Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Brexit: what are the risks and opportunities for UK competition policy?

Brexit is not going to make the UK economy more competitive – and this makes competition policy more important than it has ever been. There are several opportunities that should not be missed, as well as dangers that must be avoided.

Competition is a good thing. It brings new ideas, stimulates innovation and keeps prices low and quality high. By making goods and services more affordable, it can also reduce inequality. But it needs to be fair – and that is why we need vigilant competition enforcers to make sure that the power held by big companies, many of them global corporations, does not become excessive and that abuses do not happen. How is all this going to be ensured with the UK’s departure from the European Union (EU)?

What is the current state of competition, globally?

Competition policy is already in a state of flux around the world – and the disruption of Brexit adds extra volatility in the UK. Estimates of soaring corporate profits in the United States over the last 30 years (De Loecker et al, 2020), and across the OECD more generally (Calligaris et al, 2019), have recently been replicated by the UK’s competition authority, the Competition and Markets Authority (CMA, 2020). The CMA analysis suggests that in the UK, competition across the economy may have declined over the last two decades. It finds, for example, that since the global financial crisis of 2007-09, there has been a 6% increase in mark-ups – the difference between companies’ costs and the prices they are able to charge.

A firm’s power to raise prices (or reduce quality) can be amplified through acquiring or excluding existing and/or potential rivals that could moderate their ability to do so. Competition agencies can block these anti-competitive acquisitions, and punish exclusionary behaviour and collusive agreements, as well as recommending remedies to address other features of markets that prevent, restrict or distort competition.

As a result of these increasing mark-ups and detailed assessments of past enforcement by competition authorities like the CMA (Argentesi et al, 2019; Kwoka, 2014; Cunningham et al, 2020) which also point to a record of policy under-enforcement, there has been a major policy rethink in the UK, the EU, the United States and beyond.

In order to address this loss of competition, the CMA has recently consulted on tougher new merger guidelines, and has adopted a stronger enforcement stance, at least on mergers, such that eight out of the nine mergers it examined in detail in 2020 were blocked, remedied or abandoned (CMA, 2021). Proposals for legislative change have also been made by independent experts (Baker et al, 2020; Motta and Peitz, 2020; Caro de Sousa and Pike, 2020; Kwoka and Valletti, 2020).

Where competition is lacking, imports may play an important role. Research shows that while antitrust enforcement has helped to slow excessive profit growth in non-tradable goods and services, in tradable sectors, competition from imports has been more important in reducing profits (Besley et al, 2020). By destroying frictionless trade with the EU, Brexit leaves the UK facing additional non-tariff barriers and isolation in a world in which tariff barriers are rising. For example, the World Trade Organization (WTO) identifies that 8.8% of G20 trade is now covered by import restrictions compared with 0.7% after the financial crisis. The OECD suggests that trade restrictions in services increased by 30% in 2019.

The tougher stance by the CMA therefore makes a lot of sense: competition policy will have to do more work in the years ahead just to make up for the loss of the useful discipline provided by import competition.

What opportunities does Brexit bring?

In this context, Brexit creates a number of opportunities. First, it creates the chance to strengthen the EU’s enforcement regime, for example by speeding up and improving the effectiveness of the remedies that are applied when firms behave in an anti-competitive way.

Second, it provides the UK with the chance to continue in its efforts to strengthen merger control. For example, by disregarding the EU Court’s controversial decision to allow further dangerous concentration in mobile phone networks (Centre for Competition Policy, CCP, 2020), and taking a tougher line with digital acquisitions such as Google’s recently cleared purchase of Fitbit, which threatens privacy and healthcare markets, according to academics and privacy experts.

The CMA has proposed taking a tougher approach when assessing acquisitions by dominant digital platforms. Under this plan, it would permit only those mergers where it sees no realistic prospect of harm to consumers. By contrast, at present, if it is unclear whether a merger is likely to harm consumers, then the merger is permitted even if it poses a significant risk. There is no reason why such sensible adjustments could not be made, not only in digital markets, but across the board to offer the same protection to consumers in other markets.

Third, the CMA will be empowered to build on its strong record of challenging mergers such as Siemens/Alstom, which create national or European champions, even if, under political pressure, the EU were to choose to abandon its own impressive record of such challenges.

Fourth, while EU membership never prevented the CMA from examining important emerging concerns such as common ownership (Azar et al, 2018), monopsony (where a single firm has control of a purchasing market) in labour markets (Naidu et al, 2018) or privacy and competition (Valletti, 2019), these topics have rarely percolated from academic research to the practice of competition policy. Brexit provides the CMA with an opportunity to rethink its approach and to tackle these issues.

The consequences of doing so might prove to be dramatic for inequality (Ennis et al, 2019). Indeed, the UK has already made good progress towards developing a more inclusive competition policy, and so is well placed to adopt recent proposals to add gender inclusive (OECD, 2020) and racially inclusive (Slaughter, 2021) elements to its policy.

A great opportunity also lies in the ability to experiment with novel approaches, continuing the leadership that the UK has demonstrated with its Open Banking initiative, which developed rules and open API standards that required leading banks to allow interoperability. This allows consumers and small firms to manage their finances more effectively through innovative products designed by smaller ‘fintech’ firms.

This is important when it comes to digital platforms, where the debate is typically led by big players (like Apple, Facebook and Google) with experienced lobbyists. In contrast, local entrepreneurs, which are much more directly relevant to the UK economy, are unfamiliar with the shaping of policy: these are the voices that need to be heard.

What are the main risks?

The possibility of progressive divergence that Brexit offers would allow the UK to deliver these reforms even if the recent EU proposals for digital markets were to be watered down during the legislative process. At the same time, there are clear risks from going it alone.

In the first place, two sets of standards could result in cost, uncertainty and inefficiency (Vickers, 2018). This is clearly not good for business decisions.

Second, there are some global problems, not least with the big digital platforms, that will only be effectively addressed through global cooperation. By surrendering its traditionally powerful influence on EU policies, especially on economic matters, the UK has reduced its ability to shape those solutions. This may make the level of cooperation that is required much more difficult to achieve.

Third, there is the risk that the UK might revert to the types of public interest test on which it relied prior to the Labour government’s decision to strengthen competition policy by introducing the Enterprise Act in 2002. As John Vickers, former director-general of the Office for Fair Trading (a predecessor of the CMA) has said: ‘The lure of the “public interest”, which means different things to different people, should be resisted when it comes to competition policy. That is not because competition is the be-all and end-all. Of course it is not. But making decisions about competition on non-competition grounds is generally a poor way of advancing other objectives’ (Vickers, 2018).

Last, and perhaps most dangerously, there is a serious risk that those who would prefer to turn the UK into an unregulated tax haven will use Brexit to attempt to impose the type of lax antitrust enforcement that the United States has suffered for many years. While the EU-UK trade cooperation agreement has been set up to prevent precisely such a prospect, it remains to be seen whether the institutional arrangements it creates are sufficient to protect EU or indeed UK consumers and workers from the risk of such a reckless course of action.

Should the government be allowed to support UK companies?

This brings us to state aid and subsidy control. These rules prevent governments from providing unfair advantages such as cheap loans or favourable contacts to favoured domestic companies. In the past, the UK has provided little in the way of selective advantages that distort competition between firms and reduce value for consumers. For example, the country spent just 0.34% of GDP on state aid in 2018, less than a quarter of the Germans, who spent of 1.45% (EU, 2019).

Figure 1: Aid by instruments in current prices

Source: EU, 2019 (data/prices for 2018)

But the protracted Brexit negotiations almost foundered on the desire of the UK government to retain the ability to subsidise UK industry, allegedly with the intention of sponsoring a trillion dollar tech company. Similarly, the former Labour leader Jeremy Corbyn cited state aid rules as a reason not to remain within the European single market.

The political pressure to subsidise firms is therefore evident. This will need to be resisted by an independent regulator that the UK has committed to build. The new regulator will enforce as yet unspecified rules restricting the government’s freedom to award subsidies to its favoured firms and industries. In parallel, the EU white paper on foreign subsidies sets out a clear framework for the EU to investigate UK firms that compete in EU markets using distortionary subsidies.

Under the EU-UK trade cooperation agreement, the UK’s rules, which may or may not include similar extra-territorial provisions to the EU’s proposals in order to protect UK consumers, will need to follow the same principles used by the EU to enforce state aid rules. These rules have proved valuable, for many years, in preventing governments across Europe from engaging in a destructive ‘race to the bottom’ to provide ever-larger subsidies or tax breaks to selected firms.

For example, some have pointed to the need for a subsidy regulator post-Brexit to have unparalleled independence from government if it is successfully to restrict temptations for the government of the day to give a leg-up to their preferred firms or to build the type of national champions that failed to deliver growth in the 1970s (Crafts, 2017). Certainly, the unsuccessful WTO subsidy regime offers no real external discipline to support such a regulator. The Bank of England, the National Institute for Health and Care Excellence (NICE) and the Office for Budgetary Responsibility (OBR) could therefore act as potential models (Crafts, 2017).

For now, these responsibilities will reside with the CMA. But while the CMA may have the necessary independence, there is a risk that the award of such powers will constitute a poison pill that damages its broader relationship with government. This risks fatally undermining its ability to engage successfully in the type of pro-competitive advocacy across government that is such a key part of an effective competition policy.

Instead, following the principle of having one clear objective for each regulatory body (de la Mano, 2017) there is a need for a new institution, with state-of-the-art independence safeguards. This body will not only need to ensure a level playing field for EU firms in UK markets (which is of paramount importance in order to avoid the tariff responses set out in the trade cooperation agreement), but also to prevent damaging competition and protectionist measures by both the devolved governments and local councils.

At the same time, it will have to meet the challenge of delineating the scope for innovative mission-based pro-competitive interventions that can address market failures and missing markets. These have been identified as damaging the UK’s ability to deliver inclusive growth and shared prosperity (Mazzucato, 2021).

Where can I find out more?

Who are experts on this question?

Authors: Chris Pike (OECD) and Tommaso Valletti (Imperial College London)
Note: The opinions expressed and arguments herein are those of the authors and do not necessarily reflect the official views of the OECD or its members.
Photo by Mika Baumeister on Unsplash
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