The European Union’s draft Merger Guidelines consider import competition from foreign rivals to be a powerful competitive constraint on domestic producers, thus easing clearance for mergers between those domestic competitors. This stipulation ignores how a merger between domestic rivals can lead to subsequent trade barriers, writes Felix Montag.
This article is part of a symposium on the European Commission’s draft Guidelines on the assessment of mergers under Council Regulation. The new merger guidelines mark their first systemic update since their first release in two parts in 2004 and 2008. You can read the rest of the contributions to the symposium as we publish them here. We encourage responses to our symposium, which can be submitted to promarket@chicagobooth.edu.
The European Commission’s draft Merger Guidelines highlight the importance of scale, global markets, and import competition. They state that growth and scaling up firms can be procompetitive, and they single out mergers through which “companies gain scale to be active in global markets where they face pressure from few global incumbents.”
As the 2024 Draghi report on “the future of European competitiveness” showed, European firms’ inability to scale is a real problem. The single market that is meant to supply that room for scale is still fragmented. The International Monetary Fund estimates that internal barriers are equivalent to a tariff of roughly 44% on goods and 110% on services, far above the barriers between American states. While merger control cannot reduce trade barriers, it should allow firms to build scale through mergers when this does not harm competition.
Some have remarked that the Commission may have read the Draghi report as a case for relaxing merger control to build European champions. The thinking may be that when markets are global and imports from international rivals constrain domestic producers, merger control should be less concerned with domestic (or European) mergers.
In practice, the Commission appears to have taken a more traditional route. In addition to highlighting scale and growth, the draft Guidelines point out that imports may be assessed as a competitive constraint and would push the Directorate-General for Competition (DG-Comp) to assess a merger between two European firms in the market more favorably. However, this competitive constraint would be unwound in the presence of trade barriers, wherein domestic competition would be the more important competitive constraint.
What the Guidelines ignore is that mergers can create the conditions under which trade restrictions arise. Thus, the presence of the import competition that would encourage DG Comp to approve a merger might disappear after the merger is consummated and because of the merger itself. If mergers can cause the creation of subsequent trade barriers, then merger control will underestimate the consumer harm from a merger.
When imports won’t discipline the merging parties
Imports discipline a market only as long as they keep flowing. A domestic firm can lobby its government to restrict imports through anti-dumping or countervailing duties (AD/CVD) and other tariffs or regulatory barriers.
A merger between domestic producers can increase the incentive to seek trade protection in two ways. When one domestic producer wins a duty on imports, its domestic rivals gain, too. A merger between the firm that petitions for trade protection and its rivals allows that firm to capture the gains to its rivals, so protection becomes worth even more. Once domestic competition is consolidated, the foreign rival accounts for a larger share of the competition that remains, so a duty that raises the foreign rival’s costs is worth more still to the domestic corporate petitioner.
The issue is particularly salient for AD/CVD, as these cases are typically opened following a complaint by domestic producers. World Trade Organization rules specify that a petition is deemed “on behalf of the industry” if its supporters account for at least 25% of total domestic market production and more than 50% of those producing domestically who express a view, which simplifies the procedure. Mergers that lead to more concentrated domestic production therefore facilitate subsequent tariff petitions.
This is not hypothetical. When home appliance manufacturer Whirlpool acquired Maytag in 2006, the United States Department of Justice cited in its approval imports as a decisive competitive constraint on the merging parties, although the importers had only made narrow inroads into the market at the time. Once the importers’ share of the U.S. washer market grew, Whirlpool successfully petitioned for multiple rounds of AD/CVDs that limited the competitive pressure from imports.
In the EU, Owens Corning, an American company that sells insulation, roofing, and fiberglass products, acquired Saint-Gobain’s Vetrotex glass-fiber business in 2007. The Commission’s conditional clearance relied in part on customer reports that imports were a viable alternative to domestic producers. About two years later, a group of European producers, as well as Owens Corning, filed an anti-dumping petition against continuous glass fiber from China, the very imports that had helped justify the deal and successfully obtained import duties.
When merger reviews do consider trade defense, they treat existing duties as a fixed feature of the landscape rather than asking how the merger changes the incentive to seek new ones. In its review of steel manufacturer ArcelorMittal’s acquisition of Ilva, the Commission assessed import pressure in light of the competitive landscape created by anti-dumping duties. The merger’s own effect on the demand for protection went unexamined.
A simple behavioral remedy
In 2022, the U.S. Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights commissioned a review into how market competition affects AD/CVD processes and found that the U.S. International Trade Commission cannot consider how AD/CVD cases impact domestic consumer welfare. However, without changing the law, the Merger Guidelines in the European Union are better placed than the U.S. to address the impact of trade barriers on competition. While trade-defense law in the U.S. does not allow consideration of how trade remedies may affect downstream users and consumers, the EU has a “Union interest” test. Before imposing duties, the Commission must weigh “all the various interests taken as a whole, including the interests of the domestic industry and users and consumers,” and it may decline to act where measures would not be in the Union interest.
Where the Commission clears a merger because of the expectation that imports discipline the merged firm, this could include a behavioral remedy in which DG-Comp has the right to comment on (and perhaps veto) that firm’s petitions for tariffs and other trade protections for a defined period after clearance. This would uphold the merged firm’s legitimate right to protect itself against unfair competition, while ensuring that it cannot move to curb the import competition its clearance relied on.
Cross-border mergers cut the other way
By the same logic, cross-border mergers (between both EU countries and EU and non-EU countries) should be seen more positively. When a domestic firm acquires a product market rival that produces abroad, that foreign business is harmed by any new trade barriers. Taking advantage of efficiencies created by cross-border mergers often requires the free exchange of goods, capital, services, and labor. So, the incentive to seek protection is more likely to fall than to rise. Mergers between firms in different markets create an incentive to lower trade barriers; mergers between competitors in one import-exposed market create an incentive to raise them.
This maps onto the draft Merger Guidelines, which single out mergers by which companies gain scale to be active in global markets. Cross-border mergers that generate efficiencies could be seen as just that. It is also why political resistance to cross-border deals is doubly costly. Not only does it prevent scale-building mergers that would help stitch Europe’s markets together, but it also prevents the type of mergers that generate incentives to reduce trade barriers.
The Merger Guidelines get labor right
Cross-border mergers can also involve corporate restructuring. The draft Merger Guidelines deliberately leave out job losses from restructuring or offshoring, which are “unrelated to the loss of competition resulting from the merger, such as corporate restructuring.” While job losses as a result of a corporate merger can have dire consequences for the individual worker, that restraint is sound. Preventing the efficient reallocation of resources across the economy would pose an obstacle to growth.
Merger control is also not designed to offset a loss to consumers in one market against jobs saved in another and the costs can be high. In recently published work, I find that the aforementioned Whirlpool-Maytag merger harmed consumer welfare. However, it also preserved more jobs than a counterfactual cross-border merger would have. Still, each counterfactual job the merger did save would have had to be worth several hundred thousand dollars a year to offset the actual harm to consumers. Protecting jobs through merger control is expensive and not well targeted.
Instead, the labor provisions in the draft Merger Guidelines focus on the impact that mergers can have through their effect on market power. While the notion that monopsony power can depress wages is not new, the recent empirical literature has shown that mergers can have a significant effect on this monopsony power and cause an additional wage depression. The draft Merger Guidelines explicitly recognize this and clarify that labor markets should be seen as another market in which many of the tools and tests typically used in product markets can also be applied.
One aspect that is not discussed in the draft Merger Guidelines is the potential interaction between corporate restructuring and monopsony power. In a cross-border merger involving a tradable good and where a domestic producer acquires a target with spare production capacity somewhere else, this may increase the acquirers bargaining power vis-à-vis its workers and depress wages or worsen working conditions. While this type of merger does not involve an overlap between the merging parties in the labor market, it can increase monopsony power. This may require developing new theories of harm not currently covered in the Merger Guidelines.
Three changes to the Guidelines
These observations point to three adjustments to the Guidelines.
First, the Commission should discount import competition as a post-merger constraint when those imports can be curtailed by future trade measures. While the draft observes that trade restrictions affect the competitiveness of imports, it stops short of asking how the merger changes the incentive to seek them.
Second, when a clearance does rest on the competitive constraint imposed by imports, the Commission should give DG Comp a time-limited right to weigh in on the merged firm’s trade-defense petitions through the Union-interest test.
Third, the Commission may want to consider the effect of mergers on monopsony power, even in the absence of overlap between the merging parties in the labor market.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
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