Fearing the effects of unbridled big business, Congress in 1914 passed the Clayton Act, an historic law designed to block corporate mergers that threaten to reduce competition.

Concerned about the flood of imports and the decline of U.S. industries, Commerce Secretary Malcolm Baldridge last week charged that the Clayton Act's antimerger provisions now threaten U.S. competitiveness.

Baldrige's call for repeal of a key section of the act has drawn a sharp retort from the antitrust community.

"He doesn't really understand what he's talking about," said William F. Baxter, former chief of Justice's antitrust division and now a professor at Stanford School of Law. "Present merger law does not interfere with mergers insofar as they create companies that are more efficient."

Assistant Attorney General J. Paul McGrath, current director of the antitrust division, said "he's speaking out of his expertise. He's out of date about what the law is about."

Baldrige has proposed repealing section 7 of the Clayton Act, long a cornerstone of antitrust law, which allows the Justice Department to prevent corporate mergers that "may" lessen competition or "tend to" create a monopoly.

Baldrige said section 7 may be discouraging companies from attempting mergers that would create stronger, more competitive firms. Repealing the section would enable companies to pool resources and shrink excess capacity in declining industries such as steel, he said.

Times have changed since the act was passed, and the reasons for section 7 "no longer exist" at a time when 75 percent of all U.S. products face foreign competition, Baldrige said.

Justice Department officials and academic experts argue, though, that the antimerger portions of the Clayton act do not hurt U.S. industrial competitiveness. On the contrary, they say current law and antitrust policy allow the mergers Baldrige wants to see.

"Existing laws really accomplish the goals Baldrige is trying to accomplish," McGrath said.

The Federal Trade Commission "has reviewed mergers in a way the secretary would find commendable," said John H. Carley, FTC general counsel. "The law has not thrown up that much of an impediment."

McGrath said he agrees with Baldrige that antitrust law enforcement should not "handicap our country's competitiveness in world markets."

The Justice Department considers both foreign competition and the possibility of improved economic efficiency when evaluating a proposed merger, McGrath said. "The only use of section 7 is to block mergers that are likely to have the effect of raising prices artificially," he noted.

Baldrige argued that the presence on the books of section 7, with its focus on potential harm, inhibits business from considering mergers that would pass the department's tests. He said the law makes U.S. business "very nervous, exceedingly nervous, in some cases flat-out scared" about attempting to merge.

Under his proposal, companies "would have to sin first" before being punished. The government would scrap the presumption that "bigness is badness," or that concentration in an industry necessarily leads to collusion, price-fixing or other anticompetitive activity.

Antitrust experts say that presumption was thrown out long ago.

"What Baldrige is talking about was true 20 years ago," McGrath said.

"There was a time in the '50s, '60s and '70s when the courts routinely interfered with mergers that would have made industry more efficient," Baxter said. "We screamed and howled about it, and we have won that fight."

Baxter led the effort in 1982 to broaden the range of factors considered by the Justice Department in evaluating a proposed merger.

"Baldrige listens to his industrial friends, who still commiserate about the bad old days," Baxter said. "The people feeding him this stuff are the people who want to make anticompetitive mergers, who want a further loosening of antitrust laws."

Before 1982, the Justice Department's merger guidelines assumed that the concentration of market power in a few corporate hands automatically would lead to collusion, said Charles F. Rule, deputy assistant attorney general. If a proposed merger passed a certain concentration ratio, it was challenged.

The old guidelines lacked a clear definition of "the market" in which the effects of a merger would be assessed. As a result, policymakers didn't pay enough attention to whether a merger would help the domestic economy by lessening the impact of imports on U.S. markets, Baldrige and other critics say.

The 1982 guidelines updated the definition of "the market" so that foreign competition would "implicitly" be a factor in decisions allowing mergers, and introduced a newer measure of market concentration, Rule said. The department also decided to consider whether proposed mergers would result in increased economic efficiency if that issue was raised by companies seeking a merger.

McGrath revised the merger guidelines in 1984 so that they stated even more explicitly that foreign competition should be taken into account when companies seek permission to merge. The amended guidelines also stated that claims of improved economic efficiency should be considered in every case.

Last year Congress passed a law that eased antitrust restraints on joint ventures for research and development. Currently, such a venture is not considered an automatic violation of antitrust law, and is judged on its competitive effects, Rule said.

But Baldrige has support from some conservatives, who say a fundamental change in the law is necessary. Reforming the guidelines is not a lasting solution, said James L. Gatuso, a policy analyst for the Heritage Foundation.

"Another administration could change them again," Gatuso said. "If I were in business, I would worry about that."

Gatuso said changing the law could eliminate that uncertainty, and that Baldrige's suggestion "sounds like it would be a good idea."

Some legal experts, however, doubt that eliminating section 7 of the Clayton Act would make any difference.

Baldrige proposes leaving intact other antitrust laws to protect consumers against corporate collusion and anticompetitive activity. Some observers say these laws could be applied in the same manner as section 7.

The Hart-Scott-Rodino Act still would require companies to notify the government of a proposed merger. Section 1 of the Sherman Act would continue to prohibit corporate combinations "in restraint of trade." The Federal Trade Commission Act still would empower the FTC to police the marketplace against illegal competition.

"Other acts could accomplish the same law enforcement objectives as Clayton 7," said Carley, the FTC general counsel.

The Justice Department's guidelines do not distinguish between the Sherman and the Clayton acts, Rule said. The department would make the "same analysis" of a merger under either act, he said.

Repealing section 7 "would not change our enforcement policy at all," McGrath said.

"To talk about repealing section 7 of the Clayton Act misses the issue, because Section 1 of the Sherman Act is still there," Baxter said. "The real question is, should we change both to create a more permissive environment for mergers? I would say no, we have the right degree of permissiveness at this time."

Baxter said the only problem is private parties that use the Clayton Act to obtain court orders blocking mergers.

"Private litigants are more interested in keeping their industry anticompetitive than in promoting competition," Baxter said. "If they hunt around and get the right judge, they will get an injunction that will be sufficient to screw up the merger."

Baxter cited the case of Stroh Brewery Co. and Christian Schmidt Brewing Co., which together obtained a court order temporarily halting a merger between two of their competitors, Pabst Brewing Co. and G. Heileman Brewing Co.

There are about half a dozen such actions a year, Baxter said. "Those suits are almost always perverse."

While administration officials defend current antitrust policy as consistent with Baldrige's goals, congressional Democrats criticize both the policy and the goals.

The Reagan administration's antitrust policy has already "effectively repealed the law," said Rep. James Florio (D-N.J.), chairman of the House subcommittee on commerce, transportation and tourism.

Baldrige, McGrath and FTC Chairman James C. Miller III "all want a greater concentration of economic power," Florio said. "Baldrige naively thinks you have to change the law. McGrath and Miller say you don't have to change the law because you can accomplish the same thing through administrative modifications."

Administration officials don't want to try repealing part of the Clayton Act because they want to avoid a "national debate, a legislative debate they will lose," Florio said. "The question is, how do you get them to enforce the law?"

Rep. Peter W. Rodino Jr. (D-N.J.), chairman of the House Judiciary Committee, rejected Baldrige's proposal, arguing that "the purpose of the antitrust laws is to promote a competitive business environment. Properly enforced, those laws will make American business more competitive with foreign firms -- not less."

"The claim that repeal is necessary because of our international trade position is an attempt to find a scapegoat for the failed budget and monetary policies that have led to our disasterous trade imbalance," Florio said.

Sen. Strom Thurmond (R-S.C.), chairman of the Senate Judiciary Committee, had no comment on Baldrige's proposal.

"The antitrust laws were designed to prevent overconcentration in industry," Florio said. "We want the laws enforced in keeping with the intent of the laws."

As for Baldrige's argument that corporate concentration is not necessarily bad, Florio said, "Fine, let's put it in the public policy arena, debate it and then decide whether the antitrust laws should be changed or whether they are outdated."