6:03 AM Oct 21, 1993

LIBERALIZATION NEEDS ACTIVE COMPETITION POLICY

Geneva 20 Oct (Chakravarthi Raghavan) -- Trade and foreign investment liberalisation policies which is being adopted worldwide need to be actively buttressed by competition policies against oligopolist global market power including through abusive exercise of intellectual property rights or pricing abuses by foreign suppliers, according to a report by the UN Conference on Trade and Development.

The report, "The role of competition policy in economic reforms in developing and other countries", is one of the documents before this week's meeting of the Intergovernmental Group of Experts (IGE) on Restrictive Business Practices (RBPs) who review annually the implementation of the "Set of Multilaterally Agreed Equitable Principles and Rules for the Control of RBPs" (the Set) a voluntary set of guidelines negotiated in the 1970s under UNCTAD auspices and adopted by the UN General Assembly in 1980.

Efforts to put teeth into the Set and particularly for home countries to undertake some obligations to curb monopolies and oligopolistic cartels operating on their export sectors has been consistently resisted by the major industrialized countries.

While some of them, including the EC and the US, now talk of bringing competition issues onto the agenda of a post-Uruguay Round trading system and negotiations, these are principally intended to hit any anti-competitive practices in a foreign country (with Japan frequently cited as an example) that affects imports from abroad.

In opening the IGE meeting Monday, the Deputy to the UNCTAD Secretary-General, Carlos Fortin, told the experts from some 60 countries participating in the meeting that at a time when major efforts are focused on the conclusion of the Uruguay Round, "an enormous and challenging task remained -- ensuring closer integration of competition principles into the international trading system".

The UNCTAD study notes that the wave of liberalisation, deregulation and privatization being undertaken in a large number of countries, developing and the former centrally planned economies, need to be supported by rules of the game to ensure competition.

While some of the liberalising economies have prepared such laws, many others were yet in the process. But the common aspirations of countries in undertaking this "reform" would be realized only if enterprises act under the spur of competition so that consumer dissatisfaction would serve as a market sanction against poor performance.

While liberalization of regulatory barriers should increase opportunities for competition, the barriers would still play a role for some time and liberalization policies alone would not suffice to overcome disincentives to market entry.

The domestic markets in most developing are highly concentrated, since the level of demand could support relatively few firms producing on a minimum economy of scale, apart from a number of disincentives in the market.

This phenomenon is also true of the central and east European economies. Countries undertaking structural adjustment and stabilization programmes and phased reforms for domestic deregulation, public sector reforms and privatization would find a lag before reforms could generate sufficient competition to create self-correcting market forces.

But in the meanwhile, incumbent firms would take advantage of deregulation to engage in RBPs to prevent new entrants into the market which previously were blocked by government interventions. And the problem would not merely be a transitional one: it would be more difficult to take corrective actions to dislodge, without damaging the economy and business confidence, firms and structures that have become entrenched.

As experience has shown the attainment and maintenance of competitive markets cannot be achieved through laissez-faire, but require rules of the game. "The more one removes direct government controls over the economy, the more one must work to ensure maintenance of competition."

Competition authorities in countries, the study suggests, should play an advocacy role within the government to safeguard competition. Without a well articulated competition doctrine, there was the danger of individual firms, favourable in general to liberalization, lobbying against liberalisation efforts that would affect their interests.

This did not mean a doctrinaire approach to competition policy, but articulating one taking account of behavioural factors rather than just market share data, including product substitution possibilities, market entry and impact of technological change to ensure that overall the policies do not impede efficiency, growth or development goals.

The extensive liberalization of foreign investment regimes, in developing and other countries in recent years, the study notes has contributed to increased amounts of foreign investment.

Such investment when directed to export markets does not affect competition within domestic markets for final products. But where it is directed to domestic markets, it has had considerable effects, since the average size of a TNC affiliate is larger than those of domestic competitors.

While the initial market entry by the foreign investor could reduce industrial concentration and increased competition, much would depend on mode of entry: a greenfield investment by a subsidiary not introducing a new product into the economy would reduce concentration and increase competition in the short-term. But where the investment is through takeover of an existing local firm or a joint venture, there would be no immediate effect on concentration and this may be even strengthened where the TNC through imports and local firm have been competing, as in the case of Kenya where entry of foreigners weakened competitive position of domestic incumbents.

Also, having entered new markets, foreign investors may create their own barriers to potential competition or drive competitors out from the market through use of RBPs -- including discriminatory pricing behaviour, transfer pricing abuses, cross-border subsidization of predatory pricing or non-price competition. Such practices have been found in the Latin American electrical industry.

The UNCTAD study suggests that liberalizing import trade should precede liberalizing foreign investment controls, so that the investor is not attracted to protected sectors who might then press for special protection, including exemptions from competition law, as a precondition for investing.

In Kenya, for example, some TNCs demanded virtually exclusive rights before investing, while proceedings against firms suspected of RBPs were hampered by threats of relocation. In Egypt, foreign firms demanded protection against alleged "dumping" by Japanese firms.

While competition from imports is a key element to ensure that a national market remains competitive, premature exposure of domestic firms to foreign imports would decimate infant industry, lead to concentration of market power in foreign hands or trading intermediaries.

Even where import barriers have been liberalized, as in many developing and other countries, imports have limitations as a source of competition where the imported product does not directly compete with the domestic product because of product differentiation, competition among foreign suppliers is weak (enabling high prices or RBPs) and intellectual property rights restrict parallel imports or competing technologies. Over and above are the shortages of foreign exchange in developing countries.

The study underlines the special difficulties experienced where competition regimes overlap with intellectual property regimes and cites again the case of Kenya where a distributor was prevented from importing a branded pharmaceutical due to territorial restriction imposed by a British patentee on a US licensee from whom the distributor had bought the product. In Nigeria, in five percent of technology import contracts there was tying classes, and in eight percent of purchasing contracts for machinery and raw materials by Thai firms.

"As developing and other countries strengthen protection of intellectual property rights, they would also need clearer rules to prevent the exercise of these rights from becoming the basis for abuse of market power, but efficiency considerations and the risk of deterring foreign suppliers would need to be taken into account."

While the study makes no direct reference, the Uruguay Round TRIPs agreement would strengthen the position of the transnational patent rights holders, who would now be assured of an import monopoly and ability to supply a market through imports rather than local working and by denying or restricting licenses. While laws and regulations of countries relating to parallel imports are not to be attacked under the proposed TRIPs regime, restricted licensing against exports to other markets could be indulged in by the patent rights holder and would be difficult of attack in the absence of active international cooperation policies which appear unlikely in the face of the neo-mercantilism of the major industrial powers who are pushing the interests of their corporations through TRIPs.

Developing and other countries applying their competition laws to RBPs affecting their import trade would sometimes experience the need to have recourse to extra-territorial exercises of jurisdiction to obtain information or enforce decisions, the study says.

Developing countries would have sufficient jurisdiction in these matters if they model the extra-territorial reach of their legislation on the lines of those asserted by developed countries like the EEC whose approach is being adopted now by several east European countries.

But the study concedes that whatever the theoretical scope, it may be difficult in practice for developing and other countries to enforce such jurisdiction such as when it is victimised by off-shore price fixing, bid-rigging or predatory pricing. A country may be able to intervene only if the foreign supplier or suppliers has a local subsidiary, but even this may have little effect if the main production was abroad and outside its jurisdiction.

However, the RBPs Set, does provide that States could seek appropriate remedial or preventive measures against RBPS within their competence when it comes to their attention that such RBPs adversely affect international trade, particularly the trade of developing countries.

But in many countries, export cartels are expressly sanctioned and permitted.