South Asia Watch on Trade, Economics & Environment (SAWTEE)

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In defence of export cartels
Published: The Kathmandu Post, 9 July 2004
By: Ratnakar Adhikari

While domestic and international cartels are frowned upon by the competition authorities and consumers alike, competition laws of virtually all countries exempt export cartels from prosecution by domestic authorities. Export cartels are associations of firms that cooperate in the marketing and distribution of their product in foreign markets. Whereas previously only developed countries exempted their export cartels from their competition disciplines, now the developing countries as well as economies in transition are joining the bandwagon. While some scholars and several WTO members have recently condemned such cartels, others have argued that they allow efficiency gains that actually promote competition and trade. Evenett et al (2001) lists out 12 countries (OECD countries and economies in transition) where national exemption is provided to the exporters by their respective competition laws. Out of them, four countries (Germany, Japan, the UK, and the US) had some sort of notification/authorisation requirement, while eight others (Canada, Estonia, Hungary, Latvia, Lithuania, Mexico, Portugal and Sweden) do not even require the same. However, implicit exclusion is now the norm in the European Union (EU). Any export cartel formed for the purpose of exporting goods to non-EU member countries is outside the scope of Article 81 of the Treaty of Rome, which deals with competition.

In the US, export cartels are shielded from antitrust action by three statutes, two of which involve a registration procedure. Consequently, they are more visible to foreign competition agencies. Among them the most important is the 1918 Webb-Pomerene Act (WPA), which gives registered export associations a qualified immunity from its anti-trust discipline.

It appears that Pakistan is one of the first developing countries to have introduced exemption from export cartel in its competition legislation enacted way back in 1971, namely, Monopolies and Restrictive Trade Practices Ordinance. Similarly, Article 6 of Mexico’s 1992 Federal Law of Economic Competition contains explicit provision relating to export cartel.

Other developing countries or countries in transition, which have either amended their earlier legislation, or replaced them by new ones or prepared a completely new legislation, have introduced such exemptions in their laws. Probably they have started understanding the virtues of the same!

For example, Section 3(b) (i) of the 1998 South African Competition Act, which replaces the old Maintenance and Promotion of Competition Act of 1979, lists "maintenance or promotion of exports" as one of the possible grounds for granting an exemption for a restrictive agreement or practice.

Likewise, Section 5(ii) of India’s 2002 Competition Act, which replaces the earlier Monopolies and Restrictive Trade Practices Act of 1969, is a more far-reaching "carve-out". Similarly, as per Article 2 (2) of Bulgaria’s Law on the Protection of Competition, introduced in 1998 activities, the consequences of which restrict or might restrict the competition in another State, is not subject to its competition law.

As mentioned above, now the trend is towards making explicit mention of the exemptions provided to export cartel, given that it is pursued by almost every country. However, the debate on the efficiency implications vs. "export of anticompetitive effect" (or beggar-thy-neighbour effect) of such cartel, is far from settled.

Export cartels could provide significant benefits to the exporters. First, export cartels are formed for the purpose of saving variable costs of transportation, warehousing and handling, by being able to negotiate better rates for larger volumes.

Secondly, they could help the members of export cartels save their fixed costs of market research and setting up and maintaining networks and facilities for shipping, customs clearance, storage, marketing and distribution, and liaison with government officials where necessary. These are likely to be specific to each destination, and individual producers might find that their volumes are too small to justify incurring such costs. Or they could avoid unnecessary duplication by centralising these functions in a common agency.

Thirdly, they view export cartel as a means to pool risks. This appears to involve two separate considerations. First, access to the production facilities of many producers yields a more reliable source of supply, resulting in the cartel being better placed to meet orders. Secondly, common marketing gives each producer a share in a diversified portfolio of buyers, spreading the risks of non-payment by buyers, demand slumps, or disruption in deliveries caused by political or natural events in particular markets.

Similarly, an examination of Japanese export cartels in their heyday led to a finding that most of them did not appear to affect export prices or volumes; if anything, they contributed to cost reduction and quality assurance in some cases. In other cases, exporting firms cooperate by engaging in price fixing: either agreeing to sell their exports at the same price or to sell them through a single, joint sales agency that will accomplish the same thing. Firms may also use cooperative export organisations to jointly market products. These activities are clearly anticompetitive, with implications for the importing country’s economy and consumers. They could have the same effect as hardcore international cartels.

Despite criticisms, international community does not seem to be too concerned about the exports cartels, not least because of the limited volume of export made under such arrangements.

There is a general trend towards viewing export cartels as beneficial for the developing economies. Some authors have strongly supported both import and export cartels in absence of which it would be difficult for small entrepreneurs to engage in international trade. Similarly, some have gone even to the extent of making a qualified case for permitting developing countries to maintain cartels in industries producing manufactured exports, to allow for economies of scale, coordinated marketing, financing of technology development, and even coordinated export pricing so as to avoid charges of dumping in foreign markets.

In their submission to the WTO Committee , Thailand, India, China, Indonesia and Egypt made use of the principle of "Special and Differential Treatment" to argue that developing countries should be allowed to continue to exempt their export cartels, on the grounds that they were made up mainly of smaller firms, while requiring developed countries to abolish their exemptions.

Applying the same logic, Nepal, which is in the process of preparing its competition law, as a part of its voluntary commitment made at the WTO during the process of its accession, has also included export cartels in the "exception and exemption" category in the draft legislation. The culture of learning from international experience at the time of enacting domestic legislation is something noble in the context of Nepal. Ministry of Industry, Commerce and Supplies should be commended for this brilliant move. Let us hope that this culture is institutionalised.

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