told the Commission that since they did not produce the product it could not be in their interest to protect it). Responsibility for defining Community Interest is split between the Member States, the Commission and ultimately the Court. The decision process is one of a series of filters. The Commission receives an anti-dumping complaint, after an initial investigation and hearing the advice of the Member States, the Commission acting alone is empowered to adopt Provisional anti-dumping duties. It publishes its decision, which may be legally challenged. Then after the full investigation and in the light of any new arguments that may be put to it by parties with standing to do so, the Commission proposes definitive duties to the Council of Ministers. The Council votes by simple majority to accept or reject these (prior to 1994 it was by QMV). Interested parties - who since 1994 include consumer groups as well as users - can challenge any decision in the Court of First Instance if they can show a flaw in the reasoning of the Council or the Commission. There is thus a succession of filters to pass, the anti-dumping unit, the Trade Commissioner (who may well take a different view from his staff), the full Commission, the Council, and finally the Courts (CFI and eventually ECJ). Although the outcome of this procedure is frequently very protectionist, the policy underlying it is much less so: we see at the end of the decision making process only those measures that have been adopted and not the cases where action has been averted. The Commission is usually reluctant to propose measures if it does not think a majority can be found in the Council, so is inclined to use informal means to suppress complaints it thinks stand no chance of success. Given the degree of criticism of EU anti-dumping it is worth recalling that according to the Commission's Annual Report on Anti-dumping and Anti-Subsidy Activities barely 1% of imports are directly affected, although of course the threat of anti-dumping affects a broader class. The pattern of anti-dumping actions shows a number of distinct clusters of product, notably electronics, chemicals, labor-intensive manufactures and a number of raw material products. Commission officials argue that this pattern is the result of the spontaneous action of firms. The EU electronics industry has chosen to file regular anti-dumping complaints and the Commission has responded; the Commission has not chosen this sector as the focus for an explicit industrial policy. Formally speaking the Commission cannot move on trade policy without either a complaint from business or a mandate from the Council; existing legislation offers only a small margin of maneuver. The Commission cannot easily plan to use trade policy pro-actively to support industrial policy aims. One senior official has commented privately “The only policy to use anti-dumping against Asian electronics firms is that of the European companies themselves.” Nevertheless this gave the Commission in the mid-1980’s an opportunity to put in place something resembling a consistent policy, the consequences of which have not necessarily been what was originally, intended. The one absolutely clear consequence of anti-dumping measures has been a flood of inward investment by Japanese and Korean consumer electronics firms, and also semi-conductor firms. The EU producers of consumer electronics show little sign of benefit (Philips) or are quitting (Nokia, Thomson). On the other hand, since prices continue to fall, the costs to consumers are hard to measure in the absence of a well-specified counterfactual. The main impact on the EU economy is therefore the DFI itself. Is this good or bad? In a simple neo-classical model tariff jumping investment is likely to lead to resources misallocation, but these conclusions do not necessarily carry over to more realistic models that incorporate endogenous and firm specific comparative advantages, rents shared with workers and spillover effects. The Commission’s view of these developments is paradoxical: it denies that it has deliberately sought to use anti-dumping to attract direct foreign investment, but argues that inward investment has been a beneficial consequence. Officials argue that the aim is not to protect the complainant firms but to simply curtail “unfair” competition. If the outcome of the actions is a growth of foreign owned business in the EU that, they argue, is good. Many officials dislike the term “Industrial policy” and yet such arguments have appeared in the reasoning behind anti-dumping decisions: the strategic industrial case for sustaining EU production of consumer electronics, semi- conductors and photocopiers has been made in this context. The photocopier case illustrates the inconsistencies in the Commission's approach. In 1995 the question arose whether or not to keep measures imposed in the 1980’s, since when massive DFI had occurred, leaving the only major complainant Xerox (a U.S. owned firm) with a very small share of EU production. The Commission agreed that for the purpose of standing to make a complaint Xerox and two smaller firms represented “Community industry,” but when it came to decide on community interest the Commission argued that this should be seen as encompassing all producers including the Japanese. The existence of duties sustained their investment and consequently supported the existence of a large scale component industry (indeed in the case of color televisions the Commission argued that the promotion of a TV tube industry was the main reason for wishing to retain EU production of TV sets). The problem with such arguments is not that they are manifestly wrong, but that the reasoning is opaque, since the instrument is being used for purposes wholly other than those for which it was designed. The “Community Interest” is too often window- dressing at the end. There are however signs that this is changing: pressures are mounting for an explicit treatment of the issues that are now implicit and more economic reasoning to be included in anti-dumping decisions, the logic of which would then be subject to test in the courts. Box Trade Policy in cars Before 1993 several Member States had their own separate national rules governing car imports and many authors attribute the marked discrepancies in car prices across the EU to the resulting segmentation (for details see Holmes and Smith 1995; also Bourgeois and Demaret, 1995). The Commission was willing to authorize use of Article 115 only for the recognized Italian measures. Much ink was wasted over what local content on cars was required before the output of DFI plants could be given free circulation under EC law: Articles 9 and 10 make it clear that any duty paid Japanese car made anywhere in the world has rights of free circulation. In 1991 the Commission agreed with MITI that all national measures in the EU legal or not would be abolished in 1993 and instead MITI and the Commission would negotiate six monthly on car imports. After the year 2000 normal WTO rules - including those governing anti-dumping - would apply to the car industry. Meanwhile there would be six monthly negotiations between the Commission and MITI over imports from Japan, with quotas being agreed for each national market separately. Much further ink was then wasted over whether transplant output was included in the deal. Different Member States announced different interpretations. Transplant output cannot legally be restricted under the Treaty, but of course the state of the overall EU market including transplant output was at the back of everyone’s minds in the six monthly negotiations - wholly superseding the actual numbers for the year 2000 announced in 1991. The agreement has no basis in EU law and compliance rests solely on MITI’s willingness to enforce export restrictions and the willingness of Japanese firms to “exercise moderation.” There was no definitive text that the Council would agree. In principle therefore EU trade must be GATT compatible after 2000. Any new import restrictions rely on securing agreement by a majority of Member States approval by WTO. However in 1995 the Commission and Council agreed to continue the block exemption for distribution of cars within the EU, effectively perpetuating segmentation of markets, and facilitating the administration of the quota regime. In this case EU trade policy became a substitute for industrial policy, and competition policy discretion has had to be stretched to the limits. But the involvement of the EU almost certainly liberalized the outcome. End box Overall, therefore, anti-dumping policy, while clearly capable of generating outcomes with a defensible economic logic, appears a very indirect way to achieve goals that would be better pursued directly. Commission officials privately acknowledge this, but point out two disadvantages of subsidies as an alternative. Firstly production subsidies would be restricted by WTO rules even if the Rome Treaty was interpreted to allow them. Secondly it is observed, as Krugman (1987, p. #) argues in his “sadder but wiser case for free trade in a world whose politics are as imperfect as its markets,” that optimal subsidies are as rare as optimal tariffs. The Commission’s state aid regime has its limitations. It has been suggested that in the case of protectionist policies there is always a legal actor entitled and eager to challenge the imposition of a doubtful measure in court. In the two other industrial domains where trade policy has been active - cars and textiles/clothing - we must surely conclude that while policies in both cases have been unacceptably protectionist from the point of view of economic efficiency, there is reason to argue that the “value added” of the Community dimension has been to restrain the degree of protectionism that would otherwise have occurred. Overall, therefore, the best case for EU trade policy may be to adapt Hilaire Belloc’s advice to a nervous child: “Always keep tight hold of Nurse, for fear of finding someone worse.” EU trade policy is far from being either equitable or efficient, but a sober consideration of what might be implemented by Member States in its absence casts it in a less unfavorable light than such an observation might imply. Technology Policy and Other Categories of Industrial Policy The remaining aspects of policy towards industry are those involving Community expenditure and those governing non-competition regulatory matters (mainly standards policies). We shall focus on the technology aspects here because this is where most of the action has taken place, even in terms of standards, though it must be acknowledged that there are many other areas of policy that affect industry (environmental protection legislation, for example). As we have noted, competence in technology policy as opposed to industrial policy in general was given to the Community by the Single European Act, after a series of initiatives had been launched by Commissioner Davignon in the early 1980’s. The Maastricht Treaty as we noted appeared to extend the competence of community institutions, but in fact the application of Article 130 is highly restricted. Measures must be adopted by unanimity, they must be in pursuit of pre-existing Treaty aims, and they must conform to the principles of competition policy. The SEA and Maastricht Treaty place a heavy emphasis on the technological aspects of industrial policy, though they also refer to the possibility of adjustment to assist adaptation to world competition. Before evaluating the logic of the EU’s approach, we need to ask: why have a technology policy at the EU level at all? There is a major debate about the usefulness of technology policy at any level of government. The two major arguments in favor appeal to externalities and to co-ordination problems. Despite some skepticism, a reasonable consensus exists among economists that technological innovation tends to create positive spillover effects, which will lead to under-investment in R&D. (Some models indicate that competitive market conditions may produce too much R&D through duplication; too much research but not enough innovation.) The degree of spillover is clearly likely to be greater, the more difficulty there is in appropriating R&D results. So a prima facie case exists for supporting basic R&D more than product specific innovation. What is less obvious is the precise geographical nature of spillovers, and consequently the appropriate level of government for any particular intervention. In addition, the information requirements for clearly discriminating between different types of R&D activity may be very demanding. There is much to be said for the view that most R&D spillover activity occurs through the operations of fairly localized industrial networking structures (cf. Best, 1990) and that much of the spillover is accessible to the entire world technical community. There is thus room for local and regional initiatives. The respective roles of national and EU actors are less clear. To justify action at an EU level we are looking for market failures that can be identified and counteracted by public policy, but which in terms of the subsidiarity principle cannot be handled by voluntary co-ordination by states. When we look at actual EU technology policy we can see a very clear tension between the wish of the Commission to enlarge the scope of policy established at an EU level and Member States who are mindful of the futility of zero-sum intervention at national level, but equally concerned to avoid ceding unnecessary power to the Commission. To this we must add the on-going tension between DG 3/DG 13 (pre1994) and DG 4. One outcome of this is that the Member States of the EU very deliberately chose to place a significant fraction of total collaborative R&D activity outside the framework of the EC, using the Eureka program and such ad hoc arrangements as Airbus. The Commission can participate in Eureka programs but only as one partner. Advocates of the Eureka approach argue that it has the benefit of avoiding the problems of the juste retour. EU spending rules would allow the Community to pre-commit to fixed expenditure totals for industrial policy (as Krugman has advocated in the U.S.), but they are not well adapted to ensuring an optimal allocation of spending. BOX Mac and HDTV In 1985 the Japanese proposed a new worldwide TV standard (MUSE) to replace PAL NTSC and the abortive SECAM standard once intended as a springboard for French ambitions. Driven by Philips and Thomson and the French government (though restrained by some other Member States) the Commission - especially DG 13 - felt obliged to act. It alerted the firms to the challenge they faced and orchestrated a program of development for a European standard Mac. Eureka aid (including Commission cash) and EC regulatory instruments were used, but in the end Mac had to be abandoned. Critics argued the policy was outdated interventionism. A closer reading suggests a more balanced judgement. Any new TV standard must involve equipment makers, broadcasters and regulators, if it is to take off: there are market failures here. Mac could only have succeeded if the broadcasters had been more closely involved and if the project had been realized before new digital techniques emerged. But the balance is not wholly unfavorable: EU firms have a strong position in new TV technology (though mostly in the U.S.). Lessons have been drawn: the Commission is now focusing on its role as a potential regulator in digital TV looking at competition issues, e.g. for set top boxes, etc. The basic policy problem remains the same: how to avoid global market domination by non-EU players. END BOX The efforts of the Commission have been focused mainly on the promotion of collaboration schemes for the creation of new technologies, while trying to preserve competition in the product market. The effort has been driven both by industrial/technology policy, and by relatively liberal rules under the competition regime for technological collaboration. Some would even argue that the technology component in competition policy on R&D joint ventures has gone too far (Frazer, 1993). The EU’s efforts to promote collaboration in high technology have clearly been more successful in promoting collaboration than in generating direct results. The electronics industry does not appear to have responded to the subsidies and collaborative projects of the 1980’s: the revival of production in the hands of non-EU based firms may have as much to do with trade policy as anything else. It does not follow that there is no role for EU intervention. The role of Community policy might perhaps best be conceived as attempting primarily to reduce the transaction costs of privately beneficial collaborative activities (with a subsidiary aim of contributing marginal funding towards projects of general interest with external benefits). Such a catalytic role towards collaboration can be seen as solving a co-ordination problem, in which private firms and member state governments seeking to internalize externalities might do so in a number of mutually beneficial ways, but can benefit from an agency that systematically examines collaboration possibilities and can make recommendations. Sometimes the number of parties potentially involved is small and their degree of information about the prospects for collaboration is high, as in the case of aerospace.2 In other cases many more parties are concerned: product standardization work, efforts to harmonize public procurement rules, and trans- European Networks are cases in point. There is a plethora of models which show how the market cannot be relied on to deliver the right results in standards. Ironically the aim of the Mac program was precisely to accelerate the premature lock-in that writers such as David have warned is a perverse result of market forces. It could be argued that a better policy would have been to subsidize 2 Neven and Seabright (1995) suggest that external benefits to the EU from lower prices for aircraft have been fairly small, and that Airbus will have been justified primarily if it turns out to be profitable (of which there is a reasonable prospect). This in turn implies that the number of member states, which had an interest in collaboration, was not large: the EU as honest broker was redundant. This contrasts with the areas of product standards or trans-European networks, where potentially many more member states are involved. firms to carry on research in alternative technologies once they looked too committed to Mac. Another paradox is that the money provided for Mac may well have allowed Philips and Thomson to keep up the investment in digital technology in the U.S. and enhanced PAL in the EU! Many of the lessons of the 1980’s have been drawn in the new approach to the Information Society. As Foray et al. (1995) show there has been a major switch in emphasis towards the use of competition policy instruments and regulation of technology to facilitate rather than to impose solutions. Europe’s success in the GSM mobile phone field can be identified as an example where “market friendly co-ordination” has been able to generate positive benefits for both producers and users. In the new digital media and telecom field the Commission has preferred to try and structure markets in such a way that profit rather than subsidies will be a lure. Use of the competition instrument breaks the policy making log-jam but requires the Commission to forecast what the effects of mergers and strategic alliance are going to be. We can therefore see that after many years of trial and error, technology policy is increasingly dominated by a competition-based logic, but given the nature of EU competition policy, its stress on pluralism, the justification of R&D collaboration and the emphasis on market integration, it is not unreasonable to say that to a large measure we have technology policy within competition policy, not competition policy instead of technology policy (cf. Taddei and Coriat, chapter.7). Conclusion What can we say about the nature of the rules and constraints governing industrial policy in the EU? Institutionally the rules of competition policy are hierarchically privileged in two senses. Firstly the Treaties give a certain priority to the principles enshrined in competition law. Secondly decision making made in the framework of competition law is much easier to accomplish because the Commission (subject to the Court) is the sole actor. The competition rules are not entirely oriented towards efficiency goals but their tilt is definitely in this direction; however, as we have seen there is significant institutional scope for non-competition criteria to influence what are ostensibly arguments constructed purely on competition grounds. On the other hand policies explicitly involving a high degree of intervention are not ruled out by the Treaties. But as a general rule the more intervention is involved, the stricter are the procedural requirements for action. A highly interventionist policy could be adopted by the EU - but only if it secured unanimous support from the Council on a proposal from a majority of Commissioners. There are several examples where the Community has adopted policies that have no conceivable efficiency rationale, but these have been in the presence of overwhelming political backing which no technocratic criteria could be expected to block. If we adopt the view that interventionist policies towards industry are sometimes justifiable but that economic actors have an incentive to be opportunistic in the information they supply, the broad structure of rules governing industrial intervention in the EU, which involves it more as a regulator than a spender, can be seen to have a reasonably compelling (if baroque) rationale. References Ashcroft, B./Wishlade, F. 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(1987): Is “free trade passé”. Journal of Economic Perspectives, 2(1), pp. 131- 144. Krugman, P. (1992): The Age of Diminished Expectations. Cambridge, MA.: MIT. Marchipont J. (1994): La Stratégie Industrielle de l’Union Européenne pendant et après l’achèvement du marche unique. Nancy: Doctoral Thesis, University of Nancy. Neven, D./Nuttall, R./Seabright, P. (1993): Merger in Daylight. Centre for Economic Policy Research (CEPR). Padoa-Schioppa, T. (1987): Efficiency Stability and Equity. Oxford: Oxford University Press. Seabright, P. (1996): European Union Policy Towards Vertical Restraints: A Proposal and an Evaluation. Cambridge: University of Cambridge, mimeo. Taddei D./Coriat, B. (1993): Made in France. Livre de Poche, Paris, France. Winters, L.A. (1988): Completing the Internal Market: Some Notes on Trade Policy. European Economic Review, 32, pp. 1477-1499.
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