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Export Trading Company Affairs (ETCA)
The Export Trade Certificate of Review Program - The Competitive Edge for U.S. Exporters
By Alan Borst
Ag Economist USDA Rural Development
Rural Business-Cooperative Service
What tools allow businesses - in particular, cooperatives - to work together to market products overseas? As businesses increasingly compete in a global economy, it's critical they understand the "ins" and "outs" of U.S. Regulations that can help them avoid antitrust litigation and capture higher export earnings.
Agricultural cooperatives have joined with cooperative- and investor owned competitors to form joint exporting groups throughout the past 100 years. These export groups have been able to capture economies of size, to spread export marketing risks and costs across all members, and to increase each groups ability to deal with foreign importers which are frequently organized as buyer cartels or state trading enterprises. However, such cooperative efforts may be curtailed or not even undertaken because of the threat of costly antitrust litigation.
Possible antitrust plaintiffs can include competitors who are inside the group, farmers who supply either non-member firms, trading companies or other marketing intermediaries which have some commercial relationship with the group, state attorneys general, Federal antitrust regulations, or even disgruntled firms from within the group. The threat of antitrust litigation is serious if the case is weak, because the lawsuits are among the most costly. Cooperative executives must consider the time and resources that could be tied up and the prospect of paying triple damages is they are unsuccessful in defending a lawsuit. Nearly all the antitrust cases are filed by private plaintiffs.
U.S. policy makers have long recognized the benefits of horizontal export coordination on member export earnings and competitiveness, and they have promoted it through the granting of limited antitrust exemptions-- notably the Webb-Pomerene Act (WPA) of 1918. Agricultural cooperative members are also covered by the Capper-Volstead Act (CVA) of 1922, which grants limited protections against antitrust litigation in both domestic and foreign joint marketing operations. By the early 1980's, U.S. policy makers had concluded that the WPA protections were inadequate, and thus passed the Export Trade Certificate of Review (COR) antitrust pre-clearance program as Title III of the Export Trading Company Act of 1982.
The COR program is administered by the U.S. Department of Commerce's Office of Export Trading Company Affairs. Certificates are issued by the Secretary of Commerce, with the concurrence of the Attorney General. This program allows the U.S. exporters to submit specific joint export plans to Commerce and the U.S. Department of Justice's Antitrust Division. Certified firms or associations are provided with immunity from federal and state government antitrust suits with regard to approved export conduct. (It is important to note that the COR program does not protect holders from foreign antitrust litigation.) In addition, certified exporters receive the following procedural advantages related to private antitrust actions.
- There is presumption that certified export conduct complies with U.S. antitrust laws. Plaintiffs bear the burden of providing wether that the agencies erred in their initial issuance of the Certificate or that conditions have changed so that an originally correct Certificate is no longer correct.
- If a Certificate holder is found liable, its liability is reduced from treble to single damages for damages resulting from the certified export conduct.
- If the Certificate holder prevails, it may recover attorney's fees.
- Finally, there is a shorter statute of limitations within which plaintiffs can bring an antitrust action (relative to that found in other U.S. antitrust laws).
Additional COR Advantages
Cooperative exporters seeking protection or clarity regarding antitrust exposure have various options from which to choose, including the WPA, the CVA and the Business Review Letter (BRL) programs at the Justice Department and the Federal Trade Commission. Depending on the exporters' needs, the COR program may provide the following additional advantages over some of the other alternatives.
- WPA only covers joint exporters of goods, COR allows for coverage of both goods and services.
- WPA is limited to export associations; COR immunizes over or more firms in any organizational configuration.
- WPA associations are limited to exporting; COR exporters may conduct import or domestic businesses, through only their export business is covered.
- WPA is ambiguous leaning toward negative on exclusive contracting arrangements; COR could immunize them.
- WPA is a general exemption; COR immunizes specific joint export activities through a pre-clearance procedure, which provides greater certainty.
- WPA, CVA, and BRL do not provide any of the procedural advantages allowed for in COR coverage.
- BRL is a specific but non-binding statement of the Department of Justice's position on reviewed conduct; COR pre-clearance is binding on the Justice Department and other potential public plaintiffs (unless circumstances have changed).
- CVA covers only joint marketing activity of farmers; COR potentially covers any exporting firm, including investor-owned co-op competitors and other related channel members.
The COR program is voluntary and there are no application fees. Although many applicants use legal counsel, the application form is intended to be easy to complete by the applicant, and the Office of Export Trading Company Affairs is available to provide pre-application counseling to interested applicants at no cost. Decisions on certification are done, except in extraordinary circumstances, within 90 days from the day a completed application is accepted. Analysts, economists, and attorneys from both the Commerce and Justice Departments review and process the applications, with Commerce being the contact point for the applicant. The process is intended to be user-friendly and additional information from applicants is normally sought through conference calls.
Protection at a Modest Cost
The COR program has been criticized for failing to meet inflated expectations regarding its macroeconomic impact that surrounded its 1982 passage by Congress. But, critics are misguided if they assess the program's success or value by whether it has had an impact on the trade deficit or U.S. unemployment rates.
It is best to consider this program as one useful tool, among many, available to U. S. Exporters. The success of any export venture depends on business realities and the efforts export partners put into the venture. Nevertheless, if the threat of antitrust liability is of any concern, the COR program offers some certainty and protection at a relatively modest cost. It should be noted that the costs to the government for running this program, are likewise, modest (particularly when compared with the potential liability to exporters using it). In addition, obtaining a COR sometimes serves as a catalyst for renewed export activities by certificate holders.
Congress made agricultural exporters a major target group for this program. In Title I, Section 102 (a) (5) of the Export Trading Company Act of 1982 Congress stated:
"The Congress finds that... although the United States is the world's leading agricultural exporting nation, many farm products are not marketed as widely and effectively abroad as they could be through export trading companies."
An important target sub-group of these agribusinesses were agricultural marketing cooperatives. In 1986, Janice Payt, attorney advisor at the Commerce Department's Office of the Assistant General Counsel for Trade Development, made the case in the Journal of Agricultural Taxation & Law that cooperatives could benefit from the COR program to strengthen their market power:
"It may be advantageous to organize an ETC (export trading company) as a cooperative, and cooperatives can, as members, form or otherwise participate in ETCs. Generally, cooperatives can use the ETC Act to obtain antitrust protection not available under the CVA alone and can combine the two statutes to obtain optimum protection for export activities... To obtain optimum benefits from joint exporting, cooperatives may desire to enter into arrangements with non-producers. Such arrangements fail to qualify for the CVA exemption, inasmuch as the CVA requires all members of a cooperative to be agricultural producers. For example, courts have held that a non-producer processor is not an eligible agricultural producer within meaning of the CVA... By using Title III certification, cooperatives can obtain immunity for their export activities with non-cooperatives, while still retaining the CVA exemption for domestic (and foreign) cooperative activities."
Co-ops use antitrust pre-clearance
It should also be noted that, in the 1996 Farm Bill, Congress encouraged the U.S. dairy industry to "establish and maintain one or more export trading companies under the (ETC Act)" and authorized the Secretary of Agriculture to provide his advice and assistance as necessary.
Agricultural marketing cooperatives have used the Export Trade Certificate of Review antitrust pre-clearance program for many purposes. Over 40 cooperatives have been certified in 18 different export groups since the first certificate was issued in 1983. Much has been written about the potential benefits which COR offers to prospective joint exporters, while little has been said about the experiences which certified firms have had with this program.
A series of interviews were conducted with executives from cooperative members of a majority of certified joint export marketing groups with cooperative membership. Questions were asked about how COR pre-clearance influenced their export grouping activities and what limits existed to undertaking the certified conduct. Some cooperatives reported that certification played a central role in enabling their export grouping venture by resolving serious antitrust threats which would have otherwise stopped the venture. Others reported that the certification was valuable as inexpensive legal insurance, but not absolutely needed for their venture's joint exporting activities.
Most of the certified groups with cooperative membership failed shortly after start-up or have operated sporadically and at the margin, with very limited sales volumes. A few of the certified groups, however, have been very successful at their joint exporting activities. These are the groups which, not coincidentally, have heavily used their certification. The threat of antitrust litigation tends to be proportional to the potential market power the exporters could collectively exercise through the group. The greater the potential market power, the greater the potential damages to be won through antitrust litigation.
There are natural checks to the exercise of joint export market power among certified U.S. firms. Certification has almost always been sought for joint exporting to new or underdeveloped markets. There are also strong vertical market links between these established U.S. exporters. No examples were found of competing exporters initiating horizontal coordination with respect to established export markets. Further, once vertical relationships were developed between individual U.S. exporters and foreign importers, horizontal coordination tended to decline.
Business Rlationships Important
A large proportion of the certified joint exporting activities faced little actual threat from potential antitrust litigation. Nevertheless, there were industries with painful memories of past antitrust actions, and others without a history of antitrust litigation, per se, but where relations among competitors were otherwise strained and litigation of other sorts had been threatened or taken. In these situations, certification enabled even low-risk joint marketing activities by providing assurance to highly risk-averse exporters.
Most of the respondents reported the importers with whom they dealt were also horizontally coordinated, either as state trading enterprises with some measure of publicly conferred authority, or as buyer cartels that presented a united marketing front. Thus, certification enabled the exercise of countervailing power against coordinated importers.
The business culture among the joint exporters was another determinant of their capacity to actually undertake the activities for which they were certified. The potential efficiencies some certified groups possessed went unused when distrust and suspicion fueled rivalry over cooperation. Conversely, where exporters knew and trusted each other well, some export activities were successfully implemented.
Most of the certified export groups were coordinated by a commodity association, which usually established a distinct entity to administer the joint marketing activities. This served the purpose of preserving the commodity association's eligibility to receive export promotion funds and services.
One area in particular where certification has proved useful is in legitimating political relationships between U.S. commodity associations and foreign governments. Certification helped U.S. commodity groups to:1) administer tariff export quotas granted by a foreign economic union; 2) negotiate a suspension agreement to terminate an anti-dumping investigation brought by a foreign government; and 3) implement phyto-sanitary requirements imposed by importing country agricultural officials. This has allowed commodity groups to take active and coordinated roles in governing their export markets on important issues.
Several cooperative executives reported that certified joint exporting was undertaken in conjunction with other horizontal coordination, as exercised under Federal marketing orders, information-sharing cooperatives, and bargaining cooperatives. Some of these other entities provided financing and other support for the joint exporting efforts.
Some COR program applicants were third partied, such as economic development specialists or trades association staffers, who were seeking to facilitate horizontal coordination from outside the industry. These ventures were typically less successful in promoting joint exporting than were Certificates directly sought by exporters.
Overall satisfaction with COR
The COR program is a tool which has been used to free several cooperatives from antitrust fears. Some cooperatives have been protected from the active threat of non-member farmer lawsuits, while others have been freed from the threat of litigation from other sub-sector stakeholders from the outside group. However, antitrust litigation was ended in one instance when a certificate holder used its certificate to protect its joint exporting arrangement with a disgruntled cooperative supplier that had earlier threatened the holder with antitrust legal action.
Most cooperative and ETC executives reported receiving certification for almost all of their joint exporting plans, although a few compromises were necessary. All expressed appreciation for Commerce's COR staff, and they had no complaints about the overall process of obtaining and maintaining their certification. Respondents valued the role of Commerce, which they perceived as being business-friendly and as the main contact point in the process. They also view Commerce as the liaison for interactions with Justice, which is perceived as less business-friendly because it is an enforcement agency.
In summary, cooperatives and the certified export marketing groups to which they belong have been generally satisfied with the protections provided by the COR program against litigation. A majority of cooperative exporters have not sought certification, and many of those who obtained it have never efficiently used it. But for those who have used their certification to resolve active antitrust threats or to assure otherwise anxious competitors, and who have subsequently engaged in joint export marketing activities, the COR program can be fairly credited with having enabled their higher export earnings.