25 July 2013

Shipping Cartels To Become Illegal

The international shipping industry in New Zealand has long enjoyed an exemption from the Commerce Act. Shipping companies routinely publish advertisements saying that representatives from a number of lines met and collectively decided to increase their prices by a certain amount effective from a certain date. Anyone else in any other industry trying to do the same would most probably face prosecution, followed by stiff penalties.

The Importers Institute has argued for a long time that there is no reason to for the exemptions. Shipping company clients - exporters and exporters – have to compete in environments where price collusion is illegal. The current government decided to refer this issue to the Productivity Commission. The Commission’s Chair Murray Sherwin said, “Current exemptions for shipping companies from the Commerce Act should be removed so that normal competition laws apply.”

The government decided to accept this recommendation and announced that “international shipping to and from New Zealand will be regulated under the Commerce Act, improving oversight and delivering competitive outcomes for exporting industries.” We applaud this decision and look forward to the efficiency improvements that usually result from increased competition.

Producer Cartels Continue To Under-Perform

Like the Shipping Cartels of yesteryear, some producer cooperatives owe their existence to political decisions to exempt them from anti-trust laws. In 2001, the Dairy Industry Restructuring Act exempted the dairy industry from certain sections of the Commerce Act and paved the way for the creation of Fonterra. So, how is the cooperative faring?

It is difficult to assess the success or otherwise of our dairy quasi-monopoly. As we said back in 1998, in correspondence with the then Dairy Board, “we know that the performance of [State export] monopolies is indeed very good, mainly because they keep saying that it is. It is, however, apparent that it is not good enough to withstand competition from other exporters.”

One way is to look at what economists call the 'counterfactual’. We know that Fonterra is doing well but, could or should it do as well as, say, Nestle? We know that free competition leads to efficiencies everywhere and that is the main reason why centrally planned economies invariably fail. What is so special about producing milk or kiwifruit that requires us to protect producers from normal market disciplines?

Take the case of infant formula. Fonterra was negligently hoodwinked by its joint venture partners in China who had no qualms in poisoning babies by adulterating milk formula for a quick buck. Ironically, this resulted in a strong preference by Chinese parents for infant formula made in New Zealand. In a normal competitive market, a normal competitive company would have spotted the opportunity and met the market demand quickly.

Not Fonterra, though. Selling of infant formula was to be done through their approved channels only and in a time frame that best suits the bureaucrats who run the cooperative. So, enterprising Chinese traders started buying cans of infant formula in New Zealand supermarkets in large quantities and shipping them for sale in China, for a handsome profit (cans of imported formula can retail in China for as much as $70 each). There was so much of that happening that local supermarkets started rationing sales.

One of our freight agents in Honk Kong asked us to quote freight costs for forty containers per month. We declined to quote, on the grounds that we anticipated that the authorities would put an end to this embarrassing trade, sooner or later. And so it came to pass: the Ministry of Primary Industries and Customs swung into action and lowered the boom. Products that had been approved as being safe for New Zealand consumers would in future be exported to China only by State-approved exporters.

Five years after the melamine adulteration scandal, Fonterra announced plans to launch its own infant formula brand in China in 2013, looking to grab a share of a market estimated to be worth US$6 billion annually and projected to double by 2016. In the meantime, Chinese companies started buying up land and setting up factories in New Zealand to produce their own brands.

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