“Reconciling Industrial and Competition Policies CUTS International Conference on Reviewing the Global Experience with Economic Regulation: A Forward Looking Perspective April 18-20 2011 New Delhi, India Deunden Nikomborirak Thailand Development Research Institute (TDRI)

Outline When are industrial and competition policies in conflict? How should competition authority respond to proposed industrial policy that harm competition? Should there be cross border cooperation for the review of industrial policies? Conclusion

When are industrial and competition policies in conflict? Choosing industry (and nationality) Choosing firm, industry and nationality 2. Industry Specific (national industry) 1. Firm specific (national champions) 3. Activity Specific MEDIUM HIGH LOW Competition conflict – o - meter

ASSUMING THAT MISTAKES IN PICKING WINNERS WILL OCCUR… Avoid “firm or industry specific” industrial policies in favor of “activity specific” industrial policies such as those promoting activities that display positive spillovers such as R&D, training, network expansion, etc. Avoid naming “target industries”, but merely specify the “characteristics” of industries to be promoted – i.e., industries that generate positive economic spillovers such as industries with high local linkages, industries that are knowledge-or IT intensive, etc.

ASSUMING THAT MISTAKES IN PICKING WINNERS WILL OCCUR… If “target industries” exist, then they should be in the “tradable” sector rather than “non tradable sector”. Assess whether activities that generate significant spillovers should be publicly or privately provided – i.e., R&D in pharmaceuticals, in plant breeding, or investment in food laboratories.

Industrial Policy Tools that are Major Concerns for Competition Authority Tariffs: Market concentration in the absence of competition for import. Investment tax incentives: Tax incentives often go the the largest cooperation. Subsidies: Competition-distorting activities financed by state subsidies. Standards: Industrial standards that are designed to keep off competing foreign products. Discriminatory procurement rules: (Buy American, Buy China, etc.): Contestability of the domestic procurement market. State Monopolies/Concessions: The role of state-owned enterprises/government concessions and their implications on competition in the market. Of the 48 billion spent on auto 43 billion belongs to developed countries There remains big gap between bound and applied rates for LDCs and GSPs for developed countries. For example, subsidized money was used to pay executive salaries, causing unfair advantage for subsidized businesses. Or the government may require the enterprise to lend money. Since countries are injecting large sums of money into the domestic economy, they want to make sure that most of the fiscal stimulus goes to domestic suppliers rather than imported products. Hence, governments are placing conditionality on procurement made from stimulus money. In the United States, the Buy America provision in the February 2009 stimulus package21 has been widely criticized as being “protectionist.” Even though the provision applies only to steel, iron, and manufactured goods used in government funded construction projects. China passed similar regulation in June. Canda boycott US suppliers in municipal procurement and Australia is providing advantages to local suppliers.

2.How Should Competition Authorities Respond to Competition-harming Industrial Policies? Concentrate on the most damaging type of industrial policies (most specific) Firm specific policy: prevent abuse of dominance, ensure equal subsidies or access to privileges for all players, advocate equal access to monopolistic service or goods to contain effects on downstream markets. Industry specific policy: Ensure that at least the domestic market is contestable (licensing regime, access to scarce resources, etc.). Activities specific policy: Ensure that smaller firms are not indirectly disadvantaged. General Industrial policy: (1) Ensure “sunset clauses”.(2) Establish benchmark for success (3) implement monitoring scheme. - Sometimes national champions simply means consolidation of different state monopolies (mergers) without any subsidies. In Thailand, mostly state enterprises. - Most service industries are “all protected” from foreign competitors. But at least competition among Thai telecom operators, banks, steel companies, should be fair.

3. Should there be cross border cooperation for the review of industrial policies? Industrial policy tools : economy-wide: competitive depreciation, tax breaks for innovation, venture capital, etc. industry-specific: tariffs, subsidies, tax incentives, local content requirement, etc firm specific: monopoly rights, exclusive concessions, procurement privileges, etc. Certain regional trade agreements bind preferential tariff rates, some include restrictions on subsidies and tax incentives. WTO rules govern local content requirement (TRIMs) and procurement (Plurilateral). All industrial policies that provide competitive advantage (cost subsidies or demand guarantees) of local versus foreign undertakings can be seen to have “spill overs” effect. Of the 48 billion spent on auto 43 billion belongs to developed countries There remains big gap between bound and applied rates for LDCs and GSPs for developed countries.

3. Should there be cooperation for the review of industrial policies 3. Should there be cooperation for the review of industrial policies? (cont) Certain industrial policies pursued independently can result in suboptimal outcome. Coordination is thus warranted. Competition Authority should “point out” the distortions. Competent Ministries/Authorities should endeavor to negotiate an agreement that would restrict or limit the scope of industrial policies that distort cross-border competition. This often require reciprocal commitments. Examples of suboptimal outcome:tax incentves for shipping registration. Every country competes to have shipping liners fly their own flag and so entitled to the global revenue of the shipping company. But every country competes. In the end, none gets any tax revenue. Singpapore provide exemptions for not only income of crew members, but sales of shares in shipping companies, dividends, corporate income, personal income. At the same time, countries cannot impose development requirements on shipping companies: hire local labour, Competitive devaluation has also led to detrimental results in the thirties.

4. Conclusion Competition authority’s advocacy and adjudication role will become more prominent when government implements aggressive industrial policy. Competition authority’s ability to suggest second-best, third-best solutions to mitigate potential harm to competition will be crucial. Policy advocacy is resource intensive. Perhaps, competition authority can outsource work to private consultants.

Thank You