THE ROLE OF COMPETITION LAW AND POLICY
IN INTERNATIONAL TRADE

David Parker
Assistant Secretary
Competition Policy Branch
The Treasury
Australia

INTRODUCTION AND SUMMARY

Globalisation and the closer integration and contestability of markets is a pressing phenomena for all countries. Many forces are driving this change, including advances in information technology and government policies aimed at deregulation and trade liberalisation. For business enterprises, it raises new market opportunities and also new challenges in the form of increased competition and the greater complications of dealing in international markets. For governments, globalisation raises profound policy issues as international economic forces shift the basis of economic sovereignty. One issue in that context is the interaction between trade and competition policies. There is a general recognition that the coherence of these policies needs to be strengthened.

Competition law is fundamentally a mechanism to limit the formation and effects of collusive or unilateral market power, subject to overriding benefits from economies of scale. Broadly speaking, the objective is to protect the competitive process and thereby enhance welfare. Competition laws have a domestic origin and set out rules which apply to business enterprises. The assessment of anticompetitive effects is generally confined to domestic markets. Domestic competition authorities exist to apply the law. Trade policy also has the objective of enhancing welfare through the progressive lowering of barriers to trade which allows a more efficient allocation of resources, greater economies of scale and enhancement of economic growth. Trade laws have an international origin and set out rules which apply to governments. The assessment of trade barriers has traditionally been in terms of 'border' measures applied by governments and are analysed in terms of international market access rather than competition. International trade authorities exist to provide a fora for negotiations between governments and to resolve disputes. While staring from a different basis, the objectives of trade and competition policy are consistent and mutually reinforcing. It is commonly recognised that effective competition policies are necessary for fair trade

The interaction of these two policies is by no means a new issue. Indeed the international dialogue on trade and competition policy dates back to at least the Havana Charter. However, in recent years, the issue has been given fresh impetus. The progressive reduction of border protection measures achieved through the GATT process has seen market access issues become increasingly focussed on internal barriers such as government regulation and, in particular, restrictive business practices. Frustration of trade liberalisation by such internal barriers has become the focus of several trade disputes. Moreover, globalisation is seeing the application of a patchwork of domestic competition laws to international transactions, sometimes with less than ideal results. Finally, there has been increased attention to the effects of trade remedies from a competition policy perspective.

These are without doubt difficult issues. The 'solutions', even where these can be agreed at some conceptual level, are complex and raise challenging implementation issues. From a competition policy perspective, the solutions are long term.

The Osaka Action Agenda and draft Collective Action matrices, which we will discuss later at this Workshop, reflect this background. Early action is focussed on dialogue, promotion of understanding and encouragement of cooperation between competition authorities. More substantive action is less specifically defined and is to be considered in the longer term as the policy dialogue develops.

As we pursue this agenda, we need to be aware that, from a trade policy perspective, the need for solutions is urgent. The trade policy community will not wait for consensus and action on the competition policy front. Trade policy has had some successes in this field and doubtless will continue to be applied to international competition policy problems. Therefore, we need to press on with the competition policy dialogue. That said, we need to be equally careful that we do not attempt to push for solutions before governments can agree on the appropriate course of action.

To foster dialogue on competition policy in this paper I want to address two questions.

  1. Does free international trade serve as a substitute for competition policy or is competition policy necessary for free international trade?
  2. Does competition policy help or hinder an economy's international competitiveness?

The paper will also draw out some possible longer term solutions to the problems thrown up by the interaction of trade and competition policy. My colleague from the Australian Competition and Consumer Commission, Mr. Spier, will pick up on some of these issues and highlight the potential benefits of cooperation between competition authorities.

Broadly speaking, the paper concludes that open international trade can reduce the competition problems that competition law is designed to address. Consequently, as the world economy become progressively more global, the application of competition law to national markets needs to respond accordingly. International trade does this by limiting the ability of domestic firms in the trade goods sector to exercise market power individually or collectively. However, rather than being a substitute free trade and competition policies are compliments �� competition policies may be necessary to prevent anticompetitive practices that frustrate trade. Moreover, all economies have non-traded sectors and there is a clear need for competition law to deal with competition problems in these sectors. Finally, the internationalisation of business transactions also heightens the possibility of international competition problems which should be subject to competition law. The present incomplete patchwork of domestically focussed competition laws fails to adequately address these issues.

Some countries have replaced the use of trade remedies between themselves with competition law. In the view of some countries, the present international system of competition law is not 'fit for purpose' to support a general removal of these remedies if that were contemplated.

The international trade system would ultimately be well served by progress towards some form of international framework for competition laws, but a number of 'building block' developments are likely to be required first, including more widespread adoption of competition laws and the progressive extension of bilateral enforcement arrangements between different countries. Some progress in these building blocks is occurring among APEC countries and the APEC policy dialogue will hopefully further that process.

From the perspective of individual countries there are clear benefits in adopting competition law and policy. Apart from the potential to participate more fully in the liberalisation of international trade, competition law and policy can, if appropriately applied, enhance the international competitiveness of an economy. Competition is fundamental to the efficient use of a nation's resources. Increased competition aids productivity growth and hence improved living standards.

The structure of this paper is as follows. Section I examines some elements of the interaction of trade and competition policy, examines possible long term solutions and briefly notes possible developments in international fora. Section II explores the linkages between competition policy and international competitiveness. The definition of competition policy adopted in this paper is a wide one �� it includes competition law as an important element, but also includes or overlaps partly with other market structure policies bearing on the process of competition. The paper is written from an economic rather than legal perspective.

  1. THE INTERACTION BETWEEN TRADE AND COMPETITION POLICIES ISSUES

A critical issue in the assessment of competition problems in competition problems in competition law is market definition and the identification of participants in the market. That is, what is the relevant market within which the market power of the participants is to be assessed. That assessment is done on the demand side (who are the actual or potential customers) and the supply side (who are the actual or potential suppliers) for a relevant range of substitutable goods or services. For tradeable goods, the actual or potential suppliers will include foreign suppliers if the economy is sufficiently open to imports and the situation is otherwise conducive to trade. Other things being equal, the broader the market definition, the smaller will be a firm's market power. Therefore, effective international competition can reduce the potential extent of domestic competition problems which need to be addressed by competition laws. This mechanism will be more powerful the more open is the economy and it is appropriate that the application of competition law takes this source of competitive pressure into account when assessing market conditions. For example, the Australian Competition and Consumer Commission, which is responsible for the administration of Australia's competition law, does not oppose mergers where imports account for at least 10 per cent of the relevant market.

If an economy is small, very open and at a relatively early stage of development an argument can be made that competition laws are not appropriate from a domestic perspective. If the non-traded sector is small, the most efficient market structure is likely to be highly concentrated. While, competition laws will generally take that issue into account and reach economically sensible out comes through 'rule of reason' or efficiency considerations, they do come at a cost, in terms of administration expense etc. For small open economies, directly dealing with major competition problems by the government according to general competition principles may be the most efficient approach. As an economy grows, develops and becomes more complex, such a case by case approach will become progressively less effective and more inefficient. Inconsistencies in treatment of different sectors will become more troublesome, and the complexity of case by case assessment without the benefit of an overarching law or expert competition authority will complicate administration. At some stage of development an overarching competition law is likely to be the superior approach.

While international competition can reduce market power it does not supplant the need for competition laws. Firstly, all economies have non-traded sectors which are not subject to the disciplines of international competition. Competition laws are clearly relevant for the non-traded sector. The role of competition policies in the non-traded sector is assessed further in Section II. Secondly, there are other reasons for adopting competition laws beyond purely domestic considerations. These can be broadly categorised as 'international' and arise from the intersection of trade and competition policy. As discussed below, trade and competition policies are better regarded as compliments rather than substitutes. Adopting competition laws is by no means a complete solution to the problems identified below but the application of competition laws by all countries is one of the 'building blocks' to eventual solutions.

The interaction of trade and competition has two sides. Where competition policy or law is ineffective or incomplete there can be adverse impacts on international transactions. In some circumstances this can give rise to trade policy issues. Equally, the trade distorting effects of some remedies available under trade policy can be analysed in a competition policy framework.

Ineffective competition laws and policies hinder market access

Lower border protection is exposing anti-competitive arrangements and regulatory structures within domestic economies that can hinder trade. Consequently there have been a number of trade disputes about market access where the barrier to trade is not border protection but an internal competition problem which is within the ambit of competition policy. If there are no competition laws, or if they are not enforced, or if the relevant sector is exempted, or if a competition analysis suggests the problem is innocuous, tensions can arise with trade policy.

The current Kodak dispute provides an illustration. (In using this example the paper does not presume to reach a judgement on the complex issues involved.) After World War II, the Japanese Government, through MITI (Japan's Ministry of International Trade and Industry) insulated the domestic consumer photographic film and paper markets by a combination of high tariffs (averaging 40%), import licensing requirements (until 1971), and prohibitions on inward investment (until 1976). These formal restrictions were dismantled as a result of international pressure from the US and the OECD, but Kodak alleges that the Japanese government instituted 'liberalisation counter measures' as a continuing barrier to competition from foreign firms. The market share of Kodak in Japan is substantially less than in other regional markets (less than 9% in 1994 in the market for consumer photographic film, whereas Fuji has 70% of the market for consumer photographic film and 56% of the market for consumer photographic paper). Kodak alleges that the reasons for this are:

The Kodak case has led to trade tensions between the US and Japan, including the possible use of s. 301 of the US Trade Act. In addition, the US has recently lodged a complaint with the WTO and invoked dispute resolution claiming that the benefits of trade liberalisation accruing to it have been 'nullified or impaired' as a result of a failure to address anticompetitive behaviour by Japanese companies. The outcome of this case is unpredictable and developments in this area will be watched with interest. It is unlikely the 'nullification and impairment' mechanism will prove to be sufficiently general to address all competition disputes. In particular, the impairment has to be unforeseeable and there would be a question whether that could be established in all cases.

The Kodak example highlights the importance of transparent enforcement of comprehensive competition laws. Further, ineffective competition laws may give rise to attempts at extra-territorial application by other countries, which may also give rise to international disputes. This highlights the benefits of dialogue and cooperation between competition authorities. It is clearly preferable to solve these problems through cooperation, if possible, than by dispute. The ultimate remedy in such dispute is a retaliatory trade sanction, but such trade remedies do not address the cause of the problem unless the threat causes the foreign government to capitulate on the competition issue. One of the preconditions for the removal of tensions in this area is some common agreement about the appropriate scope of competition law. Consequently, dialogue aimed at convergence of competition laws and policies is important.

The allegations in the Kodak case relate to misuse of market power and vertical restraints. Import cartels and export cartels are another area where trade tensions sometimes arise. Such cartels are not necessarily anticompetitive if the cartel members are small, such that the cartel does not have market power. On the other hand, export cartels can facilitate trade by reducing transactions costs for small players. On the other hand, export cartels can harm international trade and world welfare when they restrict exports, reduce international competition and raise prices. Similarly, import cartels may be anticompetitive if they control a significant share of the market and collude over the prices they pay to suppliers (thereby extracting monopoly rents), or over terms in domestic markets (thereby extracting monopoly rents). In either case, the volume of international trade is reduced. Export and import cartels are generally outside of the scope of domestic competition laws as the anticompetitive effects, if any, are located in foreign markets rather than in the jurisdiction in which the conduct takes place. Some competition laws simply exempt these type of arrangements.

It is worth mentioning that there is sometimes a difference of perspective between the trade policy approach and the competition policy approach. Low import penetration or market access difficulties flags a problem for trade policy. But competition policy does not necessarily see this as a concern if market structure and conduct is competitive, ie the focus is on efficiency rather than market access. An efficient market may include situations where the distribution system is tied because, in certain circumstances, vertical ties are not anticompetitive and indeed can enhance competition if they are not allied with market power. Moreover, it is generally irrelevant in competition policy (and to economic welfare) whether competition comes from domestic or foreign sources. So, there is no competition policy reason to artificially reduce entry barriers for foreign competition where those entry barriers would have to be overcome by a new domestic competitor. Issues of this kind are likely to be central to the Kodak case.

One of the difficulties in this area is that it is hard to measure enforcement of competition law. Lack of apparent enforcement action could be the result of there being no competition problems or no enforcement �� so there is no easy answer. More generally, while there are a several well known examples of dispute about anticompetitive practices allegedly causing trade barriers, there is little information on the true extent of the problem. Are there many private anticompetitive barriers to trade? Are these practices increasing as border protection falls? Are there ways that competition authorities can respond to these issues so that matters do not escalate to a trade dispute? Traders experiencing such problems may approach their trade authorities, but if the competition authorities are not 'plugged in' somewhere they may simply not hear of the issue. I believe that our policy dialogue in APEC could usefully touch on some of these issues.

Regulations limiting trade and competition

Government regulation can also limit (domestic or foreign) entry to a market (eg telecommunications monopolies). Whether this type of issue falls within competition policy depends upon the width of the definition of competition policy, which varies from country to country. In APEC, work on competition policy and deregulation has been brought together so definitional distinctions become less important. In Australia, a set of competition principles have been developed to apply to deregulation initiatives and this forms part of an extended ambit of competition policy, including deregulation, infrastructure policy, price regulation, government business activities and general regulatory principles (see Attachment A). APEC work on standards and conformance is also relevant here.

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Divergent Competition Laws / Enforcement Assistance

Divergent competition laws increase the cost of doing business and create uncertainty for companies involved in international transactions. Increased world trade means that investigations of mergers and other conduct involving multinationals are increasingly likely to involve the interests of more than one economy and be covered by the competition laws of several jurisdictions. This may lead to conflicts between competition authorities on whether conduct is anticompetitive or on the remedies to be adopted. Evidence to support a contravention of the law may be located in several jurisdictions and as competition laws generally focus only on domestic effects the jurisdiction in which the evidence is located may have no interest or legal authority in the matter. Companies can seek to exploit these differences. It is therefore desirable to have a degree of consistency in competition laws and their enforcement, and to have cooperation between competition agencies in different jurisdictions in the investigation of competition problems. My colleague Mr Spier will develop these issues further.

While it is difficult for competition authorities to deal with international cartels, countries without competition laws have fewer options to respond when such cartels use anticompetitive actions to extract additional profits from that country. An example of anticompetitive collusive conduct which would be illegal in many countries but was publicly announced in Singapore by the participating multinational companies is illustrated at Attachment B.

These issues may not raise a trade questions, but it can certainly be included in the APEC dialogue on competition policy.

Trade remedies may harm competition and consumers

There is an underlying tension which trade policy remedies (not objectives) create in terms of competition policy objectives. Trade remedies that erect non-tariff barriers and restrain trade are likely to be inconsistent with competition principles because they work by shielding producers form competition (eg, voluntary export restraints which limit the degree of competition in the domestic market of the importing country). Such remedies generally focus on producer welfare, not consumer welfare and may have adverse effects on the efficient allocation of world resources and on welfare as a whole. Use of anti-dumping remedies has been contentious for this reason. 'Abuse' of trade policy measures is also a particular problem.

Dumping remedies can be seen as a potential defence against firms which have the economic power to dump as a result of a protected position in their domestic market, including through less vigorous competition laws. However, a conceptually superior response is the application of competition laws in that country, ie the replacement of anti-dumping law with international competition law, specifically prohibitions on the abuse of market power. This approach has been successfully adopted on a bilateral basis between New Zealand and Australia as part of the Closer Economic Relations effort. Anti-dumping remedies have also been replaced by competition law within the European Union, but not within NAFTA. It is difficult to contemplate a widespread replacement of antidumping remedies with competition law in the near term. Certainly a pre-condition for that to happen would be a significant strengthening of the international competition law framework, further substantial convergence of competition law and other trade liberalisation measures.

POSSIBLE LONG TERM SOLUTIONS

Many of the competition policy problems identified above result from incomplete or ineffective law. Not all countries have competition laws or enforce them effectively. And, among those countries with competition laws, while there is general agreement about the approach to horizontal arrangements between competitors and resale price maintenance, there are differences in coverage of the law, the treatment of non-price vertical arrangements, abuse of dominance and merger control. Cooperation among competition authorities is increasing and can help to address some of the international competition issues discussed above. At present, enforcement cooperation between countries remains essentially at the bilateral stage, with relatively few cooperation agreements in place. Those agreements are not comprehensive. Over the longer term and more fundamentally, however, the problem lies in the domestic focus of competition laws and the absence of an effective international framework.

An international competition law framework is not a new concept. The Havana Charter included comprehensive rules applying to private anticompetitive practices and an institutional enforcement framework, but it was not ratified. An UNCTAD agreement includes competition provisions but it is non-binding. An OECD recommendation provides for notification between countries of competition law issues and a voluntary dispute settlement procedure �� dispute settlement has never been invoked. The TRIMS, TRIPS and GATS include certain competition provisions but these are limited to restrictions on government business activity and regulations �� no right of private action arises, ie they do not amount to a comprehensive body of law. Nullification and impairment procedures potentially apply but their impact is uncertain at this stage.

Possible framework options are

DEVELOPMENTS IN INTERNATIONAL FORA

Discussion of the interaction between trade and competition policy is likely to take place at the forthcoming WTO Ministerial Meeting. This was endorsed by the G7 Leaders at their Lyon Summit in June 1996 with a suggestion that discussion be with a view to determining how to proceed. Potentially, the Singapore Ministerial will examine the scope for commencing exploratory work, but it would seem unlikely that all countries would agree to a formal process at this stage.

APEC Trade Ministers, at their meeting in Christchurch in July 1996, agreed that a key task at the WTO Ministerial would be to establish a work program for further liberalisation �� using the built-in agenda as a central plank in this task. The built-in agenda covers future negotiations or reviews in a wide range of areas including aspects of investment and competition policy. For example, the TRIMS Agreement provides for a review to be conducted within five years to consider whether it should be reinforced with competition provisions. Considerably more exploratory work needs to be undertaken to identify which competition policy issues require multilateral rule making under the WTO and which do not.

The decision of the APEC Leaders' Meeting in Osaka to adopt an Action Agenda to implement the Bogor goals of free and open trade and investment liberalisation means that APEC can play a potentially important role in this area. The Action Agenda has as its objective, "enhance the competitive environment in the Asia-Pacific region by introducing or maintaining effective and adequate competition policy and/or laws and associated enforcement policies, ensuring the transparency of the above, and promoting cooperation among APEC economies��" It is to be hoped that this agenda can be taken forward through initial actions focused on increasing the level of understanding about the benefits of effective competition laws and through cooperation between economies/competition authorities. The longer term actions of considering the development of non-binding principles on competition policy and/or law in APEC could, if pursued, ultimately help to support some form of international framework within APEC.

  1. COMPETITION POLICY AND INTERNATIONAL COMPETITIVENESS

    The fundamental determinant of competitiveness is productivity and the fundamental determinant of economic growth and improved welfare and living standards is productivity growth. This is true within a closed economy and also in the global economy, although in the latter case swings in exchange rate can mask underlying competitiveness based on productivity over the short term. Over the longer term, at any given exchange rate, more productive sectors of an economy will tend to attract scarce resources from less productive sectors. Countries will tend to be exporters of goods from relatively productive sectors and importers of goods from relatively less productive sectors, according to the pattern of comparative advantage. But productivity and factor endowments are not fixed. Government policies can positively (and negatively) influence both through the various stages of economic development. The following discussion focuses on the role of competition law and policy in enhancing productivity.

    As noted in the introduction, competition law has to balance the positive and negative effects of firms being large relative to the size of the market. The negative effect is the adverse efficiency implications of market power. The positive effect is that relatively large size may be necessary to achieve economies of scale if the market is small. Balancing these issues is known as the 'antitrust dilemma' �� unrestrained market power leads to inefficiency as can excessive restraint of scale to limit market power. Competition laws often entrust this complex and 'fact rich' balancing task to expert competition authorities. Competition laws exist because the market, left to its own devices, is unlikely to get the balance right from of social perspective. The challenge for competition authorities is to avoid 'regulatory failure', ie. themselves getting the balance wrong.

    Market failure or regulatory failure leads to static inefficiency. Such inefficiencies can reduce international competitiveness irrespective of whether the inefficient industry is in the traded sector or not. The non-traded sector is an important as a supplier of inputs to the traded sector and can thus affect the competitiveness of the traded sector particularly of those industries which are most intensively reliant on the inefficient non-traded input.. Recent competition policy reforms in Australia have substantially increased the focus of competition policy on infrastructure industries for this reason.

    The above discussion relates to static efficiency but in recent years there has been a growing emphasis in the issue of so called dynamic efficiency, ie maximising innovation and total factor productivity growth over time. For markets where technological progress is rapid, achieving dynamic efficiency will be much more important than static efficiency.

    There is today a strong view that competition is one of the main forces driving innovation. Earlier suggestions that high concentration drives innovation because dominant firms have spare and stable resources finds little empirical support. The work of Porter (1990) has been important in this area. Porter's analysis strongly indicates that intense domestic rivalry is one of the most important pressures that leads firms to innovate (to learn by doing, to create new products or production methods etc) and grow productivity. In porter's analysis, domestic rivalry is central to the whole issue of competitiveness and he is strongly supportive of a well functioning competition law to ensure rivalry among competitors in the developed economies. Porter specifically eschews a national champions approach to economic development, noting that these rarely become internationally competitive, rather they tend to become dependant on continued assistance and protection.

    As noted above, at an early stage of development, an economy may be sufficiently simple for governments to manage competition issues on a case by case basis without the benefit of an overarching competition law. At some point in the development process innovation becomes an important driver of development and the economy becomes too complex to micro-manage competition problems. Competition laws will then become an important contributor to international competitiveness. Moreover, Porter and other researchers have highlighted the importance of industry policy including competition principles during early stages of development Experience in the Asian region has demonstrated that the early development stage can be highly accelerated, particularly given the increased mobility of foreign capital. These considerations tend to suggest that there could be benefits in introducing competition laws relatively early in the development process.

    Porter places particular emphasis on domestic rivalry, rather than foreign rivalry, because of its visibility and that success of a domestic rival cannot be attribute to 'unfair advantages' enjoyed by foreign rivals. Complacency and inertia in successful firms is, therefore, particularly susceptible to domestic threats. Competition policy needs to balance this consideration against market power and scale economies. Domestic rivalry will tend to be less important in mature industries which are not subject to rapid innovation and in small markets if the opportunity to achieve world scale through exports is not feasible. Another point against over zealous pursuit of domestic rivalry is that it could stifle competition in another important market, ie the market for corporate control. This may leads to management inertia as much as lack of competition in markets supplied by a firm. The point here is that competition law should protect the competitive process and not competitors as such, particularly if those competitors are inefficient.

    For all of these reasons, the formulation and application of competition law is not a trivial task �� it is important to get the balances right or regulatory failure will displace market failure. Technical assistance within APEC has a role to play here. The competition policy institutions in Australia stand ready to do what we can, subject to the ever present resource constraints, to assist other APEC countries in this area.

    There has been relative little work which attempts to quantify the benefits of increased domestic competition. One exercise was undertaken in Australia when Governments were considering the adoption of the proposed national competition policy reforms (see Attachment A). These reforms include a comprehensive program of deregulation using competition principles. The Industry Commission (1995) estimated the macroeconomic consequences of these reforms using a computable general equilibrium model (128 industries) with estimated static productivity improvements imposed in each industry. The model results are sensitive to a range of factors including the estimated productivity improvements, export and import elasticities and macroeconomic model closure rules. That said, the central case scenario indicates a potential one off increase in the level of GDP of 5 1/2 per cent. The one off increase in exports associated with this higher level of GDP was around 15 percent. Partly this is due to a macroeconomic effect (lower inflation and improved government budget balance being associated with a lower real exchange rate) but it is also due to productivity improvement in export industries and in industries supplying inputs to export industries. A substantial proportion of the gains is expected to come from reforms in the electricity industry.

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    BIBLIOGRAPHY

    IBRD (1993), The East Asia Miracle: Economic Growth and Public Policy, International bank for Reconstruction and Development.

    Industry Commission (1995), Growth and Revenue Implications of Hilmer and Related Reforms, AGPS 1995.

    Porter M.E. (1990), The Competitive Advantage of Nations, 1990 MacMillian Press.

    Warr, P.E. (1994), Comparative and Competitive Advantage, Asian Pacific Economic Literature, Vol 8, No 2, November 1994.

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    AUSTRALIA: NATIONAL COMPETITION POLICY REFORMS

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    The national competition policy reform package was agreed between Australian Governments at COAG in April 1995. The package represents a significant milestone in microeconomic reform. It includes both specific reform elements and agreed processes and principles (ie. a reform framework) that will mandate further extensive and specific reforms for many years.

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    The reform package involves a restructuring of the competition institutions and comprises six interrelated substantive reform elements:

  1. Extended application of competitive conduct rules:
  1. Legislation review:
  1. Structural reform of public monopolies principles:
  1. Access to infrastructure facilities:
  1. Competitive neutrality principles:
  1. Prices oversight of government business enterprises: