CARTELISATION IN GLOBAL MARKETS CARTELISATION IN GLOBAL MARKETS

FOR PRIMARY COMMODITIES, FOR PRIMARY COMMODITIES,

GOVERNANCE CHALLENGES AND WAY GOVERNANCE CHALLENGES AND WAY

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Pradeep S. Mehta • Aradhna Aggarwal • Natasha Nayak

CUTS International

Symposium on Trade in Primary Products and

Competition Policy22 September, 2011, Geneva

Motivation for the study?Motivation for the study?

Two fold:

First, high dependence of developing countries on primary sector exports; yet dominance of some countries in world wide trade of these products

Second, steep rise in commodity prices, impacting both the developing and developed world adversely

The reasons?The reasons?

Restrictions on the trade in commodities in the form of licensing, quotas, export restrictions, tariffs, packaging regulations and other non tariff barriers

Anti-competitive practices of international export cartels

We focus on the latter which is often overlooked

Export cartels?Export cartels?

“hard core” cartels comprise of private producers from at least two countries who collude to fix prices, establish output restrictions or quotas, or share markets

private export cartels where producers from one country engage in market allocation in export markets, but not in their domestic market

state-run export cartels

Is the presence of export Is the presence of export cartels in commodities cartels in commodities significant?significant?Not exactly known

Connor (2006): eight out of 283 known private international cartels in commodities during 1990-2005

This means only 3 percent of the total known international cartels

Other studies endorse this finding

Do cartels have a role in the Do cartels have a role in the primary sector trade?primary sector trade?

Not really, because: a majority of private cartels never come to

light,

the number of cartels do not reflect their impact on trade, producers and consumers,

cartels in the up/down stream industries can have serious impacts on primary products trade, and

there is sporadic evidence of cartels which might have long term effects

Can cartels succeed in the primary Can cartels succeed in the primary products sector?products sector?

Determinants of success

◦ Industry characteristics: concentration and entry barriers

◦ Product characteristics: product elasticity

◦ Frequency of business shocks

◦ Large buyers

Success of cartels in the primary Success of cartels in the primary sector…sector…

Incentives:◦ concentration of natural resources◦ extraction skills and infrastructure◦ low product elasticity etc.

De-stabilising factors:◦ large number of participants, ◦ possibility of entry barriers,◦ large buyers, ◦ bargaining issues◦ demand shocks etc.

Key role of large multinationals (such as de Beers), trade associations or even national governments

INTERNATIONAL AGREEMENTS AND INTERNATIONAL AGREEMENTS AND CARTELISATIONCARTELISATION

International Commodity Agreements (ICAs)

Interface between global trade rules and cartelisation: export restrictions, anti-dumping, TRIPs

Adverse effects on world trade

Need to be explored further

NATIONAL COMPETITION POLICY NATIONAL COMPETITION POLICY and EXPORT CARTELSand EXPORT CARTELS

Implicit or explicit exclusion from action against them by the home authorities

Critics: beggar thy neighbour policy

ECONOMIC CONSEQUENCES OF ECONOMIC CONSEQUENCES OF EXPORT CARTELSEXPORT CARTELS??

Ambiguous, both theoretically and empirically,

But, anti competitive practices adopted by them can have disastrous impacts (CUTS’ studies on Fertilisers, Coffee, Potash)

Need for ◦ case studies,◦ deeper studies with explicit counterfactual

analysis, and ◦ improvement in data quality

Effects of CARTEL in DOWNSTREAM Effects of CARTEL in DOWNSTREAM INDUSTRIES: CoffeeINDUSTRIES: Coffee

Consumers

Retailers

Roasters

International traders

Domestic traders

Smallholder/estate

30 grocers = 33% of global market

4 companies (Philip Morris, Nestle, Proctor & Gamble and Sara Lee) = 45% of global coffee market

4 companies (Neumann, Volcafe, ECOM, Dreyfus) = 39% of global market

25 million farmers and workers

Effects of cartels in upstream industry: CUTS’ study on fertilisersFertiliser price rise due to anti-competitive

practices in the potash market

Only 12 percent of the incremental fertiliser subsidy translated into higher consumption of fertilisers, the rest was due to price rise

Governance challenges:Governance challenges: Unilateral solutions

application of the “effects doctrine”: ◦ private actions for damages

but a prisoner’s dilemma

(a country prohibiting export cartels can always make itself better off by allowing them and a country that permits export cartels can make itself worse off by prohibiting them)

Governance challenges:Governance challenges: Few Multilateral solutions

◦ Strict disciplines on export restrictions

◦ WTO Remedies against injury caused by export cartels (Counter measures, reverse antidumping, safeguards)

◦ Formation of Countervailing Buyer Cartels

◦ Multilateral Agreement on Competition (with S&DT)

◦ Creation of an international competition authority

The way forwardThe way forward

Agreements on information sharing on cartels

Capacity building reforms

Technical assistance by the WTO

International Competition Fund (CUTS has been strongly advocating for such a fund)

Diversification of exports

Thank you for your attention

CUTS Internationalwww.cuts-international.org