The EC Treaty's free movement of goods
Introduction
The European Union jealously guards its Single Market with a view to the vast potential benefits to be derived from the ever closer integration of the economies of the member states. Broadly speaking, the purpose of EC competition policy is to encourage competitive economic activity by EU undertakings and to discourage and sanction activity deemed injurious to competition. Competition law aims to maximise efficiency by enabling the best goods and services to flow freely between the member states. In this regard the competition rules work hand in hand with the so-called Four Freedoms , and in particular with the free movement of goods regulations. The free movement of goods rules are designed to guarantee that the Member States do not impose regulations, measures or practices that hinder the free and unrestricted circulation of goods around the Single Market. Together, the competition and free movement systems of law underpin the economic integrity of the Single Market project and as such they are indispensable instruments of the EU legal order.
Need it be said, it is in the interests of every EU citizen that the market in which he or she acts as a consumer is as efficient as possible. If a market is competitive and open to free movement the best goods and services are able to circulate freely around the community and weaker market players will be replaced by stronger undertakings that are able to produce competitive goods. The EU consumer will therefore benefit from being able to choose between a wider range of quality products and more generally the consumer should reap the advantage of being a member of a wealthier society given that many other benefits should flow into society as a consequence of an efficient combined market.
The Cecchini Report published in 1988 was based on extensive studies carried out by Emerson, a leading Community Economist. Cecchini identified some of the potential benefits that could be entailed in a committed drive towards a free and competitive Single Market. Cecchini projected that the policy could substantially increase EU GDP, create millions of new jobs and significantly reduce underlying inflationary pressures as cost and price sensitivities are magnified. Cecchini also indicated that the total wealth gain for the EU could run to hundreds of billions of ECU. It was further anticipated that pursuit of a competitive Single Market will guarantee the EU a trading advantage over non-participating nations and on the world stage generally. Clearly, all the above benefits are in the interests of the EU consumer, either directly or indirectly.
Cecchini pointed to three major areas of cost savings likely to be generated by market integration. His report identified the so-called static trade effect, which would allow benefits to be gained from allowing public bodies and authorities to buy from the cheapest EU suppliers. Secondly, Cecchini noted the competition effect, which it was speculated would allow greater international competition to exert downward force on prices charged by domestic undertakings, in sectors where competition was hitherto limited, as a result of new penetration of EU firms into the national market. Thirdly, the report argued that a restructuring effect would result from the repositioning and reorganisation of undertakings and industrial structures responding to new competitive pressures which encourage higher efficiency levels and greater economies of scale.
With specific regard to the EU consumer (which is the focus of this paper) the Cecchini Report stated that there would be substantial savings for “private sector buyers”. It was argued that this group would benefit paying less for goods whose prices had been reduced due to the end of restrictive practices and other inefficiencies in the public sector. Furthermore, Cecchini suggested that market integration would mean large cuts in state subsidies, higher levels of competitive innovation, investment and growth. Again, all these ramifications of the prosecution of a policy aimed at an efficient Single Market are either directly or indirectly to the benefit of individual EU consumers.
Two of the key strategies employed by the European Community as it strives towards this goal are respectively the implementation of the competition rules and the application of the free movement provisions of the Treaty of Rome. The benefits encapsulated by Cecchini, in essence, underline the importance of the two areas of EC law under discussion in this paper and explain why the EU institutions are so keen to apply the law effectively in this context. As will be seen, the free movement of goods provisions and competition laws of the EC attack activities and policies which impair the efficiency and integration of the market to the detriment of the EU citizen, who is the ultimate consumer of the goods and services that it provides. These two sets of rules act in tandem to address different forms of market abuse from different angles and, it is submitted, effectively complement each other in the process to deliver a regime that caters for (almost) every eventuality. Both legal systems offer comprehensive prohibitions and threaten swingeing sanctions (in particular competition law) and they are interpreted and applied by the European Commission and Court of Justice in such a way as to enhance their scope and utility in most circumstances. They are discussed, in turn, below.
Competition Law
In theory, a high level of competition in a market should ensure an optimum allocation of production factors and resources within the Community by exposing and penalising inefficiency and waste and rewarding successful innovation and efficient practices. The main competition law rules are set down in Title VI of the Treaty of Rome in Articles 81, 82 and 87. All of these provisions have the potential to derive benefits for EC consumers if properly applied. It should be noted that the Court of First instance deals with competition law cases and that the Court of Justice hears the appeals from CFI decisions. Aspects of the rules are discussed in the following sections, with a view to the title to this question, from the perspective of the interests of the EU consumer.
Article 81 EC
Article 81 of the Treaty establishes the Community’s cartel-busting regime. This provision prohibits cooperation, concerted action, overt and covert agreement between competing undertakings operating in the Single Market. The text of the Article is as follows:
“(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
(2) Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
(3) The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
- any agreement or category of agreements between undertakings;
- any decision or category of decisions by associations of undertakings;
- any concerted practice or category of concerted practices,
which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”
It is clear even from a superficial reading of this Article that it sets down a comprehensive ban on coordination between companies which may affect trade between Member States. It should be noted that The European Court of Justice has confirmed on numerous occasions that even a bare potential effect on trade will be sufficient to trigger prohibition. In Vereniging van Cementhandelaren v EC Commission , in the context of an agreement that only extended over one Member State, the Court held:
“An agreement extending over the whole territory of a Member State by its very nature has the effect of reinforcing the compartmentalisation of markets on a national basis, thereby holding up the economic interpenetration which the Treaty is designed to bring about and protecting domestic production.”
This is clearly to the benefit of the typical EU consumer, whose economic freedom is typically confined to activity within the Member State of domicile. In Ets Consten Sarl and Grundig-Verkaufs Gmbh v EC Commission the Court emphasised the proactive nature of EC competition law, which again is to the advantages of consumers in the European Union. The Court ruled:
“…what is particularly important is whether the agreement is capable of constituting a threat, either direct or indirect, actual or potential, to the freedom of trade between Member States in a manner which might harm the attainment of the objectives of a single market between the States.”
This policy effectively ensures that consumers do not have to suffer lengthy periods of market-fixing before action by the Commission and sanction by the Court.
Furthermore, EU consumers benefit from the fact that it is not necessary to point to a firm agreement before enforcement action by the Commission and sanction by the Courts will be triggered. In the decision Polypropylene the Commission elaborated on its definition of the concept of agreement:
“It is not necessary, in order for a restriction to constitute an “agreement” within the meaning of Article 81, for the agreement to be intended as legally binding upon the parties. An agreement exists if the parties reach a consensus on a plan which limits or is likely to limit their commercial freedom by determining the lines of their mutual action or abstention from action in the market. No contractual sanction or enforcement procedures are required [in the agreement] . Nor is it necessary for such an agreement to be made in writing.”
In practice this policy is to the advantage of EU consumers given that they will not have to suffer the effects of anti-competitive collusion between companies which is essentially casual in its nature. The EC institutions will act against concerted action which amounts to less than a legally constituted agreement where the effects of such cooperative action damages the market. Moreover, in the Kodak decision the Commission confirmed that standard conditions of sale and contract, which impinge directly on consumer interests, will also be deemed ‘agreements’.
As can be seen from the text of the Article, concerted practices, which are informal and typically clandestine forms of collusion, and decisions by associations of undertakings which have the potential to affect millions of EU consumers, will also attract enforcement and sanction. The concept of the concerted practice was defined in ICI Ltd v EC Commission (Dyestuffs) as:
“…a form of coordination between undertakings which, without having reached the stage where an agreement properly so called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition.”
In Re The Application of the Publisher’s Association Decision the EU authorities moved against a trade association decision that purported to fix prices to the detriment of the interests of EU consumers and in the celebrated Bosman case on the organisation of professional football in Europe Union (Royale Belge des Sociétés de Football Association ASBL and Others v Jean-Marc Bosman and Others) the Court of Justice found that even decisions of an association of associations of undertakings, namely the European football association UEFA, were also covered by Article 81. The Bosman case also evidences the flexibility of Article 81, given that the ruling brought professional football, and professional sport in general unequivocally into the realm of economic activity governed by the competition rules to the benefit of sports fans and general consumers across the European Union. The Bosman case also underlined the symmetry and complementary partnership between the competition rules and the free movement provisions - although obviously in this instance it was the free movement of workers, not goods, that was combined with competition law to provide a comprehensive regulatory response.
As can be seen from Article 81(3) the EU is empowered to acquiesce in the face of cooperative activity between undertakings if certain strict criteria are met. This is to the advantage of EU consumers because it means that cooperation which has a beneficial effect on the economy or market conditions will not be punished and such activity will not trigger action that could amount to a waste of valuable resources, which, after all, are ultimately paid for by the EU tax payer.
The EU takes a so called rule of reason approach to its appraisal of concerted action which may merit exemption under Article 81(3). The rule of reason concept originated in US antitrust law. The rule allows the anti-competitive effects of collusion to be balanced against any beneficial market impact it may derive.
Therefore, Article 81(3) enables the Commission to declare Article 81(1) prohibition inapplicable if the benefits of the collusion concerned outweigh the harm to competition caused by it. There are two positive and two negative criteria - 2 requirements and two restrictions - and they must all be met before an exemption can be granted. All of the conditions reflect, to a greater or lesser extent, the interests of the EU consumer.
The first condition requires the agreement to produce some kind of technical or economic progress. The ACEC Berliet decision involved collaboration between companies to build a prototype bus. On the facts it was found that an exclusive purchasing agreement was justified in light of the technological advance that would be made as a consequence of the deal, to the benefit of consumers and society as a whole.
The second Article 81(3) condition is more directly referable to the interests of consumers. Under this condition consumers must receive a fair share of the resulting benefits to be gleaned from the concerted action. The chief factor in the Commission’s interpretation of this fair share requirement appears to be the delivery of lower prices to consumers. Good illustrations can be found in the Rockwell/Iveco and VBBB/VBVB decisions, where pricing was prioritised over less tangible consumer benefits.
Other factors commonly taken into account include improved consumer service and the provision of a broader range of products. The Ford/Volkswagen decision offers a good example. Also, it is argued very much in the wider interests of the EU citizen, environmental benefits may qualify as consumer benefits in this context. In Philips-Osram (the companies which ultimately combined to produce the first long life low power light bulbs) the Commission stated:
“The use of cleaner facilities will result in less air pollution, and consequently in direct and indirect benefits for consumers from reduced negative externalities. This positive effect will be substantially reinforced when R&D in the field produces lead-free materials.”
The third requirement of Article 81(3) requires that the market restrictions imposed must be indispensable to the attainment of the beneficial results. The golden thread of proportionality, which runs through vast tracts of EU law, is applicable here. In other words the Commission and the Court will ask the simple question “do the ends fully justify the means?” If there is a way to derive the same benefits for the EU market and consumers which is less restrictive of competition then the Commission will demand that it is adopted. In another decision close to the heart of many EU consumers, Re Carlsberg Beers , proportionality was brought to the fore in a tying agreement between Carlsberg and Grand Metropolitan which temporarily restricted competition for the sake of increased market penetration and competition in the long term.
Article 82 EC
Whereas Article 81 regulates the behaviour of undertakings tempted to collaborate with each other to influence market conditions to their advantage, Article 82 EC controls the actions of companies that are powerful enough to act independently of market pressures and extract economic advantages by virtue of their commercial dominance. Clearly this is an essential counterpoint to Article 81 because firms with monopoly power have as much or possibly even greater influence over market conditions as a group of competing companies might. The text of Article 82 is set out below:
“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
Again this Article is teleological interpreted and applied by the European Courts, with a view to protecting the EU market and the individual consumer interests that comprise it. Dominance is assessed once the Court has established what is called the relevant product market, which is deemed to be that specific product range and area within the Single Market where dominance is claimed to be exerted. Essentially a product market will include any product which is equivalent to or interchangeable for the specific product being marketed by the dominant company: see for authority Michelin v EC Commission.
This is the key test of Article 82 because the extent of the product market defined will normally determine whether or not a company is deemed dominant within it, and that in turn will trigger enforcement action and in many cases a huge financial sanction. Significantly the EU consumer is put at the heart of the test. Whether or not a product is deemed interchangeable with other products is judged from the vantage point of the consumer, taking into account the characteristics, price and uses of the product in question.
In other words, the issue is whether the product under scrutiny can be replaced by other products which satisfy the same consumer demands? If it can be replaced the product in question forms part of a larger product market comprising of all the products which are freely interchangeable with each other. If it cannot be readily replaced or substituted by any other product, for instance because of its individual characteristics, it is deemed to form a relevant product market on its own. A case confirming this point is Europemballage Corp and Continental Can v EC Commission.
This is the key tactical battle in Article 82 litigation. Undertakings argue for broad consumer uses and preferences - to expand the likely size of the relevant product market and thus dilute dominance, whereas the EU enforcing authorities typically assert narrow consumer uses and preferences to reduce the size of the market for review and thus emphasise and polarise market power within it.
The authorities normally win the contest, given the tendency of the Court of Justice to prefer an interpretation of EC competition law which reinforces its power. In the case United Brands v Commission the Court held that the lowly banana formed a product market of its own, independent of that of other fresh fruit, because it was found that bananas had special and unique qualities that set them apart from other fruit. In particular the Court noted, that, from the point of view of the EU consumer, the size, shape and softness of bananas rendered them easy for consumption by… consumers with less than the requisite number of teeth…(!) such as the very young and the elderly.
It should be noted that there is no derogation provision in Article 82 similar to that embedded in Article 81. There are clearly fewer scenarios that could justify the continuance of market manipulation by powerful companies than could excuse cooperation between competing companies. However the Court has introduced the concept of objective justification to fulfil the same role as Article 81(3). It is very difficult to successfully defend an action by means of an objective justification, as illustrated by cases such as United Brands and Hilti AG v Commission . However there have been a few successful instances, including Coca-Cola Export Corp Filiale Italiana. Whatever the particular facts of a case, in similar fashion to Article 81(3), consumer interests will be to the fore in the Court’s determination as to whether justification for dominant activity that could amount to abuse is available.
The Free Movement of Goods Rules
The free movement rules complement the competition laws by ensuring that Member States cannot by their actions or policies frustrate the free play of a market which has been opened up by the application of Articles 81 and 82 EC. Free movement provisions therefore deal with state interventions, whereas Article 81 and 82 deal with the behaviour of private firms, but both legal systems are aimed at the same end, which is the maximisation of efficiency and the depletion of barriers to trade with the Single Market.
Article 23(1) of the EC Treaty provides one of the basic rules on free movement of goods:
“The Community shall be based upon a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries.”
This provision bans some of the most obvious restrictions on and barriers to the interpenetration of trade. If Member States were free to set customs tariffs and duties on trade between each other a Single Market would not exist. It is as simple as that. All such duties are prohibited to allow the free circulation of goods around the Community, and the underlying rationale for this policy, just as in the case of competition law, is that EU consumers will benefit from a wider choice of goods and lower prices in a universal European market which in turn is wealthier given the increase in unfettered economic activity.
Customs duties are specifically the focus of Article 25 EC which provides that:
“Customs duties on imports and exports and charges having equivalent effect shall be prohibited between Member States. This prohibition shall also apply to customs duties of a fiscal nature.”
There is no definition of the concept of a charge having equivalent effect in the Treaty, and thus case law has been forced to provide one. In Commission EEC v Luxembourg and Belgium the Court of Justice stated that any charge:
“whatever it is called and whatever its mode of application… which, if imposed specifically upon a product imported from a Member State to the exclusion of a similar domestic product has, by altering its price, the same effect upon the free movement of products as a customs duty may be regarded as a charge having equivalent effect.”
It is submitted therefore that the Court is not concerned with the nature or form of a charge, but only with its effect on the market.
In the Van Gend en Loos case , the European Court confirmed the Article 25 is directly effective. This has the effect of granting the right of enforcement directly to individual private EU citizens. This ensures that EU consumers are empowered to take an active role in defending their own interests if they consider that a Member State has acted in contravention to this rule and blocked the free movement of goods.
Article 28 EC provides another key rule, this time not in relation to tariffs, but in relation to quotas, another easy device for Member States to use to defend and partition their national markets. The Article sets out the following straightforward prohibition:
“Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.”
Article 29 provides a similar rule in regard to exports, although this measure is not as often litigated as its sister provision.
“Quantitative restrictions on exports, and all measures having equivalent effect, shall be prohibited between Member States.”
Together these Articles prohibit complete import and export bans, and import and export quotas, which obviously create barriers to trade. It should be noted that the insertion of the phrase measures having equivalent effect in this context exponentially increases the number and form of Member State policies that could conceivably be outlawed. It is quite obvious that Member States do not need to establish rules which directly discriminate against cross border trade in order produce the effect of favouring domestic production over foreign imports. Part of the EU’s rationale, just as in the context of the competition law provisions, is that this will be to the disadvantage of the Single Market generally, and in particular to the consumers based in the compartmentalised state, whose economic freedom will be reduced by a limit artificially placed on the purchasing options by the actions of their government.
The Court of Justice dealt with the issue in Procureur du Roi v. Dassonville , where it defined a measure having an effect equivalent to a quantitative restriction as:
“all trading rules enacted by Member State which are capable of hindering directly or indirectly, actually or potentially, intra-Community trade”
The Dassonville formula, as it became known, was applied in many cases and proved extremely effective in giving force and effect to the EU free movement of goods controls. However, in fairly unusual step, after concerns that the formula gave rise to prohibitions that were overly expansive the Court rowed back from its previous policy in the case Keck and Mithouard. This action involved a criminal prosecution under French law for selling goods at a price less than the price for which they had been purchased. The defendants claimed that Article 28 EC outlawed this restriction on ostensibly lawful economic activity.
However in its judgment the Court distinguished between measures concerning the goods themselves, and measures dealing with the selling arrangements applicable to those goods. The Court thereafter found that only measures concerning the goods directly were covered by Article 28 EC. Measures addressed specifically at regulating selling arrangements were held to be beyond the reach of Article 28.
When the issue of the interpretation of measures having equivalent effect was thereafter considered by the Court of Justice in the case Punto Casa SpA v. Sindaco del Comune de Capena , it was found that held that rules imposed by the Italian State on Sunday shop opening were not covered by Article 28 of the Treaty. This development is arguably not in the interests of EU consumers generally, although on
the logic that the Member States are run by democratic governments that reflect the wishes of the majority of their electorates, it can be argued that the EU is merely deferring its competence to take account of national preferences in specific cases. On this analysis the EU consumer is not prejudiced by this retreat from Dassonville.
Taxation is another device that can be employed by Member States to give domestic production and advantage over imported goods in national markets and this may well have a direct and negative effect on EU consumer costs and choices if States are allowed to proceed unchecked. For this reason the EC Treaty adds a ban on discriminatory taxation to the basket of rules guaranteeing the free movement of goods.
Article 90 EC stipulates that:
“No Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products.
Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products.”
With a view to protecting the integrity of the Single Market and the interests of EU consumers in general the Court of Justice enforces Article 90 with the same commitment as it applies the competition provisions and the other rules on free movement. It has shown itself typically unconcerned with and undeterred by the political sensitivities of intervening in a Member State’s taxation policy.
In the early case of Lutticke Gmbh v Hauptzollamt Saarlouis Luttucke was an importer (of powdered milk) who claimed that a tax imposed by the German authorities was discriminatory given that a German produced product would not be subject to a similar demand. The European Court agreed and banned the tax, which would have had the effect of not only impeding trade between Member States, but also increasing the price of the product for consumers in Germany.
Simply put, just as our analysis of the competition provisions indicate, the Court’s approach to the enforcement of the free movement rules, based predominantly as it is on the maintenance of the Single Market, will usually have the effect of safeguarding EU consumer interests. This policy and commensurate effect shines through the jurisprudence of the Court on all aspects of the free movement regime.
Conclusions
The competition provisions and free movement of goods rules in the Treaty of Rome do as the title suggests perform complementary roles in creating a single European market in goods and as such they inevitably produce certain benefits and advantages for the EU consumer.
However, that is not to say that the system is perfect. Far from it. There are still gaps and ambiguities which will allow anti-competitive behaviour between undertakings keen to gain a trading advantage and unwarranted interventions from Member States eager to protect their own national markets. This will be detrimental to the interests of EU consumers but one can only hope that these are eliminated one by one as the EU authorities learn through experience and observation. Moreover, the regime will inevitably require continual adjustment and refinement as market conditions change and market behaviour evolves over time. In this regard the Court of Justice will need to intervene to ensure the joint competition/free movement system is adapted by case law to meet the challenges ahead.
THE END
WORD COUNT: 5221 (excluding footnotes)
BIBLIOGRAPHY
Cecchini P., The European Challenge: 1992, the Benefits of a Single Market (1988)
Europe 1992: The Overall Challenge [Summary of the Cecchini Report]. SEC (88) 524 final, 13 April 1988
EU Law - Text Cases and Materials, Craig and de Burca, (2003), Oxford University Press
Law of the European Union, Kent, P., (2001) Longman
Textbook on EC Law, Steiner and Woods, (2003) Blackstone
Morris, P, Morrow, S and Spink, P (1996) ‘E.C. Law and Professional Football: Bosman and its Implications’, Modern Law Review, November: 893.
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