Hong Kong’s Competition Law: Friend or Foe?

by Hannah Berdal
Hannah Berdal is in her third year at the University of Western Australia, studying a combined degree in Law and Commerce with an Economics major. Hannah is currently involved in the Students in Free Enterprise society at her university as an executive member and was recently an intern at The Lion Rock Institute.

Hong Kong’s Competition Bill has been a long time coming. With the law already enshrined throughout most western economies and anti-trust cases frequently making the headlines overseas, it was only a matter of time before pressure to implement similar legislation reached its peak. However, considering that Hong Kong already outperforms the rest of the world’s economies in open market competitiveness without such legislation, will the local consumer really benefit from such a law governed by the monopoly of the State? And why are SME’s (small-to-medium enterprises), one of the law’s supposedly major beneficiaries, so vocal against enacting this law? With many overseas nations suffering a turbulent and questionable history with the law, the rationale for its adoption in an already cutting edge economy remains unclear. Hong Kong must study the track record of this law elsewhere in the world and review similarly established policies, like those in Australia, to provide useful insight as to its effectiveness and ramifications for the Hong Kong business community.

Competition Law Through Time

The notion of breaking down big business to help industry competitiveness is hardly a new concept, with the first records of anti-trust sanctions dating back to the Roman Empire. With the promise of an even playing field for all competitive entities as well as a protective barrier for consumers, anti-trust regulation is still a favourite among both government and its people — cementing itself as a definitive part of most modern business landscapes. The past decade in particular has seen a rapid uptake of the law and today at least some form of government regulation and oversight of corporations can be found in over 100 countries.

Although the global adoption of the law may add certain credibility to the economics behind its effectiveness, there has been little material evidence providing a direct correlation between a healthier business environment and competition law. Interestingly enough, Hong Kong’s private sector has remained one of the most consistently competitive throughout history, while many other regulated economies have fallen victim to big government bureaucracy and roadblocks to corporate success (translating to poor choice, price and quality for consumers).

For Australia, its longstanding affair with Competition law dates back to the early 1970’s with the inception of the Trade Practices Act 1974 (now Competition and Consumer Act 2010), and has continued to be widely invoked through the Australian Competition and Consumer Commission (ACCC) and their associated regulatory bodies. The ACCC seeks to ‘promote efficiency and competition in business, to reduce prices and to protect all Australians against unfair practices’, acting as the primary enforcement of penalties for breaching provisions within the Act. While this seemingly noble piece of legislation appears to be a champion of Australian business, the notion of regulating with the aim of freeing the market has significant problems. The law itself and its ACCC have quickly become entangled in political interest, excessive litigation costs and have created a business community that is often punished for being too ‘competitive’, prompting many to believe that Hong Kong will follow a similar path. So will Hong Kong flourish through this law du jour? According to the Australian experience, maybe not.

The Costs of Competitiveness

Competition Law is an expensive law to implement, maintain and pursue, for both government bodies as well as private enterprise. For entities that have traditionally flourished in a low cost business environment (notably SMEs), this can be especially burdensome due to the significant compliance costs and continuous lawyer involvement associated with business decision making. The costs for businesses that are pursued by the government for competition law reasons also have the tendency to escalate alarmingly; regardless of whether the claim is dismissed (The infamous IBM case that accumulated an enormous annual cost of US$50m – US$100m over 15 years before being dropped by the American government is a great example of this). In Australia, the penalties for businesses can reach up to 10% of annual turnover and up to $500,000 for individuals, not to mention the severe damage to a business’s reputation and client relationships. This puts an entity at enormous risk of capital flight and uncertainty among shareholders, creating an environment for private industry that isn’t exactly ‘competitive’.

While many claim that these penalties are an effective way to punish companies that engage in anticompetitive behavior, the real cost is at the expense of a country’s workers, shareholders and economy, as the innovation motive for the private sector is significantly dampened. The costs associated with maintaining compliance to the competition law therefore leaves more money out of the businesses pocket, meaning less to invest, innovate and grow, achieving the exact objective the government had sought to avoid through the regulation.

The cost of maintaining the law and its regulatory authorities by the Government also has implications on efficiency and private sector rights. By creating large divisions of government this essentially increases the control that the largest monopoly of all, the state, has on its people and markets. Non-interventionism has always been the backbone of the Hong Kong economy and it seems that a law that inflates government control and diminishes the rights of consumer sovereignty and freedom is the complete opposite to what has traditionally made Hong Kong such a vibrant free market economy.

When the Government Gets It Wrong

When anti-trust was first established, policy makers identified big business as a result of corruption and that its presence would inevitably lead to the exploitation of the consumer. In today’s markets however, this concept is fundamentally flawed. When thinking about the characteristics of a successful business, one that is driven by profit and satisfying consumer demand, economies of scale (that is, high output and lower prices) will occur naturally should the entity be innovative and satisfy demand most effectively in an industry. Surely this is a positive outcome for the consumer, the worker, and the business: more spending is fuelled by more jobs as an industry expands which in turn is fuelled by a competitive economy. In a free market, there are no limitations to competition, as a firm who has a competitive edge and large profits is only a source of encouragement for more innovation and new market entrants in an attempt to share the profits of an industry.

By regulating the private sector through competition law, the Government starts to distort the market and essentially subsidizes less efficient firms from the market place through its protection, leading to a lack of market participants as well as a lack of incentive for firms to operate efficiently and gain market share for fear of being investigated and probed. As for the arguments against cartels, unhealthy monopoly and collusion, free markets and the profit motive break down all ‘corruptive’ private sector behaviour naturally, as each participant involved has different expectations and costs. Should prices be rigged, one competitor will eventually undercut this agreement for the sake of profits, and should prices increase, the threat of new competitors will dissolve the rise almost immediately. In this sense, a true cartel or anti-competitive behaviour can only be properly executed with government assistance, an argument that makes competition law near redundant in a modern day economy, let alone beneficial to its markets. With the liberalization of trade and globalization becoming increasingly pertinent, Hong Kong’s industry landscape also risks being disadvantaged when compared to its global competitors, as the restrictions on market share harm companies that are trying to gain a scale advantage on an international level.

In Australia, the attempts to punish competitive industry for the wrong reasons are numerous and especially evident through the recent misdirected trials pursued by the ACCC. The recent Metcash Ltd. and Franklins merger debacle, whereby the Pick N Pay Franklins grocer attempted to be acquired by wholesale merchant Metcash (both considerably smaller compared to the dominating grocery chains), led to enormous scrutiny due to the contradictory nature of the case and the strangely skewed definitions of particular markets. Australian independent grocery chains would have suffered at the hands of the ACCC had the merger not been accepted, as the merger would allow smaller, independent chains to have more of a competitive edge over the largest chains in the industry, Coles and Woolworths. This decision has caused an outcry from those desperate to see an increase in competition in this market and calls into question the credibility and rationale behind the ACCC, as well as its ethos behind its actions against the private sector. With situations such as these; it begs the question: whose interest is the ACCC trying to protect?

This isn’t the first time the ACCC has got it wrong, either. Cases that seem misdirected and relatively insignificant to warrant taxpayer-funded court action (such as the ‘free to roam’ chicken meat saga) as well as the copious hypotheticals used, notably surrounding the block of the Tabcorp bid for UniTab in 2006 (ACCC claimed to predict the impact on future competition at a time when state governments hadn’t even began to review gambling license regulation), have increased doubts as to the Australian government’s ability to engage effectively in the regulation of anti-competitive practices. And who can forget the infamous National Australian Bank bid for AXA Asia Pacific back in 2010, where the definition of the market (‘investment platforms for retail investors with complex needs’) was so narrow many even doubted its existence?

For Hong Kong the landscape may become startlingly similar, as the proposed law fails to encapsulate the true essence of a competitive economy. By imposing these competition laws on the Hong Kong business community, many will be incorrectly penalized and the private sector will crumble under the weight of the regulation — particularly in this current economic climate.

Political Alignment and Confused Business

Today, one thing remains clear: It is extremely hard for any government body to remain impartial when regulating industry. Australia’s competition law history confirms this, providing a bleak reminder of how easily regulatory bodies are able to be swayed by political interest and lobbyists from less efficient enterprise.

Former ACCC chiefs Allan Fels and Graeme Samuels were both notorious for making biased claims against particular industries that were typically at the forefront of political debate and the mainstream media, such as petrol. The ACCC had pursued allegations against Victorian petrol stations in 2005, with alleged price collusion in the Victorian towns of Ballarat and Geelong both failing in the courts (it was later found that the ACCC had in fact fabricated evidence of data on this allegation). The FuelWatch scheme that was later introduced then began investigating whether discounts provided by major supermarket chains were in fact legal. For an agency that aims to benefit consumers, the investigations into cheaper prices seem counter-intuitive.

The recent National Broadband Network plan, a government initiative aimed at monopolizing the fibre-to-the-premises internet market, has also been interestingly handled by regulatory authorities. The blatant monopolistic nature of the enterprise fails to be regulated to the same degree as other private sector corporations; further confirmation as to how the government retains absolute control, and therefore exclusion rights, to competition law.

Looking into Hong Kong’s similarly vague drafted legislation (and its infamous inability to define the word ‘competition’) paints a similar and uneasy picture for its own business community. The recent media frenzy in Hong Kong over tariff increases by the two major electricity companies, CLP (formerly Hong Kong Electric) and Power Assets has already proved how the government has vested interests that may take precedence should the Competition Law become passed. The government has been fiercely protecting the two monopolies whilst simultaneously pushing for the Competition Law legislation to be enacted, a seemingly confused proposal that has created widespread confusion for both the private sector as well as the general public. Should it follow Australia’s history with the law, Hong Kong may find that the law is easily swayed by government interest and will advantage the state monopolies more regularly, and more dramatically, than its private sector counterparts.

Creating a Competitive Environment

Whilst it is understood that the argument against corruptive behaviour is a valid one, history tells us that government intervention is not needed to prevent anticompetitive behaviour. Ironically, nearly all government derived practices with the aim of regulating the marketplace, such as tariffs, quotas, subsidies and other regulative functions have been the main source of market distortions, with particular players having an artificial advantage over others in the market. Australia has shown how easily Competition Law is able to become riddled with litigation costs and political alignment, with the fine line between a leader in the market (whose position can be attributed to strong innovation and timely decision making) and an exploitative player in the industry leaving businesses in a head spin and lawyers scratching their heads.

Surely regulation over competition in Hong Kong, one of the world’s most competitive economies, should be kept as minimal as possible to provide the most prosperous platform possible for the market, particularly as the globalization of trade markets becomes increasingly pertinent?

Hong Kong should reconsider the Competition Law, especially in its current format, to preserve the nations prosperous history of freedom and innovation — or this supposed ‘champion’ of business may soon be paving the way to high costs, declining productivity and some disastrous consequences for such a dynamic economy.

About Editor

Editor of Capitalism.HK

Posted on March 8, 2012, in Berdal and tagged , . Bookmark the permalink. Leave a comment.

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