Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, July 14, 2010

WSJ Op-Ed Against the Hong Kong Competition Law

Posted by D. Daniel Sokol

I have not read the Hong Kong draft law and so I cannot comment as to the specifics on the law.  However, this op-ed that appeared in the Wall Street Journal titled Competition Law and (Dis)order seems to lack a basic understanding of competition law and economics and takes broad swipes at antitrust more generally.  The reason why trade open economies have competition laws is because the non-tradable sectors may have lots of cartels and lots of abuse of dominance problems. Even if you are a libertarian (which the op-ed author seems to be), you should recognize that a naked cartel hurts consumers and that the possibility of false positives for such cartels is very low.

From what I can tell, the relatively new Singapore Competition Commission has done exceptionally well in its short existence. You do not see businesses fleeing Singapore because of the competition law.

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Comments

Hi Daniel

This op-ed in the WSJ was written by a member of the Lion Rock Institute, which purports to champion free-market thinking in Hong Kong. The LRI's opposition to any competition law in Hong Kong has a long history.

For readers who want to read the Competition Bill in full (it was published on 2 July 2010 and tabled in Hong Kong's Legislative Council on 14 July 2010), they can find it in the Government Gazette here:

http://www.gld.gov.hk/cgi-bin/gld/egazette/gazettefiles.cgi?lang=e&year=2010&month=7&day=2&vol=14&no=26&gn=18&header=1&part=0&df=1&nt=s3&newfile=1&acurrentpage=12&agree=1&gaz_type=ls3

And if anyone wants to keep up with future developments (and find out more about the background to Hong Kong's proposed general competition law), our website provides a lot of free information in addition to subscriber-only content: www.hkcompetitionlaw.com

Cheers

Peter Macmillan
Chief Editor
HONG KONG COMPETITION LAW
www.hkcompetitionlaw.com

Posted by: Peter Macmillan | Jul 14, 2010 4:46:04 PM

Re: the Singapore experience with competition law, your positive assessment is correct.

Ironically, Hong Kong's previous resistance to introducing general competition law was expressly based, at least in part, on the fact that Singapore didn't have such a law at the time. How things change.

Here's an article we wrote about recent enforcement activities by the Singapore Competition Commission and how it contrasts with Hong Kong's history of allowing all forms of anti-competitive practices in its economy:

Singapore 14, Hong Kong Nil
http://hkcompetitionlaw.com/2010/06/07/singapore-14-hong-kong-nil/

And here's another article in which we discuss the continued exposure of ordinary Hong Kong people to cartel behaviour in the airline industry, while other jurisdictions provide protection through competition law enforcement.

Silence is not always golden
http://hkcompetitionlaw.com/2010/05/28/silence-is-not-always-golden/

Cheers again

Peter Macmillan
Chief Editor
HONG KONG COMPETITION LAW
www.hkcompetitionlaw.com

Posted by: Peter Macmillan | Jul 14, 2010 4:59:41 PM

Dear Peter,

I've only just seen this post but I guess as I am the author of the WSJ article in question I should defend myself. I don't think your comments really do the debate in Hong Kong justice.

I am not sure what you mean by "purports to champion free market thinking in Hong Kong". I'm sure you're smart enough to know that the Lion Rock Institute is hardly alone among free market think tanks worldwide in taking the position it does on competition laws. I also am sure you are aware of the numerous free market Nobel prize winning economists who are also against these laws.

What troubles me most of all is why lawyers can possibly be in favour of the proposed Hong Kong law.

Imagine that a new regulator is to be established in Hong Kong with powers to:

- prevent freedom to contract
- invalidate existing contracts
- force businesses to dispose of assets and IP
- force businesses to license IP to competitors
- to have final say on what forms of commerce and terms of contracts are permissible in Hong Kong
- impose massive fines on businesses and force directors off boards

Surely such a government bureau would have to demonstrate a pretty compelling case for such powers and any powers given to such a regulator would have to be incredibly tightly worded. Vague arbitrary laws are bad laws - this is the first thing taught in law school.

Now consider the grounds under which the competition commission can take action:

(a) "predatory behavior towards competitors"
(b) "agreements that limit or control product, markets, technical development, or investment"
(c) agreements, concerted practices etc. that "prevent restrict or distort competition"
(d) where market participant with "substantial degree of market power" engages in conduct that "abuses" such power.

Such terms are inherently vague. There is no way by simply reading the text of the HK law you can possibly say for certain what contracts will and will not be permitted. Such vaguely worded terms are no more vague than those found in the numerous "economic crimes" which exist in Mainland China. Simply saying that the commission promotes competition does not make it so. There is no way that you would accept a patriotism commission to promote patriotism with similarly vague and arbitrary powers.

Lawyers should be extremely skeptical of such vague laws that contain such inherent capacity for arbitrary enforcement. But the position of too many lawyers with little economic training is somehow simply because someone says that "the economics" justifies them then such laws are somehow all OK.

I am sure even you would accept that determining the exact size, nature and permanence of a market and the respective powers of those in any particular market and how long they exercise any power is extremely tricky (and in my view is actually beyond the competency of any regulator to determine.) The law as drafted thus has an inherent unpredictability and lawlessness to it. There are good reasons why all lawyers should be concerned about it.

I've actually sent you numerous emails (attaching previous articles and papers we have written in this area) but the email on your website does not seem to work. I'd be happy to meet up and discuss as I have with other participants in the debate. I'm sure you'll find me pretty civil and informed on this matter.

I am also pretty confident that in the end I'll convince you that I'm right.

Best regards,
Dan Ryan
Director
The Lion Rock Institute
(E) dan.ryan@lionrockinstitute.org

Posted by: Dan Ryan | Aug 2, 2010 7:51:35 AM

Dear Dan,

Which Nobel prize winning economist specifically came out against antitrust law? I think that you over-reach.

The problem that you have regarding the possible application of the law is that it is purposely vague. This is intetional because the idea is that the law adapts to changes in economic theory. Of course, this assumes that the judiciary understands economic thinking and will come out with the right sort of decisions. I agree that the institutional context of antitrust matters and maybe the Hong Kong context suggests a set of antitrust institutions that respond to the reality of law and regulation in HK.

However, you did not address the initial point that I raised regarding the use of antitrust law to combat cartels or to address market failure in non-tradable sectors. Are you suggesting that these are not problems or that antitrust is not the most effective means to deal with them?

Posted by: D. Daniel Sokol | Aug 4, 2010 5:18:13 PM

Dear Daniel,

"Cartels", "Monopolies", etc can only exist where government regulations keeps out the threat of new competitors. Any alleged absence of competition in non-tradeable sector only makes sense if the government is keeping new competitors out or subsidizing existing incumbents. If you allege they exist in the non-tradeable sector in Hong Kong then please provide specific examples and we can discuss them on a case-by-case basis. The Hong Kong competition law in any event applies to both trading and non-trading sectors.

As to your other point regarding Nobel Prize winners I have selected below just a few quotes of some fairly reputable people on the competition law and Hong Kong's competition law in particular. You will note they include Nobel Prize laureates. Hayek (another Nobel Prize winner) and Schumpeter would also have almost certainly been against competition laws as well.

"When the prices went up, the judges said it was monopoly. When the prices went down, they said it was predatory pricing, and when they stayed the same, they said it was tacit collusion."
Ronald Coase, Nobel Prize Winner for Economics 1991

“I have gradually come to the conclusion that antitrust laws do far more harm than good and that we would be better off if we didn’t have them at all, if we could get rid of them.”
Milton Friedman, Nobel Prize Winner in Economics 1976

“The financial demise of a competitor is not the same as getting rid of competition. The courts have long paid lip service to the distinction that economists make between competition —- a set of economic conditions —- and existing competitors, though it is hard to see how much difference that has made in judicial decisions. Too often, it seems, if you have hurt competitors, then you have hurt competition, as far as the judges are concerned.”
Thomas Sowell
Rose and Milton Friedman Senior Fellow
The Hoover Institution
Stanford University

"The proposed legislation in Hong Kong government’s “Detailed Proposals for a Competition Law” would be disastrous for business, government and the consumer alike. It would have the opposite to the intended effect, because it would open the door to lobbying by vested interests. The consumer would lose out due to a
less competitive business environment, as stronger businesses are discouraged from acquiring or driving out of business the weaker ones. But even worse, the government’s new role of deciding who is competing “fairly” will expand the opportunities for corruption and encourage the private sector to seek advantages
through government action rather than their own efforts. Hong Kong has clearly benefited from government staying out of the business realm, so it is a mystery why it would want to throw away this competitive advantage now."
Hugo Restall
Editor
Far Eastern Economic Review

Many people cite Adam Smith, the eighteenth century patron saint of markets, in support of regulatory provisions to ensure competition keeps prices low. Those wishing to use Smith’s work selectively to press for a regulatory agenda are often fond of quoting his aphorism: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
But Smith went on to counsel against intervention by the authorities saying:
In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. Moreover, in a statement that ventured into general political matters he said: "It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice."
He realized that monopoly could only persist if empowered to do so by government. He also recognized that a body set up to target agreements between private operators would end up bringing far more harm than good.
Alan Moran
Director of Deregulation Unit
The Institute for Public Affairs

As to your statement that the law is "purposefully vague". I would suggest that you reflect very seriously on whether any law can be said to be a good law if it is designed to be vague and give authorities wide discretion about the types of commerce or behavior they will permit. Those of us who live and work in Hong Kong are perhaps more sensitive than most to "purposefully vague" laws of the kind they have across the border in Mainland China. It troubles me a great deal that so many lawyers fail to see the dangers of "purposefully vague" laws.

Best regards
Dan Ryan

Posted by: Dan Ryan | Aug 12, 2010 8:05:31 PM

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