The EC Treaty's free movement of goods and competition provisions perform complementary roles

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, without the payment of custom duties or any other barriers to trade. A second fundamental component of a Customs Union is the common customs duty. This dictates that if goods produced in third countries are imported into any Member States, those goods will be subject to the payment of a common customs tariff, no matter where their point of importation into the Customs Union.

The free movement of goods is therefore a goal which is not an end in itself but merely one component of the maintenance of a Customs Union and 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 frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty.”

Article 14 EC therefore sets out the fundamental legal foundation for the establishment of an internal market within the European Community. As can be seen an internal market requires the abolition of internal barriers regarding the movement of workers, services and capital as well as goods, but this paper focuses on the latter.

Generally speaking, impediments to the free movement of goods can be divided into three categories: physical impediments, fiscal impediments and technical impediments. Physical impediments include customs protocols on goods moving over national borders. Fiscal impediments include tariffs, direct and indirect taxes levied on imports, exports, or goods in transit. Technical impediments include quantitative restrictions or national measures having a equivalent effect to quantitative restrictions which interfere with the free circulation of goods, and such may consist of national regulations ostensibly designed for the marketing of goods or for protection public health and safety, which nonetheless have an effect that is contrary to the goal of free movement.

Article 23(1) of the EC Treaty states that:

“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.”

In order to understand this foundation principle it is necessary to analyse some of its key words. The meaning of the word “goods” is clearly fundamental to the provision and the best way to shed light on the issue is to look at the jurisprudence of the European Court of Justice, which is given the duty of interpreting and applying the Treaty.

In Commission v Italy (Art Treasures) , the Italian Government prohibited the exportation of art treasures including articles of historic, artistic, archaeological or ethnographic nature, claiming that such did not constitute "goods" within the meaning of the Treaty. The European Court took the opportunity to define “goods” as "products which can be valued in money and which are capable, as such, of forming the subject of commercial transactions." As a result art treasures fell within the meaning of "goods" under what is now Article 23(1).

The above definition is not surprising but it is worth emphasising at this point that the interpretative policy of the Court of Justice is contextual and purposive and that a generous line is always taken in regards to fundamental planks of the Treaty, so as to accord it the maximum scope and efficacy. Two further cases on the meaning of goods illustrate the point that the general concepts entailed in key Treaty provisions, including those on free movement of goods and competition law, will always be read and applied expansively by the European Court to ensure the vitality of the legal regime deemed so important to the integrity and success of the Single Market and EU as a whole.

In Municipality of Almelo v NV Energiebedriff Ijsselmij , the European Court ruled that even electricity constituted "goods", although it did not go so far as to say that all intangible products would necessarily qualify as "goods". Moreover in Commission v. Belgium , the Belgian state banned the importation of waste and argued that it was entitled to do so because waste did not constitute "goods" if it could not be reused or recycled because it could have no commercial value. However, the Court of Justice dismissed this assertion and found that all waste was 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 equivalent effect shall be prohibited between Member States. This prohibition shall also apply to customs duties of a fiscal nature.”

This provision was given increased scope in the case of Van Gend en Loos v. Nederlandse Administratie der Belastingen , the Court of Justice ruled that this provision has direct effect, which meant that it could be relied on directly in the national courts of the Member States by individual citizens and that it established individual rights which those national courts are obliged to protect. As a consequence, the potential accessibility and efficacy of this key provision was dramatically enhanced.

The integrity of the Single Market is held in such high esteem by the European Court that even where there is objective social justification for a customs duty it will be prohibited if deemed to constitute a disproportionate impediment to trade and the free circulation of goods. In Sociaal Fonds voor de Diamantarbeiders the Belgian authorities imposed a duty on imported diamonds to raise money for the social protection of workers employed in the national diamond industry. The Court of Justice wasted no time in finding that customs duties are banned regardless of any consideration relating to the purpose for which such are introduced and regardless of the purpose for which the generated revenue is intended to be put. The duty was thus prohibited.

In the 1968 case Commission v. Italy (Statistical Levy) the European Court offered another generous definition of a fundamental term, again presumably to enhance the efficacy of the law in question. The Court defined “charges having an equivalent effect” as:

"Any pecuniary charge, however small and whatever its designation and mode of application, which is imposed unilaterally on domestic and foreign goods by reason of the fact that they cross a frontier, and which 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 not discriminatory or protective in effect and if the product on which the charge 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, which constitute a direct and manifest restriction on trade and a similar rule is imposed on export bans and quotas by Article 29. However, by the addition of the phrase “measures having equivalent effect” the scope of this ban is vastly increased. Of course, it is not necessary for Member States to impose directly discriminatory rules in order to create a situation in which domestic goods are favoured in the national marketplace 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 the day demanded a certificate of origin which could only be obtained from British customs. However, the trader asserted that such a requirement was equivalent to a measure having an effect equivalent to a quantitative restriction and that it was therefore prohibited by what is now Article 28.

The Court of Justice took this opportunity to define the meaning of 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 Court proceeded to find that the Belgian requirement constituted a prohibited measure of equivalent effect to a quantitative restriction as prohibited by the Treaty.

Moreover in the Commission v. Ireland , which became known as the ‘Buy Irish Case’ the Irish government sponsored national advertising campaign encouraging the purchase of Irish products. The European Court found that the campaign was designed to change consumer habits to favour domestic products over imports, and that this also amounted to a measure having equivalent effect to a quantitative restriction in violation of Article 28.

In Keck and Mithouard , Keck & Mithouard marketed French produced coffee and beer at retail prices lower than the price for which they had actually purchased the goods. They were thereafter prosecuted in the French courts for selling goods for less than their actual purchase price which contravened French law. Keck and Mithouard asserted that what is now Article 28 EC prohibited the French law.

After numerous expansive judgments, the Court of Justice decided to limit the applicability of Article 28 in this case. The Court proceeded to draw a distinction between measures which concern the goods themselves, such as those relating to presentation, packaging and composition, and measures relating to so-called “selling arrangements”.

The Court of Justice held that only measures concerning goods fell within the jurisdiction of Article 28 EC. Measures relating to other selling arrangements were deemed to fall beyond the scope of Article 28. This distinction was confirmed by the European Court in Punto Casa SpA v. Sindaco del Comune de Capena , where the Court of Justice held that the Italian Sunday retail closing rules did not fall within the jurisdiction of Article 28 EC.

As stated above, it is easy to appreciate that the manipulation of national 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 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.”

Again, the European Court takes a purposive approach to the interpretation of this provision and its key gateway terms and conditions, with the aim of ensuring its optimum reach. In the 1983 case of Commission v UK the United Kingdom maintained differing levels of internal taxation on wine and beer. The ECJ held that wine and beer were similar and that the differential in taxation constituted unlawful discrimination contrary to what is now Article 90.

EC Competition Law

While the free movement provisions are largely concerned with regulating the activities of the Member States, by banning such measures as import quotas, discriminatory taxation and customs tariffs, the primary competition law rules to be found in Articles 81 and 82 EC are directed at controlling the behaviour of private firms.

As a result of this simple allocation of legislative jurisdiction and applicability the European Community can effectively assert control over 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 which should be in competition with one another decide to engage in cooperation of some kind to influence the market in their interests. Such cooperation has the potential to create anomalies and inefficiency to the detriment of the market as a whole and the consumer base that it serves. Article 81 sets down a general prohibition on such anti-competitive cooperation.

Article 81(1) provides that:

“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.”

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 to interpret the key terms of Article 81 both purposively and generously, so as to afford the provision the widest possible scope and greatest utility as a key policeman of market activity. For example, the term “undertaking” is not defined in the Treaty but it has been interpreted in the most expansive possible sense by the Court to include any legal or natural person engaged in some form of commercial or economic activity: see Commercial Solvents Corp v Commission.

Examples of undertakings include: public undertakings (where such engage in commercial activity) Bodson v Pompes Funebres des Regions Liberees ; partnerships Commission Decision (73/323) Re William Prym-Werke ; individuals - including for instance an inventor in AOIP/Beyrard and an opera singer in Re Unitel . Even not profit making organisations can be treated as undertakings where such act on a commercial or quasi-commercial footing Commission Decision GVL.

Under the principle of extraterritoriality even companies based outside the EU and the Single Market can be held to account under the competition laws if their behaviour has an anti-competitive effect on trade within the Community. In the Ahlstrom (Wood Pulp) case companies based in North America and Scandinavia (which at the time was outside the EU) colluded to fix prices on the wood pulp market and this had an effect on the EU market. The Commission took action against the companies and the European Court upheld it, basing its jurisdiction not on the location of the companies but on the location of the effect of their behaviour.

As for the provision that agreements must be between undertakings, there is only one live issue. The Court of Justice will not generally act against companies cooperating in a parent subsidiary relationship, because such companies essentially form a single economic unit and no competitive relationship would normally exist to be impaired. See for example: Centrafarm BV v Sterling Drug Inc .

The concept of “agreement” between undertakings has again been interpreted broadly by a Court eager to ensure the efficacy of this key competition law rule and its utility in partnership with the free movement provisions to control market behaviour. For example the case ACF Chemiefarma NV v EC Commission saw the Court of Justice rule that a mere gentleman’s understanding between companies would trigger the prohibition if such:

“amounted to the faithful expression of the joint intention of the parties to the agreement with regard to their conduct in the Common Market.”

It should also be noted that the Court does not distinguish between horizontal and vertical agreements in applying Article 81. Horizontal agreements are those between undertakings operating at the same level of industry, whereas vertical agreements are those between undertakings at different levels of industry. A horizontal agreement would thus be made between two manufacturers in a market, and might amount to price fixing for example, whereas a vertical agreement would be struck between a manufacturer and a wholesaler or retailer, and might constitute a tying agreement.

Both types of agreement are offensive to competition law and would be prohibited accordingly as detrimental to the free play of trade and commerce around the Single Market.

A concerted practice is a less tangible form of collusion than an agreement or a decision. The purpose of including the concept within Article 81 is presumably to allow the Commission and the Court to act against undertakings who seek to abide by casual and clandestine arrangements or loose deals struck in smoke filled rooms. The key case in point is Cooperatieve Vereniging Suiker Unie UA & Ors v EC Commission where the court stressed that a concerted practice comprised of three elements:

1. There must be some form of coordination or practical cooperation between undertakings which replaces their independent action;

2. This coordination must be achieved by direct or indirect contact; and

3. 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 enthusiastic enforcement of the free movement of goods provisions. It would be pointless for the EU institutions to impose a strict regime on the Member States under the free movement of goods rules only to allow private undertakings to run amok in and manipulate the Single Market as they saw fit. The European Commission, the Court of Justice and the Court of First Instance (which is responsible for dealing with most competition law cases at first instance), are well aware that both sets of provisions must be interpreted and enforced with an equivalent purposive aim and in sympathy with the ultimate objective of market protection and efficiency.

Article 82 EC

While Article 81 seeks to maintain effective competition by banning multilateral cooperation, cartels and collusion between undertakings, Article 82 operates to control the unilateral conduct of single firms that have an economically powerful, independent or so-called dominant position in the markets in which they are active.

Article 82 provides that:

“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.”

It should be noted that dominance per se is not unlawful and that mere size or power will not contravene Article 82. However, business that are in a dominant position within at least some substantial part of the Single Market are at risk of infringing Article 82 if they are tempted to abuse their market power in order to obtain some kind of competitive advantage or excessive profit.

The rationale for controlling the activities of powerful individual firms is clear. If a firm seeks to impose unfair trading conditions or charge excessive prices in a competitive market the firm will simply lose business. However, where the firm in question enjoys a dominant position within the relevant market it may be able to act in such a way as to distort the market in its favour without fear of serious economic consequences for its own business.

In similar fashion to the terms of the free movement of goods provisions and Article 81 EC, the essential gateway concepts of Article 82 are liberally interpreted and purposively applied with a view to the objective of market protection and efficiency that all these provisions share.

In the case United Brands v Commission , which involved the abuse of a dominant position on the European banana market by a powerful company, the Court confirmed its policy to apply the provisions of Article 82 with a view to enhancing its efficacy as an enforcement mechanism, in just the same way as it approached the application of the free movement of goods rules and Article 81 prohibition in contemporary cases.

The Court’s commitment to the enforcement of these provisions is perhaps 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 of breach of competition law and given that many of the undertakings involved are global companies with huge turnovers the penalties involved can be daunting.

As long ago as 1991 in Tetra Pak Rausing SA (II) v Commission a single fine of 75 mECU was imposed on the Scandinavian carton board company. A total of 248 mECU in fines was imposed on members of the Cement Producers’ Cartel in 1994 and Volkswagen was individually fined what was then a record 102 mECU in 1998 for abuse of dominance. This of course is where the parity in approach between the competition provisions and the free movement of goods rules breaks down. If Member States were liable to be fined ten per cent of their turnover… well, the consequences would be interesting to say the least.

State Aid

Article 87(1) EC provides that:

“Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.”

This public element of competition law is also rigorously applied in practice and the same ethos of market protection that is shot through the Court’s approach to the free movement and private undertaking competition provisions is evident in this context. It is perhaps in the context of state aid that the relationship between the competition rules and the free movement provisions is at its closest. If a Member State chooses to fund or sponsor a measure which, for example, has an effect equivalent to a quantitative restriction it may be that the act proves to be in simultaneous contravention of both areas of the Treaty. This issue is directly pertinent to the question posed in this work and is 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 but it is perhaps of greatest relevance in this context. In this case the Court of Justice found that a government sponsored “Buy Irish” marketing campaign constituted a measure having equivalent effect to a quantitative restriction on imports contrary to Article 28. The three year campaign in question was coordinated by the Irish Goods Council and the commissioned advertising was extensive in its scope and reach.

The Irish government sought to argue in its defence that the campaign lacked the necessary binding force to qualify as a measure under the terms of (what is now) Article 28 EC, but the Court found that state-sponsored publicity designed to encourage consumer discrimination in favour of domestic products inevitably constituted a measure having equivalent effect to a quantitative restriction. Moreover the Court found that the Government’s financial support of the Irish Goods Council also brought the matter within the realm of state aid and competition law. It is interesting to note that this was the conclusion of the Court even though the campaign proved, in practice, to be an unmitigated failure.

The case of Apple and Pear Development Council v K.J. Lewis Ltd offers additional guidance on this issue. Here, the Court of Justice considered a domestic campaign run in the United Kingdom that was designed to increase the market share of English and Welsh varieties of apples and pears at the expense of imports from the elsewhere in the Single Market. Conceived and coordinated by the Development Council, a series of adverts promulgated the slogan “Polish up Your English”. The campaign was financed by a compulsory levy imposed on fruit growers. Several producers objected to the charge and claimed that the Council’s activities contravened the free movement and state aid provisions of the Treaty.

The Court of Justice found that a body resourced by public funding owes the same duty as the state in regards to the free movement rules. In particular it held that such a body is under a duty to refrain from sponsoring advertising that is intended to discourage the purchase of imports from other Member States, and that, by the same token, such a body must not endeavour to encourage consumers to buy domestic products purely on the grounds of their national origin. That said however, the Court did add that (what is now) Article 28 does not prevent a state-funded undertaking from publicising the specific qualities of domestic produce or from organising campaigns to promote certain varieties that are typical of national production. In the view of the court this fine line between the free movement and state aid provisions is sustainable provided that the emphasis is placed on the characteristics of the product in question and not on its origin.

The above cases suggest therefore that Member States must take care to consider the legal consequences of any proposal to become financially involved in a marketing campaign with a direct or indirect nationalistic focus. It may be that such government involvement is deemed to contravene both the free movement provisions and the competition law rules in the area of state aid.

Concluding Comments

It is submitted in conclusion that the statement under discussion is both accurate and well founded in so far as it goes. There is in theory and in practice a symbiotic partnership between those rules guaranteeing free circulation and free competition in the European marketplace. The free movement of goods provisions and competition law articles of the Treaty of Rome stand as twin pillars supporting the overarching plan of the Single European Market in an effective and complementary capacity. Both sets of rules strive towards the same end - namely the most open and efficient Single Market possible, and for this reason they complement each other even though they are generally speaking, addressed at different constituencies.

Whereas the free movement of goods rules largely regulate the behaviour of the state, in controlling inter alia, customs duties, charges having equivalent effect and taxation, the primary competition law provisions focus on controlling the behaviour of private undertakings. The state aid laws are the exception to this rule of thumb, being competition rules in origin but applicable to the activities of the Member State.

By these means the two sets of rules applied in combination manage to cover all the major threats to the integrity of the free flow of trade within the Single Market. Both sets of rules are applied with equal vigour and commitment. As noted above it would be a futile exercise for the EU institutions to impose a strict regime on the Member States under the free movement rules while at the same time allowing private undertakings a free reign to abuse and manipulate the Single Market. There is therefore no doubt that, to answer the question posed in this paper directly, these provisions perform theoretically complementary roles in creating a Single European market in goods and in producing benefits for the consumer. The case law of the European Court suggests that some real success has been achieved in regard to these stated objectives, but exactly how effective the provisions have actually been in practice would have been a much more difficult question to answer.

It is however submitted that one thing is clear, and that is that the European Court of Justice and the Court of First Instance are wholeheartedly committed to the goals set out in the Treaty in regards to both the free movement provisions and the competition law rules. If history is any guide to future development, the scope and efficacy of these provisions is likely to be protected and slowly expanded by the jurisprudence of these Courts, which act in a complementary capacity in similar fashion to the Treaty provisions under review.