Global problems & solutions

The Financial Express, January 13, 2012

By Pradeep S Mehta and Frederic Jenny

Interactions between trade and competition could not be more intimate than they are today, when countries the world over are getting severely affected by the volatility of trade in primary commodities. The major commodity spike of 2007-08 sent alarm bells ringing when the prices of many primary goods doubled from what they had been not so long ago. Much of this fluctuation may be explained through the simple economics of demand and supply, while managing supply side failures is critical to restore some sense in the market. One such management issue is that of the inability of trading nations to deal with rampant anticompetitive practices, especially when the importing countries pay heavily for anticompetitive practices exempted by exporting countries’ competition laws. A case in point here is the global potash fertiliser export cartel.

A recent study by one of us has highlighted the overcharge paid by India due to anticompetitive practices in the global potash market. Under a competitive scenario, the price of potash would decline from $574 per tonne in 2011 to $217 by 2015, and subsequently increase to $488 by 2020. However, in the continuing presence of fertiliser cartels, the price of potash would steadily increase from $574 per tonne in 2011 to $734 in 2020. The resulting overcharge for India and China, two of the largest buyers of potash, amounts to more than a billion dollars per year per country.

Such export cartels are in some cases government sponsored. For example, in February 2010, China, which controls more than 95% of the global production of rare earths, a collective name for 17 minerals used in high technology from mobile phones to military equipment, announced that it intended to impose restrictions on rare earth mining in the next five years while maintaining international cooperation on trade in the metals, including “reasonable” export quotas.

But export cartels also exist in the manufacturing sector and can originate in developing countries. For example, last year, the Chinese government filed an amicus brief in a US court in support of a motion to dismiss a private suit against four Chinese vitamin manufacturers accused of having cartelised their exports to the US since 2001. The Chinese government argued in its brief that it had supervised the price-fixing as part of its effort to “play a central role in China’s shift from a command economy to a market economy” and in order to mitigate the exposure Chinese companies faced in potential anti-dumping investigations.

Export cartels have a significant influence on prices in general and on the swing of prices of primary products in particular. Competition authorities in the countries of origin of the export cartels do not act against them because export cartels do not affect the domestic markets of the cartelists. Competition authorities in the victimised countries do not have powers to act against the export cartels, which they suffer from for a variety of reasons. They may lack extra-territorial jurisdiction (as the litigation in India against the US-based soda ash cartel under the now repealed Monopolies and Restrictive Trade Practices Act, 1969, showed); the sovereign compulsion doctrine may prevent them from prosecuting state-sponsored export cartels; they may not have the means to gather the evidence they would need to convict the perpetrators even if they have jurisdiction, or they can be under pressure from their government not to act against them so as not to expose the country to retaliations endangering its own economy and state-supported export cartels.

In January 1997, the WTO established a working group on the interaction between trade and competition policy to explore the linkages and see whether a multilateral agreement on competition could be incorporated in the WTO acquis. The idea was carried forward in the Doha Development Agenda. Alas, the same was taken off the negotiating agenda in 2004 due to opposition by developing countries to negotiations on several issues, which included a competition policy.

Given the reforms in competition regimes brought about across the world since the collapse of the agenda in WTO (130 countries have adopted a competition law today as opposed to 35 in 1995) and now that it seems as though the Doha negotiations do not have an immediate future and that the WTO has to redirect its focus from trade negotiations to analyses, the time has come for this multilateral organisation to undertake a serious and dispassionate study of the effects and the appropriate legal regime to regulate export cartels. Such a study would need to distinguish between the export cartels that may actually enhance the export opportunities of small countries which would not otherwise be able to access export markets from the export cartels that have no such redeeming values and are limited to rent seeking and reducing competition rather than enhancing it. It would also need to distinguish between the purely private export cartels and the state-sponsored cartels, like oil, which may deserve a different treatment. Finally it should take into account the fact that export cartels may originate in countries that have vastly different levels of economic development and therefore have quite different domestic impacts.

Sweeping the issue under the carpet, as has been the case of late, fosters beggar-thy-neighbour activities, hampers competition in international markets and prevents trading countries from getting the benefits of trade liberalisation.

Frederic Jenny is chairman, OECD Committee on Competition Policy, and Pradeep Mehta is secretary general of CUTS International.

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