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Competition Policy, Consumers’ Rights and International Trade Presented by: Dr M. A. Razzaque 16 April 2006
Here we will discuss: • What is competition? • What is Competition Policy? • Competition policy and law acting for consumer welfare • Consumerism and Consumer rights • International Trade and consumer rights
v International trade and trade liberalisation v. Trade liberalisation and competition policy v Does competition policy restrict international trade? or, does it promote trade competitiveness? v WTO and competition policy v Competition policy under trading blocs
What is competition? Competition Literary meaning: a contestable situation where people fight for superiority. In market economy, competition is a process whereby firms fight against each other for securing consumers for their products
Fair and Unfair Competition Fair Competition Unfair Competition • Producing quality goods • Becoming cost-efficient • Optimizing the use of resources • Adopting the best available technology • Investing in research and development, etc. • Fixing prices with the rivals • Setting a price which is lower than cost in order to throw out competitors from the market • Advertising that belittles others’ product, etc.
Types of competition Price Competition among suppliers to win customers by offering lower price. May not be an appropriate strategy for those loyal to a particular brand. Non-price Competition to win customers not by lowering price but by advertising, offering after-sales-service, using sales-promotion tools, etc.
Forms of Market Competition Models of Competition Number of buyers Number of sellers Nature of products Barriers to entry and exit Perfect competition Very large Identical products None One Single product Very large Monopolistic Very large competition Large Minimum differences None Oligopoly Very few Large differences Large Monopoly Very large
For detailed information please consult • Competition Policy and Law Made Easy: Monographs on Investment and Competition Policy, #8 ; CUTS (Pages 1 -4)
Oligopoly Market : Competition Among the Few Key Features: • Interdependence between firms in performance and strategy • Aggressive action followed by defensive reaction • Price competition and price war (Recent packages offered by Mobile Phone companies) • Intense non-price (promotional publicity) competition, which may result in wasteful expenditures.
Detail on Oligopolistic market structure • Making Sense of Competition Policy, by Frank Fishwick (1993) (Pages 47 -62)
Competition Policy /Law 1. Competition policy => government measures directly affecting both Firm Behavior and Industrial structure. 1. A competition policy should include both: i) Economic policies adopted by Government, that enhance competition in local and national markets, and ii) Competition law designed to stop anti-competitive business practices.
Components of competition policy Competition Policy Competition Law Government Policies Private Actions Deregulation and Privatization Trade Policy Industrial Policy Consumer Policy Regulations Governing Capital and FDI Other Policies
Competition Law (National) Anti-Competitive Agreements Between Firms ( Collusion) • Import cartels • Price fixing • Market sharing • Bid rigging • Limiting production • Refusal to buy or supply • Tie-in arrangements • Exclusive-dealing • Resale price maintenance • Territorial allocation Abuse of a Dominant Market Position • Predatory pricing • Price discrimination • Excessive pricing • Abuse of intellectual property monopoly Regulation of Mergers to Prevent Tactics to Gain Excessive Dominance in a Market Applies to: • Total unification of the companies involved • Buying of sufficient shares in a company so as to have a say in policy formulation
The three stages of provisions that a competition law constitutes are: • The behavior and structure of firms in the market • Institutional and enforcement design with a competition authority, and • Competition advocacy.
For details on competition policy and law: • Competition Policy and Law Made Easy: Monographs on Investment and Competition Policy, #8 ; CUTS (Pages 23 -26) • UNTCAD: Trade and development Board: Intergovernmental Group of Experts on Competition Law and Policy; sixth session, Geneva, 810 November 2004 : Communication Submitted by the People’s Republic of Bangladesh (Pages 2 -4)
Consumerism and Consumer Rights • The idea of consumerism was initiated in the Western world during the 1960 s. • American President John F. Kennedy formed a committee with US congress members and announced four rights of consumers in 1962 : 1. The Right to Safety 2. The Right to Choose 3. The Right to Information 4. The Right to be Heard
Consumerism and Consumer Rights (Continued…) • The Consumers International (CI), former International Organization of Consumer Unions (IOCU), the umbrella body, for 240 organizations in over 100 countries, expanded the charter of consumers rights contained in the US Bill to eight: 1. Basic Needs 2. Safety 3. Information 4. Choice 5. Representation 6. Redress 7. Consumer Education and 8. Healthy Environment. • On this basis, the United Nations, in April 1985, adopted its Guidelines for Consumer Protection, that all citizens, regardless of their incomes or social standing, have basic rights as consumers.
Scope of Consumerism According to World Congress Statement, Consumerism should ensure: v v v v Effective Consumer Policy Sustainable Consumption Food Security and Food Safety Access to Healthcare Trade and Economics Consumer Education International Rules and Standards Product testing
• For further information, please see CI 16 World Congress Statement (pages 9 -14)
Duties of a Consumer • According to United Nations, five duties of a consumer are: 1. To be aware about the quality of Products and services 2. To bargain for right product 3. To consider the rights of other consumers so that they are not harmed by his conducts 4. To be aware of maintaining the sustainable environment 5. To be active and united for consumer protection.
Need for a Competition Policy Benefits to Consumers ü A fair deal in the market place with: v. The best possible choice of quality v. The lowest possible prices, and v. Adequate supplies of commodities.
Benefits to Efficient Producers n A safeguard against practices that could drive companies out of business. n Lower entry barriers to promote entrepreneurship and growth of SMEs. n Efficient allocation and utilization of resources ensures more output and employment. n Control of international unfair competition and restrictive business practices, such as international cartels
On the whole, a competition policy maintains and promotes the competitive spirit and culture in the market.
Globalization and the need for Competition Policy Globalization and Competition Outcome of threat to Concentration of Market Power Therefore, we need competition policy to monitor, prevent and control anti-competitive practices.
For details on globalization and competition: • UNTCAD: Trade and development Board: Intergovernmental Group of Experts on Competition Law and Policy; forth session, Geneva, 3 -5 July 2002 : The relationship between competition, competitiveness and development. (Pages 3 -6)
Arguments Against Competition • Preventing formation of large firms may reduce efficiency. The situation arises when there exists significant economies of scale: Examples : Natural Monopolies, like, Infrastructure, Power and Railway. • An obsession with competition might be counterproductive leading to inefficiency especially when goods and services tend to be homogenous. • Policy actions against highly profitable firms could work against the development of dynamic and thriving firms. • Over-regulation could increase firms’ cost of operations and generates inefficiencies.
International trade and trade liberalisation International trade – Exchange of goods and services amongst countries Trade Liberalisation? Þ Undertaking liberal policies for imports Þ Having liberal policies for exchange transactions
Trade Policy and Instruments v Policy => sets out objectives and means to attain them v Instruments => a set of tools through which policy objectives are to be materialised.
Trade Policy Instruments to Control Imports q Import bans q Quota – quantitative restrictions q Tariffs (customs duty, supplementary duty, VAT, Dev surcharge) q Tariff rate quotas q Foreign Exchange restrictions q Import Licensing
Trade Liberalisation would imply: • Relaxation/removal of import bans • Relaxation/removal of quantitative restrictions • Reduction/removal of tariffs • Relaxation of foreign exchange restrictions • Simplifying the import licensing procedure
How trade measures are recorded: • Use of certain classification system (such as HS and SITC) • Use of codes to reflect disaggregation of commodities v Consider the Code: HS 0202200 _ Meat and Edible Meat Offal _ Meat of Bovine Animal Frozen _ Meat Bovine Cut w/Bone Frozen
Operative Tariff Schedule Ø OTS of Bangladesh 2003 -04 Excel Sheet showing Bangladesh’s OTS
Calculate the impact of tariffs 87032113 (luxury vehicle) $100 CD 22% SD 250% DS 4% AIT 3% VAT 15% $122 $305 $317 $327 $375
On-going Trade liberalisation in Bangladesh Ø Significant changes in terms of abolition of import quotas, simplification of import licensing procedures, reduction in import tariffs, harmonisation of tariffs, reduction in the number of tariff slabs.
Bangladesh: Removal of QRs at the 4 -digit HS Classification Level Year Total Restricted for trade reasons Banned Restricted Mixed Restricted for non-trade reasons 1985 -86 1987 -88 478 529 275 257 138 133 16 79 49 60 1988 -89 1990 -91 1991 -92 1992 -93 1993 -94 1995 -97 1997 -02 2003 -06 433 239 193 93 109 120 122 63 165 93 78 13 7 5 5 5 89 47 34 12 19 6 6 8 101 39 25 14 14 16 16 10 78 60 56 54 69 93 95 40
Trade-Related Restrictions as Proportion of Total HS 4 digit Import Lines
Bangladesh: Un-weighted Average Duty Rates License Fiscal Year CD SD VAT IDSC Fee Total 1991 -92 1992 -93 57. 23 47. 14 0. 73 1. 44 14. 03 12. 17 - 2. 22 2. 19 82. 29 69. 57 1993 -94 1994 -95 1995 -96 1996 -97 1997 -98 1998 -99 1999 -00 2000 -01 2001 -02 2002 -03 35. 83 25. 95 22. 46 21. 87 21. 1 20. 52 17. 12 17. 13 16. 5 1. 67 0. 61 0. 82 0. 97 1. 11 1. 49 2. 04 3. 22 1. 96 11. 63 10. 4 10. 58 10. 66 10. 63 10. 36 10. 81 10. 83 10. 94 2. 27 2. 26 1. 99 2. 07 2. 92 2. 15 1. 98 1. 99 2 2. 08 - 56. 3 42. 43 38. 95 38. 57 40. 61 40. 49 36. 86 39. 38 40. 15 35. 51
Are all these liberalisation good for competition? v Certainly, liberalisation tends to promote competition We can work out the competitive effects from the impact of tariffs. CD SD+DS+AIT BD price World $100 30% 50% $195 World $100 30% 0 $130
q Domestic producers have to compete with international firms q Liberalisation could be an effective means for dealing with monopoly and oligopolistic market structures. q Liberalisation can ensure ‘love for variety’ and quality
Liberalisation however may not work, if: v Importers form cartel and/or are involved in tacit collusion v Foreign firms can manage to ‘avoid’ competition v Import of goods is restricted due to such factors as foreign exchange scarcity/import licensing procedure/political unrest leading to disrupted transportation and communication system, international crises leading to supply shortfall.
In the first place, liberalisation may not be possible, if: Ø If there is a strong pressure from the domestic industry groups (vis-à-vis given the isolation paradox and free rider problem amongst the consumers) Ø Political economy of protection – the connection between domestic producer groups and policy makers. Ø Infant industry argument (but what if the infants are never grown up? ) Ø Employment argument (but who does the bear the costs? )
Sugar Price Hike 17011100 (raw cane sugar) US price $0. 46/Kg ($462/mt: ) CD 30% SD 30% DS VAT 4% 15% 1$ = TK. 70 0. 59 0. 77 0. 80 0. 93 Tk. 65 Alternative Price: $0. 46/Kg 0. 59 X X X Tk. 41. 3 Alternative Price: $0. 46/Kg X X X 0. 53 Tk. 37 ØShipment and insurance costs have not been considered here, which would be around 10 percent
For sugar price: http: //www. sugartech. co. za/sugarprice/index. php q BUT, Note that alternative scenarios might result in loss of government revenue. q Flexible trade policy will require flexible revenue raising capacities. q The basic point is: on many occasions one can rely on international trade to tackle the anti-competitive practices.
Does competition policy restrict international trade? or, does it promote trade competitiveness? q Evidence for restricting international trade is unknown. q However, strong possibility of raising the competitiveness of domestic industry and thus expansion of exports. q The strategy of providing some protection to begin with and then setting industries free may be effective, if the right industries are selected.
WTO and competition policy • Still not an agreement under WTO • First proposed in Singapore 1996 but without any success • Many developing countries opposed the idea of bringing in competition policy in WTO – why? • Having competition policy is not WTOinconsistent as long as the principle of nondiscrimination is maintained. • In fact, it may be required to have CP to deal with unfair practices of international suppliers.
Competition policy under trading blocs • Consider SAFTA • Suppose, BD and India are to exchange 0 for 0 tariffs under SAFTA while the tariffs on rest of the world remains the same. • Let’s get back to our sugar example
Existing situation CD SD DS 17011100 (raw 30% 4% cane sugar) US price: $0. 46/Kg 0. 59 0. 77 0. 80 India: 0. 40/kg 0 tariff under bilateral FTA VAT 15% 0. 93 0. 46 1$ = TK. 70 Tk. 65 Tk. 32 (Tk. 60) Pro-consumer 10% 0% 0% 15% tariffs US Price: $0. 46/Kg 0. 50 0. 58 Tk. 40. 7
Concluding Observations • Trade is usually good for competition. • Loss of revenue can however be a concern. • Trade and competition can promote competitiveness of the domestic sectors. • Trade and competition policy does not rule out the need for providing protection to local industry. • Bangladesh has made some significant progress on trade liberalisation.
• But, there are further scopes for supporting consumers. • Well-thought out and flexible use of trade instruments can serve the purpose of consumers and domestic industry. • Regional trading arrangements will have to be carefully handled to protect consumers. • Behaviour of the importers need to be carefully monitored.