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"Supreme Wisdom"--A Commentary by Prof. George Priest


(This essay was originally published in the Friday, June 18, 2004 edition of the Wall Street Journal.)

Supreme Wisdom
By George L. Priest, John M. Olin Professor of Law and Economics

Central to the globalization debate is the issue of the extent to which the United States should compel the application of U.S. laws and regulatory standards to activities in other countries. Many Democrats, including Rep. Richard Gephardt and Sen. John Kerry, have demanded that foreign nations expand their labor protections and environmental standards as preconditions free trade agreements. Most foreign governments resist these demands both because they are intrusions on the sovereign policies the countries have adopted with regard to regulation, and because to adopt American standards dramatically reduces a country's comparative advantage to the detriment of its workers hoping to improve their lives.

The Supreme Court faced this issue in a case decided earlier this week where the question was whether U.S. antitrust laws should be extended to punish anticompetitive behavior affecting consumers in Ecuador, Australia, Panama and the Ukraine. The Court resoundingly rejected the claim. In a unanimous opinion, it confined U.S. antitrust standards to conduct affecting U.S. commerce alone, explaining its concern that the extension of American laws could "interfere with a foreign nation's ability independently to regulate its own commercial affairs."

The case involved a suit against Hoffman-La Roche and other foreign and domestic vitamin manufacturers for fixing vitamin prices world-wide. There was no question that the defendants were guilty of the offense: The defendants had earlier been levied huge criminal penalties by the U.S. Justice Department, the European Union and other countries. Several of their executives were jailed. A treble-damages class action by U.S. purchasers settled for a judgment valued at more than $1 billion.

The issue in Hoffman-La Roche was whether foreign purchasers could recover treble damages under the Sherman Act just as U.S. purchasers had. The case was controlled by the Foreign Trade Antitrust Improvements Act which excludes from the Sherman Act "conduct involving trade or commerce . . . with foreign nations," but provides an exception from the exclusion for anticompetitive acts that have a "direct, substantial, and reasonably foreseeable effect" on domestic commerce.

The plaintiffs had a plausible case. Some of the price-fixing occurred in the U.S. In addition, it was clear that the world-wide price-fixing scheme had a "direct, substantial, and reasonably foreseeable effect" on U.S. commerce; that was why the Justice Department had fined the firms and had jailed their executives and why the class of U.S. purchasers recovered the $1 billion settlement.

The Supreme Court, however, rejected that straightforward interpretation of the statute, noting that the harms alleged were suffered entirely abroad. Exactly relevant to the globalization debate, the Court asked, "Why should American law supplant . . . Canada's or Great Britain's or Japan's own determination about how best to protect Canadian or British or Japanese consumers from anticompetitive conduct . . . ?" It defended its interpretation by concluding that, "if America's antitrust policies could not win their own way in the international marketplace for such ideas, Congress . . . would not have tried to impose them, in an act of legal imperialism, through legislative fiat."

The Court, appropriately, did not discuss the broader public policy issues regarding globalization. It based its decision on the importance of avoiding interference with the sovereign authority of other nations and on its interpretation of congressional intent. But the implications of the values defined in the Court's opinion are clear.

Democrats, including Messrs. Gephardt and Kerry, claim that it is only fair to American workers if the foreign competition that they face is subjected to identical levels of labor and environmental regulation that the workers are subjected to in the U.S. Thus, they demand that free trade agreements be conscribed by the requirement that the foreign nation adopt standards similar to those that prevail in the U.S. Practically, these demands are only relevant to trade agreements with developing nations, subjecting them to much stricter levels of regulation than the nations themselves desire.

However protective of U.S. workers, these demands constitute harmful economic policy. They destroy the comparative advantage of the developing nations and cripple the extent to which workers in these nations can make use of their developing workplace abilities. Put starkly, these demands keep developing nations poor.

The Supreme Court recognized this problem in the Hoffman-La Roche case and established, at least for antitrust regulation, the principle of allowing each nation to define its own regulatory policy. Remaining trade protectionists in the U.S. should take a lesson from the Court.

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Mr. Priest teaches antitrust at Yale Law School.