7Update Enewsletter Volume-1 No.1

A bi-monthly, internationally circulated e-newsletter of the CUTS-Centre for International Trade, Economics & Environment (CUTS-CITEE), which has been designed to disseminate information about the “7 UP Project”, in addition to reporting interesting newsitems, which have been reported across the globe on competition and other related issues.

The 7-Up Project is a 2 year research and advocacy programme being conducted by the Centre with the support of DFID, UK for a comparative study of competition regimes of seven developing countries of the Commonwealth.

Editor’s Note

A good competition law and policy is a concomitant requirement for any market-based reforms. In as much as reforms are brought about to rein in unnecessary command and control measures, a competition law ensures the promotion of a sound market, which is not exploited by dominant businesses. A competition law promotes competition, whereby it buttresses consumer welfare and economic efficiency. Importantly it also enables the government to keep a check on concentration of economic power

On the other hand the current phase of globalisation and liberalisation is adding newer and complex definitions to the definition of market structures, concentration etc and pushing the authorities to redefine concepts like dominance and abuse of dominance. Furthermore, the advent of World Trade Organisation has added new dimensions to the scenario.

Since the time the WTO took up the examination of the interaction between trade and competition policy in 1997, much interest has been raised in several countries. In 1995 only about 50 countries had a competition regime where as now roughly 85 countries have legislation on competition. Secondly there has been a pressure from both the multilateral institutions, in cases such as Indonesia, and internally to draft new and effective competition laws, such as UK and India.

It is one thing to have a competition law and another to have an effective competition law. The effectiveness of a law is dependent on several factors: drafting, control, budget, independence, research and investigation support etc. The overall policy environment of the country also matters substantially. Thus the purpose of regulation of markets in favour of consumers and economic efficiency is defeated, which affects the overall economic development of the country.

In order to establish what is the best way forward for developing countries to have effective competition laws, it is, first of all, necessary to learn from their own experiences. Sharing their experiences among themselves will also help them to overcome the drawbacks, which prevent them from having a good and effective competition regime.

Given the above background CUTS has undertaken a project titled “A Comparative Study on Competition Regimes in Select Developing Countries of the Commonwealth”. Seven countries from South Asia and Africa have been selected for the project, which have had some experience of the same and are at somewhat similar levels of development with a similar jurisprudence. The selected countries are India, Pakistan, Sri Lanka, Zambia, Kenya, Tanzania, and South Africa. The project popularly named as ‘7-Up Project’ is of two years duration commencing from 1st September 2000. One can refer to our Website www.cuts-india.org for more information on the project.

We are publishing this e-newsletter as part of the project mainly to disseminate information on the project. 12 issues of 7-UpDate will be published within the project period and this is first in the series. This issue, apart from introducing the project to the readers, contains major news/views with respect to competition issues.

We would be grateful to receive your comments on the newsletter, both on its content as well as on its structure, and ways to improve it further.

Happy reading!

I. Project Progress

There has been considerable progress in the first two months towards the project implementation. Following the progress summary:

For more information either contact us are visit our Website www.cuts-india.org

II. Major News

Fourth review of the ‘UN Set’ on competition principles and rules

On 29th September 2000, the United Nations Conference on Trade and Development (UNCTAD) adopted a resolution reviewing for the 4th time “all aspects of the Set of Multilaterally Agreed Principles and Rules for the Control of Restrictive Business Practices” (herein after ‘the Set’). Last review of the Set had taken place in November 1995.

Growing importance of competition law and policy, in general, and the Bangkok Declaration of UNCTAD X, in particular, set the background for the 4th Review Conference. The UNCTAD X decided in its “Bangkok Declaration” that “in addition to national efforts, the international community as a whole has the responsibility to ensure an enabling global environment through enhanced cooperation in the fields of trade, investment, competition, and finance (…) so as to make globalisation more efficient and equitable”. Moreover, the Plan of Action, adopted at Bangkok during UNCTAD X in February 2000, mandates UNCTAD to continue to examine issues related to competition law and policy of particular relevance to development.

Significant addition to the background was also made by the second session of the Intergovernmental Group of Experts on Competition Law and Policy, June 1999, Geneva. The real pace of 4th Review Conference, was, however, set by the regional and subregional seminars in Jaipur (India) for Asia and the Pacific; Kiev (Ukraine) for Central and Eastern Europe and the CIS member countries; Casablanca (Morocco) for African and Arab countries; Livingstone (Zambia) for Southern and East Africa; and San Jose (Costa Rica) for Latin America and the Caribbean. These seminars were conducted in order to arrive at a consensus on the conditions required to make globalisation both efficient and equitable.

In sum, the 4th Review Conference:

Apart from the above the Conference decided that the Intergovernmental Group of Experts on Competition Law and Policy should draw up its work plan for the purpose of institutional capacity building; competition advocacy and educating the public; providing inputs to possible international agreements on competition etc. It also resolved that UNCTAD should continue to study the issue of competition, competitiveness and development with particular emphasis on:

Monti on EC Competition Policy Reform
In a recent “World Competition” (Vol. 23, No. 2, June 2000), a journal published by Kluwer Law International, Mario Monti, Member of the European Commission with responsibility for competition policy, wrote the guest editorial. The article titled “A European Competition Policy for today and tomorrow” mainly focussed on the reforms being undertaken or proposed vis-à-vis European competition policy. He precisely focused on three of the main avenues which the Commission is pursuing in order to adapt the competition law enforcement policy to new challenges of today’s world economy. These avenues are:

Procedural reform
The European Commission, over a past few years, has undertaken a major review of the procedures for the enforcement of the competition rules. It is being proposed that Article 81 of the Treaty of Rome should be rendered directly applicable as a whole, and that the current system of ex ante notification should be abandoned. This means that competence for the enforcement of the Community’s competition rules should henceforth be shared between the Commission, on the one hand, and the EU Member’s national competition authorities and courts on the other.

The above change in policy, according to Monti, would enable the Commission to concentrate its efforts on the most serious instances of anti-competitive behaviour, on investigating major cross-border mergers, as well as on progressing the liberalisation of new sectors. It would further result in enhanced enforcement by effectively increasing the number of potential prosecutors, and by facilitating private enforcement.

He, however, warns that the reform must take into account the need to ensure the maintenance of an adequate level of legal certainty for market participants. To ensure the coherent and consistent enforcement of competition rules, a degree of centralised guidance would need to be preserved, and this would be the role of the Commission, added Monti.

Legislative reforms
The Commission is also in the process of modernising and rationalising the Community’s substantive secondary legislation in the competition field. This reform is for the dual purpose –first, to simplify these cumbersome and complicated provisions, and secondly to bring these legislation into line with current economic thinking.

On 1st June 2000, a new “block exemption” Regulation entered into force covering all categories of vertical agreements except motor vehicle distribution. The new legislation identifies a number of serious restrictions which will not normally be exempted from the prohibition contained in Article 81 of the EC Treaty. According to the new policy companies with market share of less than 30 percent will be exempted from competition rules that prevent them making any vertical agreement. Only vertical arrangements between enterprises with higher market shares will require individual scrutiny. Commission has also published guidelines indicating its approach towards such cases.

This reform, says Monti, amounts to a major simplification and harmonisation of the treatment of vertical arrangements across all sectors, thereby reducing unnecessary regulation and consequent compliance burden on companies.

The Commission is also reviewing its policy toward horizontal agreements between competitors. It has proposed that this should take the form of a revision of the existing block exemption for specialisation and research & development agreements, complemented by a comprehensive set of guidelines.

International cooperation
Monti recognises the importance of effective cooperation between competition authorities due to challenges presented by globalisation, in general, and increasing number of large-scale, trans-national mergers, in particular. To him, experience with bilateral EU-US cooperation has been very effective – particularly in merger cases, substantially reducing the risk of divergent or incoherent rulings.

The Commission is seeking to expand and intensify its bilateral cooperative network in the competition field. Last year it concluded cooperative agreement with Canada, and now it has been granted a mandate to negotiate a similar agreement with Japan. Monti further says, “In the long run, however, I am convinced of the need to also put in place a multilateral framework ensuring the respect of certain basic competition principles”.

Joel Klein on multilateral competition policy
In a significant development, Joel Klein, head of US antitrust division at the Department of Justice, has called for a global initiative on competition policy. He pointed out that there is a need for a new organisation to set standards and align competition policy worldwide. However, favouring for a ‘cautious beginning’, he emphasised that the new body would not have enforcement powers and that it would not be a part of the World Trade Organisation. Also such multilateral body would not deprive individual nations of antitrust authority, he added.

The main concern, as reflected from Klein’s statement, is that due to cross-border mergers. What has changed, according to him, is the number and complexity of cross-border mergers that raise similar regulatory concerns in several countries. He said that there is no other way to relieve political friction and reduce the regulatory burden on companies. Speaking at a conference to celebrate the 10th anniversary of the European Commission’s merger regulation he opined that a bilateral relationship would be insufficient to cope with the problems we [EU and US] are going to face in the future.

Klein said that such an international antitrust body might begin as a simple working group or committee comprised of representatives from existing international organisations such as WTO, OECD (Organisation of Economic Cooperation and Development) and the UNCTAD.

The trade experts believe that Klein’s suggestion is aimed at sidelining the European Union’s proposal to include competition policy in a new round of discussions at the WTO. Lord Brittan, former EU trade commissioner, has said that there would be no objection to Mr. Klein’s proposal as a supplement to the WTO, but not as an alternative.

Though it would be interesting to watch EU-US trade diplomacy on this issue, the statement by Joel Klein is indeed a significant step. This has given a fillip to the move towards some sort of international competition body, an idea that had been resisted by the US for long.

III. Country Focus

Taming Unilever in Bhutan!
There are no lawyers in Bhutan! That is to say that there are few lawyers but none are allowed to practice in the courts in this idyllic Himalayan Buddhist kingdom. People are not litigious and don’t even bother to complain, and sellers also do not cheat. There is a judicial structure having a court in all the 20 districts, and a High Court. Appeals against the apex court’s decisions may be made to the Advisory Council for disposal. People can represent themselves in these proceedings. There are few laws and most often regulations are promulgated to regulate the society. Adulteration or shortweighing are punishable, but there are no normative laws to determine the violation. Instead, norms established under Indian laws are followed. For example, Indian standards or India’s maximum retail price policy is enforced by the Bhutanese government on goods sold in its domain.

Bhutan has a population of just about 600,000 and a per capita income of over US$645, nearly twice that of India, which dominates its economy. Over 70% of goods sold in Bhutan come from India. In the consumer goods sector, the major manufacturing activities comprise a liquor factory, two fruit processing factories, cement factories, ferro alloys, calcium carbide and particleboard and furniture units. However that does not preclude similar goods to be imported from India and elsewhere.

All Indian companies operate through local wholesalers in Bhutan, who are licensed by the Bhutanese government to operate as such. In 1994, the Ministry of Trade and Industry (MTI) undertook an exercise to regulate the dealership of Indian companies. It demonopolised the wholesale distribution trade in Bhutan. It had two main provisions. Firstly, any trader will not hold more than 10 agencies, thus widening the scope of trade. Secondly, no of major principal company in India will be the sole agent for any company selling goods in Bhutan.

In its first action, the MTI asked Hindustan Lever Ltd., Calcutta to appoint more than one wholesaler for distributing its goods in Bhutan. At that time HLL, the Indian subsidiary of the Anglo-Dutch TNC: Unilever, was operating through the Tashi Group of Companies as its sole wholesaler. Tashi is the biggest business house in Bhutan with varied interests from hotels to cooking gas. In response to the MTI’s directive, the HLL responded that since the market in Bhutan is too small, it does not feel the necessity of appointing another agency. The turnover of HLL in Bhutan at that time was in the range of Rs.15mn per annum.

The MTI insisted that HLL appoint another agency, but the firm’s response was evasive. HLL dodged MTI by claiming that either the new applicant party has little capital or that it has no experience of trading in consumer goods and so on. Finally, the MTI suggested the name of the Food Corporation of Bhutan, a government company, which has both capital and distribution network. Yet HL stating did not respond positively. This time, the MTI sent an ultimatum to HLL stating that it will cancel Tashi’s license to operate as HLL’s wholesaler. This worked and HLL soon appointed FCB as its second wholesaler.

FCB rose to the occasion and soon multiplied HLL’s business in Bhutan to nearly Rs.40-45mn by aggressive marketing through its 96 fair price shops in the whole country. Today, HLL is happy that its business has nearly quadrupled by creating new markets, where Tashi could never have reached or was too complacent to make the efforts. In another similar situation, Nestle India Ltd heeded MTI’s advice and it has more than two wholesalers, thus there is healthy competition in Nestle’s products in Bhutan.

Exclusive dealing is a problem in all developed and advanced developing countries, and many competition authorities do not even frown on it. Yet in the case of Bhutan, the agreement realised that monopolistic agencies can actually exploit the market both by manipulating the prices or not catering to the demand.

Clearly, the MTI’s demonopolisation regulation promotes competition and does not control competitors. In conclusion, one can draw the following important lessons:

Response: It [the article] has nailed the well worn argument that small economies do not respond well to competition thus small underdeveloped countries like Guyana have well lived with monopolies for far too long even though visible evidence showed this policy to be exploitative. An important factor, however, was the good intent of the King and those persons behind the Ministry of Trade & Industry for fairness in trade. Such good intentions tend to pay great dividends.
Sheila Holder

IV. Announcement

7-Up Project Launch Meeting
Jaipur, India, 20-21 December 2000

Venue: Hotel Trident, Amber Fort Road, Opposite Jal Mahal, Jaipur 302 002 India
Ph: +91-141-63 0101; Fx: +91-141-63 0303

CONTACT US

CUTS Centre For International Trade, Economics & Environment (CITEE)
D–217, Bhaskar Marg, Bani Park,
Jaipur 302 016, India,
Ph: +91(0)141-228 2821
Fax: 91.141.2282485
Email: cuts@cuts.org