Brazil lost US$500 million to an international cartel from its privatization of Eletropaulo Metropolitana, a Government-owned electricity distribution company. The privatization of the electricity company was done through floating a tender, with the reserve price publicly announced before the bids being US$1.78 billion. Three bidders were allowed to participate in the auction: (i) Enron, a US energy trader; (ii) the Light Energy Consortium (comprising AES, a large US energy group, Electricité de France, Houston Industries, and CSN, a Brazilian steel company); and (iii) VBC, a Brazilian group.
Just before the auction took place, AES, a member of the Light Energy Consortium, approached Enron with an offer that for not bidding for Eletropaulo Metropolitana, Enron would be allowed to build a power plant with AES to supply Eletropaulo, as well as operate the plant and provide all the fuel (the Light Energy Consortium had considered a similar deal with VBC but had decided against it on advice from its lawyers). At the auction, the Light Energy Consortium came armed with two bid envelopes: one offering US$1.78 billion and another offering an extra US$500 million. When it became apparent that Enron and VBC, who were both at the auction, were not submitting bids, the Light Energy Consortium submitted the lower bid for US$1.78 billion. If Enron or VBC had submitted bids, the Light Energy Consortium would have submitted the higher bid with an extra US$500 million.
That was the amount that Brazil directly lost through the rigging of the bid. It was also estimated that Brazil could have lost up to US$1 billion, being the difference between the bid of US$1.78 billion deposited by the Light Energy Consortium and the maximum value of Eletropaulo Metropolitana as estimated by Enron when it was considering bidding.
There were however other indirect costs to Brazilian consumers of electricity that arose from the bid rigging. Under the bid rigging agreement between Enron and the Light Energy Consortium, Enron would be granted a contract for the production of electricity, and part of the increase in the cost of electricity due to the contract would naturally be passed on to electricity consumers.
rivals engage in anticomps if they can obtain a short-term advantage by misleading consumers, supplying unsafe goods or acting in a grossly unfair way. The costs of such short-term advantages will fall on both consumers and legitimate traders, often to the long-term detriment of consumers
there are four main types of business practices that can have restrictive or anti-competitive effects. These are:
(i) horizontal restraints:
Horizontal restraints are uas between competing firms producing identical or similar goods or services, to restrict competition [eg price-fixing, collusive tendering and market or customer allocation uas]. These uas are ‘hard-core cartels’
(ii) vertical restraints:
Vertical restraints are uas between rivals at a different level of the production/distribution chain, establishing conditions of purchase, sell or resell.
vertical ua types: tie-in; exclusive dealing; and rpm
(iii) adp:
this is where the ‘rule of reason’ approach is most justified.
A person in a dominant position will be able to set prices or other market conditions without significant , short or long term, impact from competitors or consumers
Dominance therefore comes with [market power: ability to profitably maintain prices above competitive levels for a significant period of time.]
market power usually manifests as reduced quality, or a lack of innovation…. however, dominance per se is not anti-competitive, but the abuse of it, eg. creating entry barriers
(iv) anti-competitive mergers and acquisitions:
most mergers pose little or no serious threat to competition, and may actually be pro-competitive.
Other mergers however seriously harm competition by increasing the probability of exercise of market power
three main types of mergers (horizontal mergers, vertical mergers and conglomerate mergers)
Horizontal mergers present the greatest danger to competition, as they reduce the number of rivals, leading to market concentration, which could create dominant or monopoly uas.
Competition Issues in Commodity Markets
funds from USDA/ARS for support to the “Global Cocoa Programme” made available to the CIRAD cocoa programme (Tree Crops Department) and to IPGRI.
firms and consumers in the North do not pay for such a difference in quality as “organic” and/or “fair” trade.
only cl [and not the white man’s obsession with quality] can best achieve true quality, convince decision makers and donors, and bolster the incomes of small farmers
Chocolate manufacturing is structured around three major operators (apart from those linked to trade): the cocoa grower, who produces the bean; the grinder/buttermaker, who processes the bean into cocoa butter, powder and couverture; the chocolate maker
The Ivorian stabilization system was completely dismantled by commodity chain liberalization in August 1999. The stabilization system fixed a minimum reference prices for producers. Consequently, when a cocoa sale was made, the exporter had to compensate the stabilization fund for any difference between the sale price and the minimum reference price (the “repayment” operation). On the other hand, when world prices were lower than the reference price, CAISTAB compensated exporters by granting them a payment (known as “support”) corresponding to the difference.
but with the imposition of the so-called “modern” liberalisation to developing countries, STABEX is the only way left to compensate for commodity market instability….however, today STABEX however only intervenes with donations
the commitments made at the (WTO), are breached, since wto does not authorize discriminatory or non reciprocal trading. Consequently, the EU proposes Economic Partnership Agreements (EPA) between 2008 and 2020 with the ACP countries. STABEX has thus facilitated access to the banking system for producers
In 2001, the Ivorian national coffee and cocoa producers association (ANAPROCI) suggested the restoration of a stabilization system, instead of liberalisation.
Futures and options markets
it was not until the 20th century that it became possible to protect oneself from price fluctuations: the first cocoa exchange was created in New York in 1925 in the wake of a stock exchange boom and crash with London following in 1928 (exchange now forming part of LIFFE)
These futures contracts and markets transfer the price risk (unexpected rise or fall between order and delivery) from those who do not accept it (“arbitrage dealers”: traders, processors, chocolate makers, cocoa producers, etc.) to those who accept it (“speculators”).
Purchasing options (“calls”) and sales (“puts”) completed this system for cocoa at the end of the 1980s. These are conditional futures contracts enabling the option to request performance, or cancellation, subject to payment of a premium (known as the “option price”). Thus, in modern merchandise trading, there exists today a clear distinction between:
A/ the “physical market” (also called the “real” market, “cash” market or “spot” market) deals in cocoa beans or cocoa products conditions (price, quality etc) are mutually agreed….arbitrage (alternative dispute resolution) is done under trading associations. In extreme cases (refusal by one of the parties to comply), it becomes enforceable through legal channels
B/ the futures market : shifts ten times more volumes (on paper) than the physical market. the futures requires a middleman (Broker) to buy or sell commodities. This involves a standard contract that can be bought or sold at a given place (NYBOT or LIFFE), on the trading floor (NYBOT) or in front of computer screens (LIFFE since the end of 2000). In the futures contract, only the price and delivery month are negotiable.
-the advantages of futures market:
(1) cost reductions throughout the commodity chain since, by limiting their risk margin (money gained by speculators is lost by other speculators), middlemen also limit their commission;
(2) more flexible and more efficient management of market flows;
(3) transparency in operations through the immediate publication of quotations; and
(4) theoretically more difficult price manipulation by large operators, even if “squeezes” affect the smooth functioning of the markets.
– drawbacks:
(1) in the short term, the futures market can increase instability, even though it does not modify long-term price trends;
(2) producers always find themselves in the role of speculators, since they can choose at any moment to sell or not to sell
(3) resorting to arbitrage is not free of charge (registration fees, brokerage, exchange taxes, etc.); and
(4) the options system encourages traders and industrialists to speculate, which amplifies the role of futures markets, increasing its disadvantages.
(5)futures markets do not locally encourage the production, differentiation and recompense of quality, since they rely on the maximum homogenization of batches, which is done more to meet a low rather than a high standard (only the least attractive cocoas are delivered to the exchange).
* A london businessman, anthony ward, implemented a “squeeze” (buying most of the product in a market to force prices to rise, and selling at the high price to pocket a gain of millions ), and he even funded the war that broke out in the Côte d’Ivoire on 19 September 2002 to multiply his stake, he was apparently backed by the American insurer AIG, or the Commodity Arbitrage Fund AIG DKR….a “squeeze”, may lead to the abrupt destructuring of the economy of a country such as the Côte d’Ivoire
it is paradoxical that the world cocoa price is determined by speculators on markets in which only paper circulates. Nevertheless, let us not forget that old traders’ saying “physical is always right!”.
the lysine cartel that was dismantled, the total cost of its formation and management was estimated at under US$15.7 million , i.e. 4 to 8 per cent of its assumed profits
the Côte d’Ivoire, supplies over 40 per cent of world demand for cocoa beans. But for how many years will that continue?
cultivation has been in crisis, whereas demand for chocolate has continued to grow worldwide. Chronic price instability is now combined with increasing competition from south-east Asia, the difficulty of ensuring continued production by farming on newly cleared forest, the growing threat of diseases and resistance to pesticides, quite rough liberalization of the commodity chain in 1999, a European directive authorizing the use of cheap substitutes for cocoa butter in chocolate, an American drive to certify cocoa and chocolate “free of child slavery”, dubious events on the London and New York futures markets and, lastly, on 19 September 2002, the outbreak of a civil war dividing the country in two
(1) In 1989/90, the “cocoa war” halved the price of a kilogram of cocoa beans paid to Ivorian producers. Since then, up to 2001, that price barely improved….the 1999 liberalization, have destabilized their working environment (price, credit, etc.)…The liberalization of Ivorian cocoa is only advantageous to middlemen, since their rivals, the cooperatives, now collect fewer beans as they are unable to pay producers for their crop immediately (their access to bank credit was divided by 25 at the time of liberalization).
(2) International grinders (ADM, Barry-Calbault, Cargill…), making semi-finished products (cocoa liquor, butter and powder, or even couverture), are incorporating upstream (taking over or sidelining all Ivorian exporters, dealers and middlemen)
(3) On the French market, chocolate makers (Mars, Nestlé…) and/or distributors (Carrefour and others) are gaining more from a tablet of chocolate: between 1992 and 2001, unlike the ingredients (bean, liquor, butter, couverture, sugar, etc.) its price rose steadily
globalisation (the world liberalization), has not only strengthened the concentration of firms downstream, but has also led to the exertion of a buying power upstream, particularly over farmers, since their dispersal is now total.
<> cocoo: press for a change in clcp, since this map, harms the collective well-being (wpi) , and should be a clear breach of clcp…..curiously, there is still no international body capable of correcting this market failure affecting Ivorian cocoa farmers, and more generally developing countries that do not have the resources to set up and enforce their own competition policy…..Indeed, the WTO is limited to promoting just one very rudimentary form of competition (free circulation of goods).
PRODUCT STANDARDS, COMPETITIVENESS AND DEVELOPMENT
This legal vacuum goes against the interests of either developing country’s export competitiveness or pro-poor development.
In most developing economies, product quality expectations are much lower than international norms. Consequently, domestic regulations are generally ‘softer’. In addition to this, it has been estimated that up 30 per cent of gross domestic product (GDP) and 70 per cent of workers in the developing world are now informal
In Sub-Saharan Africa, Latin America, Central Asia and Russia it is not unusual for informality to exceed 50 per cent of GDP. Within the informal sector there is no obligation to conform to regulations and standards, or offer consumer protection
in Egypt, for example, the ongoing imposition of obsolete quality standards on food products, has resulted in more than 80 per cent of the food being produced informally by smallscale providers. Inappropriate and expensive business legislation discouraged small entrepreneurs from becoming formal, [an entry barrier to those who wish to be formal]
cocoo: inapropriate liberalising laws are a barrier to entry for smaller companies for basic goods, thus they are forced to remain informal, and consequently cl and consumers are not respected.
also, where consumers are forced, through lack of choice, to use the informal market for basic goods, they are denied their rights to safety, information, redress and a healthy environment.
Furthermore, prices on the informal market have been at least 15 per cent more than the price on the formal market. thus, the bulk of the lucrative export market goes to the few largest , few, formal companies [as only they are allowed to export]
The smaller and medium-sized firms (SMEs) get caught in a cycle of underdevelopment. This also excludes them from initiatives such as the US’s African Growth and Opportunity Act (AGOA) and the EU’s Everything But Arms (EBA).
Certain PPM (product and production methods) requirements mask comparative advantage and are imposed for protectionist gain.
serious policy issues emerge if these measures lock small producers out of the more dynamic export markets, leaving them to supply the less lucrative local and informal markets. Alongside these flawed government measures, private standards, and codes of practice, (promulgated by the major retailers in developed countries and not governments) are now increasingly affecting smes and farmers
Auditing systems also present challenges when different auditors have varied interpretations, and this can become an entry barrier to smes.
Another example of entry barriers, is the Kenyan green bean sector. as private standards rose, supermarkets dominated the market and demanded more reliable sources than the wholesale markets were able to offer. Consequently, there was an increase in direct purchases through integrators/exporters
eg. small Colombian exporters of cut flowers were also adversely affected by the introduction of the Flower Label Program (FLP) which is a private, voluntary eco-labelling programme led by German industry aimed at restricting the use of toxic chemicals and pesticides for the cultivation of such flowers….The Colombian government’s submission to the WTO contended that the FLP is arbitrary and discriminatory, as it imposes significant compliance costs but it is de facto a mandatory measure since non-compliance results in ‘negative pressure’.
<> cocoo: challenge countries’ failure to file submissions to the WTO…. or to prepare submissions for them….and for wto to have true cl powers.
India: the footwear industry’s voluntary labelling schemes has raised the costs of compliance for Indian footwear exporters by approximately 33 pc
also firms in the United States, Japan and the United Kingdom, suffer 10% additional costs of complying with foreign standards
US courts have typically evaluated the procompetitive benefits of a product standard against any anti-competitive implications under what is termed the ‘rule of reason’ (ROR) analysis…however, such a mechanism is absent at the international level
<> cocoo will apply the ROR in favour of developing nations
the lack of coherent recognition of non-product-related (nPR)-PPMs at the international level applies to both mandatory and voluntary standards. This legal vacuum go against the interests of developing countries….there is a strong need to advocate the formal and transparent regulation of nPR-PPMs.
The GATT/WTO legal framework governing product standards:
As noted above, product standards can be both mandatory (government driven) and voluntary (market driven). These standards can also be either ‘product related’ or ‘non-product related’ . A ‘product-related’ PPM (PR-PPM) changes the characteristics and quality of the final product, to protect the end-user or the environment
Non-product-related PPMs (nPR-PPMs) do not affect or change the product, but how is created or harvested. For example, slave labour will not affect the look of an object, but it violates multiple internationally recognized and customary human and labour rights. Other examples involve protection of the environment or the welfare of animals. Mandatory product standards set by government are regulated by GATT (General Agreement of Tariffs and Trade)/WTO agreements.
the PPM debate has focused largely on the interpretation of the GATT, the Sanitary and Phytosanitary (SPS) Agreement, and the Technical Barriers to Trade (TBT) Agreement
only the TBT Agreement is examined where, to date, neither PRPPM nor nPR-PPM disputes have been handled within the WTO’s Dispute Settlement Mechanism (DSM). The TBT Agreement is to ensure that Members can apply product regulations to fulfil legitimate policy objectives – provided are not “more trade restrictive than is necessary” and do not create “unnecessary obstacles to international trade”.
Therefore, the WTO deems any legislation made in accordance with recognized international standards, not to constitute an unnecessary obstacle to trade.
Article III: National Treatment (NT) and ‘like’ products:
Article III obligates WTO Members to grant foreign products treatment that is at least as favourable as the treatment granted to domestic ‘like’ products.
However, relevant GATT/WTO nPR-PPM jurisprudence to date includes the 1991 US – Tuna I (Mexico) GATT Panel report, which found that differences in nPR-PPMs are not relevant in determining ‘likeness’ and the 2001 EC – Asbestos case where the Appellate Body found that the determination of ‘likeness’ is about the “nature and extent of a competitive relationship between products”.… this ec opinion has been criticized as it leaves little policy space for Members to distinguish between products based on non-economic considerations, thus is unable to consider environmental or health concerns.
art. xx.b of gatt gives the only protection to PI goals: ‘necessary to protect human, animal, or plant life or health; • Article XX(g) relating to the conservation of exhaustible natural resources’
The Appellate Body created a three-factor balancing test for deciding whether or not a measure is necessary when it is not per se indispensable:
i) the contribution made by the measure to the legitimate objective;
ii) the importance of the common interests or values protected; and,
iii) the impact of the measure on trade
Appellate Body EC – Asbestos:
whether a French ban on the manufacturing, sale, and import of asbestos fibres was ‘necessary’ to protect the health of workers and consumers, as required under Article XX(b). The Appellate Body accepted that a country may single out a product and adopt measures to address its health risks, without first exhaustively investigating the risks posed by substitutes. The Appellate Body also reaffirmed that a Member was free to choose its level of protection and found that the balancing test laid out in Korea – Beef with respect to Article XX(d), was also applicable under Article XX(b). Finally, the Appellate Body confirmed the importance of the value to be protected, noting that the preservation of human life and health was “both vital and important in the highest degree”.
The US –the Appellate Body interpreted the term ‘exhaustible natural resources’ to include living, renewable and non-renewable resources.eg– Tuna, salmon, are an exhaustible natural resource in need of conservation management.
In US – Tuna/Dolphin I and US – Tuna/ Dolphin II: the Panels of both cases concluded that dolphins qualified as natural resources. The Panel also determined that, first, clean air is a resource, second, it is natural, and third, potentially could be depleted… in 1996 US – Reformulated Gasoline. Finally, in US – Shrimp/Turtle I, the Appellate Body found that living resources are just as ‘finite’ as petroleum, iron ore and other non-living resources
The chapeau of Article XX prohibits a measures’ application if it constitutes either “arbitrary or unjustifiable discrimination between countries where the same conditions prevail” or a “disguised restriction on international trade”.
High levels of environmental or social protection can, however, have positive effects on the competitiveness of domestic producers and countries, and can spur innovation.
Legal frameworks covering private standards:
While mandatory government standards are subject to the constraints of the MFN and NT non-discrimination provisions, they do not extend to private voluntary standards
The TBT Agreement also obligates Members to take “reasonable measures to ensure compliance” by Non-Governmental Organization (NGO) bodies with the Code of Good Practice by nongovernmental bodies. However, in the Tuna – Dolphin case the Panel found that the provisions of a voluntary US eco-labelling scheme did not violate Article I:1 of the GATT Agreement (MFN Clause) because the Dolphin Protection Consumer Information Act (DPCIA) ecolabelling scheme is not a market restriction, because it does not prevent a manufacturer from selling its product in a marketplace without complying with the environmental requirement. This implies that only ‘government-conferred’ [and not ngo conferred] advantages are subject to the MFN requirements, and for a measure to restrict access to a market, it must leave an exporter with no choice but to comply with it….but this is hard on them because:
a. some [eg environmental and social] standards in their export markets are not always well publicized, or well understood or may not allow enough time for sme producers to conform
b. the standards may be set at excessively high levels or require complex testing and monitoring to ensure compliance. but, in developing countries, this standards cause sme commodities exporters to face product price rises…which causes purchasers to switch exporter…Commodities purchasers will not pay a premium for environmentally or socially high standards
c. Disputes between private entities, NGOs and non-state organizations are beyond the mandate of the GATT Agreement…..Thus, is hard to prove that a private standard violates the MFN clause, not least because private actors have no direct role in the WTO. Not only must a private party be represented by a government, but there is also an absence of a state entity to launch dispute settlement proceedings against.
In the Japan Films case, the WTO Panel acknowledged no ‘bright line rules’ that allowed it to rule out an action as being non-governmental, just because it was taken by a private party.
In the Korea Beef Case, the WTO Appellate Body held Korea responsible for violation under Article III:4 (NT) because domestic law gave a sufficient incentive for its retailers to act in a manner inconsistent with the WTO.
<> cocoo: challenge private standards under wto Article III:4. …but, is difficult to show that a private standard violates Article III:4 because must be shown to affect internal sale, discriminate between like products, and not to afford like treatment to imported products. Nevertheless, it can be argued that the scope of a ‘regulation or requirement’ does not prima facie exclude private actions under Article III:4
in developing country SMEs, as long as the NGO standards result in discriminatory competitive conditions which deny them effective equality, the standards could violate Article III:4. 4.1.2.TBT
Conclusions
The regulation of both mandatory and private standards is not yet comprehensive regarding nPR-PPMs.
compliance with private voluntary standards and schemes is becoming increasingly mandatory for developing country producers wishing to access the main retailer supply chains. While export traders are the key link between the purchasers and the producers, SMEs are being excluded from lucrative international markets because of the high burden imposed by the private standards.
Developing country domestic policy, should identify the extent to which subsidies or public support programmes are needed to offset the cost disadvantage that stems from international technical regulations.
The TBT Agreement excludes any product standard or regulation based on the nPR-PPM criteria of most developing countries. While this prevents these criteria being used to discriminate between ‘like’ products, it also causes private nPR-PPM product requirements to be unregulated within the WTO
The primary objective of the TBT Agreement is to discipline the arbitrary use of technical barriers to trade, and is the best way for challenging a private standard. If terms including ‘non-governmental bodies’, ‘standardizing bodies’, ‘Standards’ and ‘Technical Regulations’ are interpreted to exempt private standards from being regulated it would undermine the Agreement.
The best policy option is to use the TBT Agreement’s ‘review’ mechanism, which gives WTO Members an opportunity to “review the operation and implementation of this Agreement” at the Triennial Review of the TBT Committee with a view to “recommending an adjustment of the rights and obligations of this Agreement…thus, Developing countries should see this mechanism of the TBT Agreement, to clarify interpretation, as well as for amending the text of the TBT Agreement, and to support proposals eg for voluntary eco-labels and for insuring that private standards that restrict markets are not used for protectionist purposes