Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

Ahead to the Future: Challenges of Competition and Competition Policy

to the CD Howe Institute
Toronto, Ontario
October 25, 2004

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I want to begin today where a great Canadian economist concluded her speech to the Empire Club, almost thirty years ago:

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"In closing, let me remind you that there is considerable evidence that Canada's industrial performance has not been what it should; indeed, in recent years our productivity growth has been lagging behind that of most other major industrial countries. These findings should be of major concern to us all. I would suggest, moreover, that they are indicative of the urgent need for a range of policies that can help spark the "creative dynamism" within the system, and propel the forces of economic change. Not least among such policies, I would submit, are our efforts to mould competition policy into a more effective instrument."

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So spoke Doctor Sylvia Ostry on the eve of efforts to amend the Competition Act in 1976. These of course are different times in many ways. Unlike 1976, we now enjoy strong job creation. We have stable and low inflation. We have a very strong trade and fiscal balance.

We have also seen unprecedented globalization, the Internet, vast growth in international financial flows, the emergence of the Asian tigers, their retreat and their re-emergence led by the Chinese dragon. We have seen trade barriers shrink, often to insignificance, not just in North America, but around the world. Knowledge-based capital dominates discussions of competitiveness. And we have seen the information age mature from infancy to noisy adolescence.

But sadly, as in 1976, our productivity performance is a concern. According to the Conference Board, labour productivity in the Canadian business sector averaged just 82% of that in the US in 2001, and of 29 industries considered in the report, 19 had labour productivity below the levels of their US counterparts in 2001. These 19 industries account for 73 per cent of GDP in the business sector. At the same time, we appear to have increasing concentration in our manufacturing industries, and higher concentration levels than found in the United States.

This is not news to this audience. Many of you are very familiar with both the litany of change that has occurred in our economy, and the challenges we face as a nation in a turbulent world. These changes have far reaching implications, not the least for Canada's competition policy - our Act and the way we enforce it - and how we can ensure it is effective in the 21st century Canadian economy.

Let me take you back to even before 1976, to the 1960s when the basic framework for Canada's "modern" Competition Act was framed. At that time, the Economic Council of Canada, a tri-partite think tank engaging labour, business and government, was tasked with a review of Competition policy in Canada. The Council looked long and hard at the environment facing Canada at the time. They considered business structures and practices. They looked ahead to the challenges Canada would face in the future. And they pondered the role that Competition policy could play in building a modern economy, at least modern by the standards of the 1960's.

The result was a seminal piece of thinking which influenced much of what became our Competition Act in 1986, almost two decades after the Council's report.

The delay, between 1969 and 1986, reflected the inherent difficulty in introducing wide-scale, fundamental changes to a piece of economic framework law such as the Competition Act. Reform of the Competition Act has always generated a great deal of interest, controversy and discord, reflecting both the natural desire of stakeholders to secure what they view as their own best outcomes, and the intrinsic difficulty in developing corporate law which establishes some of the basic rules for a competitive marketplace.

The difficulties in crafting competition law are legion, from constitutional issues to questions of fundamental economics and business practices. While we can ponder whether the Economic Council had the right prescription for the 1970s and 1980s, the key question is whether we have the right answers for the coming decades.

This is not a simple question, and the answer will have many facets. Let me illustrate this with reference to where we are on two key elements of the Competition Act.

On the merger front, we have witnessed a number of waves, from the movement to the horizontally diverse mega-corporation in the 1980s to the dot.com-merger wave of high-tech takeovers as firms sought Eldorado in niche technologies and, more often than not, came away with only fool's gold.

More recently, we have seen the firms attempting to get bigger through consolidation in order to take on emerging global challengers and prosper from equally impressive global opportunities. This is a natural development. As Minister Emerson noted recently:

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"While our strongest economic ties are within North America, we are also doing business around the world and are very much part of the globalization process that has fundamentally changes our economy and the way we live. Globalization is leading to corporate consolidations. It's leading to global supply chains. And it's creating new pressures on our global markets and trade arrangements."

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Several firms in Canada, such as Alcan, have already acted, and others have claimed the need for mergers in order to meet the challenges or take advantage of the opportunities of globalization - banks and the forest industries spring to mind. Such developments can raise important questions for merger policy, including whether we can and should permit greater concentration amongst Canadian producers where they face emerging global competitive forces. Where global competitors discipline prices, there are no competition concerns. However, where the merger will result in insufficient competition in our markets, should we allow such mergers to proceed?

A recent book by Michal Gal on competition policy for small economies suggests we might. Gal asks the frequently cited question, "Does size matter?" She concludes it does and argues that small economies with sectors protected from international trade may need to accept higher concentration ratios to achieve minimum efficient scales of production. Accordingly, in Gal's view, these small economies need competition policies that reflect real economic constraints imposed by size and protected markets, including policies dealing with competition restricting mergers, regulation of oligopolies, and special attention to questions raised by dominant firms.

She does not posit a one-size-fits all model, however, and it is not clear where Canada fits within the Gal model. Certainly, we are far from being a closed economy, being the most trade dependent country in the G7, with exports plus imports totalling over 70% of our GDP. Our markets are heavily integrated with the largest global economy, and we fit in the largest 12 global economies.

That said, however, her general point regarding the need for competition policy to be tailored to reflect the changing economic realities of a country strikes me as sound, especially if the tailoring is undertaken within a framework which also respects the importance for trade and investment of global convergence on core principles of competition policy.

So the question is, do we have the right model for merger policy in Canada in the 21st century?

A recent case involving the propane industry in Canada brought this question squarely to the fore in the context of one section of the current Act that directly relates to this question.

Let me explain. In 1969, the Economic Council looked out and saw a Canadian industrial base that had grown up in the post-war period, protected by high tariffs and other trade barriers, enjoying a preferential access to the British motherland - a motherland that was then showing little by way of economic revival. They saw an economy dominated by branch plant manufacturing with little indigenous creativity. And not just in Canada, but also globally, the key to growth and prosperity was thought to lie in how efficiently we could utilize our scarce stock of capital and deploy our labour force.

The Council also recognized that the governments of the day were into a period of economic interventionism to achieve various and sundry policy goals, from Canadian ownership to regional equity to employment creation to improved income distributions. It was the heyday of the Crown Corporation and the eve of major intrusions into the economy - the Foreign Investment Review Act, the National Energy Program and the Anti-Inflation Program were only a few years away.

Faced with this diagnostic of Canada's economic and political situation, the Council argued that the purpose of our Competition Policy should be single-mindedly pure: the achievement of economic efficiency. They almost, but not quite, got their wish. When the modern act was created in 1986, efficiency was but one of a list that included regional, small business, consumers and mercantilist interests as objectives in the purpose clause of the Act.

But the Council did get their way in one section of the Act. The mergers section features the attainment of efficiency as an absolute defence. Section 96 states that the Tribunal shall not block a merger which, and I quote:

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"has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made."

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The idea is compelling. But Canada is unique in the industrialized world with such a defence, and it is appropriate that we ask ourselves if this formulation is what Canada needs now, or can we do better.

The importance of the question is clear. Recent studies by Stats Canada (John Baldwin), the Conference Board, and The Institute for Competitiveness and Prosperity clearly demonstrate the critical role that competitive markets play in fostering efficiency, innovation and dynamic growth. To quote from the synopsis of the Institute's report on Ontario, for example:

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"Public policy also needs to drive towards creating greater pressure on businesses. No matter how much government support is given for innovation, businesses only innovate to the extent their customers and competitors pressure them to."

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Yet the current Act suggests that we can and should trade-off efficiencies against losses of competitive dynamism. Is this the way we should be thinking now? Is it useful or appropriate to think of ourselves as a small economy and adopt the Gal framework, or do we need a made-in-Canada approach to evaluate mergers in the coming years, an approach which permits those companies facing global competition to achieve competitive scale while still ensuring that Canadian markets remain competitive and vibrant.

We are turning to people like you to help us find ways forward. On September 24, I released a discussion paper on the role of efficiencies in the Competition Act, and two weeks ago, I met with senior competition officials from around the world to seek their views. We have asked Canadians for input on the discussion paper by December 21, and we will follow this up with roundtables in Vancouver, Toronto and Montreal. Finally, we will create a panel of experts to review the input and particularly to focus on the situation of the Canadian economy and the relevance of the efficiency defence.

The question of increased concentration levels in industry, through mergers or otherwise, also emerges in respect of the civil provisions of our Act, and in particular in the context of the Government Discussion Paper on proposed amendments to the Act.

In our 1986 legislation, an important distinction was drawn between criminal and civil provisions. The criminal provisions, dealing inter alia with price fixing, bid rigging, price maintenance and price discrimination, feature significant deterrents - up to two years in prison for price discrimination.

Meanwhile, the principal consequences of breaching the civil provisions are the issuance of a cease and desist order by the Competition Tribunal. In part, this reflected the view that acts in the civil provisions might, in some cases, be welfare enhancing. However, it may be useful to consider whether the harm to competition is greater in the case of some acts compared to others.

We recognize that competition in the marketplace demands that firms be aggressive and imaginative in taking on their competitors and in putting their best foot forward in trumpeting their products. We certainly don't want to unduly limit the competitive spirits of Canadian business in the light of emerging international competition. But we also have to ensure that Canadian markets remain competitive.

So the question we face is whether we have the approach right in providing significant incentives to firms to avoid anti-competitive behaviour in the criminal sections of the Act, while the civil provisions are lacking incentives. Can we find incentives to comply with the Act that avoid turning off pro-competitive practices while "disincenting" anti-competitive behaviour?

This answer to this question will inevitably have to take into account a number of issues. Is our current approach appropriate to the business behaviour being considered, the potential economic impacts of such behaviour, and international norms for business conduct? Do our restrictions and deterrents support or detract from dynamic competition, innovation and growth in the Canadian economy? These are not easy questions.

I know that I have raised a lot of issues today. Yet I have been discussing only two aspects of the Act that need consideration on an ongoing basis. There are others, of course, including the treatment of cartels and other arrangements among firms. But our time is limited and I want to use the time remaining to hear your views.

Conclusion

I opened today with Sylvia Ostry's closing comments from 1976. So let me be consistent by closing with her opening remarks where she noted that:

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"To some of its opponents, competition legislation is clearly something to be placed in a catalogue of horrors, matched only, perhaps, by plagues, incest or tax reform."

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Well, competition policy may not rival the NHL strike as a topic of invigorating debate, but it is critically important. Four years ago, we entered the 21st century. It is time that our competition act and policy caught up.