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Mexico and the World
Vol. 1, No 4 (Fall 1996)
http://www.profmex.org/mexicoandtheworld/volume1/4fall96/mexicanpollicies.html

Competition Policies in Mexico

By: Caludia Griera Hernández


Introduction

On 22 December 1992, Mexico introduced a new competition law: the Economic Competition Law (ECL). This came into effect six months later and replaced the unforced Organic Law of Monopolies of 1934, in an attempt to not only foster and increase economic efficiency, but to attract foreign investors ensuring them a non-discriminatory treatment. This replacement of legislations meant also a shift in objective and scope, from a law used to protect the consumers against price rises, to a law intended to prevent distortions in the market.

This essay attempts to examine the influences of the foundation and subsequent development of the Mexican competition policy. I argue that the creation of a competition policy was a fundamental issue to attain in order to complement the economic liberal model prescribed by international creditors and financial organisms, initiated in the mid 1980's and also an issue to achieve in order to succeed with NAFTA negotiations. Nevertheless, the development of this policy and its enforcement has been determined by domestic influences of the political and economic elite. This essay comprises: a) Mexico's economic and political background; b) aims and characteristics of an "optima" competition policy; c) Mexican competition policy; d) NAFTA's provisions on competition policy, e) Limitations of the Mexican competition policy, and conclusions.

Mexico's economic and political background

World War II reduced trade among nations, therefore Mexico, as many other less developed countries (LDC's) who had been dependant on imports from developed countries, was forced to cover its national demand with its own production, stimulating the import substitution scheme. During this period, the Mexican industry grew at an annual rate of 7% and the GDP grew at a rate of 6% per year. Associated to this economic boom, a growth in employment and productivity was observed.

With the import substitution scheme (1940-1958) two main goals were to be accomplished: a) obtain national growth; b) decrease the dependence on imports. The Mexican state began to play a key role, implementing strategies which supported the industrialisation process. This, through public investment and an industrial protectionism policy. The Mexican government as active promoter, justified its investment, which represented 40% out of the total investment. It concentrated itself in strategic sectors providers of infrastructure, such as oil, electric energy, roads and agriculture.

During World War II, protectionism was given to the new born Mexican industry. However at the end of the war, the government had to devaluate its currency in order to maintain its protectionism policy, which also included tariffs and import regulations. In addition to the commercial policy, there were other incentives given by the government which enhanced industrial investment, these were tax exemptions and credit facilities. Machinery and equipment were allowed to be imported under a duty free tariff in order to increase productivity. During this period it was established that cars destined to the Mexican market ought to incorporate national autoparts up to 60% of the automobile's cost, a clear example of the excessive protection given to national producers. The excessive protection given to the Mexican industry originated a considerable gap between the domestic and the international goods' quality and prices.

Between 1959-1970, the economic policy was directed to an increase in internal savings. Fixed parity and prices were established. The government recurred to external long term debts in order to finance infrastructure investment and afford the foreign currency supply. In order to fight its payment balance deficit, the government increased import tariffs and non-tariffs barriers. It is important to notice that during this period the Mexican economy relied heavily on the oil exports, it was a period denominated "monoexport". Confident with the high world oil prices, the Mexican government recurred to excessive foreign credits, so when the 1973 world oil crisis occurred the payment balance was badly affected.

In 1976 the Mexican government devaluated the peso in 58%, which caused an increase in prices, capital outflows and a decrease in the manufacture industry's growth and output. The government had to recur to the International Monetary Fund (IMF), which established the domestic policies to be followed by Mexico: elimination of government's subsidies and prices' controls, international trade openness, decrement in import tariffs and a reduction of the government intervention in the economy.

Thus, in the mid 1980's Mexico began to move toward an economic liberalisation, which was evidenced by the adoption of an strategy of structural change designed to remove the instability which characterised economic activity during the preceding years. This program contemplated four fundamental issues: fiscal discipline and austerity, federal deregulation, privatisation of state-owned entities; and trade liberalisation. This would attract foreign investment and alleviate public debt.

"This four dimensional process of adjustment was an unavoidable response to the populist policies of domestic industrialisation via massive expansion of the state sector and import substitution protectionism. In the period between 1970 and 1982, the paraestatal sector grew from 300 companies under state-run control to an outrageous 1,555." (Salinas Leon, 1994, p.3) By the end of 1993, the government had desincorporated a total of 909 entities, which generated more than $21 billion in new income for the state.

The desincorporation process included the sale of large enterprises such as: ASEMEX, the largest insurance conglomerate in Latin America; AHMSA and SICARTSA, Mexico's biggest steel holding; Aeromexico, the biggest domestic airline; and TELMEX, the national telephone company which is ranked as the third most important of its kind in the world.

Salinas Leon mentions that the policy of desincorporation was marked with popular discontent, due to two main reasons. On one hand, in the majority of the post-privatisation cases, the service has remained inefficient and incompatible with the demands for business competitiveness generated by open trade in the world markets and the implementation of the NAFTA. On the other hand, this discontent has sparked political speculation of corruption and favouritism in the use of privatisation policies to reward cronies with monopolistic or quasi-monopolistic interests in exchange for party support. (Salinas Leon, 1994, p. 12)

As per its "liberal" attitude toward international trade, in 1986 the country signed its membership to the General Agreement of Trade and Tariffs (GATT), which brought along a considerable reduction to Mexican protectionism and promised stability and balance in the political and economic system. This trade liberalisation reforms were consistent and even exceeded the policies prescribed by the IMF and the World Bank.

Some years later after its entrance to GATT, Mexico achieved its acquired compromises: lowered tariff and non-tariff barriers, eliminated most of its import and exports licenses, eliminated official prices, lowered fences for foreign capital flows and investments, among others.

The economic liberalisation taking place in the country was due to both, international and domestic influences. In the international sphere, the international creditors and financial organisms such as the International Monetary Fund (IMF) acted as inspectors and looked for "letters of intent promising changes in economic policy of a generally deflationary, disciplinary, pro-market and anti-subsidy nature" (Strange, 1994, p.112) At a national stage, individuals and representatives of large business enterprises that could withstand foreign competition stressed that an open market would be the best means for promoting economic development in Mexico.

The economic liberal model evolved. In 1994, the North American Free Trade Agreement (NAFTA) came into force and was considered as the ultimate expression of the Mexican economic liberalism. The decision of NAFTA membership was influenced principally by domestic issues. The NAFTA promised economic and political dividends. "It would allow the government to strengthen and consolidate an economic restructuring that was already underway...Next, it would help to lower domestic inflation through increased competition form imports. It would also help large Mexican firms to use their capital and export capacity to reap the largest possible gains from a more open economy. ...The NAFTA should prove an attraction for private foreign investors and help restore their confidence in the Mexican government...It would heighten Mexican competitiveness in manufactured exports, and, most important, it would re-ignite economic growth and help create jobs.

The NAFTA's political dividends were almost as important as its economic ones... The state would recapture its legitimacy it lost during the Echeverria (1970-1976) and Lopez Portillo (1976-1982) sexenios and would retain a firm grip on the political infrastructure...The NAFTA was a measure that would breath new life into the country's authoritarian rule."(Poitras and Robinson, 1993, p. 7)

The advent of NAFTA and other bilateral trade agreements pressured to foster institutional competitiveness through the formation of safe climate of investment. (Salinas Leon, 1992, p.14) A Foreign Investment Law was enacted in December 1993. This statute sets forth the rules to encourage foreign investment and to promote domestic development through such investment. This Law, linked to the NAFTA, broadens the possibilities of foreign investment up to 100% of the capital stock of corporation at various economic activities that were previously restricted.

In order to structure a successful open market economy, it was necessary to establish policies that appointed the new rules of the game. Apart of trade policies, it was required to create competition policies. Competition policies would reinforce the privatisation, free trade and deregulation policies previously adopted by the government. This framework would promote economic efficiency and would attract national and foreign investors by keeping markets competitively structured.

Therefore, as a response to the adopted liberal model, the government enacted the ECL, which prohibits monopolies, as well as those practices that may reduce, damage or avoid the competition and free access to production, processing, distribution and commercialisation of goods and services.

In the National Development Plan for 1994-2000, President Zedillo enhances the promotion of domestic and international competition by saying that" Monopolistic practices shall be attacked, indistinctly if these are performed by private or state-owned enterprises. With respect the to the state authority, the privileges will be avoided, since these engender discrimination and inefficiency. Actions to carry out the Economic Competition Law will be reinforced. Authority's discretionality to grant concessions, licences and permits will be abolished. The industrial policy will be focused in the creation of the fiscal, financial, regulatory and technological conditions, so every enterprise will participate in the economic activity under fair rules." (Zedillo, 1995, p. 87)

It has been two years since the Law came into force and its effectiveness is questioned. Instead it is commented that this law has served to legalise concentration of power and monopolies. Also, this statute has some other weak aspects, which will be commented afterwards.

Aims and Characteristics of a Competition Policy

Competition policy in Mexico

Competition and monopoly concern is not new in Mexico. In fact, the 1857 Mexican Constitution established the prohibition for monopolies and in 1934 a Monopoly Law was enacted. However this legislation contained discretionary procedures and its application was limited to prices control. The new ECL creates specific procedures that translate this old concern in concrete actions.

The purpose of the Law is to foster the economic efficiency and protect the process of competition and free market participation, through the prevention and elimination of monopolies, monopolistic practices and other restraints on the efficient operation of goods and services markets.

Relevant authority

The ECL created the Federal Competition Commission (the Commission), an entity independent of the Ministry of Trade and Industrial Development, which shall be technically and operationally autonomous and its responsibilities include preventing, investigating and opposing monopolies and monopolistic practices and mergers. The Commission shall be free to issue its decision and shall be composed by five Commissioners appointed by the Mexican President, including its chairman. The Commission shall deliberate acting as a body, and shall adopt its resolutions by majority vote. The chairman of the Commission shall have a tie-break vote.

Scope of the legislation

The Law is applicable to all economic agents: individuals, corporations, agencies or entities of the public administration, associations, or any other form of participation in business activities, and governs the following areas:

Maximum prices

Maximum prices of goods and services which are essential for the domestic economy or mass consumption are fixed by the Ministry of Trade and Industrial Development, once the Federal Executive determines which products and services may be subject to maximum prices, such as medicines.

Monopolies and monopolistic practices

The Law prohibits monopolies and any practice that may reduce, damage or avoid the competition and free access to the production, processing, distribution and commercialisation of the goods or services. It defines monopolies and establishes that in order to judge these, it must be proven that the presumed responsible party has substantial power over the relevant market.

Absolute monopolistic practices

Absolute monopolistic practices include agreements between competitors in order to establish price-fixing, market allocation, or joint reduction of output of goods and services.

Relative monopolistic practices

Relative monopolistic practices include the contracts, agreements or cartels whose purpose or effect is or could be to wrongfully displace other agents form the market or substantially impede their access thereto. The principle relative monopolistic practices considered in the ECL include vertical market allocation agreements, resale price maintenance and vertical non-price restraints, restraining, and unilateral refusals to deal.

Mergers

The Law defines mergers and establishes that in order to determine whether a merger should be approved or penalised, it must be taken in account the relevant market, their market power on the relevant market and the degree of concentration in said market. It is required that the following mergers are notified to the Commission before they are formed:

a) if the value the transaction amounts over 12 million times the minimum wage (MW) prevailing in the Federal District, which approximates to £15,200,000.00.

b) if the transaction implies accumulation of 35% or more of the assets or shares of an economic agent whose assets or annual sales amount more than 12 million times the MW.

c) if combined assets annual sales of the merging parties exceed the sum of 48 million times the MW (approximately £60,800,000.00).

It is important to mention that, following the European Union example and not the US Antitrust Law, the ECL does not appoint any criminal sanctions for antitrust violations.

Exemptions

It is important to notice that for the purpose of this Law, there are strategic areas reserved exclusively to the Federal Mexican Government, which under Article 28 of the Constitution cannot be considered as monopolies. These activities include manufacture of issuance of coins, mail transportation, telegraphs, radiotelegraphs, satellite communication, oil, the primary petrochemical industry, electric power generation for public services, railroad and the generation of nuclear power.

However, as Salinas Leon claims, the Mexican Constitution in its Article 28 contains a small but all-compassing clause which endows the Chamber of Deputies with the authority to decide which sectors qualify as 'strategic'. This grants legislators with an unlimited power to expropriate any interest which fits the political moment or a particular person. In 1982, the bank expropriation was justified by invoking the clause. It could happen again, it could happen to anything. (Salinas Leon, 1994, p. 13) This presents a threat for national and foreigner investors even if an economic liberal model is been adopted.

Also, it shall not be considered monopolies the following:

a) associations of workers

b) privileges granted to authors and artists for the production of their works

c) privileges granted to inventors for the use of their inventions

d) co-operative enterprises or associations that sell their products abroad provided that:

i) said products are the principal source of wealth of the region in which they are produced

ii) they are neither sold or distributed in Mexico

iii) the incorporation of such entities is authorised by the legislation.

Procedures and Sanctions

Procedures shall be initiated ex-officio or at the request of the interested party. The notice shall be given in writing. The Commission may request additional information within twenty days following the reception of notice. The Commission shall have forty five calendar days in which to issue a decision. In exceptionally complex cases, the Commission may extend the time limit for up to another sixty calendar days.

The Commission may impose the following sanctions: a) the suspension, correction or suppression of the practice or merger; b) the total or partial break-up of the unlawful practice or concentration without imposing any fines; c) fines up to 375,000 times the MW (£475,000). If the Commission decides the practice is extremely harmful, it may impose a fine equivalent to 10% of the annual sales of the immediately preceding fiscal period or up to 10% the value of its assets, whichever is higher.

An appeal for a reversal may be filed to the Commission itself, in connection with the decision handed down by the latter, within 15 working days following the notification of said decision. This is rather impartial since it is not very probable that the Commission may reverse or amend an already taken decision. Being prosecutor and judge does not inspire confidence, nor allows the entity to prevent arbitrary exercise of power.

Resolutions

The ECL establishes that the Commission must publish an annual report describing the outcome of its functions. The activities performed by the Commission can be divided in three main groups: mergers, ex-officio procedures and particular request procedures.

Between June 1993 and June 1994 the Commission analysed mainly mergers, due to the requirement of notification to the Commission before they were formed. During this period, the Commission received 52 merger projects, of which only six were not approved or were subject to certain conditions for its approval. The projects presented came from the industrial, the telecommunications and the financial sector. Sixteen ex-officio procedures were initialised regarding possible monopolistic practices. The Commission resolved that in six cases, harmful practices were performed and a total of N$2,453,000.00 (£240,000 approximately) fines were imposed. The Commission received a total of 22 particular request procedures, of which 16 were immediately rejected because they lacked the minimum requirements established by the ECL.

Between June 1994 and June 1995 the Commission received 122 merger projects, of which only one was not approved and four which were subject to certain conditions for their approval. It received a total of 45 particular request procedures, of which six were immediately rejected because they lacked the minimum requirements established by the ECL. Two requests were penalised and other three were subject to recommendations from the Commission. The rest of the requests had not been solved by June 1995.

As per the numbers above written, it may be said that both the Commission and the 'population' are getting more acquainted with the new legislation, since the number of requests almost doubled within a year. It is also noticeable that on the second year of operations, the Commission increased the number of sanctioned practices and of denied mergers, reflecting the knowledge and experience acquainted by the Commissioners. This result may also be a way to legitimate the autonomy and objectivity of the Commission.

NAFTA provisions on competition policy

Article 1501 of the NAFTA text confirms the prevailing link between free trade and domestic competition. This Article states that "[e]ach Party shall adopt or maintain measures to proscribe anti-competitive business conduct and take appropriate action with respect thereto, recognising that such measures will enhance the fulfilment of the objectives of this Agreement. To this end the Parties will consult from time to time about the effectiveness of measures undertaken by each Party.

Each Party recognises the importance of co-operation and co-ordination among their authorities to further effective competition law enforcement in the free trade area. The Parties shall cooperate on issues of competition law enforcement policy, including mutual legal assistance, notification, consultation and exchange of information relating to the enforcement of competition laws and policies in the free trade area." (Holbein and Musch, 1994)

The NAFTA also establishes measures and procedures on how a Party shall promote co-operation and competition law enforcement with another Party with respect to monopolies and state enterprises, underlying that the application of regulatory control, administrative supervision or application of other measures, shall be consistent with the Agreement.

It is important to mention that Article 1503 establishes that nothing shall be construed to prevent a Party from maintaining or establishing a state enterprise, and that these shall maintain non-discriminatory treatment to the sale of its goods and services to investments in the party's territory of investors of another Party.

As can be observed from the above statements, the NAFTA not only proscribes anti-competitiveness conduct within each Party's territory, but within the free market area. Chapter Fifteen of the free trade agreement could be considered as an initial antitrust co-operation agreement among the three countries, where some international consensus on antitrust standards as well as co-operation and anticompetitive enforcement are achieved. The provision in the Agreement should cause businesspeople to consider and plan carefully their strategies regarding their business conduct that may not meet one Party's requirements.

Finally, Article 1504 appoints that a working group on Trade and Competition shall be established, to report and make recommendations, within five years of the date of entry into force of NAFTA on issues concerning competition law and policies in the free trade area.

Mexican ECL is consistent with Chapter Fifteen, which indicates that the former legislation is in line with the current terms of the trade agreement, and may raise the suspicious that in order to proceed with the NAFTA negotiations, the Mexican government was suggested to enact a competition law.

Limitations of the Mexican competition policy

As with many new legislations, the emission of the ECL raises many questions about how the law will develop and if it will attain effectively its goals.

One of the questions arisen is the effectiveness the Law and the Commission will develop. "Theoretically created to avoid and prevent monopolistic practices in Mexico, in its two years of life, the Commission has acted in the opposite direction" (Aguilar, 1995, p. 35) This expression reveals that certain inconformity and disapproval prevails among nationals and foreigners with respect to the decisions taken by the Commission. Aguilar states that the Commission has served, in most of the cases, as an entity that legitimise monopolies and monopolistic practices.

It is said that the Commission decides under economic and political pressures, therefore its autonomy is severely questioned. Two of the most criticised approved mergers have been a) the acquisition of Cablevision, a relevant television company, by Telmex, the telephone enterprise; b) the acquisition of Radio Red, a radio transmitter, by Radio Centro, another important radio transmitter. Both transactions are seen as a threat to competition and are considered as monopolies. The later was approved by the Commission under the argument that this merger would not generate a monopolistic practice, since both companies did not have a considerable market power. "The Commission took as the relevant market the whole mass media, not only the radio communication market" (Aguilar, 1995, p. 2)

The fact that the Commission acts as the judge and the jury is an obstacle to prevent arbitrary exercise of power. Perhaps if an additional competition institution was created (p.e. a competition court or tribunal), which would question the Commission's decisions and which could annul the Commission's actions on the ground that the later has not provided enough evidence to support its claims, then the Commission and the ECL would be more reliable and trustworthy. A court or tribunal might serve as a counterweight to the decisions of the Commission.

Another challenge for the Commission is the approach and treatment it will give to the monopolies and oligopolies formed before the ECL came into force. "One of the most perplexing problems facing the Federal Competition Commission is the existing level of economic concentration in Mexico. In 1992, twenty-five companies accounted for 47.1% of Mexico's Gross Domestic Product...A single firm controls over 60% of the market of the cement. Three banks account for 73.9% of the total funds of the Mexican banking system...This high level of industrial concentration has been maintained or exacerbated by the ongoing process of privatisation."(Newberg, 1994, p. 603)

According to Morales, the Mexican economy is ruled by ten business groups (Grupo Carso, Grupo Industrial Minera Mexico, Cementos Mexicanos, Televisa, Industrias Penoles, among others). She sustains that President Zedillo is enhancing the economic concentration by the privatisation process of airports, ports, railways, highways and petrochemical plants, since only few have the economic resources to acquire these enterprises. Thus, the Commission should enforce the ECL to those monopolies and monopolistic practices that were formed before this statute was enacted, otherwise it would not accomplish its role.

Conclusions

The substantial amount of economic deregulation that Mexico has experienced in the 1980's and 1990's is clearly an important movement into the direction of favouring competition. However, there are still important regulated areas of the Mexican economy (energy, oil) where deregulated competition could bring benefits, speaking in terms of efficiency. This, added to an adequate competition policy would achieve a successful market, one of the symbols of the new economic order.

Mexico's liberalisation programme was initially influenced by international pressures, such as the market oriented sturcture policies prescribed by the IMF and the World Bank. However, competition policy was enacted much later than the other previous liberal economic policies 'suggested' by these international institutions, such as tariff reductions and deregulation. The approximately seven year gap is questionable, and might be said that it was not until the NAFTA negotiations that the issue was brought up once more. However, if Mexico wanted to sign this free trade agreement, the creation of a competition policy had to be seriously taken and enforced. Thus, leading to conclude that the enactment of the ECL was due to international influences.

Since NAFTA includes a complete chapter regarding competition policy and the negotiation of this trade agreement was influential to the establishment of the ECL, it is not surprising to find certain similarities in the scope and procedures of the Mexican legislation with that of its biggest commercial partner. This similarities in scope and procedures might make the competition policy a further tool for integration with its northern neighbours.

Even though international influence pressured the Mexican government to enact a competition policy, its posterior development has been mainly influenced by the national political and economic elite. Government and businessmen were interested in its creation: the President and the ruling-party could use it a tool to legitimise the regime and assure its survival; small and medium enterprises promoted the policy since it offered them certain 'protection' from the prevailing monopolies; large enterprises were eager about the policy

because it would protect them from monopolies or mergers to be achieved by the imminent entrance of foreign competitors into the Mexican market.

The effectiveness of the ECL is now questioned, principally due to the little enforcement by the Commission. It is arguable, however, that this legislation is new and is still in an evolution process, in which it can be modified according to new experiences and conditions. If we compare this statute with the European Union Competition Policy or the US Antitrust Policies, we can trace that these took a long period to develop and mature. The principle elements of the European Union's competition law scheme were developed over the first fifteen years of its existence, but it was not until 1989 that the Merger Regulation was introduced.

As above mentioned, it is too soon to make a critique or to be totally sceptical about this policy, but as from what has been resolved and decided by the Commission in its two years, it may be appropriate to say that the ECL is a "myth": it appears on paper but not in actions. The policy's enforcement is in hands of the Commission, who more often responds to political and economic interests rather than to the 'spirit of the law'.

Another element to point when judging the Commission, is its 'autonomy'. The fact that the Commissioners are appointed by the President makes it hard to believe that the Commission is an autonomous institution, independent form the President and ruling party's interests; instead this leads to consider that these are political positions granted to those who will act accordingly to the President's will and welfare. Therefore, it is necessary to implement an scheme where the Commissioners are appointed on their knowledge and moral basis, and not on their political tendencies.

The ECL not only offers confidence and a fair playfield for foreign investors and domestic companies competing for the market share, it also intends to abolish corruption and the authority's discretionality, providing fair rules for every player and not only specific individuals or firms. The accomplishment of this task will not depend entirely on the ECL, but at least this legislation is a starting point.

Bibliography

Aguilar, G. (1995) "El Dificil Arte de Legitimar Monopolios", El Financiero (Mexico) 14 nov, p.35

Comision Federal de Competencia (1992) Ley Federal de Competencia Economica (Mexico: Official Gazette)

Comision Federal de Competencia (1994) Informe anual 1993-1994 (Mexico: CFC)

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Claudia Griera Hernández
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Revised: August 26, 1996

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