WORLD TRADE
ORGANIZATIONWT/WGTCP/W/94
31 August 1998
(98-3344)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM HONG KONG, CHINA
The following communication, dated 27 July 1998, has been received from the Permanent
Mission of Hong Kong, China with the requ est that it be circulated to Members.
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Item 2(a):  Impact of State Monopolies, Exclusive Rights and
Regulatory Policies on Competition and International Trade
I. INTRODUCTION
1. Hong Kong, China considers it important to examine, from a competition-oriented
perspective, governmental regulatory policies and how they affect the interaction between trade and
competition policies.  This submission attempts to take a brief look at two aspects of governmentalregulatory policies.  The first relates to state monopolies and exclusive rights.  The second touches on
certain aspects of the competition regulatory regime in some economies.  The sole intention is to raise
issues which Hong Kong, China considers as probably relevant to the discussion of the interaction
between trade and competition policies.  We do not have any proposals or firm views on how to tackle
the issues raised.  Nor are we of the view that this survey is exhaustive.  Instead, we would wish to
benefit from the educational process of the Working Group.
2. This submission shall first take a look at the WTO rules on state monopolies and exclusive
rights.  We shall then take a look at some aspects of competition laws/rules/policies in certain
economies which may involve varying degrees of government-sanctioned exclusivity.  In the last
section, we shall list a number of issues which we are able to identify to date as probably relevant to
the Working Group's deliberations.  The intention is to probe, insofar as is possible, the extent towhich such regulatory policies contribute to, or detract from, the attainment of economic efficiency
and consumer welfare.
II. EXISTING GATT AND GATS DISCIPLINES
GATT Disciplines
3. GATT recognizes (e.g., in Articles II:4, XVII and XX:d) the right of WTO Members to
establish or maintain monopolies and state enterprises, and to grant "any enterprise, formally or in
effect, exclusive or special privileges".  GATT Article XVII "State Trading Enterprises" (STEs)
includes in its coverage of STE the following :
- "a state enterprise, wherever located";- "any enterprise" that has been granted, "formally or in effect, exclusive or special
privileges";WT/WGTCP/W/94
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- "Marketing boards" (interpretative note to paragraph 1) and "import monopolies"
(paragraph 4) are explicitly included.
Therefore, what makes an enterprise an STE under the GATT is not solely state ownership.  It can
also be the special privileges that it enjoys with  the implicit or explicit consent of the relevant
authorities.
4. Though most GATT rules address government s in their role as regulator of economic
activities rather than in their role as producer, trader or consumer of goods, GATT Article XVII:3
recognizes that STEs "might be operated so as to create serious obstacles to trade".  In order to dealwith these problems, GATT includes specific provisions relating to STEs and import monopolies:
(a) The interpretative note (GATT Annex I)  specifically states that "throughout
Articles XI, XII, XIII, XIV and XVIII, the terms 'import restrictions' or 'export
restrictions' include restrictions made effective through state-trading operations".
(b) GATT Article II:4 seeks to protect the GATT schedules of concessions from being
circumvented by import monopolies.
(c) GATT Article XVII seeks to regulate and limit the market behaviour of STEs by
requiring WTO Members and their STEs to comply with special non-discrimination
requirements and notification requirements.  In particular, Article XVII:1(b) provides
that STEs shall have regard to the provisions of the GATT and shall, in their
purchases and sales, act "solely in accordance commercial considerations".
(d) In addition, Article XVII:3 explicitly provides for "negotiations on a reciprocal and
mutually advantageous basis designed to limit or reduce obstacles" to trade resulting
from the operations of STEs.
(e) According to the "general exceptions" in GATT Article XX, "nothing in this
Agreement shall be construed to prevent the adoption or enforcement by any
contracting party of measures … (d) necessary to secure compliance with laws orregulations which are not inconsistent with the provisions of this Agreement,
including those relating to … the enforcement of monopolies operated under
paragraph 4 of Article II and XVII".
The basic purpose of these provisions is, ac cording to a GATT panel report, "to extend to
state-trading the rules of the General Agreement gove rning private trade and to ensure that contracting
parties cannot escape their obligations with respect to private trade by establishing state-trading
operations".
GATS Disciplines
5. Compared with GATT Article XVII on STEs, the scope and disciplines of GATS Article VIII
are more limited in several ways:
(a) GATS Article VIII applies only to "monopoly suppliers" and "exclusive service
suppliers".  State ownership and privileges of a special and exclusive nature are not
explicitly covered;
(b) the obligation under Article VIII relates only to the "supply of the monopoly service"
which may be "in a manner inconsistent with that Member’s obligations underWT/WGTCP/W/94
Page 3
Article II and specific commitments".  In other words, GATS Article VIII is limited
to the objective of preventing the circumvention of GATS obligations by monopolies
and exclusive service suppliers.  Other business practices of the monopoly or
exclusive service suppliers do not appear to be covered.  The potential problems this
may raise from the competition policy perspective are compounded by the exceptionsfrom fundamental GATT disciplines such as MFN and National Treatment that the
GATS allows.
Yet, unlike the GATT, the GATS defines trade to include the supply of services through cross-border
delivery and commercial presence.  This could entail far-reaching implications and raise issues on the
interface between trade in goods and services on the one hand, and trade and investments on the other.
A case in point is foreign acquisition or attempted acquisition of an STE as defined in GATT or ascaught by GATS Article VIII through equity investment, and the relevant domestic regulations on
foreign ownership of enterprises with exclusive privileges.
III. COMPETITION REGIME
6. Based on literature on the competition regimes of some economies, Hong Kong, China
notices certain features which may have implications on how the Working Group may consider the
question of state monopolies and special or exclusive privileges from a competition-oriented
perspective.  Below is a first attempt to identify  some elements in the treatment of government-
sanctioned rights and privileges under the competition laws, rules and policies of some economies.
Some of the points made may not be generally applicable, as there is considerable heterogeneitybetween economies in the coverage and disciplines of their competition laws, rules and policies.
(a) Exclusive distribution arrangements have been exempted on the ground that it would
help enhance consumer choice by allowing a local firm to take charge of promoting a
product, which otherwise cannot easily penetrate the local market.  However, whethersuch arrangements would really enrich the choice of the ultimate consumers seems
far from certain.  This is particularly so if in certain circumstances, consumers are
narrowly defined as those service suppliers who require the product in question as
one of the production inputs rather than the people as the ultimate consumers.
(b) Exemptions are made in furtherance of certain social goals.  Examples include anti-
trust exemptions for local sports, and ownership and operating restrictions placed onsome media services.
(c) A more relaxed attitude towards the emergence and/or merger of dominant firms
when they are considered possible "national champions", or that sector is considered
as a high-growth sector, or when it is considered desirable to enable the firms inquestion to achieve scale economies to be competitive internationally.
(d) Exemption of export cartel from competition laws and rules.  The justifications
appear to be export promotion and a perception that it is foreign economies, rather
than the domestic market, that would be adversely affected by such collusivebehaviour.
7. It appears to us that the above exemptions also confer special or exclusive privileges, and can
have implications for the conditions of competition in international trade in goods and services.
Hong Kong, China does not have any firm view rega rding the resultant implic ations on the interaction
between trade and competition policies.  Nevertheless, we are of the view that, to properly tackle the
interaction issues in a world economy increasingly marked by globalisation of trade and investments
as well as a decline in border barriers, governmental measures relating to these activities/enterprises
should be examined carefully.  Failure to do so may impede market access, undermine non-WT/WGTCP/W/94
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discriminatory conditions of comp etition and thus deviate from the objectives of optimising economic
efficiency and consumer welfare.
IV. POSSIBLE QUESTIONS TO BE EXAMINED BY THE WORKING GROUP
8. Hong Kong, China feels that, notwithstanding the relevance of private business practices to
the interaction between trade and competition policies, governmental policies and regulations are of
primary importance.  As the brief survey of exemptions from competition laws, rules and policies
suggests, it is governmental policies and regulations which ultimately define what is and is not
permissible business practice.  Therefore, the Working Group should not one-sidedly look at
proposals for additional competition rules for private  anti-competitive practices and international co-
operation among competition authorities, without according priority attention to the many
inconsistencies between and within governmental  trade and competition rules and policies.
9. Following the WTO Approach, and arising from the brief survey of the WTO disciplines on
STEs and monopolies and exclusive service suppliers, as well as certain government-sanctioned
special and exclusive privileges in some competition regimes, below are some questions which may
merit consideration by the Working Group:
(a) What kind of behaviours by state trading, monopoly and exclusive suppliers are
potentially anti-competitive?  And to what extent do they conflict with the WTO
principle of non-discrimination?
(b) To what extent are governmental policies regulating state-trading, monopolistic,
special and exclusive privileges as permitted under WTO rules consistent with the
competition policy objectives of promoting economic efficiency and consumer
welfare?
(c) Do the inconsistencies identified in (b), if any, point to the desirability of removing
such governmental measures and strengthening the WTO disciplines in respect of
potential anti-competitive state-trading, monopolistic and exclusive practices?
(d) In view of the similar objective of the GATT and GATS rules to prevent
circumvention of WTO obligations, are the differences in their treatment under the
rules as mentioned in paragraph 5 justified?  Should we strive for more consistentrules to better promote coherence between policies affecting competition and trade in
both goods and services?
(e) Are competition rules generally applicable to the commercial activities of state-
trading enterprises, monopolies and exclusive or special privileges (e.g., exportcartels) permissible under some of the existing competition regimes?  Should state
action doctrine and similar legal defences, exceptions and exemptions granted by
competition authorities afford immunity for such activities?  How may trade and
competition be affected as a result of these exceptions and exemptions?
(f) Related to (e), how may an effective competition policy deal with monopolies and
exclusive or special privileges having an implications on the conditions of
competition in international trade?
(g) Are certain exemptions and exceptions from competition regime inevitable?  If so,
which anti-competitive practices should be subject to per se  prohibition and which
should be subject to a rule-of-reason test?  If certain exemptions and exceptions are
considered necessary or desirable, how should such government-sanctionedWT/WGTCP/W/94
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derogation be defined in order to minimise possible abuses and distortions to trade
and conditions of competition?
V. CONCLUDING REMARK
10. As indicated in the introductory remark of this submission, and as reflected in the
interventions also by other WTO Members during the last meeting of this Working Group1, this
Working Group should focus on the "interaction issues" of trade and competition policies.  This
"WTO Approach" should also apply to the examination of state trading practices and monopolies as
well as special and exclusive privileges.  The objective is to ensure the coherence of trade and
competition policies.  The brief and preliminary survey in this submission suggests to us that, if
competition-oriented reforms of trade and competition rules are required, they should relate not only
to private , but also to governmental  anti-competitive practices.  It is Hong Kong, China's hope that the
issues raised in this submission can facilitate the Working Group's consideration of the interaction
issues.
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1 See WT/WGTCP/M/4, e.g., paragraph 5 (statements by Mexico and Korea).