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.

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(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.