Critical Mexican Competition

Law under Senate Scrutiny

By Carlos Angulo - Congressman

President Peña Nieto presented last year a series of constitutional amendments initiatives that were past in

an unprecedented spree of fast moving political consensus. Many countries of the World have praised this

achievement by Mexico, a country that has one of the most difficult political environments to deal with

structural changes. One of these changes was developing the constitutional framework for a modern

antitrust or competition law.

During March 2014, the Chamber of Deputies of the Mexican Congress approved the presidential

initiative for a new antitrust law ("Federal Law of Economic Competition") that was based under the

recently adopted constitutional framework. However, this initiative suffered more than 90 changes made

by the Lower House.

The bill that was passed by the Chamber of Deputies now is in the process of being reviewed by the

Mexican Senate. The Senate has started a series of appearance of Congressmen that were involved in the

approval of the bill, by organizations of the private sector that are going to be regulated under the new

law and by a panel of experts in which the author was invited to participate.

My main concern is about the unprecedented powers that would be bested on the new Federal Antitrust

Commission to regulate the economic players, on the one hand, and the watered down powers that the

Commission has to rule on government policy and executive regulations that interfere with market fair

play.

The focus of this article is to present the above mentioned challenges that the Mexican Senate has in

making the necessary adjustments in the Anti-trust bill that is under review.

To honor the truth, the bill that was passed by the Mexican House, in general terms, is a quantum leap on

the current Antitrust Law that impedes the regulator to sanction and prosecute Anti-trust actions of the

economic players.

What is the issue in the bill under review? One of the principal issues of the new law is that the new

regulator does not have sufficient powers to change government policy, executive regulations and

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administrative actions that distort the markets avoiding a level playing field to have a sane development

of competition.

To describe the matter, we would need to make a quick historical run on how Mexico developed its

industrialization. From the forties to the early seventies of the past century, Mexico made a bold move to

industrialized the Country, trough a policy known as Desarrollo Estabilizador or "stabilizing growth

policy", by creating protected environments for Mexican entrepreneurs that wanted to invest in creating

industries, by granting them monopolistic positions in areas that were non-existing in Mexico, and were

subject to importation of final goods.

For instance, if one wanted to manufacture copying machines, the Mexican entrepreneur first entered into

a license agreement with one of the big worldwide copying machine manufacturers, made a business plan

that was presented to the government, to get approval to create a monopoly to develop in Mexico the

manufacturing and/or assembly of copying machines.

As a result, the government banned all importations of copying machines in Mexico that where not of the

brand name authorized to the Mexican businessman, as well as the all importations of all necessary inputs

for the manufacturing of copying machines. The authorized company was then able to import and sell

copying machines, manufacture and assemble copying machines of the brand name under license, thus

generating a protected and nurtured monopoly for copying machines.

With this policy Mexico created the so called “Mexican miracle”, developing all kinds of industry, from

cement, breweries, automotive, packing, mills, steel producers, and also the government developed all

kind of government owned business, like telephone services, toll roads, paper mills, fish processors,

railroads, movie studios and theaters, hotels, even tortilla manufacturers. All had monopolistic positions,

and continue to have so, even after the government started to privatize its businesses in the eighties.

Although this policy was successful at the beginning, it started to collapse in the early seventies. Finally

when Mexico entered into the General Agreement on Tariffs and Trade, the World Trade Organization

and NAFTA, it had to dismantle all this protectionist system. But the monopolies had already penetrated

the markets and were not impeded to continue operating, even after the government sold the businesses to

private enterprises.

When President Salinas enacted the first antitrust law in Mexico in December 1992, an antitrust regulator

was created for the first time, but it did not had sufficient powers to fight the economic players that were

monopolies or had dominant positions in the market and were abusing such position.

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The principal problems of the Competition Federal Commission (Comisión Federal de Competencia or

COFECO, by its Spanish language acronym) were that the sanctions provided by law, were too weak, and

that the loopholes in the law, permitted an endless sequence of recourses that made COFECO worthless in

fighting monopolies and abuses in dominant positions. This situation can be illustrated by the fact that it

took COFECO more than a decade to rule in last instance the dominant position of Teléfonos de México

or TELMEX.

The last amendment made to the Salinas antitrust law was in April of 2012. The principal changes made

in this amendment by President Calderón administration, had to do with enhancing the capabilities of

COFECO to pursue antitrust conducts, including changes in the law to avoid any legal chicanery that left

COFECO without teeth to enforce the law.

Now with the constitutional changes in place and the new antitrust law presented by President Peña, we

have an antitrust regulator, Comisión Federal de Competencia Económica, or COFECE, with a vigorous

mandate and with sufficient teeth to enforce antitrust violations made by economic players. But, what are

the challenges that the Senate has in approving this new law under its review?

Considering the above described monopolistic culture developed by government policy in Mexico, there

is still a great deal of distorted markets that would need to get fixed by COFECE. This could be

accomplished by issuing binding rulings that would obligate the government to change its policies,

executive orders and non-congressional regulations that create these market-unfair policies.

However the Peña Nieto initiative only grants COFECE the capability of issuing non-binding rulings to

such effect. But the Constitution grants COFECE, as an autonomous body, with the powers to request to

the Mexican Supreme Court laws or regulations of economic competition nature. However, this power is

limited to constitutional issues only, and not to a wide range of anti-competition matters that the

government has created and need to be fixed.

In another situation there is a wide range of markets that have barriers to trade and have anti-competition

issues, that are “natural”, that is, that were not either created by distortions promoted neither by

government actions or omissions nor by economic players that have violated the law. The issue here is

that the proposed bill, paradoxically, grants COFECE powers to intervene in such markets

notwithstanding that there are no violations of the law coming from the economic agents or players

involved in such market.

In such respect, Terry Calvani, the former Commissioner of the Federal Trade Commission of the U.S.

Government that made a review of the Presidential initiative, mentioned the following: “Presumably the

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proposed legislation focuses on those markets that fail to perform competitively for reasons other than

government regulation. Intervention in such markets might make the market more competitive, but it

might not. In any event, there are costs associated with punishing market participants, who have

otherwise broken no law. I have already mentioned the inherent unfairness of being punished when one

could not have anticipated the illegal quality of one’s situation and the resulting deterrence of investment

for fear of crossing what is a very unclear—indeed invisible—line.”

He added:” But there are other costs. Intervention may be inefficient. There is ample economic evidence

that some firms are large because they are efficient (which regularly results in better offering and/or

pricing conditions to consumers), and efforts from government to de-concentrate may yield smaller

inefficient firms. As someone who has served in the competition agencies of two countries, I appreciate

the strengths and weaknesses of competition agencies. I do not believe that competition enforcement

agencies are well placed to intervene absent illegal behavioral conduct in an effort to make things better.

I would not have had confidence that either of the competition law enforcement agencies with which I was

associated would have had the requisite experience and expertise to re-engineer markets.”

In conclusion, the bill under review in the Senate must be corrected by granting to the new regulator a

broad range of powers to re-direct government policy that has distorted the markets, and by eliminating

the authority that COFECE has in intervening in this “natural markets” that have distortions not created

by government policy or by economic agents that are not in violation of law.

If COFECE would have these powers, we believe that Mexico could loose further competitiveness,

because this may discourage new innovative companies to invest in Mexico, because of the threat that

they may be subjecting their products to price controls and other government interventions without any

violations of statutes.

The new law, grants many opportunities for Mexican consumers to have a first world set of markets with

prices that are competitive, and the right to have economic players doing their best to enhance quality,

and customer satisfaction.

But granting to COFECE powers that do not exist in any other country that has developed markets for the

benefit of consumers, not only may deny Mexican consumers in having state of the art products, but also

Mexico may loose investment opportunities because of the uncertainty that this issue may create.

We hope that the Senate takes the challenge in granting COFECE sufficient powers to move the

government in changing its anti-competition practice at all levels, including Municipal, State and Federal

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authorities, including the Federal District, and have COFECE confine itself enforcing and prosecuting

violations of economic agents that violate the law, with relative and absolute monopolistic practices,

collusions, cartels, abuse in dominance and un-authorized concentrations. This will send a clear massage

to investors that Mexico can now guarantee free access to domestic markets, a level playing field to

economic players, and is not a treat to innovative and successful companies that do not violate antitrust

provisions.

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