Covid-19 and the geopolitics of the Herfindahl-Hirschman Index

The Covid-19 pandemic has revealed that trade is not a free flow whose tap globalization has turned on for good: export may be restricted due to unavailability and, as in the case of import, as part of foreign policy. What emerged as a discontinuity with the globalization of the last three decades makes the assessment of a market structure more challenging.

When evaluating a horizontal merger or acquisition, once the relevant market has been defined, competition authorities have to calculate the market shares. This assessment provides a first indication of the market structure and the competitive importance of both the merging parties and their competitors.

In some jurisdictions, such as the EU and the US, the market shares are used to assess the concentration using the Herfindahl-Hirschman Index (HHI); the higher the post-merger HHI and its post- and pre-merger variation, the lower the probability that the notified operation will be unconditionally approved by the authorities. This quantitative tool assumes that the undertakings on the supply side are independent; this is why mergers unlikely to identify horizontal competition concerns may require additional scrutiny in case of “significant cross-shareholdings among the market participants” or when “indications of past or ongoing coordination, or facilitating practices, are present[1] .

How the recent pandemic has affected trade is relevant for competition policy in two ways:

  • The trend of trade policies that has broadened the perimeter of the geographic dimension of relevant markets can suddenly U-turn;
  • The explanatory power of the HHI may be negatively affected by undertakings that are linked by something less observable than cross-shareholdings and past or ongoing coordination.

National security and the geographic relevant market

In the first half of 2020, countries that were importers of personal protective equipment (PPE), such as gowns, gloves, face-masks and protective eyewear, saw their stockpiles shrink alarmingly. PPE manufacturing, in fact, has become more and more concentrated during the last years in low-cost countries, which is consistent with David Ricardo’s theory of comparative advantage, the cornerstone of an inclusive globalization (IMF, 2020).

This efficiency-improving concentration has reduced the resilience of trade once the PPE manufacturing countries were hit by the virus: less production due to the respective lockdowns, fewer PPE exports to protect the health of their own citizens. Export restrictions, legitimate tools when national security is at stake (see Art. XI: 2 letter b of the GATT and Art. 36 of the TFEU), have showed how the geographic dimension of the relevant markets pushed by globalization can suddenly shrink.

When the nationality of market shares matters

Along with trade disruption, the Covid-19 pandemic has made the nationality of imports relevant not only for the application of the rules of origin by customs authority. Countries are characterized by different degrees of interventionism in their respective economies as reflected in the distinction between market and non-market economies. Though this distinction is only relevant to calculate the dumping margin within the WTO[2], it also affects the extent to which firms can be controlled by the state.

Some authors (see Zhang, 2012; Petit, 2016; Enderwick, 2017; Biguet, 2018; Healey, 2018) have already analyzed how State-controlled enterprises (SCEs)[3] can be more challenging for competition policy enforcement. For example, when the control is indirect (ie, the de jure decision-makers are de facto following the State’s authorities’ indications), then SCEs can disguise a horizontal acquisition as a more leniently-assessed conglomerate acquisition and can more easily coordinate their behaviors in an anti-competitive way.

It is understandable that two SCEs controlled by the same State may not be considered as two independent undertakings in the HHI calculation; but what about SCEs controlled by different States?

If SCEs exporting a specific commodity are in countries that are strongly linked – eg, by economic, military and political relationships – and if these countries are blessed with an effective retaliatory power, then it is more likely that coordinated sovereign behaviors generate a cartel for that commodity. The case of export cartel is nothing new if we consider the Organization of the Petroleum Exporting Countries (OPEC). The retaliatory power of a sovereign member is stronger the longer the political horizon of its government and the wider the portfolio of its SCEs[4].

In the case of PPE, the production is concentrated mainly in China and South-East Asian countries such as Malaysia, Thailand and Viet Nam. During the Covid-19 pandemic China’s authorities have already provided evidence to control, for political reasons, the export of goods essential for public health (this is the so-called ‘mask diplomacy’ mentioned by Legarda, 2020 and Fuchs et al ., 2020).

However, Chinese firms that export PPE may have a weight in their relevant markets that trespass the market share calculated for the HHI. China’s authorities, in fact, along with a vertical influence over their domestic firms, can exert a horizontal influence with countries[5] where the majority of PPE is manufactured and where an unorthodox understanding of the market economy may turn firms, if required, into SCEs. Differently from OPEC, where the leading countries could not be too choosy in their export (due to the weight of oil revenues on their respective GDP), PPE exporters have more diversified economies and can easily buffer the restrictions of an effective cartel lead by a country whose retaliatory power is not weakened by an election cycle or by the unpredictability of democracy.

Lesson learned

After the initial emergency due to PPE shortages, importing countries have replenished their respective stockpiles (once the initial export restrictions have been lifted), have used demand-side substitutes, have produced PPE thanks to supply-side substitutability and, as in the case of the EU[6], have launched a debate around proactive industrial policies inspired by import-substitution wishes.

But the alarm about the trade resilience and the nationality of import has been rung. And, as cheap goods such as PPE have become the clog in the wheel of public health, other commodities essential for national security, currently traded, may be subject to unexpected restrictions.

The recent evidence suggests that the assessment of a market structure may be challenging because, in some sectors, the connections between undertaking is not as observable as cross-shareholdings or coordination. Thus, for the HHI, market shares that are summed after having been squared, should instead be summed before having been squared. This is why, the mathematical beauty of the HHI has to be ‘corrupted’ with qualitative geopolitical analysis.


[1] Art. 20 letters c) and e) of the Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004 / C 31/03).

[2] See the second Ad Note to Article VI: 1 of the GATT 1994.

[3] Both ownership and control are not easy to ascertain (UNCTAD, 2016; Damgaard et al. , 2019), however the former is not relevant in competition as demonstrated, for example, by the ownership-neutrality principle in the EU. A State, in fact, can behave as a market economy investor, and an enterprise can be controlled by the State even if it is listed among the shareholders in the cap table.

[4] A sufficiently diversified portfolio of SCEs facilitates cross-subsidization especially if some sectors of the domestic economy are not open to competition.

[5] Especially in countries where Belt and Road Initiative projects are financed by Chinese entities (see Fels, 2017 and Hiebert, 2020).

[6] On 16 June 2020 the EU Commission has launched a consultation to develop a new “strategic autonomy” advocated by the European Council (23 April 2020) that combines the commitment to free and fair trade with the need of producing essential goods within EU borders.

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