The Harmonisation
of ASEAN
Competition Laws and Policy from an Economic Integration Perspective
By
Dr. Lawan Thanadsillapakul
Co
(Cellophane).(76) If the relevant product market was
"all flexible packaging material", then Du Pont's share was
only 20%. But if instead the relevant product market was just cellophane,
Du Pont had 75% of the market. Second, small market shares may be consistent
with market power. Indeed, this would be the case when several small
firms collude to control a market. For example, 10 firms each with 10%
of the market may collude to charge monopolistic prices. Obviously,
there is a limit to this given the free-rider problem when the number
of firms increases in a collusive agreement, as in any other co-operative
agreement.(77) Third, large market shares may be consistent
with low market power. Indeed, potential entry may significantly reduce
incumbent firms' market share as underlined by the "contestability
theory". For firms with large market share, the presence and nature
of barriers to entry is a much more useful guide to policy than the
market shares themselves.(78)
A
thorough analysis of entry barriers is clearly crucial to the proper
implementation of competition law, in particular as to assessing levels
of dominance, since a firm may not exercise significant market power
over time in the absence of barriers to new entries in the relevant
market. Barriers to entry can be of three types: artificial (introduced
by government regulation or trade associations), natural (linked to
the production technology, scale and scope economies) and strategic
(set up by firms to deter entrants, through over-investment or loyalty
bonuses, for example). Common practice in US and EU competition law
suggests that while most effort has been put into determining the relevant
market and assessing market power - usually in term of market share
-, little (or at least not enough) attention has been paid to entry
barriers.(79) In the application of Article 82 (ex
86) of the EC treaty on the abuse of dominant position, "the primary
indicator" of dominance is market shares while the level of entry
(and exit) barriers is only a "secondary indicator". Another
proxy for market power sometimes used is the level of profits. The idea
is that firms with high profit levels abuse their dominant position.
Any
legislation implicitly or explicitly forbidding high profit levels may
have unexpected effects. If the competition authority regulates abuse
of dominant position by imposing a profit ceiling, then firms will have
a serious incentive artificially to inflate costs. This in turn provokes
misallocation of resources. Competition authorities, when regulating,
should bear in mind that firms react strategically to competition rules.
More importantly, as already mentioned, high profits may simply reflect
the greater efficiency of the firm with a competitive edge.(80)
To
summarise, competition policy, as any other government policy, should
include efficiency considerations. If, in dealing with abuse of dominant
position, competition policy tends to focus on firms' market share rather
than on strategic barriers against entry into the market, then efficient
firms may be penalised. This will give the wrong signals to firms, which
will try not to become too large, in terms of market share, rather than
to become more efficient. This is particularly important in developing
countries where market failures are due to market distortions. Clearly,
if a firm has a dominant position due to credit constraints in the domestic
market, the best policy must surely be, not to prevent "abuse"
of dominant position by the incumbent firm, but rather to correct the
credit shortage and so in turn allow for entry by new firms.
(b)
Monitoring horizontal agreements, vertical restraints and unfair competitive
practices
Allan
BOLLARD and Kerrin VAUTIER have suggested seven conceptual frameworks
to evaluate the competitive environment under competition law and policy
in developing economies: (1) merger regimes, (2) abuse of dominant power,
(3) horizontal agreements, (4) vertical restraints, (5) jurisdiction
exemption, (6) unfair trade practice and (7) role, enforcement and powers.(81)
In
many developing countries, mergers and abuse of dominant power are monitored
while horizontal agreements, vertical restraints, and unfair competitive
practices are not. In addition to this shortcoming of competition law,
these countries appear to suffer from weak enforcement of the existing
rules. Among the ASEAN member States, only Indonesia and Thailand regulate
competition. The other members, while elaborating their own competition
law, regulate non-competitive behaviour using alternative means. Singapore
promotes competition by inducing foreign competition under liberalised
trade and FDI regimes. The ASEAN countries differ considerably not only
in the type of rules they impose but also in the basic design and type
of enforcement arrangements. Last but not least, competition law in
Indonesia and Thailand and the draft competition law in the other ASEAN
members is predominantly structure-based, not outcome-based, and enforcement
is administration-based, not judicially-based.(82) This entails difficulties in effectively enforcing competition law and
monitoring horizontal agreements, vertical restraints and unfair competitive
practices.
(c)
The interaction of competition law and other government measures, laws
and regulations
A
competition regime encompasses any government measures that affect private
sector activity. State-owned enterprises constitute a typical form of
regulated activity, though they are by no means exclusive. Regulations
generally fall into one of two categories: economic regulations, including
agricultural price restrictions and restrictions on entry into certain
sectors such as the telecommunications sector, and social regulations,
including environmental and sanitary requirements for certain products.
Generally, economic regulations induce cost efficiency, while social
regulations are considered beneficial for public welfare. However, social
regulations can be created for, and used to provide, industrial protection.
The ASEAN governments therefore need to balance economic and social
regulations, and carefully analyse the impact of all laws and regulations
on the competitive economy. It is very important to re-assess all relevant
government legislation and regulations to ascertain the extent to which
they distort or promote competition by minimising the risk of anti-competitive
conduct through appropriate discipline on business conduct. The Competition
Principles also emphasise the importance of international co-operation
between both competition agencies and authorities to deal with ever-increasing
cross-border issues and capacity building in the ASEAN members. The
Competition Principles should serve an important role in formulating
and implementing competition policies.
VI.
- THE INTERACTION BETWEEN REGIONAL COMPETITION LAW AND POLICY AND OPEN
REGIONALISM (83)
The
functions of a feasible ASEAN regional competition law and policy (discussed
in the Introduction to this article) should include the promotion of:
(1) liberalisation of trade and investment in ASEAN;
(2) free and fair competition among firms in ASEAN by monitoring behaviour
of firms doing business in the region, and;
(3) a proper competitive balance between intra- and extra-ASEAN business
enterprises.
These
three functions of a feasible ASEAN regional competition law and policy
will play an important part in facilitating ASEAN open regionalism.
They will ensure that ASEAN keeps its regional market open for both
intra- and extra- regional trade and investment (the first two functions).
The third function is fundamental to open regionalism, to ensure a proper
competitive balance between intra- and extra-ASEAN firms.
Competition
law and policy should help to promote the growth of small and medium-sized
enterprises, which form the majority in local ASEAN economies, and allow
them to compete with their larger rivals.(84) The
liberalisation of trade and investment based on fair competition will
enable local small and medium firms to develop their economic strengths,
upgrade their technological production processes and improve managerial
systems and commercial skills, in order to compete with foreign firms.
Competition law will ensure that firms, both local and foreign, are
prevented from engaging in restrictive business practices, abusing a
dominant position or forming a cartel or any other type of unfair practice
that might damage other firms. Under such fair competition circumstances,
every firm, be it small or large, will be able to compete in its respective
market, size and field of business. Furthermore, competition law would
permit the ASEAN countries to evaluate the economic benefit deriving
from the influx of foreign firms, on the basis of whether or not they
are likely to damage local small and medium firms, and thus using competition
policy to protect these local firms. This may be achieved through, for
example, merger control regulation preventing TNCs from merging or acquiring
another company to create or strengthen their commercial dominance in
the market. This would encourage foreign investment to be made on a
"green field" basis that could contribute to the regional
economy, ensuring that it competes with other firms (local or foreign)
on the same fair basic grounds and conditions.
Since
there are many small and medium firms in the ASEAN countries, and since
these firms fear that an ASEAN regional market open to powerful TNCs
might significantly affect local smaller firms, efforts to protect the
competitive position of these local companies and to ensure fair competition
will increase their confidence in doing business in the single ASEAN
open market.(85) A regional competition law and policy
could help to ensure this.
Competition
law could also allow each single country to protect its indigenous enterprises
or national/cultural industries to preserve country-specific values
or maintain the country's global renown in a specific field.(86) In the Czech beer case, an American firm, Anheuser-Busch, brewer of
the American Budweiser lager beer, wished to acquire a stake in Czech
Budvar, famous for Budweiser Budvar lager beer, but to no avail. Both
companies produce the same brand name of "Budweiser" beer
and disagree over the brand name, but neither have an exclusive right
to use the brand name internationally, so they settled the dispute by
allocating the use of the name in different markets.(87) However, a conflict arose when they both entered the European markets,
where the agreement did not clearly define the territory assigned for
the use of the name by each party. The American firm wished to merge
the two companies so that they could produce and sell the product world-wide
without any constraint. However, Czech Budvar is traditionally regarded
as the producer of the true Czech Budweiser lager beer and consumers
both in the Czech Republic and elsewhere favour the typical and unique
beer as originally produced by Czech Budvar. Consumer campaigns were
mounted to preserve Czech Budvar as the national indigenous industry
and stop its acquisition by the American firm.
MUCHLINSKI
has argued, in relation to this case, that since the Czech Republic,
alone among the transitional economies, has abolished specialised foreign
investment laws and has actively liberalised investment, only privatisation
and competition law could act as vehicles for the close screening of
foreign investment. The EU law as a source of principles for the regulation
of foreign investment would also be justified, since the Czech Republic
and the EU have had an agreement(88) to bring the
Czechs' commercial and economic laws into line with EU law as a prelude
to possible future membership of the EU. As a result, EU competition
law, which concerns anti-competitive and concerted practices, abuse
of a dominant position and preferential State aids that distort competition,
must be taken into account regarding any business practices in the Czech
Republic. Competition law could provide an alternative screening procedure
for foreign investment to examine any threat of damage to national industry
by means of merger or acquisition. In this perspective, the protection
of indigenous industries could be based on concern for consumers and
the availability of a choice of products, which is compatible with cultural
diversity.
The
ASEAN countries follow an "open door" policy in respect of
investment liberalisation so as to allow regional competition law, which
is consistent with liberalisation, to play an important role in protecting
domestic firms from damage such as in the Czech beer case. In this way,
ASEAN can reconcile a positive approach to foreign investment, justified
by a lack of regulatory control, with control over any undesirable market
and social effects of FDI through laws that apply to foreign and domestic
firms alike, notably competition law, merger and acquisition control
regulation, and anti-monopoly control. (89)
In
other words, ASEAN indigenous industries could be protected under the
ASEAN regional competition law and policy and by regional merger control
regulation. Moreover, consumer and local interest group views on particular
businesses or industries can be taken into account by the authority
concerned. (90)
VII.
- CONCLUSION
In
conclusion, the function of regional competition law and policy and
regional merger control regulation would be to ensure the review of
mergers and anti-competitive practices in the ASEAN countries, which
currently lack both effective domestic controls and experience in dealing
with mergers, acquisitions and anti-competitive practices, so that member
countries could to enlist the support of the Regional Merger Task Force
where concentrations occur that have significant actual or potential
anti-competitive impact within any of the member countries. Regarding
the shaping of ASEAN regional competition law, it may be developed and
adapted from the models for international competition law and the approach
towards a multilateral competition regime proposed at international
level. Harmonisation of substantive national competition law combined
with the network model, especially the regional enforcement network,
may be suitable to ASEAN's open regionalism infrastructure and its "ASEAN
way", and concerted. An ASEAN regional competition law and policy
could enhance regional economic strengths and ensure that the regional
market open to non-ASEAN trade and investment would prevent powerful
transnational corporations from entirely dominating the regional economy.
This complies with the main concept of open regionalism, which is to
enhance both intra- and extra-ASEAN trade and investment, so that a
regional competition law and policy would be suitable instruments to
achieve this goal.
_______________________________________________________________
(76)
Ibidem.
(77)
See OLSON, Mancur, The Logic of Collective Action: Public Goods and
the Theory of Groups, Harvard University Press, (Cambridge) (1965).
(78)
See KUHN, Kai-Uwe / SEABRIGHT, Paul / SMITH, Alasdair, "Competition
Policy Research: Where Do We Stand?", CEPR Occasion Paper No. 8,
Centre for Economic Policy Research, (London), (1992).
(79)
See HARBORD, David / HOEHN, Tom, "Barriers to Entry and Exit in
European Competition Policy", International Review of Law and Economics,
14 (4), December (1994), 411-435.
(80)
See DEMSETZ, Harold, "Two Systems of Belief about Monopoly",
in Harvey Goldschmid et al (eds.), Industrial Concentration: The New
Learning, Little Brown (1974).
(81)
See BOLLARD, Alan / VAUTIER, Kerrin M., "The Convergence of Competition
Law within APEC and the CER Agreement", in Rong-I Wu / Yub-Peng
Chu (eds.), The Asia-Pacific: Competition Policy, Convergence and Pluralism
(1998), 126-34.
(82) Ibidem.
(83)
See GARNAUT; ELIASSEN / MONSEN; Garnaut / Drysdale / Kunkel, supra note
(84)
See WHISH, Richard / SULFRIN, Brenda, Competition Law, 3rd ed., Butterworths,
(London/Edinburgh) (1993).
(85) In fact, the ASEAN countries have been aware of
this sensitive issue and have already canvassed the small and medium
firms in the region, preparing them for competing with extra-ASEAN firms.
See Joint Statement on East Asia Co-operation, 28 November 1999, Manila,
and The Philippines. Also, each individual ASEAN country has set up
Small and Medium Firm Networks to promote and strengthen S&M enterprises:
for example, the Small and Medium Industry Development Office in Malaysia
and the Bureau of Small and Medium Business Development in the Philippines.
(86)
See MUCHLINSKI, P.T., "A Case of Czech Beer: Competition and Competitiveness
in the Transitional Economies", The Modern Law Review, Vol. 59,
5 (September (1996)), 658-675.
(87)
The dispute was settled by agreement of 4 September 1911, whereby the
US brewer was granted exclusive use of the "Budweiser" brand
name in North America, while the Czech brewer was granted the name for
the rest of the world. But it did not confer any rights or imposed any
restrictions with regard to use of the name in Europe, nor did it prevent
any party from establishing an exclusive right to the Budweiser trade
name as part of its trading style in any European country.
(88)
The Czech Republic has become a party to an EU Europe Agreement (EA),
which entered into forced on 1 February 1995 to ensure greater convergence
between EU economic laws and the national law of the non-EU Contracting
States, as a precondition for any future application for membership.
(89)
Muchlinski argued that "maximum foreign shareholding limits in
national laws have tended to be relaxed. The most promising avenue for
regulation is competition law, in that a level of foreign ownership
that may create an anti-competitive concentration can be legitimately
challenged without upsetting the logic of free market policies. See
MUCHLINSKI, supra note 86 (at 59).
(90)
For instance, the issue can be brought to the Regional Merger Task,
within the spirit of the Regional Merger Regulation, consumer groups
can request that the Task Force review a concentration where FDI creates
or strengthens a dominant position or merges with or acquires such domestic
firms.