Chair, CHAO, Yang-Ching

The Fair Trade Commission, Chinese Taipei




Chair CHAO, Yang-Ching

The Fair Trade Commission of Chinese Taipei


APEC's Competition Policy and Deregulation Workshop

Davao, August 18, 1996

Mr. Chairman, first of all, I wish to thank New Zealand for all the hardwork in the organization of the workshop. I would also thank the host economy, the Philippines, for making the conference arrangement. I am sure the views exchanged and shared in this two-day workshop will contribute significantly to member economies' implementation of competition policies and/or laws.

I have been asked to address the topic of open markets as an approach to competition policy in relation to small businesses in a free market economy. My presentation today will primarily base on Chinese Taipei's experience in its enforcement of the competition laws.

The economy of Chinese Taipei has experienced much growth over the past 40 years. The last four decades have successfully transformed the previously less developed economy into a dynamic newly industrialized economy.

The economic growth and the changes in the international trading environment have brought about substantial pressure for industrial restructuring. One of the most notable changes is reflected in the relative importance of small and medium sized firms in Chinese Taipei's economy. The internationalization of its economy through, among others, lowering of tariffs and removal of other trade barriers, have much exposed domestic firms to foreign competition. Moreover, the integration of national markets through trade liberalization under the GATT/WTO and other regional free trade arrangements calls for increase in the size of the firms competing in the international market. This, together with the increase in the labor cost, means Chinese Taipei's small businesses are facing serious challenges.

The situation with respect to small and medium sized firms is reflected in the relevant statistics. According to the 1995 White Paper on Small and Medium Enterprises (SMEs), 96% of Chinese Taipei's firms are SMEs. In 1994, SMEs employed approximately 80% of the labor force, and accounted for slightly over 50% of our export and 32% of the total sale. What is worth noting is that the SMEs accounted for 70% of the total export in 1982 and 40% of the total sale in 1986.

Like many other economies, Chinese Taipei finds the existence of SMEs a very valuable element of its economy. It also recognizes that SMEs are not necessarily the most efficient mode of production or distribution in the relevant sectors, particularly in the face of changing international economic environment. To help the survival of the SMEs by strengthening their competitiveness, Chinese Taipei has adopted a series of policies, such as encouraging SMEs to shift outward their production lines to lower-labor-cost regions; providing assistance to improve their efficiency and competitiveness through, among others, identification of the sectors where the SMEs have comparative advantage over larger firms, or scale is not necessarily a major determinant of competitiveness, more intensified R&D efforts, improved marketing, and restructuring of operation. Many of such positive policies involve cooperation or collective efforts by and among SMEs.

The issue then is to what extent the enforcement of Chinese Taipei's competition law can complement the overall policies towards SMEs, without much sacrificing the basic goals of the Law. The Fair Trade Commission, i.e. the administrative agency in Chinese Taipei responsible for enforcement of the Law, has not developed a comprehensive set of specific policies or guidelines in relation to application of the Law in cases involving SMEs. The Commission however has a general sympathy towards SMEs. So far, issues are dealt with on a case-by-case basis. In the four and half years of enforcement of the Law, we have compiled certain case law which might be of interest to other APEC economies.

Before going into the specific competition issues involving SMEs, I shall first give you a brief introduction of the Law.

The Fair Trade Law

The Law was enacted in February 1991 and first implemented in 1992. The history of Chinese Taipei's enforcement of its Fair Trade Law is rather short when compared to the 100 years of United Sates, the half century of Japan and the 20 years of the Republic of Korea.

The Law covers a wide range of antitrust as well as unfair competition concerns. The antitrust part of the Law regulates monopolies, mergers and concerted actions. The Law in general permits the existence of monopolies, as long as they do not abuse their market power. Mergers involving parties reaching a certain sales volume or market shares must apply to the Commission for approval. The Commission in principle forbids concerted actions but allows for exceptions which require the Commission's prior approval.

The unfair competition part of the Law regulates unfair competition which includes resale price maintenance, various other types of vertical restraints, acts which are likely to impede fair competition, false and deceptive advertising, commercial disparagement, multi-level sales and any other practices which are deceptive or grossly unfair.

The Commission is an independent agency at the ministerial level. Its Commissioners are required by law to exercise authority independently. The economists and lawyers as Commissioners are generally aware of the need to enforce the Law in such a way as to suit the general economic development strategy, while maintaining adequate amount of equity among the players in the market. However, different Commissioners may give different weights to equity, when the equity concern runs counter to the efficiency concern. The SMEs to a certain extent are viewed as an equity element when it conflicts with the efficiency concern. The Law does not require the Commission to consider exclusively the efficiency element. Rather, the standards to be applied are economic benefit to the community as a whole and public interest. The Commission therefore has the discretion to decide to what extent it would like to factor in SME concern, when it conflicts with the efficiency concern.

Specific Issues Involving SMEs

1. Horizontal Collaboration

The most serious challenge to the Fair Trade Law and its enforcement in relation to SMEs is the horizontal collaboration among SMEs for purposes of pooling resources together to meet the scale requirement or to prevent "excessive" competition. The industrial policy for the SMEs generally calls for more tolerance towards joint efforts by SMEs.

The Fair Trade Law adopts a rather strict approach in regulating horizontal collaboration. It applies a per se rule; this is to say, a practice that falls within the definition of concerted action is found illegal, without further investigating whether it has any anti-competitive effect. This approach is later found to be rather harsh, considering the prevalence of SMEs in the local market. Particularly, the rather interventionist policy of the government at the earlier stage of economic development from time to time required collective actions by the business operators who are mostly SMEs, with trade associations acting as government instrumentality in organizing such collective actions.

The Commission, in an attempt to temper the effect of the per se rule, introduces a de minis standard in the application of the Law in this area, so that concerted actions of negligible effects would not be pursued.

In addition, the Law provides a number of possibilities for the Commission to grant exception to the general rule against horizontal collaboration. Specifically, collective efforts by SMEs for purposes of improving their efficiency or increasing competitiveness is permissible. Other exceptions that are available to all types of business are : collective efforts in standardizing specification which helps to lower cost; improve quality or increase efficiency; joint R&D; division of work to facilitate specialization and therefore rationalization of business operation; agreement in respect of competition in foreign markets for purposes of promoting or securing export opportunities; concerted action in respect of import in order to strengthen trading capability and recessionary cartel.

The Law requires the Fair Trade Commission to assess each of these cases in light of the benefits that will be brought to the economy as a whole, and public interest. In effect, the Commission has a broad discretion in making such determination. The Commission has been rather sympathetic to firms that have to compete internationally. But the Commission is concerned that being too generous in granting the approval would defeat the whole purpose of the Law in relation to horizontal collaboration.

The exceptions that have been approved so far include, among others, joint force in the transport of imported bulk commodities, such as soy beans and corns, joint venture in the development of specific technology that has industry-wide application, and joint processing of credit card bills by card-issuing banks.

2. Merger Control

Merger control rules would have effects on the size of the firms operating in the market. The Law requires merging firms reaching certain sales volume, or market shares before or after a proposed merger, to seek prior approval of the Commission. The current threshold for merger notification requirement is set at New Taiwan Dollars 2 billion (approximately 75 million U.S. Dollars) in sales volume, or 1/4 of the market for a party to a proposed merger or 1/3 of the market after the merger. The most frequently invoked threshold is the sales volume of 2 billion, which has been much criticized by the business community as too limiting.

The Law gives the Commission broad discretion in making the judgment of whether a proposed merger should be given approval. If the proposed merger, in the judgment of the Commission, will bring benefit to the economy as a whole, and the benefit exceed the cost associated with the lessening of competition caused by the merger, the Commission is authorized by law to grant approval.

The Commission is aware of the need for business operation of certain size in order to attain efficiency or increase competitiveness. The Commission is, however, concerned about, but yet to develop an analytical framework to deal with, the social value associated with SMEs. This is to say the Commission has not developed a clear policy as to whether merger or collaboration among smaller firms should be the preferred means of achieving the aim to attain the necessary scale economy, or whether it should be loose in both cases and allow the firms to make their own choices.

3. Distribution Channel and Associated Vertical Restraint Problems

One of the most notable changes in Chinese Taipei's market is the emergence of large chain stores and hypermarkets. Like their counterparts in the western countries a few decades ago, the locally-owned retailers are facing tremendous competitive pressures from large-scale operators. However, the Commission has not been asked to review its position in respect of resale price maintenance, which if permitted by law, will to a certain extent temper the effects of low-price competition from the large chain stores and hypermarkets.

The Fair Trade Law bans resale price maintenance, with the only exception for the situation where the products involved are daily necessities which are subject to free competition with similar kinds of goods available in the market. Such "daily necessities" are to be determined by the Commission. As mentioned, the Commission has not been asked by the firms to consider the need to list out such daily necessities so as to give room for resale price maintenance scheme to operate. The reason might be that the small stores are not organized enough to put forward a common position, or the suppliers are not willing to offend their large-scale customers by installing a resale price maintenance scheme.

The Commission has, however, noticed a potential danger of discriminatory practice by the suppliers, who may be forced to charge lower prices in selling to large chain stores and hypermarkets without such justification as cost-based quantity discount. This practice would grossly disadvantage smaller distributors, as they may not have the same bargaining power as the large ones.

The experiences in the U.S. and other western countries seem to suggest that the retailing revolution is an irreversible trend. Indeed, more and more locally owned small stores are becoming part of large chains, while others are being driven out of the market. The Commission has been trying to slow down the process, in order to allow the small stores more time to adjust. The Commission has ordered the chains of consumer cooperatives to limit their customers to members of the individual cooperatives. Hypermarkets located in industrial zones are required by the Commission not to go into the retail market to have direct sales relationship with consumers.

Chain stores are closely monitored by the Commission. The related franchise arrangements are deemed by the Commission as having similar effects as that of acquisition, and therefore are required to obtain prior approval of the Commission. Through the approval process, the Commission would have an opportunity to review the market position of each chain to prevent the dominance of a particular chain. The Commission also reviews the franchise agreement to ensure that there is no undue restriction on the franchisees, such as exclusive dealing arrangements.

The chain stores and hypermarkets have been ordered by the Commission to cease the practice of collecting surcharges from the suppliers for obtaining the "right to display" or the "right to be put on the shelf" for their merchandise. This action is particularly meaningful when the suppliers are smaller firms vis-vis their distributors.

4. Licensing of Intellectual Property Rights and Small Businesses

The large number of SMEs engaging in the manufacturing for export of products, who require technological inputs from large corporations or even multinationals, presents another set of competition issues. Licensing of technology has been an area of much controversy. On several occasions, the Commission found it necessary to intervene in the licensing process, when the licensees are apparently much less experienced and small in size and therefore lack of the necessary bargaining power to reach a fair deal. This is particularly so, when the technology's application is so wide that the number of firms seeking licenses is substantial, and the licensor is the monopoly or an oligopoly in the relevant technology market. In a particular case, the foreign licensor has been required by the Commission to specify to its potential licensees in detail the patents associated with the technology involved; to provide explanation of its technology and licensing terms in the local language; to form a good faith belief before alleging infringement of patent rights; and to refrain from using legal action having extremely harmful effects as a threat in the negotiation process.

Another area involving small business operators is the video rental market. The Commission has found that the film distributors possessing copyrights, through their local agents, impose various restrictions on local rental shops, including such tying arrangements as requiring purchase of videos in sets (for example, 300 films as a set). There are instances where the distributors refuse to sell video films to rental shops, and would provide the products only to its franchisees who are required to pay a substantial entry fee and to operate the rental business on a profit-sharing basis with the distributors. The Commission, while accepting the value of the scheme in the protection of the relevant copyrights, has found such a scheme overly restrictive. The Copyright Law of Chinese Taipei bans parallel imports of copyrighted work including film videos, and therefore the rental shops have no alternative means of obtaining the products. The Commission then decided to order the local distributors to provide an alternative way of making the videos available to the rental shops.


The success of Chinese Taipei's dynamic economic growth is highly contributive to the sector of small and medium enterprises. In addition, SMEs represent a culture of great value to us. The continual growth or at least existence of the sector is conducive to sustain our balanced economic development.

Global economy has pointed towards internationalization. To meet new challenges in global trading, Chinese Taipei's economic policies have shifted from protectionism to industrial structural adjustment strategies. The adjustment is to enhance competitiveness of our firms in an open market system. While a set of policies have been made for continual growth or survival of the SMEs, the Fair Trade Law and its enforcement is an additional tool to help achieve the aim. In the absence of a comprehensive set of guidelines for application of the Law in cases involving SMEs, the case-by-case approach of the Commission in the area of vertical restraints and unfair trade practices has helped improve the business environment for SMEs. What remain to be solved are the extent to which the Commission would permit joint ventures among SMEs, and the extent to which the Commission's merger policy would permit the emergence of large-scale firms posing competitive threat on small firms or having the effect of creating a concentrated market structure.