Competition Laws in Hong Kong Term Paper

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Competition Laws in Hong Kong

Competition is a mainstay in business just as much as it is for any sports team. Businesses, in general, would probably rather that they have their industry all to themselves, but healthy competition drives the market. Without it there would be no need for innovation, and the one company could set the price of goods wherever they wanted to. Therefore, competition is good for a business because it is good for the consumers. In recent years, the governments of Hong Kong and the People's Republic of China (PRC) have both enacted competition or merger law which is supposed to make for a fair free market within the country. This has been met with opposition and with skepticism, but the general feeling is that it could open markets to both smaller investors and foreign firms. This essay will focus on defining what competition law is, the specifics of the Hong Kong proposals, and then look at how Hong Kong will possibly be affected by the new slate of laws.

To give every individual who wants to enter a market the ability to, governments have found it necessary to induce fair competition practices. A free market system is the best way for an economy to run, but if people were allowed to have completely free reign in a market there would be collusion, price fixing and other non-desirable free competition hampering activities. As Li and Young (2008) said;

"Competition law is generally enacted to control and influence certain business conduct deemed harmful to the smooth functioning of a competitive market. This is usually a byproduct of deregulation and opening up of markets to competition, as market forces alone might not be able to ensure allocative efficiency and competitive pricing is achieved"

Because the good of the consumer is the goal, competition that allows companies into the market is encouraged.

Governments are forced to regulate companies because there must be some way for every business to bid for market share within an industry. Therefore, there are usually two basic stances that competition law takes. These are;

"a prohibition of cartel arrangements, which impacts the types of discussions and arrangements that Association members may become involved in through the Association, and what directions or guidance the Association itself may provide to the members; and a prohibition of the 'abuse' of market power, which may impact the manner in which an Association can provide services to its members - particularly where it is the sole provider of such services" (HA, Hickin & Obrien, 2010).

Large companies, or even a small one that has a lot of market share, and thus power, within a market, will often use that advantage to harm others. Another form of competitive drain occurs when several companies get together and work together to control the processes within a market. Both of these outcomes are undesirable to both competition and fair market pricing. Thus, governments generally try to regulate these actions.

Another problem that can directly affect whether there is collusion or favoritism in a market is government involvement in industry. As Dan Ryan (2008) said in an article in The Australian "Industries are constantly changing. True cartels can only be created by government regulation. The key point is that competition laws do not focus on removing these government-imposed barriers to entry." This particular barrier is one that has directly affected the ability of businesses in the Asian community to operate fairly. Hong Kong and the PRC are prime examples of governments who helped foster cartels and power abuse by some families and their companies (Ryan, 2008). These countries have tried to right the wrongs in the past, but have come to realize that without adequate competition, they will not long be have the ability to compete with other nations.

The PRC enacted merger reform in August of 2007 (Li & Young, 2009) in response to the international grumbling, and they have been followed by the Hong Kong government in 2010 with their competition laws soon coming into effect. The Hong Kong and China statutes have many similarities, but since this paper is to focus on the competition laws of Hong Kong, that will be the major focus.

For the past decade Hong Kong has been talking about how they would create these laws and exactly what they would say. First proposals came to the public eye in 2006, and then a more finalized proposal in 2008 (Carnabuci, Potter, & Han, 2008). The agreements proposed law did not change much in that time except to clearly delineate what penalties would be handed out.

First, Hong Kong had created a Competition Policy Advisory Group (Compag) which heard cases regarding competition problems (Carnabuci & Chalk, 2006). The board had the authority to investigate the claims that were brought before them, but "given the absence of a competition law, Compag does not have any statutory powers to investigate, enforce or impose sanctions. (Carnabuci & Chalk, 2006). This meant that it was a toothless entity that had little they could do other than gather data on possible corruption.

With the recommendations that had been made by this committee and others, proposals of what the actual law should encompass came about. The thought was that;

"general and broadly drafted provisions be introduced to combat the following activities: price fixing; bid rigging; market allocation; sales and production quotas; joint boycotts; unfair or discriminatory standards; and abuse of a dominant market position. However, these activities should only constitute offences under the proposed competition law if they are carried out with anti-competitive intent (ie the intent to distort the market) or have the effect of distorting normal market operation and lessening competition" (Carnabuci & Chalk, 2006).

These were considered simply the beginnings of a discussion and there was no thought as to how these would affect the business community. The sanctions for such actions would be "penalties/fines; directors disqualification orders; final and interim cease and desist orders; and administrative settlements in lieu of formal proceedings" (Carnabuci & Chalk, 2006), but these would only be civil in nature. No criminal sanctions would be made against the offenders.

The more finalized proposal given in 2008 had some refinements that streamlined the law and made it more palatable to the public and the business community. A major refinement was that "The prohibition affects only horizontal agreements (ie agreements or concerted practices between undertakings operating at the same levels of the supply chain). Vertical agreements, on the other hand, would be regulated only if one party has a significant market position" (Carnabuci, Potter & Han, 2008). As far as the penalties to be incurred, the committee decided on "penalties of up to HK$10m (U.S.$1.3m). For higher financial penalties (subject to a cap that is likely to be based on the prevailing international standard of 10 per cent of total turnover during the period of infringement) or civil orders such as directors' disqualification orders of up to five years, the Commission would be required to make an application to the Tribunal" (Carnabuci, Potter & Han, 2008). In this way the companies knew what the new law would do, and they were apprised of the stiff fines and civil sanctions that could be carried out if they did not abide by the law.

The final law had several points of focus that were common to most other competition laws. The basic law is against associations that have the intent of defrauding other members of an industry. Whereas some of the actions such an association may take are not in themselves illegal, when they affect the fair trade of an industry they become criminal. Membership rules must not be such that they either exclude new members, and any rules for the association "should be fair and non-discriminatory, and should not unduly restrict the competitive activities of members" (Ha, Hickin, & O'Brien, 2010). General meetings and discussions are allowed, but they must not "collectively agree…to the terms or manner in which they supply (or acquire) goods and services" (Ha, Hickin, & O'Brien, 2010). These associations are also not allowed to distribute any fee schedules that direct the members what they must charge for a particular good or service (Ha, Hickin, & O'Brien, 2010). Any industry standards must not restrict entry into the market, and "business operators that hold a sufficiently high degree of market power ('dominance' under the AML, and 'substantial market power' under the proposed Hong Kong law) from engaging in conduct that amounts to an abuse of that power" (Ha, Hickin, & O'Brien, 2010). These rules are fairly standard practices with regard to competition law around the world, and are what Hong Kong will implement shortly.

Such laws have been set in place in other principalities previously, and they have been shown to either restrict trade too much, allow bureaucrats to free a hand in the matters of business or they have not performed the function which they were meant to originally. In the United States, competition law in some form…

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