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Renato Ruggiero, WTO Director-General, recently stated that there are three major challenges facing the multilateral trading system. The first task is to consolidate what was accomplished in the Uruguay Round, especially making sure that the new dispute settlement system “works in a legally and politically credible manner.” On this score the WTO seems to be doing quite well. The seven-member Appellate Body — which will serve as the World Trade Court — has begun to function. Its first case will be an appeal by the United States from a WTO panel decision that the Environmental Protection Agency’s reformulated gasoline program denies national treatment to gasoline imports from Venezuela and Brazil. Over a dozen additional dispute settlement cases now are pending.

A second task of the WTO is to finish the leftover business from the Uruguay Round. This includes important ongoing negotiations in the field of services, such as financial services, telecommunications, and maritime transport services.

Third, the WTO will have to deal with a new agenda of subjects that were not dealt with in the Uruguay Round. Many at the WTO and the OECD (Organization for Economic Cooperation and Development) are advancing a new focus for future trade policy: the objective of international contestability of markets.

The theory of contestable markets was advanced by William J. Baumol, an economist, in 1982. He argued that the optimal form of industrial organization is a perfectly contestable market characterized by costless entry and exit. In such a market the entrant would encounter no obstacles in terms of production techniques or perceived product quality relative to the incumbent. Thus, entry would be judged simply on the basis of the incumbent’s prices. In such a market, p (price, which is the same as marginal revenue for a perfectly competitive firm) would equal mc (marginal cost) and there would be no monopoly profits. Costless entry and exit mean that neither p>mc nor p<mc would be compatible with equilibrium, even for a short period. In theory, p>mc immediately would attract new entrants, and p<mc would result in market exit by excess incumbents. Baumol concedes that in the real world costless market entry and exit is not possible, but improving market contestability should, nevertheless, be an important policy goal.

Trade theorists now carry over the concept of contestable markets to the international context. They advocate the international contestability of markets as an important new objective of the multilateral trading community. In particular, two new ideas are emphasized: first, a market is deemed internationally contestable when the conditions of competition allow unimpaired market access for foreign goods, services, ideas, investments, and business people; second, the investment mode of doing business is as important as trade because trade and investment are complementary means of contesting markets. Together, these ideas place a new emphasis on market access and presence as a touchstone of future trade policy.

The theory of contestable market holds that ease of entry and exit to markets (without intervening anticompetitive barriers due to government of private restrictions) leads to efficiency, even if there are only a few firms in an industry, because they will be forced to price their products competitively because of the ease of market entry. An internationally contestable market is one in which “the competitive process — the rivalrous relationship between firms — is unimpeded by private or public anticompetitive conduct.”1

Two major initiatives are being prepared to implement the market contestability objective. First, both the WTO and the OECD are examining the linkages between trade and competition policies. As tariff and other trade barriers have diminished, private market restraints have become a principal factor blocking access to international markets. In order to deal with this problem, a program of convergence of antitrust policies likely will be formulated, probably in the form of a Plurilateral Trade Agreement at the WTO.

The new common competition policy will not, however, constitute a World Antitrust Code; something much less ambitious will be offered because there is less agreement on the economic foundations of competition policy than on the economies of free trade. For this reason, it is difficult or impossible to harmonize the major antitrust systems of the world. Nevertheless, the outlines of a possible Agreement on Competition Policy are becoming clear:

• Restrictive business practices such as cartels, monopoly power, and vertical restraints that foreclose or impede market access should be prohibited when such conduct harms consumers and the competitive process.
• Enforcement cooperation should be granted to provide trading partners with reasonable access to each other’s enforcement system.
• There should be a procedure for notification and information about proposed mergers and other agreements between enterprises.
• National antidumping laws should be modified to bring them into harmony with antitrust laws concerning price discrimination and predatory pricing.

International disputes over such matters as the transnational reach of national enforcement jurisdiction should be submitted to an international dispute settlement system.A second, much-discussed initiative is the negotiation of a Multilateral Agreement on Investment (MAI) that will constitute a general policy framework for international direct investment. The importance of this undertaking reflects the increasing role played by investment in the world economy. In 1993, the production of foreign investment goods and services totaled $5.5 trillion compared with $4 trillion in world exports of goods and non-factor services.