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International Agreements: Opportunities and Threats to Competition PDF Print

Printed in Business Monday newspaper on March 22nd, 2010 

Barbados is a signatory to several international agreements. These include multilateral agreements such as General Agreement on Tariffs and Trade (GATT 1947) and World Trade Organisation (WTO), free trade agreements like CARICOM, CARICOM-Costa Rica, and CARICOM-Dominican Republic, and an Economic Association Agreement in CARIFORUM-European Community Economic Partnership Agreement (EPA). We are also negotiating in pursuit of a CARICOM-Canada Trade and Development agreement.

Being a signatory to these treaties has major implications for national and regional markets. These agreements generally seek to reduce tariffs on trade and allow supplies and suppliers to move, interact and compete freely, with the ultimate objective that the increased economic activity will lift the living standards of the respective populations.

Under the CARICOM Treaty for instance member states will not be allowed to introduce any restrictions to the right of establishment of nationals of other member states unless otherwise provided in the Treaty. This means that individuals from all of the signatory states will have an equal right to create and manage “economic enterprises” anywhere in the region with no greater stipulations than are required for a local business.

Under the EPA it is also anticipated that reciprocal treatment will be afforded to suppliers from the European Union as is afforded to national companies of any CARIFORUM state to bid equally for public sector contracts. Empirical evidence however suggests that such agreements do not lead to an immediate sprint to capture small markets like Barbados. In fact these agreements are expected to lead to net benefits. They are designed on the premise of expanded opportunities for domestic businesses, and are expected to stimulate trade activity.

As the provisions of these agreements begin to take effect there will be an increase in the amount of trade activity domestically and across the region. Domestic businesses will now have access to markets of a far more substantial size than they would have previously. They will therefore have greater opportunity and incentive to develop their productive capacities to satisfy the demands of the expanded market.

Consumers even moreso are expected to benefit from these agreements. As the markets are opened and enterprises from regional and international signatories now compete for the same “pie”, all businesses will have to respond to maintain or increase their market share. Products will have to be more economically priced, be of a higher quality, and packaged more attractively in order to stay ahead of the increased competition.

These agreements however will also present some threats to the local enterprise and to competition. It is generally accepted that the businesses operating in the international signatories to these agreements are of a much larger size than our domestic businesses. In this respect these businesses with greater productive capacity will be more capable of supplying our regional markets when the need arises than would our domestic businesses be capable of supplying their market. Our relative lack of capacity will mean that we could less capably fulfil major contracts in their jurisdiction than vice versa. Especially as it relates to business services which are easily transferable, domestic businesses will face substantial competition as companies which can provide these services more economically, aggressively seek to out-bid domestic enterprises.

With this increase in the number and size of the market participants, economic activity will increase and likewise the risks of anti-competitive conduct. Evidence has shown that some businesses when faced with additional competition, will avoid the hard work of cutting costs and increasing efficiency, and turn to less fair means of outperforming their counterparts. It is anticipated that once restrictions are lifted and businesses are now exposed to increased competition that, practices such as exclusive dealing, tying contracts and predatory pricing will emerge, all designed to foreclose efficient competitors from the market. It is expected that there will also be increased instances of price fixing and market sub-division.

Exclusive dealing contracts will require the clients of enterprises to deal only with that supplier or its affiliates, to the exclusion of all the other market players. This will mean that clients who previously dealt with a particular supplier may indicate that it can now only purchase from its competitor. Tying contracts also will seek to make consumers purchase goods other than those they initially intended to purchase, in order to close out suppliers in the market for the second or “tied” good. In addition, where possible, suppliers will also seek to drop prices very low in an initial period to force potentially effective competitors out of the market. All of these types of practices are endemic of extremely aggressive competition.

There is little doubt that the increased market activity will lend itself to these developments and it is necessary therefore that domestic enterprises be cognisant not only of the potential opportunities that these agreements do create, but also the potential threats that lie in waiting. Most of these agreements like CARICOM, EPA CARICOM-Canada do however include chapters on competition law and policy designed to allow authorities on either side of the agreement to share information in the hope of successfully investigating and eliminating these practices should they arise. The responsibility to be aware and to prepare accordingly, however, still lies with domestic enterprises.

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