Apr 25, 1990

DEREGULATION REQUIRES EFFECTIVE COMPETITION POLICIES.

GENEVA, APRIL 23 (BY CHAKRAVARTHI RAGHAVAN) -- The process of deregulation and opening up of large portions of the economy to the free play of market forces and increased regional integration efforts have made effective international competition policies even more urgent, a top official of the UN Conference on Trade and Development declared Monday.

The Director of the International Trade Programmes division of UNCTAD, Mr. B. L. Das was addressing the 9th session of the intergovernmental group of experts on Restrictive Business Practices (RBPs).

The IGE is serving as the preparatory body for the second UN Conference to Review all aspects of the set of multilaterally agreed equitable principles and rules for the control of RBPs. The set was adopted by the UN General Assembly in 1980 as a voluntary code of guidelines. The review conference is scheduled for November 26 to December 7, 1990.

The IGE meeting, Das said, was taking place at a time when the need for free competition to regulate supply and demand in the economy and to determine the prices of goods and services was receiving increasing attention worldwide.

In the OECD countries, price controls and regulation by the state have been gradually relaxed in favour of increased reliance on market mechanisms. Deregulation processes had opened up large portions of the economy - in particular service sectors such as transportation, banking and insurance, which were previously regulated by the state, to the free play of market forces.

This trend had been strengthened by the accelerated pace of the single European market of 1992, the U.S.-Canada free trade agreement and the trade liberalisation efforts in the Uruguay Round.

Also, many debt-troubled Third World countries implementing stabilisation policies have adopted budgetary corrections, abandoning subsidies and relaxing price regulations and controls to rely more closely on market prices. In many other economies too the use of market forces and reliance on price mechanisms have gained momentum.

This retreat of government constraints and regulations from the economy is aimed at allowing competitive forces to play the role of the driving factor of market mechanisms.

But this would only be possible if competitive forces are allowed to exist once the government's role in the economy has been reduced, Das pointed out.

"In other words", the UNCTAD official added, "there is an urgent need to ensure that relaxation of government intervention measures do not result in the introduction or intensification of restrictive measures applied by firms involved in trading transactions".

"Hence the need for effective competition policies which will ensure full-fledged efficiency by preventing a drift by enterprises towards anticompetitive practices, abuses of dominant positions of market power and monopolisation of markets through undue concentration of market power".

The necessity to defend competition, in particular by adopting RBP control laws and setting up effective institutions to apply the laws, was a well-established policy in the OECD countries and in a rapidly growing number of third world countries who were increasingly seeking UNCTADís technical assistance in this area.

In the context of the RBPs it was the responsibility of the international community to provide assistance to Third World countries which wished to develop domestic competition and the review conference should be an occasion to make pledges of contributions for technical cooperation, both financial and in the form of expertise.

It was also the responsibility of the international community to contribute to "a more transparent and fair competition in international transactions", Das added.

It was also particularly important to make full use of the provisions of the set and reinforce its applicability to international trade. This, in turn, would require priority being given to information and transparency as well as to definition of consultation procedures.

On the issue of information and transparency, it would appear that the existing possibilities under the set had not yet been fully implemented.

With further progress on legislation and technical assistance, countries from all regional groups would become better equipped and more willing to exchange information.

Further steps could include setting up of domestic notification and registration procedures on RBPs affecting imports and exports, to be followed by notification of information to all interested trading partners through the establishment of a centralised information-exchange system.

As regards consultation procedures between countries envisaged in the set, Third World countries would be in a better position to make effective use of the provisions once they were able to effectively detect, investigate and control RBPs adversely affecting their trade and development.

Eventually, "special efforts have to be taken in the developed countries to discourage their firms from adopting RBPs in their transactions in developing countries and also in eliminating or reducing the effects of such practices".

A report by the secretariat analysing the consultation procedures of the set and their use notes that there is no concrete evidence of reasons why the procedure has not been used so far.

"However, the fact that many countries could refer to the 'effects doctrine' - namely, that their laws do not apply when the effect of an RBP is not felt within their territory - in order to decline taking remedial action against RBPs being subject to consultations-, might well discourage the initiation of consultation procedures", the report said.

Analysing various options in this situation, the report suggests that it might be most appropriate at this stage to recommend or adopt measures to stimulate and facilitate use of the consultation procedures.

The consultation procedures in the set would correspond better to the needs of Third World countries if they were in a better position to effectively detect, investigate and control RBPs adversely affecting their trade and development.

For this, in countries without RBP legislation, it would be necessary to provide such laws and establish an "RBP focal point" competent to deal with RBP issues.

Those with RBP legislation, should have better coordination between the RBP control authority and authorities responsible for external trade. Such coordination could be established through an inter-Ministerial RBP liaison office or RBP focal point whose task would be to ensure that the Foreign Trade Ministry and other authorities dealing with external trade transactions (such as the central bank or government procurement officials) are fully aware of RBP issues and are able to detect and bring them to the attention of the RBP authority.

The RBP authorities would also be in a position to make full use of the procedures for consultation.

But if the consultation procedure did not bring relief to the affected party, some effective follow-up procedure for relief would have to be established, the report suggests.

Reviewing the implementation of the set in the ten years since the adoption of the set, the report says that the objective of ensuring that RBPs do not impede or negate realisation of benefits arising from liberalisation of tariff and non-tariff barriers, particularly those affecting trade and development of Third World countries have clearly not been met.

Similar is the case in regard to the objective of eliminating the disadvantages to trade and development resulting from RBPs of Transnational Corporations (TNCs) or other enterprises and maximising the benefits to international trade and particularly the trade and development of Third World countries.

At the IGE meetings there have been diametrically opposite views, as between the OECD countries and countries belonging to the Group of 77, east Europeans and China, as to whether there has been an increase or reduction in use of RBPs by the enterprises since the adoption of the set.

By their very nature, RBPs are difficult to quantify and evaluate in comparable statistical data. Being secretive by nature a large proportion of RBPs escape any control and never appear in statistical data. An increase did not necessarily mean increase in practices but could mean better enforcement. Similarly reduction in reported RBP cases might reflect a more lenient or less active attitude of authorities.

Also, some states have a higher degree of transparency and the information supplied by them bring to light more cases than in other countries.

In domestic markets where there has been dismantling of state monopolies or state-regulated sectors, enforcement of RBP legislation has been found to be necessary to ensure competition.

"Similar safeguards for newly deregulated sectors at the international level do not exist at present ... as domestic markets open to competitive forces of international trade, domestic legislation is often not sufficient to come to grips with practices originating from one side of a border and having adverse effects on the other".

While progress in GATT and other fora have reduced the impact of governmental barriers to trade, "enterprise-level restraints, such as RBPs, become more prominent".

The rise of so-called "grey-area" trade restraints (such as Voluntary Export Restraints and Orderly Marketing Arrangements) during last decade is an indication that arrangements to share markets and fix prices between exporting and importing country industries have in many cases received explicit or tacit approval of governments.

The report notes that one of the most controversial provisions of the set and one, which has given rise to different interpretations, relates to its application of VERs, OMAs and other RBPs used for protectionist purposes.

Third World countries hold the view that these are private RBPs, and not governmental agreements or RBPs caused by such agreements, and hence not covered by the exemptions in the set. The east European countries and China have views close to those of the Group of 77.

The OECD countries on the other hand have argued that the set applied only to RBPs of enterprises and not to such measures of trade policies and that VERs which often result from governmental actions are covered.

The two extreme positions, UNCTAD comments, are difficult to reconcile with the history and spirit of the set.

An interpretation that would exempt only OPEC or other commodity agreements of Third World countries would be too narrow. But an interpretation that would leave out all VERs, OMAs and other arrangements limiting enterprises in their international trading activities outside the set, no matter how closely they are linked to governmental trade policies, would be too narrow in the other direction.

The clear objective of the set is to ensure that RBPs do not impede or negate the realisation of benefits of trade liberalisation. The OECD countries also agree that VERs which are not the result of governmental actions and policies are covered by the set.

Accordingly, VERs and OMAs caused by unilateral governmental actions would appear to come under the set. Also, a private RBP tolerated by a foreign government is not defendable because of this governmental toleration.

Many countries, including industrial countries, have gone further in assuming that foreign governmental encouragement or sponsoring did not change the private nature of the RBP and claim jurisdiction over such cases, accepting as a valid defence only cases of foreign government compulsion.

"In view of this widely accepted view, it appears difficult to understand why national laws should be applicable to private RBPs in spite of foreign government involvement short of compulsion, but not the set", UNCTAD comments.

"Also, the view that the most effective way to implement the set is to adopt and vigorously enforce national RBP laws includes the suggestion to apply such laws to VERs and OMAs not based on foreign government compulsion or directly caused by a sovereign act of state".

"The review conference will therefore have the difficult task of reaching agreement about the implementation of the set as far as phenomena like VERs and OMAs are concerned, and for this purpose it would be necessary to reach agreement about the interpretation of B.9 of the Set".