The Harmonisation of ASEAN
Competition Laws and Policy from an Economic Integration Perspective

By Dr. Lawan Thanadsillapakul

operations.(37) The Trade Competition Act focuses on three areas:(38) to reduce barriers to entry, to improve market activity and to eliminate monopolies. The Trade Competition Act forbids any business operator with market power unfairly to fix or maintain sale levels or sale prices of goods or charges for services, to impose conditions that unfairly limit, directly or indirectly, its customers' opportunities to purchase or sell goods, to receive or provide service, or to acquire credit facilities from other business operators.(39) The Act also prohibits business operators from unreasonably suspending, reducing or limiting services, production, purchase, distribution and imports, destroying or damaging goods to produce a situation of imbalance between supply and demand, or unreasonably interfering with other persons' business partners.(40) Under the Competition Act, no business operator shall operate any merger that might may give rise to a monopoly or unfair competition.(41) The Act on Prices of Goods and Services prevents price fixing,(42) while the Anti-Dumping and Countervailing Act aims to prevent dumping injurious to a domestic industry.

All these Acts focus mainly on the domestic market and are more concerned with fair competition in the Thai market than with the implementation of fair competition at regional market level. The regulations include a guarantee against State competition, against competition by State monopolies selling or dealing in similar products, against price controls by the State, against export restrictions and against imports by the State or by its agencies and enterprises. However, the practice of import bans on competing products to protect domestic enterprise counteracts the principle of fair competition in this case, thus offering an example of ineffective implementation of unsystematic competition rules.

· Vietnam has no competition law and policy as yet but an inter-ministerial committee is actively engaged in drafting a Competition and Anti-Trust Law. It will be effective in 2005.(43) The draft includes a ban on abuse of a dominant market position and on a monopoly market position, agreements to restrict competition, unfair competitive practices and State administration of business competition or State monopolies, both contentious issues. Vietnam's chief problems in elaborating and stipulating competition law and policy are its inefficient legal infrastructure, lack of knowledge of competition law and poor competition culture. The Vietnamese Minister of Trade has admitted that a great many managers and businesspeople are insufficiently aware of the issues of competition.(44)

· While all ASEAN countries have anti-dumping laws and a consumer protection law, most do not have a systematic and comprehensive competition law capable of regulating business rivalry and controlling potential restrictive business practices of producers in global networks. It is important that the ASEAN countries introduce a comprehensive regime of investment liberalisation, deregulation, privatisation and competition law enforcement rather than merely relaxing local laws and lifting barriers piecemeal, which is not effective and more likely to confuse foreign investors, who tend to feel overwhelmed by a proliferation of sometimes contradictory laws and regulations. Regulatory differences in the investment(45) field are obstacles to foreign investment. Consequently, the comprehensive regionalisation of competition laws could effectively enhance the capacity of the legal environment to attract foreign investors.(46)

2. Merger regulations to replacing rules restricting foreign equity in ASEAN investment law

Even though a comprehensive regional system of merger control does not yet exist, it is in the interests of ASEAN to establish merger control in the region.(47) Since ASEAN will have to implement national treatment in the near future and eliminate investment laws that are incompatible with the objectives of the ASEAN Investment Area, merger regulations are needed to replace any such laws used as a screening instrument, in order to forestall the emergence of cartels, trusts, oligopolies, concentrations or dominant market positions that could harm the ASEAN economy.
One of the main restrictions on foreign investment found in all ASEAN countries' investment laws and regulations is the limitation of foreign investors' shares or equities in local companies. One reason for limiting foreign equity in a local firm is to ensure that foreign investors cannot dominate the domestic market and abuse their market power. No foreign company can merge with or acquire another local or foreign firm, since its equity would exceed the specified legal limit. However, such restrictive investment treatment is regarded as discriminatory and as an impediment to foreign investment. It has also had negative effects on the ASEAN countries' economies. For instance, foreign investors cannot generally hold more than 49% of shares in a company located in any of the ASEAN countries except where the company has been established under a promotion scheme or is entitled to specific status, e.g. pioneer status. Hence the majority of shares are held by domestic investors, who have to seek capital by various methods, chiefly loans, and since domestic loans carry very high interest owing to the ASEAN governments' financial policy aimed at encouraging domestic saving,(48) they tend to turn to offshore loans. Ironically, the inflow of capital in this case is in the form of short-term foreign debt rather than direct foreign investment. As a consequence, the greater the number of foreign investment projects in the ASEAN countries (especially those involving massive capital funds), the greater the volume of offshore loans. This is an example of negative policy impact in the ASEAN countries, where individual policies may at first seem good but where the way they interact with each other eventually has a negative effect on the overall economy. In this author's view, this should be regarded as one of the important causes of the Asian financial crisis.

Moreover, merger regulations are also needed to control abuse of a dominant position by domestic companies, a phenomenon that has now reached the ASEAN countries. All firms, whether domestic or foreign, should be subject to the same regulations and controls, so complying with the national treatment principle and the implementation of the ASEAN Investment Area.

IV. - RATIONALE FOR A REGIONAL ASEAN COMPETITION LAW

The removal of internal barriers among the ASEAN countries to promote regional economic integration should not be allowed to result in companies creating territorial protection through cartels or the abuse of a dominant position. While investment liberalisation within ASEAN can help encourage the free entry of firms and to enhance the contestability of the ASEAN market, it is not enough: competition laws are needed to ensure that the former statutory obstacles to contestability are not replaced by anti-competitive business practices, thus negating the benefits that might arise from liberalisation. The reduction of barriers to foreign direct investment (FDI) in ASEAN and the establishment of positive standards of treatment for TNCs must go hand in hand with the adoption of measures aimed at ensuring the proper functioning of the market and at controlling anti-competitive business practices. The 1997 World Investment Report suggested that:

"The culture of FDI liberalisation that has grown world-wide and has become pervasive, needs to be complemented by an equally world-wide and pervasive culture of competition, which needs to recognise competing objectives" (UNCTAD, 1997).

This statement has great relevance for ASEAN regulatory practice. Anti-competitive business practices that generally occur among international firms, and hence may also happen in ASEAN countries, include the following: (49)

(a) Horizontal restraints or hard-core cartels among firms in an oligopolistic market, engaging, for example, in price fixing, output restrictions, market division, customer allocation, collusive tendering and other anti-competitive co-operation between firms selling competing products. All these business practices distort prices and the allocation of resources and result in a dysfunctional market to the disadvantage of consumers.(50) Fair competition would exist if no single supplier or consumer were able to influence market prices. Competition laws and policy may play an important role not only in prohibiting the formation of cartels but also in balancing the competitive effects of each firm's activity on the market.

(b) Vertical restraints or distribution strategies between manufacturers, suppliers or distributors, such as: tying the sale of one product to the purchase of another; exclusive dealing (the seller requires the buyer to purchase products only from same seller); territorial restraints (the seller requires the buyer/distributor to resell the product within a limited geographical area); and resale price maintenance (the seller requires the buyer to resell the product only at a specified price). Resale price-fixing also tends to be generally prohibited. The pro- and anti-competitive effects of such restraints need to be evaluated and where necessary, controlled.

(c) Abuse of intellectual property rights (IPR), for example where technology-licensing arrangements abuse the monopoly position of IPR holders, e.g. through non-competition clauses and the so-called 'grant back'. This means the licensee is required to assign inventions made in the course of working on the transferred technology back to the licensor. Another aspect of IPR abuse, that of "non-contestation clauses", is that the licensee is prevented from contesting the validity of the IPR or other right of the licensor. IPR abuses might be subject to general competition rules on horizontal and vertical restraints.

(d) Abuse of market dominance: dominant firms accounting for a significant market share may attempt to monopolise a market, for instance through excessive prices, price discrimination, predatory low pricing, refusal to deal or vertical restraints. Rules against the abuse of a dominant position may be conduct-oriented, in other words, a general prohibition against monopolising and foreclosure of competition. Another approach is result-oriented, with a prohibition for example of predatory pricing only if the losses can be recouped.

(e) Mergers and acquisition policies, where horizontal, vertical or conglomerate mergers may reduce competition or decrease efficiency. Merger policies may be designed to ensure the contestability of markets by preventing a monopoly or price-setting by a single seller and price-taking by a single buyer, as well as oligopolistic or monopolised market power. On the other hand, acquisition policies also overlap with industrial policy instruments.

(f) Public undertakings and enterprises with special privileges, which are not required to behave according to market principles (GATT Article XVII and EC Treaty Article 90) in view of their market power or financial independence. This includes firms with exclusive trading rights and monopolies.

In the new era, the ASEAN countries will need to regulate these anti-competitive business practices so as to achieve fair competitive conditions. However, they will have to beware of balance-of-market failure and government failure. If governments intervene to correct market failure or supply public goods, the risk of market failure has to be weighed against that of alternative government failure, since government intervention may lead to additional distortions. Therefore, fair competitive conditions rely on the rational behaviour of market participants or firms, perfect information, perfect market mobility, stable preferences and technologies, and the need to reflect all costs in the prices of goods and services.(51) All these conditions require a comprehensive set of competition laws and regulations in the ASEAN countries. Currently, laws and policies dealing with restrictive business practices differ from one ASEAN country to another and focus on different aspects such as anti-monopoly, anti-dumping, protection against state competition, etc. As pointed out supra, there are no systematic competition laws in the ASEAN countries except in Indonesia and Thailand. Singapore for its part has refrained from adopting competition laws on the ground that its liberal trade policies and its rather liberal investment regime are a significant guarantee of the contestability of its open economy. Now, however, all ASEAN countries are called upon to introduce such comprehensive competition laws and policies and to enforce them effectively. In fact, the general infrastructure and other comparative economic advantages of the ASEAN countries appear good; the only important drawback is that the ASEAN countries lack good governance and a rule-based system. Therefore, a combination of sound ASEAN legal and economic systems may be viewed as favourable created factor endowments(52) capable of producing a positive effect on ASEAN's competitiveness in international trade and investment.

V. - THE BASES OF AN ASEAN REGIONAL COMPETITION LAW AND OPTIONAL MODELS OF A REGIONAL COMPETITION REGIME

In the modern, globally integrated world economy, it is not only private enterprise, but also governments that engage in competition.(53) In the ASEAN countries in particular, governments have widely implemented strategic policies in the trade and investment sphere. In this respect, government plays an important role, as PETERSMAN (1993: 35) has pointed out:

"By means of industrial policies aimed at enhancing economies of scale and positive externalities of national industries, strategic trade policies aimed at shifting rents away from foreign to domestic industries, or by means of investment policies designed to attract scarce foreign capital through tax incentives and favourable investment conditions."

Markets, then, are imperfect in many ways. In effect, two kinds of competition law are required: the first to deal with private restraints of competition and market failures (abuses of market power, externalities and asymmetries in information), the second is competition law aimed at government competition to limit government failures, which may affect the supply of public goods and created endowments/comparative advantages.

On the one hand, fair competition should aim to protect less-organised firms, such as small and medium-sized enterprises, upon entering the market while protecting the public interest and consumers in a liberal economy. On the other hand, competition rules may need to be assessed so as to determine how far or to what extent they should regulate the behaviour of firms. For instance, in an example given by KORAH(54) in some business areas, merged lines of business or operators may result in more adequate and effective operation, greater product variety and more readily available services - including advanced research and technological development - than individual, separate smaller firms or operators are able to provide. For instance, if a single plant or a merged enterprise can process all the spent nuclear fuel in a region at substantially lower cost than could smaller plants, it would be unprofitable for a second firm to establish such a smaller plant. Therefore, there is a concern that competition rules may be applied to protect smaller firms at the expense of larger enterprises irrespective of efficiency. Whether collaboration or competition in a particular market leads to a better use of resources is always a difficult question to decide. While competition is desirable in lessening economic power, businessmen believe that in some industries resources are put to better use if competition is limited. Therefore, collaboration or natural monopolies may sometimes occur in response to the need for economies of scale. For instance, if a firm has merely expanded its plant in good time to meet an expected increase in demand, so that it is unprofitable for other firms to enter the

Part 7

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(37) The Act applies to all business operators and business activities in Thailand with the exception of government agencies, state enterprises, co-operatives or groups related to agriculture or farmers, and certain business operators prescribed by the Ministerial Regulation.

(38) The main provisions are Sections 25, 26, 27 and 29 prohibiting monopolies, mergers, collusion and unfair trader practices. In Art. 25, entrepreneurs are prohibited from abusing a dominant market position. The Act established specific criteria to assess market share, turnover, and competitive conditions of enterprises. Under Art. 26 entrepreneurs are prohibited from entering into mergers which may result in a monopoly or unfair competition, unless the merger gets permission from the Commission if necessary for the business and beneficial to the economy. Under Art. 27, entrepreneurs are prohibited from engaging in any operations which are considered to restrict competition and which could seriously impair the overall market structure, such as fixing the purchase or selling prices of goods and services, fixing geographical areas or conditions of purchase or sale and/or by reducing the quality of goods and services to a level lower than previously manufactured and provided. And under Art. 29, entrepreneurs are prohibited from performing any acts which is not compatible with free and fair competition and which results in destroying, impairing, obstructing or impeding or restricting the business operations of other entrepreneurs or preventing other persons from carrying out business or causing the cessation of business.

(39) Section 25 (10) and (2) of the Thai Trade Competition Act B.E. 2542 (AD 1999).

(40) Section 25 (3) of the Thai Trade Competition Act.

(41) Section 25 (4) of the Thai Trade Competition Act.

(42) Section 24 of this Act provides that "in order to prevent the fixing of the purchase price, sale price or designation of unfair conditions and trade practice, the CCP (Commission on Price of Goods and Services), with the approval of the Cabinet, shall have the power to issue a notification prescribing any goods or services as the controlled goods or services."

(43) See SUN-HEE LEE, "Vietnam: Competition law and competitiveness", http://www.asialine.dfat.
gov.au/asialine/Asialine.nsf/WebArticlesbyRegion/ED4F77D7EEB9CABBCA256C9700819471.

(44) See Report on the Progress of Drafting Competition Law in Vietnam by Mr TRAN ANH SON, Deputy Director of Competition Administration Department, Vietnam, submitted to APEC in the Second APEC Training Course on Competition Policy, arranged by the Japanese Fair Trade Commission Japan

(45) TRISCIUZZI, G.S., "Multilateral Regulation of Foreign Direct Investment", in Fisher, B.S / Turner, J. (eds.), Regulating the Multinational Enterprise: National and International Challenges, Praeger (New York) (1983), notes: "Perhaps the most important potential benefit would be the harmonisation of currently diverse systems of national laws and regulations. For example, harmonisation could reduce the high costs borne by multinational corporations in dealing with widely divergent regulatory regimes in different countries".

(46) See GEIST, supra note 12, who points out that it is not surprising to find that investors encounter and become discouraged with the potentially confusing and time-consuming regulations established by individual states. Also Professor Mark BAKER noted in a 1991 review of Latin American FDI Codes that, "the greatest disincentive to direct foreign investment was dealing with local authorities. Foreign investors do not like to deal with foreign authorities because their application and approval procedures are unclear and cause substantial delays;" also see BAKER, Mark B. / HOLMES, Mark D., "An Analysis of Latin American Foreign Direct Investment Law: Proposal for Striking a Balance Between Foreign Investment and Political Stability", University of Miami Inter-American Law Review, Vol. 23, No. 1 (1991), 30.

(47) For a detailed discussion on international merger control regimes see WILSON, Joseph, Globalisation and the Limits of National Merger Control Laws, Kluwer Law International, The Hague/London/New York, (2003).

(48) See World Bank, The East Asian Miracle: Economic Growth and Public Policy, World Bank Policy Research Report, World Bank, (New York) (1993a); also PETRI, Peter A., The Lessons of East Asia: Common Foundations of East Asian Success, World Bank< (Washington, D.C.) (1993a).

(49) Compiled from various sources: UNCTAD (1997) World Investment Report 1997: Transnational Corporations, Market Structure and Competition Policy. New York and Geneva: United Nations Publication.; PETERSMANN, E.U., "International Competition Rules for the GATT-MTO World Trade and Legal System", Journal of World Trade, Vol. 27, No. 6 (December 1993), 35-86; idem, "International Competition Rules for Government and Private Business", Journal of World Trade, Vol. 30, No. 3 (June 1996a); SCHOENBAUM, Thomas J., "The Theory of Contestable Markets in International Trade: A Rationale for 'Justifiable' Unilateralism to Combat Restrictive Business Practices?", Journal of World Trade, Vol. 30. No. 3 (June 1996), 161-190.

(50) If market prices are distorted either through cartels or monopolies, they are likely to distort also the allocation, co-ordination and distribution functions of market competition so that consumer welfare will be reduced by higher prices, fewer products and less freedom of choice.

(51) PETERSMANN, supra note 49.

(52) International competition among firms is influenced not only by "natural" production factor endowments, but also by government-determined conditions of competition, see DUNNING, John H., "The Global Economy, Domestic Governance, Strategies and Transnational Corporations: Interactions and Policy Implication", Transnational Corporations, Vol. 1, No. 3 (December 1992), 7-45. Dunning discussed in detail "created" and "natural" endowments.

(53) PORTER, M., The competitive Advantage of Nations, MacMillan Free Press, (New York) (1990).

(54) KORAH, Valentine, Monopolies and Restrictive Practices, Penguin Book Ltd, (Middlesex) (1968), 64.