Eliminating anti competitive practices: A timely decision in Budget 2011

Thursday, 2 December 2010 01:10 -     - {{hitsCtrl.values.hits}}

By K. J. WeerasingheFormer Director General of Commerce, Former Ambassador to EU, WTO

It is with great pleasure I read that in his budget speech to the parliament on the 22nd of November 2010, President Mahinda Rajapaksa has clearly spelt out the government's focus in relation to global trade and on the need to eliminate anti competitive practices in shipping.

A liberalised external trade dependent small economy like Sri Lanka indeed need to have checks and balances in the trading environment to keep its competitiveness, as well as to ensure the consumer and the export sector benefits from the free market environment. Therefore, the government of Sri Lanka should not only look at anti competitive practices of the liner trade but also look through the whole supply chain inclusive of the trade practices adopted by buyers, sellers and all other service providers related to international trade.

Since the first wave of globalisation in the 19th century powered by European mercantilism led by Great Britain, the trading environment has undergone significant changes. We are now in the 4th wave of globalisation triggered by the formation of the World Trade Organisation (WTO), which has led to greater integration amongst countries in terms of trade, financial flows, ideas, information and technology. These developments have not only opened up new markets but also created greater opportunities for increased trade to flow around the world, creating more value, economic growth and to eradicate poverty of the less fortunate.

However, the players in the global trade differ from country to country with their bargaining power; therefore the pit falls for smaller economies can be significant. The ability of negotiating among the trading parties may be abused in terms of the stronger party pushing the weaker party to the wall. In many cases the western buyers or service providers tend to hunt for quality products at unusually cheap prices exploiting the poorer countries and its labour force. Commonly Asia and Africa are victims of such practices. Whereas developed nations in the west throughout the process of globalisation kept on adapting new legislation and reforms to meet the challenges and to protect the interest of the consumers and the manufacturers in those countries. As a result today, the European Union as well as the United States have very strong institutions with laws and regulations to monitor anti competitive practices of various business interests operating in these countries. In the EU, the European Commission gives policy directions and guidelines to EU countries in this regard and in the US the Federal Government has its offices to monitor such practices to ensure fair trading conditions. It is very often seen in media that millions of dollars of fines are enforced on service providers as well as companies that act in a monopolistic manner manipulating the market, price fixing colluding in the west. Be it Microsoft, airlines, freight forwarders, banks or liner companies they all are governed by certain rules and regulations to which if they do not adhere the fines would be enormous.

The Sri Lankan government has looked at specifically on the liner trade. Which is of course quite rational as the local industry as well as the countries in the Asian region have continued to lobby to bring in anti competitive laws to strengthen the Asian manufacturing economies. In the past the liner trade has been given anti-trust immunity in developed countries with certain checks and balances kept in place to safe guard the interest of the service users. The antitrust immunity was originally given to liners as these industries were capital intensive and to manage the imbalance of global trade. Therefore, the liners were permitted to have discussion agreements on rates known as conferences and also discussion agreements on capacity known as consortia. They also had the privilege of having the freight plus two separations of bunker and currency adjustment factors. However, during the last few years, specially in 2008, the European Commission came to a conclusion that these antitrust immunity was been abused by carriers to manipulate the freight market as well as capacity, unfairly affecting the exporters, importers and the consumers. In October 2008, the EU removed the block exemption and dismantled the conferences. Currently the United States too have joined this effort to even bring greater reforms by abolishing the Ocean Shipping Reform Act of 1998 and to come up with a new law, proposed by former Congressman James Oberstar to reduce the immunity to a very much of a diminished form of antitrust protection as the Federal Maritime Commission too has found that US exporters were being unfairly treated by the carriers. Interestingly  India which liberalised the economy much later than Sri Lanka has a competition act ,a  multimodal transport act and the latest being the shipping and trade practices bill in the parliamentary stage, China too is now  monitoring the anti competitive developments through the Shanghai shipping exchange and the ministry of communication, Therefore, it is vital that the government of Sri Lanka not only look at the liner industry's anti competitive practices but freight forwarders and logistics companies as well. Antitrust laws have been a hot topic in the US shipping and freight transport sector recently. Few months ago three US carriers offered US$52.25 mn to settle class-action lawsuits over price-fixing in US-Puerto Rico shipping sector.

Also in the US six major freight forwarding companies had to pay criminal fines totaling up to USD 50 million for price fixing in air freight. In another incident some airlines were fined for antitrust violations for over USD 1.5 billion together with prison sentences for its executives.

It is also advised that the government in its reform agenda look at the practices of the buyer and the seller which is the origin of international trade. It is often found that large buyers with greater bargaining power harass the SME businesses by using wrong and unethical trading terms while allowing third parties to capitalise to make manufacturers helpless, and give in to their demands when goods and services are purchased. It is the responsibility of developing countries like Sri Lanka to legislate best practices that are formulated by the United Nations and the International Chambers to eliminate unequal bargaining power of the might.

I once again congratulate the President for taking the bold step for understanding the threat posed to our SME businesses. (Even the largest companies in Sri Lanka are SMEs in global standards) The president has taken this important subject to the parliament and the country at large probably as the first leader in Asian region. I propose that the President take up this issue not only to legislate anti competitive practices in Sri Lanka but also bring this to the attention and the agenda of the SAARC region heads of states.

It was a very timely and a courageous   decision that the President announced in his budget speech and every Sri Lankan who opposes anti competitive practices should support the government to enact these laws as early as possible.