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Published: Fri, 02 Feb 2018
EC Treaty – Free Movement of Goods and Competition Law
It is submitted at the outset that the free movement of goods and competition law provisions of the Treaty of Rome comprise two of the most important components of the legal mechanism designed to maintain and enhance the Single European Market, which lies at the heart of the socio-economic project of the European Union in the twenty first century.
There is a symbiotic relationship between these sets of regulations. Both provisions are designed to ensure the free flow of goods around the Union and the rationale for both can be found in the inspirational but arguably notional goal of the perfect free market, as defined as long ago as 1776 by Adam Smith in his magnum opus, The Wealth of Nations. Smith argued that a market free from all barriers and impediments to trade would allow the best producers to function at optimum capacity and generate great economic benefits that are unobtainable in markets where competitive conditions are not optimal.
There is a dichotomy in the theory of the perfect free market. Traditional policy dictates that it is necessary to intervene in the marketplace by imposing legislation to enforce compliance with competitive practices and doctrine. This policy is that which found favour with the majority of states and a good example can be found in the United States. The Sherman Antitrust Act (1890) is a Federal law which prohibits contracts, trusts, and conspiracies deemed to be in restraint of interstate or foreign trade, and the Clayton Act (1914) regulates business practices that may potentially be detrimental to free and fair competition. Practices regulated by the Clayton Act include exclusive dealing contracts; price discrimination; mergers and acquisitions; and tying agreements, or so-called requirement contracts. These US Acts stand at the centre of a legal system that actively intervenes to regulate the market to ensure the pursuit of competitive practices.
The alternative approach is that promulgated by what is known as the Chicago School of theorists. This doctrine was born at the Chicago School of Law, hence its name. Chicago School theory contends that economic markets are essentially self-regulating and that if a policy of laissez faire is adopted, dictating that no legislative intervention takes place, those companies with the best products and most efficient practices will ultimately fight their way to positions of dominance and less competitive and inefficient companies will fall by the wayside, leaving optimal market conditions. Essentially Chicago School theorists advocate that the law of the jungle should be applied to obtain a market that is close to perfect. In simple terms this theory supports the notion of the survival of the fittest in the macro-economic sphere.
Faced with these competing theories the European Union in its earlier form as the European Economic Community resolved that the real world contains too many imperfections to allow the Single Market to be left to the law of the jungle. As a consequence it adopted the traditional interventionist approach in this field. The free movement of goods laws and competition provisions that form the basis of the question under review constitute two of the most important parts of the EU legislative programme designed to guarantee that the Single Market runs at optimum efficiency to generate the maximum wealth for the Member States, their undertakings and citizens. The free movement and competition laws embedded in the EC Treaty aim to achieve broadly the same goals and to this end, given the nature of economic activity, they are addressed to different constituencies. It is submitted that the free movement provisions are addressed mainly at controlling the behaviour of the state, whereas the competition law provisions are aimed mainly at governing the behaviour of private undertakings (although it is admitted that the state aid provisions are typically treated as part of the competition regime).
EC Law on the Free Movement of Goods
The EU Single Market is built on the foundations of a Customs Union. One of the defining characteristics of a customs unions is the free and unfettered circulation of goods produced in the Member States, withoutthe payment of custom duties or any other barriers to trade. A secondfundamental component of a Customs Union is the common customs duty.This dictates that if goods produced in third countries are importedinto any Member States, those goods will be subject to the payment of acommon customs tariff, no matter where their point of importation intothe Customs Union.
The free movement of goods is therefore a goal which is not an end initself but merely one component of the maintenance of a Customs Unionand one essential element of the Single Market.
Article 14(formerly 7A) of the EC Treaty states that:
“The internal market shall comprise an area without internal frontiersin which the free movement of goods, persons, services and capital isensured in accordance with the provisions of this Treaty.”
Article 14 EC therefore sets out the fundamental legal foundation forthe establishment of an internal market within the European Community.As can be seen an internal market requires the abolition of internalbarriers regarding the movement of workers, services and capital aswell as goods, but this paper focuses on the latter.
Generally speaking, impediments to the free movement of goods can bedivided into three categories: physical impediments, fiscal impedimentsand technical impediments. Physical impediments include customsprotocols on goods moving over national borders. Fiscal impedimentsinclude tariffs, direct and indirect taxes levied on imports, exports,or goods in transit. Technical impediments include quantitativerestrictions or national measures having a equivalent effect toquantitative restrictions which interfere with the free circulation ofgoods, and such may consist of national regulations ostensibly designedfor the marketing of goods or for protection public health and safety,which nonetheless have an effect that is contrary to the goal of freemovement.
Article 23(1) of the EC Treaty states that:
“The Community shall be based upon a customs union which shall coverall trade in goods and which shall involve the prohibition betweenMember States of customs duties on imports and exports and of allcharges having equivalent effect, and the adoption of a common customstariff in their relations with third countries.”
In order to understand this foundation principle it is necessary toanalyse some of its key words. The meaning of the word “goods” isclearly fundamental to the provision and the best way to shed light onthe issue is to look at the jurisprudence of the European Court ofJustice, which is given the duty of interpreting and applying theTreaty. In Commission v Italy (Art Treasures) , the Italian Governmentprohibited the exportation of art treasures including articles ofhistoric, artistic, archaeological or ethnographic nature, claimingthat such did not constitute “goods” within the meaning of the Treaty.The European Court took the opportunity to define “goods” as “productswhich can be valued in money and which are capable, as such, of formingthe subject of commercial transactions.” As a result art treasures fellwithin the meaning of “goods” under what is now Article 23(1).
The above definition is not surprising but it is worth emphasising atthis point that the interpretative policy of the Court of Justice iscontextual and purposive and that a generous line is always taken inregards to fundamental planks of the Treaty, so as to accord it themaximum scope and efficacy. Two further cases on the meaning of goodsillustrate the point that the general concepts entailed in key Treatyprovisions, including those on free movement of goods and competitionlaw, will always be read and applied expansively by the European Courtto ensure the vitality of the legal regime deemed so important to theintegrity and success of the Single Market and EU as a whole.
In Municipality of Almelo v NV Energiebedriff Ijsselmij , the EuropeanCourt ruled that even electricity constituted “goods”, although it didnot go so far as to say that all intangible products would necessarilyqualify as “goods”. Moreover in Commission v. Belgium , the Belgianstate banned the importation of waste and argued that it was entitledto do so because waste did not constitute “goods” if it could not bereused or recycled because it could have no commercial value. However,the Court of Justice dismissed this assertion and found that all wastewas to be regarded as goods.
Article 25 of the EC Treaty concerns customs duties. It states that:
“Customs duties on imports and exports and charges having equivalenteffect shall be prohibited between Member States. This prohibitionshall also apply to customs duties of a fiscal nature.”
This provision was given increased scope in the case of Van Gend enLoos v. Nederlandse Administratie der Belastingen , the Court ofJustice ruled that this provision has direct effect, which meant thatit could be relied on directly in the national courts of the MemberStates by individual citizens and that it established individual rightswhich those national courts are obliged to protect. As a consequence,the potential accessibility and efficacy of this key provision wasdramatically enhanced.
The integrity of the Single Market is held in such high esteem by theEuropean Court that even where there is objective social justificationfor a customs duty it will be prohibited if deemed to constitute adisproportionate impediment to trade and the free circulation of goods.In Sociaal Fonds voor de Diamantarbeiders the Belgian authoritiesimposed a duty on imported diamonds to raise money for the socialprotection of workers employed in the national diamond industry. TheCourt of Justice wasted no time in finding that customs duties arebanned regardless of any consideration relating to the purpose forwhich such are introduced and regardless of the purpose for which thegenerated revenue is intended to be put. The duty was thus prohibited.
In the 1968 case Commission v. Italy (Statistical Levy) the EuropeanCourt offered another generous definition of a fundamental term, againpresumably to enhance the efficacy of the law in question. The Courtdefined “charges having an equivalent effect” as:
“Any pecuniary charge, however small and whatever its designation andmode of application, which is imposed unilaterally on domestic andforeign goods by reason of the fact that they cross a frontier, andwhich is not a customs duty in the strict sense, constitutes a charge… even if it is not imposed for the benefit of the state, is notdiscriminatory or protective in effect and if the product on which thecharge is imposed is not in competition with any domestic product.”
Another key provision is to be found Article 28 EC, which states that:
“Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.”
This Article prohibits complete import bans and import quotas, whichconstitute a direct and manifest restriction on trade and a similarrule is imposed on export bans and quotas by Article 29. However, bythe addition of the phrase “measures having equivalent effect” thescope of this ban is vastly increased. Of course, it is not necessaryfor Member States to impose directly discriminatory rules in order tocreate a situation in which domestic goods are favoured in the nationalmarketplace over those from other Member States.
In Procureur du Roi v. Dassonville , a trader imported Scotch whisky,produced in England, from France into Belgium. The Belgian laws of theday demanded a certificate of origin which could only be obtained fromBritish customs. However, the trader asserted that such a requirementwas equivalent to a measure having an effect equivalent to aquantitative restriction and that it was therefore prohibited by whatis now Article 28.
The Court of Justice took this opportunity to define the meaning of ameasure having an effect equivalent to a quantitative restriction as:
“all trading rules enacted by Member State which are capable ofhindering directly or indirectly, actually or potentially,intra-Community trade”
The Court proceeded to find that the Belgian requirement constituted aprohibited measure of equivalent effect to a quantitative restrictionas prohibited by the Treaty.
Moreover in the Commission v. Ireland , which became known as the ‘BuyIrish Case’ the Irish government sponsored national advertisingcampaign encouraging the purchase of Irish products. The European Courtfound that the campaign was designed to change consumer habits tofavour domestic products over imports, and that this also amounted to ameasure having equivalent effect to a quantitative restriction inviolation of Article 28.
In Keck and Mithouard , Keck & Mithouard marketed French producedcoffee and beer at retail prices lower than the price for which theyhad actually purchased the goods. They were thereafter prosecuted inthe French courts for selling goods for less than their actual purchaseprice which contravened French law. Keck and Mithouard asserted thatwhat is now Article 28 EC prohibited the French law.
After numerous expansive judgments, the Court of Justice decided tolimit the applicability of Article 28 in this case. The Court proceededto draw a distinction between measures which concern the goodsthemselves, such as those relating to presentation, packaging andcomposition, and measures relating to so-called “selling arrangements”.
The Court of Justice held that only measures concerning goods fellwithin the jurisdiction of Article 28 EC. Measures relating to otherselling arrangements were deemed to fall beyond the scope of Article28. This distinction was confirmed by the European Court in Punto CasaSpA v. Sindaco del Comune de Capena , where the Court of Justice heldthat the Italian Sunday retail closing rules did not fall within thejurisdiction of Article 28 EC. As stated above, it is easy to appreciate that the manipulation ofnational taxation policy can also impede the free movement of goods.Accordingly, Article 90 EC provides:
“No Member State shall impose, directly or indirectly, on the productsof other Member States any internal taxation of any kind in excess ofthat imposed directly or indirectly on similar domestic products. Furthermore, no Member State shall impose on the products of otherMember States any internal taxation of such a nature as to affordindirect protection to other products.”
Again, the European Court takes a purposive approach to theinterpretation of this provision and its key gateway terms andconditions, with the aim of ensuring its optimum reach. In the 1983case of Commission v UK the United Kingdom maintained differing levelsof internal taxation on wine and beer. The ECJ held that wine and beerwere similar and that the differential in taxation constituted unlawfuldiscrimination contrary to what is now Article 90.
EC Competition Law
While the free movement provisions are largely concerned withregulating the activities of the Member States, by banning suchmeasures as import quotas, discriminatory taxation and customs tariffs,the primary competition law rules to be found in Articles 81 and 82 ECare directed at controlling the behaviour of private firms.
As a result of this simple allocation of legislative jurisdiction andapplicability the European Community can effectively assert controlover all the main actors and influences on the Single Market.
Article 81 EC
One way in which a market can be distorted is where undertakings whichshould be in competition with one another decide to engage incooperation of some kind to influence the market in their interests.Such cooperation has the potential to create anomalies and inefficiencyto the detriment of the market as a whole and the consumer base that itserves. Article 81 sets down a general prohibition on suchanti-competitive cooperation.
Article 81(1) provides that:
“The following shall be prohibited as incompatible with the commonmarket: all agreements between undertakings, decisions by associationsof undertakings and concerted practices which may affect trade betweenMember States and which have as their object or effect the prevention,restriction or distortion of competition within the common market, andin particular those which:
- directly or indirectly fix purchase or selling prices or any other trading conditions;
- limit or control production, markets, technical development, or investment;
- share markets or sources of supply;
- apply dissimilar conditions to equivalent transactions with othertrading parties, thereby placing them at a competitive disadvantage;
- make the conclusion of contracts subject to acceptance by the otherparties of supplementary obligations which, by their nature oraccording to commercial usage, have no connection with the subject ofsuch contracts.”
Article 81(2) stipulates that any agreements or decisions prohibited pursuant to this article are automatically void.
Again, the European Court of Justice has generally been minded tointerpret the key terms of Article 81 both purposively and generously,so as to afford the provision the widest possible scope and greatestutility as a key policeman of market activity. For example, the term“undertaking” is not defined in the Treaty but it has been interpretedin the most expansive possible sense by the Court to include any legalor natural person engaged in some form of commercial or economicactivity: see Commercial Solvents Corp v Commission.
Examples of undertakings include: public undertakings (where suchengage in commercial activity) Bodson v Pompes Funebres des RegionsLiberees ; partnerships Commission Decision (73/323) Re WilliamPrym-Werke ; individuals – including for instance an inventor inAOIP/Beyrard and an opera singer in Re Unitel . Even not profit makingorganisations can be treated as undertakings where such act on acommercial or quasi-commercial footing Commission Decision GVL.
Under the principle of extraterritoriality even companies based outsidethe EU and the Single Market can be held to account under thecompetition laws if their behaviour has an anti-competitive effect ontrade within the Community. In the Ahlstrom (Wood Pulp) case companiesbased in North America and Scandinavia (which at the time was outsidethe EU) colluded to fix prices on the wood pulp market and this had aneffect on the EU market. The Commission took action against thecompanies and the European Court upheld it, basing its jurisdiction noton the location of the companies but on the location of the effect oftheir behaviour.
As for the provision that agreements must be between undertakings,there is only one live issue. The Court of Justice will not generallyact against companies cooperating in a parent subsidiary relationship,because such companies essentially form a single economic unit and nocompetitive relationship would normally exist to be impaired. See forexample: Centrafarm BV v Sterling Drug Inc .
The concept of “agreement” between undertakings has again beeninterpreted broadly by a Court eager to ensure the efficacy of this keycompetition law rule and its utility in partnership with the freemovement provisions to control market behaviour. For example the caseACF Chemiefarma NV v EC Commission saw the Court of Justice rule thata mere gentleman’s understanding between companies would trigger theprohibition if such:
“amounted to the faithful expression of the joint intention of theparties to the agreement with regard to their conduct in the CommonMarket.”
It should also be noted that the Court does not distinguish betweenhorizontal and vertical agreements in applying Article 81. Horizontalagreements are those between undertakings operating at the same levelof industry, whereas vertical agreements are those between undertakingsat different levels of industry. A horizontal agreement would thus bemade between two manufacturers in a market, and might amount to pricefixing for example, whereas a vertical agreement would be struckbetween a manufacturer and a wholesaler or retailer, and mightconstitute a tying agreement.
Both types of agreement are offensive to competition law and would beprohibited accordingly as detrimental to the free play of trade andcommerce around the Single Market.
A concerted practice is a less tangible form of collusion than anagreement or a decision. The purpose of including the concept withinArticle 81 is presumably to allow the Commission and the Court to actagainst undertakings who seek to abide by casual and clandestinearrangements or loose deals struck in smoke filled rooms. The key casein point is Cooperatieve Vereniging Suiker Unie UA & Ors v ECCommission where the court stressed that a concerted practicecomprised of three elements:
- There must be some form of coordination or practical cooperationbetween undertakings which replaces their independent action;
- This coordination must be achieved by direct or indirect ; and
- The aim must be to ‘remove in advance any uncertainty as to the future conduct of their competitors’.
Article 81 and the Free Movement Provisions
Article 81 EC is applied with a vigour that matches the enthusiasticenforcement of the free movement of goods provisions. It would bepointless for the EU institutions to impose a strict regime on theMember States under the free movement of goods rules only to allowprivate undertakings to run amok in and manipulate the Single Market asthey saw fit. The European Commission, the Court of Justice and theCourt of First Instance (which is responsible for dealing with mostcompetition law cases at first instance), are well aware that both setsof provisions must be interpreted and enforced with an equivalentpurposive aim and in sympathy with the ultimate objective of marketprotection and efficiency.
Article 82 EC
While Article 81 seeks to maintain effective competition by banningmultilateral cooperation, cartels and collusion between undertakings,Article 82 operates to control the unilateral conduct of single firmsthat have an economically powerful, independent or so-called dominantposition in the markets in which they are active.
Article 82 provides that:
“Any abuse by one or more undertakings of a dominant position withinthe common market or in a substantial part of it shall be prohibitedas incompatible with the common market in so far as it may affecttrade between Member States.
Such abuse may, in particular, consist in
- directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
- limiting production, markets or technical development to the prejudice of consumers;
- applying dissimilar conditions to equivalent transactions withother trading parties, thereby placing them at a competitivedisadvantage;
- making the conclusion of contracts subject to acceptance by theother parties of supplementary obligations which, by their nature oraccording to commercial usage, have no connection with the subject ofsuch contracts.”
It should be noted that dominance per se is not unlawful and that meresize or power will not contravene Article 82. However, business thatare in a dominant position within at least some substantial part of theSingle Market are at risk of infringing Article 82 if they are temptedto abuse their market power in order to obtain some kind of competitiveadvantage or excessive profit.
The rationale for controlling the activities of powerful individualfirms is clear. If a firm seeks to impose unfair trading conditions orcharge excessive prices in a competitive market the firm will simplylose business. However, where the firm in question enjoys a dominantposition within the relevant market it may be able to act in such a wayas to distort the market in its favour without fear of serious economicconsequences for its own business.
In similar fashion to the terms of the free movement of goodsprovisions and Article 81 EC, the essential gateway concepts of Article82 are liberally interpreted and purposively applied with a view to theobjective of market protection and efficiency that all these provisionsshare.
In the case United Brands v Commission , which involved the abuse of adominant position on the European banana market by a powerful company,the Court confirmed its policy to apply the provisions of Article 82with a view to enhancing its efficacy as an enforcement mechanism, injust the same way as it approached the application of the free movementof goods rules and Article 81 prohibition in contemporary cases.
The Court’s commitment to the enforcement of these provisions isperhaps best evidenced by the level of fines imposed in serious cases.Fines of up to ten per cent of turnover can be imposed in cases ofbreach of competition law and given that many of the undertakingsinvolved are global companies with huge turnovers the penaltiesinvolved can be daunting.
As long ago as 1991 in Tetra Pak Rausing SA (II) v Commission a singlefine of 75 mECU was imposed on the Scandinavian carton board company. Atotal of 248 mECU in fines was imposed on members of the CementProducers’ Cartel in 1994 and Volkswagen was individually fined whatwas then a record 102 mECU in 1998 for abuse of dominance. This ofcourse is where the parity in approach between the competitionprovisions and the free movement of goods rules breaks down. If MemberStates were liable to be fined ten per cent of their turnover… well,the consequences would be interesting to say the least.
Article 87(1) EC provides that:
“Save as otherwise provided in this Treaty, any aid granted by aMember State or through State resources in any form whatsoever whichdistorts or threatens to distort competition by favouring certainundertakings or the production of certain goods shall, in so far as itaffects trade between Member States, be incompatible with the commonmarket.”
This public element of competition law is also rigorously applied inpractice and the same ethos of market protection that is shot throughthe Court’s approach to the free movement and private undertakingcompetition provisions is evident in this context. It is perhaps in thecontext of state aid that the relationship between the competitionrules and the free movement provisions is at its closest. If a MemberState chooses to fund or sponsor a measure which, for example, has aneffect equivalent to a quantitative restriction it may be that the actproves to be in simultaneous contravention of both areas of the Treaty.This issue is directly pertinent to the question posed in this work andis thus discussed separately below.
Crossover between Competition and Free Movement: Shared jurisdiction, joint applicability
The Commission v Ireland “Buy Irish” case has been discussed above butit is perhaps of greatest relevance in this context. In this case theCourt of Justice found that a government sponsored “Buy Irish”marketing campaign constituted a measure having equivalent effect to aquantitative restriction on imports contrary to Article 28. The threeyear campaign in question was coordinated by the Irish Goods Counciland the commissioned advertising was extensive in its scope and reach.
The Irish government sought to argue in its defence that the campaignlacked the necessary binding force to qualify as a measure under theterms of (what is now) Article 28 EC, but the Court found thatstate-sponsored publicity designed to encourage consumer discriminationin favour of domestic products inevitably constituted a measure havingequivalent effect to a quantitative restriction. Moreover the Courtfound that the Government’s financial support of the Irish GoodsCouncil also brought the matter within the realm of state aid andcompetition law. It is interesting to note that this was the conclusionof the Court even though the campaign proved, in practice, to be anunmitigated failure.
The case of Apple and Pear Development Council v K.J. Lewis Ltd offers additional guidance on this issue. Here, the Court of Justiceconsidered a domestic campaign run in the United Kingdom that wasdesigned to increase the market share of English and Welsh varieties ofapples and pears at the expense of imports from the elsewhere in theSingle Market. Conceived and coordinated by the Development Council, aseries of adverts promulgated the slogan “Polish up Your English”. Thecampaign was financed by a compulsory levy imposed on fruit growers.Several producers objected to the charge and claimed that the Council’sactivities contravened the free movement and state aid provisions ofthe Treaty.
The Court of Justice found that a body resourced by public funding owesthe same duty as the state in regards to the free movement rules. Inparticular it held that such a body is under a duty to refrain fromsponsoring advertising that is intended to discourage the purchase ofimports from other Member States, and that, by the same token, such abody must not endeavour to encourage consumers to buy domestic productspurely on the grounds of their national origin. That said however, theCourt did add that (what is now) Article 28 does not prevent astate-funded undertaking from publicising the specific qualities ofdomestic produce or from organising campaigns to promote certainvarieties that are typical of national production. In the view of thecourt this fine line between the free movement and state aid provisionsis sustainable provided that the emphasis is placed on thecharacteristics of the product in question and not on its origin.
The above cases suggest therefore that Member States must take care toconsider the legal consequences of any proposal to become financiallyinvolved in a marketing campaign with a direct or indirectnationalistic focus. It may be that such government involvement isdeemed to contravene both the free movement provisions and thecompetition law rules in the area of state aid.
It is submitted in conclusion that the statement under discussion isboth accurate and well founded in so far as it goes. There is in theoryand in practice a symbiotic partnership between those rulesguaranteeing free circulation and free competition in the Europeanmarketplace. The free movement of goods provisions and competition lawarticles of the Treaty of Rome stand as twin pillars supporting theoverarching plan of the Single European Market in an effective andcomplementary capacity. Both sets of rules strive towards the same end- namely the most open and efficient Single Market possible, and forthis reason they complement each other even though they are generallyspeaking, addressed at different constituencies.
Whereas the free movement of goods rules largely regulate the behaviourof the state, in controlling inter alia, customs duties, charges havingequivalent effect and taxation, the primary competition law provisionsfocus on controlling the behaviour of private undertakings. The stateaid laws are the exception to this rule of thumb, being competitionrules in origin but applicable to the activities of the Member State.
By these means the two sets of rules applied in combination manage tocover all the major threats to the integrity of the free flow of tradewithin the Single Market. Bo
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