Today Europe; tomorrow the rest of the world

Date: 09/01/1997

By Ian S Forrester QC

ANY European who takes a holiday in the United States will be tempted to spend money there.

American breakfasts, toothpaste, records, bicycles and towels seem remarkably cheap. But there is a limit to how many breakfasts can be consumed and how many consumer goods can be carried home by air, so transatlantic consumer trade is a rather marginal phenomenon. But a local authority wishing to buy road-making equipment may decide that the difference between the German price and the Chicago price is so great that the potential saving is worth the effort of making a foreign purchase.

But it is not necessary to travel across the Atlantic to find lower prices. Pharmaceuticals, industrial equipment, chemicals, food and many more products are sold in North Africa, Russia, Poland and Turkey at prices reflecting local market conditions. Delivery is often made in western Europe to a trader who claims that he plans to sell the goods in a distant country. Manufacturers quote low prices in order to have a chance of making a sale in Chad or Belarus. But sometimes the trader fails to do what he has promised, and the goods are resold in western Europe at a huge profit. The manufacturer feels cheated and tries to take sanctions against the trader.

Is this kind of arbitrage activity a good thing? Perhaps.

The trader is most happy because he makes a good profit. The manufacturer loses the revenue which would have been earned on a sale in western Europe. The manufacturer's employees, who are also consumers, may therefore be marginally prejudiced. Consumers and end-users of the goods benefit if the price to them is actually lower.

As to trade within the Union, the debate is over: European competition law has been used for decades as an engine of integration. Whether or not an economist would have approved, forcing businesses to trade without regard to political frontiers between member states has had the effect of making traders more aware of their rights and has doubtless helped to accelerate the common market (imperfect though it is).

Suppliers have argued that it is unfair and irrational for them to be economically penalised for selling goods in a 'cheap' member state which then flood into an 'expensive' member state without the supplier sharing in the second profit.

But they nearly always lose. As recently as last November, the European Court of Justice declined to follow its advocate-general's proposals in the Primecrown case, concerning the importation into other member states of cheap pharmaceuticals from Spain, and upheld the conventional approach.

There is little room left to justify rigid national territorial frontiers in distribution arrangements. Another controversy brewing relates to the sale of electronic equipment which will function successfully only in the member state of its sale: should that be illegal?

Although the law concerning contractual obstacles to trade between member states was clear and Draconian, much more tolerance was extended to prohibitions on exports to or from third countries.

If a distribution agreement prohibited a Polish reseller from exporting to the Union, the European Commission norm-ally took a mild view: as such prohibitions were not likely to affect trade and competition in the latter because of customs and other barriers, they did not present serious problems, although strictly speaking the Commission should have been informed.

Times, however, are changing. There are signs that the old official toleration of contractual obstacles to trade between eastern and western Europe has gone. Our eastern European neighbours, candidates for accession, have adopted competition law concepts parallel to Articles 85 and 86 of the Treaty of Rome.

Certainly the words of the treaties are identical, but are we really sure that it is a good thing for the Commission to use the competition rules today as a means of politically and economically integrating Slovakia and Portugal next century?

Will Union manufacturers, traders, employees and consumers be winners or losers?

A related hot topic is whether the EU's competition rules should be used against world-wide distribution practices. Many products are distributed by multinational groups on the basis that the resale should occur within a certain territory: the Union, the US, NAFTA, Singapore or wherever. This is a routine practice. Given that the world is not economically homogeneous, the manufacturer wishes to control what products reach which markets and at what prices.

Nevertheless, in a number of cases the Commission is seeking to break down contractual obstacles to the transcontinental distribution of goods.

This brings us back to my point of departure: should the diesel engine user have a right rooted in EU law to be able to procure a new engine in America? Should the pharmaceutical manufacturer try to increase its prices in Brazil for fear of parallel trade from Brazil to Portugal? Should European traders be free of contractual obstacles to ship to Chad or buy in Singapore?

In my opinion, the Commission should move cautiously.

This article reflects the personal views of the author.