How to Make Hong Kong Uncompetitive

By Dan Ryan
Wednesday, April 2, 2008

HONG KONG

A series of record-breaking fines in American and European competition cases is focusing attention and concern again on the power and purpose of competition regulators themselves – just ask Microsoft. So the Hong Kong government's ongoing attempt to create such a regulator of its own is puzzling, to say the least.

Unlike most jurisdictions around the world, Hong Kong does not have a general competition law regulator. (The sole exception is a limited – and unnecessary – regime governing the telecommunications and broadcasting industries.) Yet somehow without such a regulator Hong Kong is consistently rated the freest and most competitive economy on the planet. How can this be?

Hong Kong's current "competition regulator" is its economic freedom and open market. The government keeps tariffs low and, with a few well-known and limited exceptions like the horse racing monopoly, it has maintained few government-imposed barriers to entry. This doesn't mean that certain companies haven't been able to dominate particular industries. But their ability to exploit that dominance to consumers' detriment is constrained by the constant threat that new competitors could pop up to challenge them.

Those in favor of a competition law regulator often point to the dominance in Hong Kong of two large supermarket chains – PARKnSHOP and Wellcome – as if this alone demonstrates there is a "cartel" in the retail sector. Yet strangely this has proved no barrier to new competitors establishing themselves in the territory. Neither has it prevented the explosion of small food chains offering high-end produce. Traditional markets where many locals prefer to shop do a roaring trade.

Proponents like to claim that competition laws are grounded in economic theory. This is simply false. Many of the most respected economists of the 20th century are against competition laws. They include Alan Greenspan, Nobel prize-winners Milton Friedman, James Buchanan and Ronald Coase, as well as other influential economists such as William Baumol.

Yet despite having years of practical success under its belt, the Hong Kong government is now in the process of drafting legislation to establish its own cross-sector competition regulator. It has indicated the legislation will be enacted in 2009 and the draft bill is due to be released at the end of April.

The pressure to do this has come from competition lawyers, regulators and academics. These groups, incidentally, have the most to gain from the establishment of a new regulator – international law firms are already bulking up their practices to take advantage of competition law-related disputes and regulators and academics are eyeing positions in the new regulatory body. The movement is also driven by unfounded expectations among certain sections of the community that a competition law regulator can be used to artificially force prices down.

The Hong Kong government has not yet confirmed exactly what powers the new regulator will have, exactly what form it will take, or exactly what kinds of business conduct will now be deemed "illegitimate competition." To date, the publicly available information has indicated that the new body will be focused on two main areas which are given the pejorative-sounding terms "restrictive trade practices" and "predatory pricing." The former covers a variety of cooperative commercial agreements that businesses make with each other. The latter deals with situations where a company engages in a price war by selling goods below cost.

The initial competition law regulator in Hong Kong will likely have less extensive powers than its peers in either the European Union or the U.S. The strategy seems to be to bring in the new regulator gently at first so as not to spook the business community, and then increase its powers later on. That's exactly what's happened in other jurisdictions. And there isn't one example of a competition regulator being disbanded.

In Hong Kong the introduction of a competition regulator would mark a step backward to a less competitive environment. Such regulators invariably introduce costs and inefficiencies of their own. Criminal penalties for directors are inevitably introduced, along with fines and penalties for noncompliance with the regulator's dictates. Compliance introduces significant costs on both small and large businesses. Many mergers and acquisitions that might actually benefit consumers risk being restricted or scuttled. Regulatory action also tends to be unevenly targeted, with regulators focusing on foreign businesses and businesses that are "too successful."

Hong Kong has a long and proud history of rejecting the worst excesses of state regulation that other countries have adopted. Unfortunately the current government has allowed itself to be talked into accepting that the very policies that have allowed its economy to thrive are somehow "defective" or "not fully developed."

It would be commendable if instead the Hong Kong government stood up for itself and extolled the virtues of its traditional approach to promoting competition -- low tariffs and limited regulatory barriers to entry. Other countries would be a lot more competitive and their consumers would have access to cheaper and better goods and services if they followed Hong Kong's example -- rather than vice versa.