Chair, CHAO, Yang-Ching
The Fair Trade Commission, Chinese Taipei
Mr. Chairman, first of all, I wish to thank New Zealand for all
the hardwork in the organization of the workshop. I would also
thank the host economy, the Philippines, for making the conference
arrangement. I am sure the views exchanged and shared in this
two-day workshop will contribute significantly to member
economies' implementation of competition policies and/or laws.
I have been asked to address the topic of open markets as an approach
to competition policy in relation to small businesses in a free
market economy. My presentation today will primarily base on Chinese
Taipei's experience in its enforcement of the competition laws.
The economy of Chinese Taipei has experienced much growth over
the past 40 years. The last four decades have successfully transformed
the previously less developed economy into a dynamic newly industrialized
economy.
The economic growth and the changes in the international trading
environment have brought about substantial pressure for industrial
restructuring. One of the most notable changes is reflected in
the relative importance of small and medium sized firms in Chinese
Taipei's economy. The internationalization of its economy through,
among others, lowering of tariffs and removal of other trade barriers,
have much exposed domestic firms to foreign competition. Moreover,
the integration of national markets through trade liberalization
under the GATT/WTO and other regional free trade arrangements
calls for increase in the size of the firms competing in the international
market. This, together with the increase in the labor cost, means
Chinese Taipei's small businesses are facing serious challenges.
The situation with respect to small and medium sized firms is
reflected in the relevant statistics. According to the 1995 White
Paper on Small and Medium Enterprises (SMEs), 96% of Chinese Taipei's
firms are SMEs. In 1994, SMEs employed approximately 80% of the
labor force, and accounted for slightly over 50% of our export
and 32% of the total sale. What is worth noting is that the SMEs
accounted for 70% of the total export in 1982 and 40% of the total
sale in 1986.
Like many other economies, Chinese Taipei finds the existence
of SMEs a very valuable element of its economy. It also recognizes
that SMEs are not necessarily the most efficient mode of production
or distribution in the relevant sectors, particularly in the face
of changing international economic environment. To help the survival
of the SMEs by strengthening their competitiveness, Chinese Taipei
has adopted a series of policies, such as encouraging SMEs to
shift outward their production lines to lower-labor-cost
regions; providing assistance to improve their efficiency and
competitiveness through, among others, identification of the sectors
where the SMEs have comparative advantage over larger firms, or
scale is not necessarily a major determinant of competitiveness,
more intensified R&D efforts, improved marketing, and restructuring
of operation. Many of such positive policies involve cooperation
or collective efforts by and among SMEs.
The issue then is to what extent the enforcement of Chinese Taipei's
competition law can complement the overall policies towards SMEs,
without much sacrificing the basic goals of the Law. The Fair
Trade Commission, i.e. the administrative agency in Chinese Taipei
responsible for enforcement of the Law, has not developed a comprehensive
set of specific policies or guidelines in relation to application
of the Law in cases involving SMEs. The Commission however has
a general sympathy towards SMEs. So far, issues are dealt with
on a case-by-case basis. In the four and half years
of enforcement of the Law, we have compiled certain case law which
might be of interest to other APEC economies.
Before going into the specific competition issues involving SMEs,
I shall first give you a brief introduction of the Law.
The Fair Trade Law
The Law was enacted in February 1991 and first implemented in
1992. The history of Chinese Taipei's enforcement of its Fair
Trade Law is rather short when compared to the 100 years of United
Sates, the half century of Japan and the 20 years of the Republic
of Korea.
The Law covers a wide range of antitrust as well as unfair competition
concerns. The antitrust part of the Law regulates monopolies,
mergers and concerted actions. The Law in general permits the
existence of monopolies, as long as they do not abuse their market
power. Mergers involving parties reaching a certain sales volume
or market shares must apply to the Commission for approval. The
Commission in principle forbids concerted actions but allows for
exceptions which require the Commission's prior approval.
The unfair competition part of the Law regulates unfair competition
which includes resale price maintenance, various other types of
vertical restraints, acts which are likely to impede fair competition,
false and deceptive advertising, commercial disparagement, multi-level
sales and any other practices which are deceptive or grossly unfair.
The Commission is an independent agency at the ministerial level.
Its Commissioners are required by law to exercise authority independently.
The economists and lawyers as Commissioners are generally aware
of the need to enforce the Law in such a way as to suit the general
economic development strategy, while maintaining adequate amount
of equity among the players in the market. However, different
Commissioners may give different weights to equity, when the equity
concern runs counter to the efficiency concern. The SMEs to a
certain extent are viewed as an equity element when it conflicts
with the efficiency concern. The Law does not require the Commission
to consider exclusively the efficiency element. Rather, the standards
to be applied are economic benefit to the community as a whole
and public interest. The Commission therefore has the discretion
to decide to what extent it would like to factor in SME concern,
when it conflicts with the efficiency concern.
Specific Issues Involving SMEs
1. Horizontal Collaboration
The most serious challenge to the Fair Trade Law and its enforcement
in relation to SMEs is the horizontal collaboration among SMEs
for purposes of pooling resources together to meet the scale requirement
or to prevent "excessive" competition. The industrial
policy for the SMEs generally calls for more tolerance towards
joint efforts by SMEs.
The Fair Trade Law adopts a rather strict approach in regulating
horizontal collaboration. It applies a per se rule; this
is to say, a practice that falls within the definition of concerted
action is found illegal, without further investigating whether
it has any anti-competitive effect. This approach is later
found to be rather harsh, considering the prevalence of SMEs in
the local market. Particularly, the rather interventionist policy
of the government at the earlier stage of economic development
from time to time required collective actions by the business
operators who are mostly SMEs, with trade associations acting
as government instrumentality in organizing such collective actions.
The Commission, in an attempt to temper the effect of the per
se rule, introduces a de minis standard in the application
of the Law in this area, so that concerted actions of negligible
effects would not be pursued.
In addition, the Law provides a number of possibilities for the
Commission to grant exception to the general rule against horizontal
collaboration. Specifically, collective efforts by SMEs for purposes
of improving their efficiency or increasing competitiveness is
permissible. Other exceptions that are available to all types
of business are : collective efforts in standardizing specification
which helps to lower cost; improve quality or increase efficiency;
joint R&D; division of work to facilitate specialization and
therefore rationalization of business operation; agreement in
respect of competition in foreign markets for purposes of promoting
or securing export opportunities; concerted action in respect
of import in order to strengthen trading capability and recessionary
cartel.
The Law requires the Fair Trade Commission to assess each of these
cases in light of the benefits that will be brought to the economy
as a whole, and public interest. In effect, the Commission has
a broad discretion in making such determination. The Commission
has been rather sympathetic to firms that have to compete internationally.
But the Commission is concerned that being too generous in granting
the approval would defeat the whole purpose of the Law in relation
to horizontal collaboration.
The exceptions that have been approved so far include, among others,
joint force in the transport of imported bulk commodities, such
as soy beans and corns, joint venture in the development of specific
technology that has industry-wide application, and joint
processing of credit card bills by card-issuing banks.
2. Merger Control
Merger control rules would have effects on the size of the firms
operating in the market. The Law requires merging firms reaching
certain sales volume, or market shares before or after a proposed
merger, to seek prior approval of the Commission. The current
threshold for merger notification requirement is set at New Taiwan
Dollars 2 billion (approximately 75 million U.S. Dollars) in sales
volume, or 1/4 of the market for a party to a proposed merger
or 1/3 of the market after the merger. The most frequently invoked
threshold is the sales volume of 2 billion, which has been much
criticized by the business community as too limiting.
The Law gives the Commission broad discretion in making the judgment
of whether a proposed merger should be given approval. If the
proposed merger, in the judgment of the Commission, will bring
benefit to the economy as a whole, and the benefit exceed the
cost associated with the lessening of competition caused by the
merger, the Commission is authorized by law to grant approval.
The Commission is aware of the need for business operation of
certain size in order to attain efficiency or increase competitiveness.
The Commission is, however, concerned about, but yet to develop
an analytical framework to deal with, the social value associated
with SMEs. This is to say the Commission has not developed a clear
policy as to whether merger or collaboration among smaller firms
should be the preferred means of achieving the aim to attain the
necessary scale economy, or whether it should be loose in both
cases and allow the firms to make their own choices.
3. Distribution Channel and Associated Vertical Restraint Problems
One of the most notable changes in Chinese Taipei's market is
the emergence of large chain stores and hypermarkets. Like their
counterparts in the western countries a few decades ago, the locally-owned
retailers are facing tremendous competitive pressures from large-scale
operators. However, the Commission has not been asked to review
its position in respect of resale price maintenance, which if
permitted by law, will to a certain extent temper the effects
of low-price competition from the large chain stores and
hypermarkets.
The Fair Trade Law bans resale price maintenance, with the only
exception for the situation where the products involved are daily
necessities which are subject to free competition with similar
kinds of goods available in the market. Such "daily necessities"
are to be determined by the Commission. As mentioned, the Commission
has not been asked by the firms to consider the need to list out
such daily necessities so as to give room for resale price maintenance
scheme to operate. The reason might be that the small stores are
not organized enough to put forward a common position, or the
suppliers are not willing to offend their large-scale customers
by installing a resale price maintenance scheme.
The Commission has, however, noticed a potential danger of discriminatory
practice by the suppliers, who may be forced to charge lower prices
in selling to large chain stores and hypermarkets without such
justification as cost-based quantity discount. This practice
would grossly disadvantage smaller distributors, as they may not
have the same bargaining power as the large ones.
The experiences in the U.S. and other western countries seem to
suggest that the retailing revolution is an irreversible trend.
Indeed, more and more locally owned small stores are becoming
part of large chains, while others are being driven out of the
market. The Commission has been trying to slow down the process,
in order to allow the small stores more time to adjust. The Commission
has ordered the chains of consumer cooperatives to limit their
customers to members of the individual cooperatives. Hypermarkets
located in industrial zones are required by the Commission not
to go into the retail market to have direct sales relationship
with consumers.
Chain stores are closely monitored by the Commission. The related
franchise arrangements are deemed by the Commission as having
similar effects as that of acquisition, and therefore are required
to obtain prior approval of the Commission. Through the approval
process, the Commission would have an opportunity to review the
market position of each chain to prevent the dominance of a particular
chain. The Commission also reviews the franchise agreement to
ensure that there is no undue restriction on the franchisees,
such as exclusive dealing arrangements.
The chain stores and hypermarkets have been ordered by the Commission
to cease the practice of collecting surcharges from the suppliers
for obtaining the "right to display" or the "right
to be put on the shelf" for their merchandise. This action
is particularly meaningful when the suppliers are smaller firms
vis-vis their distributors.
4. Licensing of Intellectual Property Rights and Small Businesses
The large number of SMEs engaging in the manufacturing for export
of products, who require technological inputs from large corporations
or even multinationals, presents another set of competition issues.
Licensing of technology has been an area of much controversy.
On several occasions, the Commission found it necessary to intervene
in the licensing process, when the licensees are apparently much
less experienced and small in size and therefore lack of the necessary
bargaining power to reach a fair deal. This is particularly so,
when the technology's application is so wide that the number of
firms seeking licenses is substantial, and the licensor is the
monopoly or an oligopoly in the relevant technology market. In
a particular case, the foreign licensor has been required by the
Commission to specify to its potential licensees in detail the
patents associated with the technology involved; to provide explanation
of its technology and licensing terms in the local language; to
form a good faith belief before alleging infringement of patent
rights; and to refrain from using legal action having extremely
harmful effects as a threat in the negotiation process.
Another area involving small business operators is the video rental
market. The Commission has found that the film distributors possessing
copyrights, through their local agents, impose various restrictions
on local rental shops, including such tying arrangements as requiring
purchase of videos in sets (for example, 300 films as a set).
There are instances where the distributors refuse to sell video
films to rental shops, and would provide the products only to
its franchisees who are required to pay a substantial entry fee
and to operate the rental business on a profit-sharing basis
with the distributors. The Commission, while accepting the value
of the scheme in the protection of the relevant copyrights, has
found such a scheme overly restrictive. The Copyright Law of Chinese
Taipei bans parallel imports of copyrighted work including film
videos, and therefore the rental shops have no alternative means
of obtaining the products. The Commission then decided to order
the local distributors to provide an alternative way of making
the videos available to the rental shops.
CONCLUSION
Global economy has pointed towards internationalization. To meet
new challenges in global trading, Chinese Taipei's economic policies
have shifted from protectionism to industrial structural adjustment
strategies. The adjustment is to enhance competitiveness of our
firms in an open market system. While a set of policies have been
made for continual growth or survival of the SMEs, the Fair Trade
Law and its enforcement is an additional tool to help achieve
the aim. In the absence of a comprehensive set of guidelines for
application of the Law in cases involving SMEs, the case-by-case
approach of the Commission in the area of vertical restraints
and unfair trade practices has helped improve the business environment
for SMEs. What remain to be solved are the extent to which the
Commission would permit joint ventures among SMEs, and the extent
to which the Commission's merger policy would permit the emergence
of large-scale firms posing competitive threat on small firms
or having the effect of creating a concentrated market structure.
The success of Chinese Taipei's dynamic economic growth is highly
contributive to the sector of small and medium enterprises. In
addition, SMEs represent a culture of great value to us. The continual
growth or at least existence of the sector is conducive to sustain
our balanced economic development.