“Reconciling Industrial and Competition Policies

1. “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 DeundenNikomborirak Thailand Development Research Institute (TDRI)

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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).

9. 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.

10. 4. Conclusion • Competition authority’s advocacy and adjudication role will become more prominentwhen 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.

11. Thank You