8:21 AM Nov 13, 1995

REVIEW CONFERENCE ON UNCTAD RBPS CODE

Geneva 13 Nov (Chakravarthi Raghavan) -- Issues relating to binding multilateral rules on behaviour of enterprises in international trade to buttress and compliment the disciplines on governments under trade liberalization rules of the World Trade Organization (WTO) will figure at the week-long Third UN Review Conference on UN Code on Restrictive Business Practices (RBPs) opening Monday under UNCTAD auspices.

The non-binding code - the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices or 'The Set', according to its official title, and the RBP code as it is more widely and popularly known - was negotiated under UNCTAD auspices, and adopted as code of guidelines by the UN General Assembly in December 1980, and provides for reviews every five years.

In the context of the world-wide trends towards globalization and liberalization, and the trade rules of the World Trade Organization, negotiated in the Uruguay Round, specifying disciplines on governments, national and international actions to discipline the behaviour of private enterprises have become even more necessary and The Set, while only a non-binding instrument, remains the sole international instrument on competition policy.

In reports reviewing the evolving competition policies in countries as well as the functioning and implementation of The Set over the past 15 years, the secretariat of UNCTAD suggests that it might be "premature" to elaborate international competition rules for enterprises to be enforced by supra-national body, and countries would need to continue their sovereignty over their domestic markets.

But the time may be ripe, UNCTAD adds, to have binding multilateral rules in areas of emerging consensus -- prohibiting hard-core RBPs such as price-fixing, collusive tendering by export and international cartels.

Competition authorities in countries, the report says, seem to be more willing and inclined to deal with anti-competitive behaviour of enterprises on domestic markets, but not the anti-competitive behaviour of enterprises as suppliers in foreign markets, affecting international trade, and particularly those of developing countries.

In revising their laws, many countries have strengthened the bans relating to collusive tendering, a per se offence in many countries, and heavily increased penalties on price-fixing, market or customer allocation agreements and horizontal practices in general. Numerous cases of collusive tendering and bid-rigging, in particular with respect to government procurement contracts have been challenged and heavily penalized.

But the picture about international convergence of views, UNCTAD says, is less encouraging on RBPs affecting international trade, such as product allocation and price-fixing as to exports and imports. While all countries seem to agree that these are basic contraventions of competition law, it has not been possible to date to agree to ban export cartels. Most countries seem reluctant or unwilling to attack export cartels operating from their territories, and several even sanction them.

The report also brings out the difficulties of national actions, because of lack of cooperation of authorities in other countries where the anti-competitive collusive activities take place, and the reluctance of competition authorities abroad to share information and help gather evidence.

A case cited about difficulties of national action alone is one where an enterprise in Pakistan had called invited quotations for supply of 4600 tons of electrolytic tinplate, the basic packing material for cooking oil produced by it. Quotations were received from six foreign firms, and the three lowest tenders came from firms in Luxembourg, UK and Germany - with the three firms bidding for 2300, 1500 and 800 tons respectively and corresponding exactly to total quantity required, providing strong circumstantial evidence of collusive tendering. The Pakistan firm ultimately bought from the UK and German firm and 2300 tons from a Japanese firm since the Luxembourg firm refused to supply.

The proceedings initiated by Pakistan's Monopoly Control Authority could not take action against the three colluding firms, despite the circumstantial evidence, because of insufficient procedural instruments and investigatory powers allowing for gathering evidence partly or entirely located abroad.

In reviewing the outcome of the Uruguay Round, the secretariat document says that at multilateral level this has created a new momentum in favour of worldwide competition and some of the agreements have provisions directly bearing on competition issues.

The General Agreement on Trade in Services (GATS), UNCTAD says, has a number of provisions bearing on the question of behaviour of monopoly suppliers. Art IX of the GATS also provides that in case RBPs of service suppliers restraint competition, and thereby trade in services, members may undertake to enter into consultations with others and the members addressed shall accord full and sympathetic consideration to such requests and cooperate by supplying relevant publicly available non-confidential information, as well as other information subject to its domestic law and satisfactory agreement on safeguarding confidentiality.

The TRIPs agreement also has provisions enabling countries to act abuse of IPRs by rights holders or their recourse to practices that unreasonably restraint trade or affect transfer of technology.

The TRIMs agreement calls for review no later than five years to consider whether its provisions need to be complemented with provisions on investment policy and competition policy. However, there is an asymmetry in the manner in which the TRIMs Agreement forbids trade-distorting investment measures by governments, while failing to address the RBPs by firms having equivalent effects.

But the Uruguay Round Agreements take insufficient account of the inter-relationship between RBPs and governmental rules and restrictions. The relationships between governmental regulation of the distribution sector and the exclusionist distribution structures and practices or the manner in which trade measures facilitate collusion, the report notes, are well known.

The trade practices that anti-dumping regimes seek to control are essentially the same as discriminatory pricing. But compared to the "balanced and equitable manner" in which RBP control regimes evaluate differences in pricing within national borders, anti-dumping regimes apply different and more stringent criteria and procedures for control of such differences when they occur at cross-border level.

"Thus, broader mechanisms are needed to address not only RBPs affecting international competition and trade, but also to encourage trade regimes to draw upon competition concepts and philosophies to mitigate protectionist or trade-distorting measures by governments."

"These two approaches should be seen as broadly complimentary. For this purpose there is a need to identify ways whereby trade rules could be modified so as to take more into account competition policy and consumer welfare considerations."

In assessing the application and implementation of the Set, UNCTAD notes that while the definitions in the Set for 'restrictive business practices', 'dominant positions of market power' and 'enterprises', agreed to at a time when there were considerable differences among negotiators, it would seem possible at present to agree on simplified and more up-to-date definitions.

The Set, which does not apply to intergovernmental agreements nor to RBPs, directly caused by such agreements, have been interpreted as excluding from its scope voluntary export restraints (VERs) and orderly marketing arrangements (OMAs) -- even though their similarity to market-sharing cartel agreements and/or price-fixing was blatant.

The Uruguay Round Safeguards Agreement asks governments not to seek, take or maintain such VERs, OMAs or other similar measures on the export side or 'export moderation', 'export or import surveillance', 'compulsory import cartels' and 'discretionary export or import licensing schemes'. While States are also asked not to encourage or support adoption or maintenance by public and private enterprises of equivalent non-governmental measures, there is no outright prohibition.

It is likely, UNCTAD adds, that to the extent quantitative measures are controlled by the Agreement, there will be a shift towards private restraints on trade, particularly since there is no obligation upon governments to prevent such restraints.

The strong pressures for market-oriented reforms, including deregulation, privatization and liberalization of trade and Foreign Direct Investment (FDI) have led to an emerging consensus, not only in the industrialized countries but also in developing countries and transition economies, on the importance of role of competition policy in increasing effective allocation of resources within the economy.

But most national competition laws do not deal with competition outside national boundaries, and do not control RBPs affecting foreign markets, such as export and international cartels.

"Without full cooperation from authorities of the country where such practices originate, it might sometimes be difficult or even impossible to take effective remedial action against RBPs whose adverse effects are felt in one country, while originating in another," UNCTAD says.

It was likely that as a result of liberalization private restraints to trade will tend to replace governmental barriers and there might also be conflicts between countries on interpretation of national competition rules or their enforcement, particularly in cases where such rules have extra-territorial application.

"Such conflicts of interpretation might also arise when,, as a result of FDI in one country, a dominant firm or monopoly situation is created in that specific market."

Hence the need, in an increasingly globalized world economy, for national competition policies to be complemented by actions at international level to protect and promote competition in the global market.

Such considerations, the report adds, have led to calls for placing competition policy on international trade agenda. Progress on this could reduce existing inconsistencies between international trade and competition regimes and two broad complementary approaches could be adopted to bridge the gap between competition and trade policies.

One would be for competition authorities worldwide to take mutually reinforcing cooperation measures to ensure that beneficial effects of liberalization of governmental border restraints on trade are not nullified by private restraints. The other would include measures to encourage trade regimes to draw upon competition principles to further trade liberalization process.

"In view of its experience with the Set, its broad mandate in the field of development and its universal membership, UNCTAD could make an important contribution to this process," the report adds.

With the growing convergence of views on competition policies, the international community might consider undertaking efforts to introduce broadly defined competition rules into existing international trading system, UNCTAD report suggests.

For e.g., the Uruguay Round Agreements could be further developed to bring them more into line with basic competition principles and UNCTAD's experience with the Set could be drawn upon to formulate a core of universal competition principles to be the basis for work to be done on the international trading system.

These could concern the need for States to enact and effectively enforce national competition legislation; need to apply such laws in a non-discriminatory manner; the extent to which exemptions from such laws would be appropriate; to what extent States should prevent use of RBPs within their competence when these affect international trade, particularly the trade and development of developing countries; extent to which competition authorities should cooperate with each other in resolution of cases; elimination of hard core horizontal RBPs and collusive tendering affecting international trade; extent to which States should ban national legislation having anti-competitive effects; and the extent to which preferential or differential treatment for developing and least developed countries would apply to competition issues.

But it would indeed seem premature to elaborate international competition rules for enterprises to be enforced by a supra-national body and countries would need to continue to exercise their sovereignty over their domestic markets, and elaborate their own 'tailor-made' national competition laws and enforce them effectively.

Cooperation among competition authorities would be strengthened through sets of bilateral, regional and possibly plurilateral agreements.

"The international trading system would function in conformity with the agreed universal principles of competition and with any specific contractual commitments that might be negotiated in the future, with the WTO dispute settlement mechanisms called upon to ensure that countries effectively apply these principles and rules.

"As domestic laws evolve over time and achieve a greater level of convergence and harmonization, the adoption of binding multilateral rules for enterprises could be considered," UNCTAD adds.

The report notes that there is now little controversy on the negative impact of international horizontal restraints of competition, especially of hard-core arrangements such as price-fixing, market allocation and bid-rigging and the desirability of forcefully prosecuting such cases on a national or regional laws.

UNCTAD adds; "Probably, this is at present the only definable area... where there is a consensus that hard-core horizontal restraints are eliminated to the extend possible .. a consensus reflected in a strong world trend to adopt and reform competition laws to allow legal action... There is as yet no consensus as to what a comprehensive, optimal competition law should look like, for instance in such areas as vertical restraints, merger control and abuse control over dominant firms...."

In this light, UNCTAD argues, it may be worthwhile to consider "a more modest initiative for a binding international agreement to outlaw hard-core horizontal restraints... the only type of private restraints of competition to be close to universal acceptance as highly detrimental to international trade and development."

"Such an agreement," UNCTAD says, would prohibit all arrangements and concerted practices between competing enterprises that fix prices, allocate customers or territories, assign quotas or rig bids. It could be formulated in relatively clear and precise terms, thereby avoiding the general and vague - at times even contradictory - language of more comprehensive instruments."

UNCTAD says there is wide acceptance in all countries on need to deal effectively with such horizontal restraints on international trade by private enterprises, but not on dealing with vertical restraints in abuse of dominant positions of market power and for the present only improved voluntary guidelines along the lines of The Set seem appropriate.