Presented by:

Dr M. A. Razzaque16 April 2006

Competition Policy, Consumers’ Rightsand

International Trade

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

International trade and trade liberalisation

Trade liberalisation and competition policy

Does competition policy restrict international trade? or, does it promote trade competitiveness?

WTO and competition policy

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

Competition to win customers not by lowering price but by advertising, offering after-sales-service, using sales-promotion tools, etc.

Competition among suppliers to win customers by offering lower price. May not be an appropriate strategy for those loyal to a particular brand.

Price Competition Non-price Competition

Forms of Market Competition

Models ofCompetition

Number ofbuyers

Number ofsellers

Nature ofproducts

Barriers toentry andexit

Perfectcompetition

Very large Very largeIdenticalproducts

None

Monopoly Very large OneSingleproduct

Very large

Monopolisticcompetition

Very large LargeMinimumdifferences

None

Oligopoly Very large Very fewLargedifferences

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

Competition policy => government measures directly affecting both Firm Behavior and Industrial structure.

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

Regulations Governing Capital and FDI

ConsumerPolicy

Other Policies

Competition Law (National)

Anti-Competitive Agreements Between

Firms ( Collusion)

Abuse of a Dominant

Market Position

Regulation of Mergers to Prevent Tactics to Gain

Excessive Dominance in a Market

Applies to:•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

• Predatory pricing

• Price discrimination

• Excessive pricing

• Abuse of intellectual property monopoly

•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, 8-

10 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 1960s.

• 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

• 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.

Consumerism and Consumer Rights (Continued…)

Scope of Consumerism

According to World Congress Statement, Consumerism should ensure:

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

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.

•According to United Nations, five duties of a consumer are:

Need for a Competition Policy

A fair deal in the market place with:

The best possible choice of quality

The lowest possible prices, and

Adequate supplies of commodities.

Benefits to Consumers

A safeguard against practices that could drive

companies out of business.

Lower entry barriers to promote entrepreneurship and

growth of SMEs.

Efficient allocation and utilization of resources

ensures more output and employment.

Control of international unfair competition and

restrictive business practices, such as international cartels

Benefits to Efficient Producers

On the whole, a competition policy maintains and promotes the competitive spirit and culture in the

market.

Therefore, we need competition policy to monitor, prevent

and control anti-competitive practices.

Concentration of Market Power

Globalization and Competition

threat toOutcome of

Globalization and the need for Competition Policy

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?

Undertaking liberal policies for imports

Having liberal policies for exchange transactions

Trade Policy and Instruments

Policy => sets out objectives and means to attain them

Instruments => a set of tools through which policy objectives are to be materialised.

Import bans

Quota – quantitative restrictions

Tariffs (customs duty, supplementary duty, VAT, Dev surcharge)

Tariff rate quotas

Foreign Exchange restrictions

Import Licensing

Trade Policy Instruments to Control Imports

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

Consider the Code:

HS 02 _ Meat and Edible Meat Offal HS 0202 _ Meat of Bovine Animal FrozenHS 0202200 _ Meat Bovine Cut w/Bone Frozen

Operative Tariff Schedule

OTS of Bangladesh 2003-04

Excel Sheet showing Bangladesh’s OTS

Calculate the impact of tariffs

CD SD DS AIT VAT

87032113

(luxury vehicle)

22% 250% 4% 3% 15%

$100 $122 $305 $317 $327 $375

On-going Trade liberalisation in Bangladesh

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 Restricted for non-trade reasons

Banned Restricted Mixed

1985-86 478 275 138 16 49

1987-88 529 257 133 79 60

1988-89 433 165 89 101 78

1990-91 239 93 47 39 60

1991-92 193 78 34 25 56

1992-93 93 13 12 14 54

1993-94 109 7 19 14 69

1995-97 120 5 6 16 93

1997-02 122 5 6 16 95

2003-06 63 5 8 10 40

Trade-Related Restrictions as Proportion of Total HS 4-digit Import Lines

1.9%2.2%

2.2%

1.9%3.2%

3.2%

11.1

%14.5

%20.5

%

28.7

%

38.0

%

39.6

%

34.7

%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-97

1997

-200

2

2003

-200

6

per

cent

Bangladesh: Un-weighted Average Duty Rates

Fiscal Year CD SD VAT IDSCLicense

Fee Total

1991-92 57.23 0.73 14.03 - 2.22 82.29

1992-93 47.14 1.44 12.17 - 2.19 69.57

1993-94 35.83 1.67 11.63 - 2.15 56.3

1994-95 25.95 0.61 10.4 - 1.95 42.43

1995-96 22.46 0.82 10.58 - 1.98 38.95

1996-97 21.87 0.97 10.68 - 1.99 38.57

1997-98 21.1 1.11 10.66 2.27 1.99 40.61

1998-99 20.52 1.49 10.63 2.26 1.99 40.49

1999-00 17.12 2.04 10.36 1.99 2 36.86

2000-01 17.2 3.22 10.81 2.07 2.08 39.38

2001-02 17.13 3.22 10.83 2.07 2.08 40.15

2002-03 16.5 1.96 10.94 2.92 - 35.51

Certainly, liberalisation tends to promote competition

We can work out the competitive effects from the impact of tariffs.

Are all these liberalisation good for competition?

CD SD+DS+AIT BD price

World $100 30% 50% $195

World $100 30% 0 $130

Domestic producers have to compete with international firms

Liberalisation could be an effective means for dealing with monopoly and oligopolistic market structures.

Liberalisation can ensure ‘love for variety’ and quality

Liberalisation however may not work, if:

Importers form cartel and/or are involved in tacit collusion

Foreign firms can manage to ‘avoid’ competition

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:

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)

Political economy of protection – the connection between domestic producer groups and policy makers.

Infant industry argument (but what if the infants are never grown up?)

Employment argument (but who does the bear the costs?)

Sugar Price Hike

CD SD DS VAT 1$ = TK.7017011100 (raw

cane sugar)30% 30% 4% 15%

US price $0.46/Kg

($462/mt:)

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

Shipment and insurance costs have not been considered here, which would be around 10 percent

BUT, Note that alternative scenarios might result in loss of government revenue.

Flexible trade policy will require flexible revenue raising capacities.

The basic point is: on many occasions one can rely on international trade to tackle the anti-competitive practices.

For sugar price: http://www.sugartech.co.za/sugarprice/index.php

Does competition policy restrict international trade? or, does it promote trade competitiveness?

Evidence for restricting international trade is unknown.

However, strong possibility of raising the competitiveness of domestic industry and thus expansion of exports.

The strategy of providing some protection to begin with and then setting industries free may be effective, if the right industries are selected.

• 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 WTO-inconsistent as long as the principle of non-discrimination is maintained.

• In fact, it may be required to have CP to deal with unfair practices of international suppliers.

WTO and competition policy

• 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

Competition policy under trading blocs

Existing situation

17011100 (raw cane sugar)

CD SD DS VAT 1$ = TK.7030% 30% 4% 15%

US price: $0.46/Kg 0.59 0.77 0.80 0.93 Tk.65

India: 0.40/kg 0 tariff under bilateral FTA

0.46 Tk. 32

(Tk. 60)

Pro-consumer tariffs

10% 0% 0% 15%

US Price:$0.46/Kg 0.50 0.50 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.

Thank You.