Order without (Enforceable) Law: Why Countries Enter into Non-Enforceable Competition Policy Chapters in Free Trade Agreements

Abstract

There has been an explosion in the past 10-15 years of bilateral and regional free trade agreements in Latin America (together "preferential free trade agreements" or PTAs). The purpose of PTAs is to increase trade, regulatory and investment liberalization. As trade liberalization requires more than just a reduction of tariffs, PTAs include "chapters" in a number of areas of domestic regulation. These chapters that address domestic regulation, create binding commitments to liberalize domestic regulation that may impact foreign trade. Among chapters that address domestic regulation, many of the Latin American PTAs include a chapter on antitrust/competition policy. Until now, the effectiveness of such chapters has remained unanswered. This article undertakes the first empirical analysis of Latin American antitrust/competition policy chapters in PTAs.

To understand the dynamics of PTAs, this article begins with some context of Latin American development. First, the article provides an overview of the process of liberalization in Latin America. It then describes how domestic antitrust fits within Latin American liberalization. The article then describes competition policy chapters within Latin American PTAs based on the results of coding these provisions. The standard practice in PTAs is to create binding commitments that have third party adjudication for potential disputes. The choice of binding international institutions, such as PTAs, is based on the perception of the relative strength of PTAs over purely domestic approaches. A comparison of the institutional alternatives to PTAs illustrates that this perception is not born out by the facts. This article finds that antitrust chapters within PTAs go against the standard practice of binding commitments. Competition policy chapters, unlike other chapters of the same trade agreement, lack binding dispute settlement. All Latin American PTAs lack dispute settlement for core antitrust issues of mergers, collusive agreements and monopolization within the competition policy chapters. This departure from the standard PTA practice is more striking given that other chapters in the same trade agreement have binding dispute resolution. These other chapters include some competition element to them, such as services and intellectual property. The remainder of the paper explores the dynamics of these chapters, including why PTAs treat antitrust differently from other areas of domestic regulation.

Keywords: antitrust, competition policy, international trade, contracts, norms, hard law, soft law

JEL Classification: F10, K12, K21, L40, O19