Get balance right on competition rules or run risks

As preparations for the full introduction of the Competition Ordinance take shape, the Hong Kong General Chamber of Commerce is looking forward to the Competition Commission's release of the guidelines, which is expected to take place around the third quarter of this year.

For the chamber and the general business community, it is an important starting point in considering how to implement the ordinance to ensure it does not seek to rewrite our economic policy.

Hong Kong has long recognized the risks of regulatory error when trying to second-guess the market and has had a presumption that markets get it right more often than regulators.

In terms of competition policy, this is relevant in how the commission should approach the question of over and under-enforcement when determining its enforcement policy and the types of conduct that should be targeted under the law.

With that in mind, we have urged the commission not to ``cast the net too wide'' (ie to over- apply the law or to refrain from applying appropriate exemptions and safe harbors that would allow businesses more certainty as to what is prohibited) or to ``use a net that will catch minnows'' (ie conduct that does not have the potential to substantially restrict competition).

Ultimately, the law will stand the best prospect of maintaining and increasing competition in Hong Kong only if the balance is properly struck on enforcement and businesses have as much clarity as possible on what is prohibited so that they can focus compliance efforts efficiently and effectively.

This is all the more important for SMEs with limited resources for compliance, which comprise about 98 percent of the businesses in Hong Kong.

This approach or philosophy is of particular significance in dealing with the issue of vertical agreements. It is generally recognized worldwide that vertical agreements (agreements between businesses at different levels of the production/distribution chain such as manufacturers and wholesalers) are rarely problematic for market competition, and if they are, it is usually because one or both of the parties has substantial market power.

For this reason, vertical agreements are commonly excluded from overseas equivalents of the first conduct rule, and dealt with only under the second conduct rule. The Singapore Competition Law, for example, contains such a ``carve-out,'' and the European Union has a block exemption regulation for vertical agreements.

Excluding vertical agreements would be consistent with Hong Kong's free market tradition and its policy of intervening in markets only where necessary. We are therefore encouraged to note that the administration intends to use the ``block exemption'' mechanism to address vertical agreements.

It needs to be emphasized that the exclusion/ exemption is not seeking to give undertakings a ``get out of jail free'' pass for vertical agreements. What it does, quite sensibly and consistent with economic analysis of when it is that vertical agreements might be of concern, is to ensure an appropriate exemption for agreements in circumstances where the involved undertakings do not have market power such that their vertical agreements could raise any legitimate competition concern.

It is important when considering the appropriate approach to vertical agreements to keep in mind that Hong Kong is a small, open economy (effectively just a city economy) with generally intense inter-brand competition and open borders, allowing both domestic and very large and well-established overseas brands to compete vigorously in Hong Kong's markets.

There is no evidence of vertical agreements causing significant competition issues in Hong Kong absent market power.

If a block exemption is not implemented, this signals to the market that the commission may target vertical agreements under both the first and second conduct rule. This will create an extra layer of unnecessary regulation and potential double jeopardy for businesses.

It will also significantly increase the risk of deterring businesses from implementing pro-competitive distribution and other strategies for fear of breaching an unclear rule. This would put the economy at a significant disadvantage against other economies in the region with which it competes, including Singapore.

The chamber believes that the commission should introduce a block exemption regulation for vertical agreements at the earliest possible opportunity once the law takes effect. In the meantime, the guidelines should make it clear that vertical agreements will normally only be addressed under the second conduct rule.

As a final note, we believe that the commission should focus only on conduct that substantially lessens market competition without any mitigating efficiencies. The law does not provide for, and the guidelines should not therefore suggest, that there are any per se prohibitions or presumptions of anti- competitive conduct.

In a similar vein, efficient conduct should be permitted and encouraged; efficiency enhancing conduct should not be prohibited simply because those efficiencies are being implemented by a firm that has a strong market position.

The guidelines have always been regarded as essential in helping businesses comply with the ordinance, given the relatively vague nature of the conduct rules. It is therefore also essential, as well as fair, to allow businesses a reasonable period after the guidelines have been issued to study them and make any changes to their agreements and practices before the Conduct Rules take effect or are enforced. The chamber suggests that a period of at least nine months to be fair and reasonable for this purpose.

Shirley Yuen is CEO of the Hong Kong General Chamber of Commerce


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