Vertical coordination, antitrust law, and international trade

This paper demonstrates that vertically aligned private or public organizations are capable of generating strategic trade advantage similar to that acquired through direct government export subsidization. The model considers two forms of vertical coordination that lead to advantageous trade positions in international markets: upstream vertical restraint and downstream equity sharing. Such practices are commonly employed both by state trading agencies and by private firms in nations with lenient antitrust laws. The finding has important implications under new World Trade Organization (WTO) rules intended to reduce government intervention in international transactions. Recent reforms in the WTO favor nations that sanction highly refined vertical linkages between firms, while nations with stringent antitrust legislation have an incentive to negotiate for greater harmonization of international laws.