Select Committee on Scottish Affairs Minutes of Evidence

Memorandum from the Department of Trade and Industry (DIS 6)

Letter to the Clerk of the Committee from the Parliamentary Clerk, Department of Trade and Industry

  Thank you for your letter of 18 July 2001.

  I am pleased to enclose a revised Memorandum[15] for the Select Committee's use. As well as generally updating, where possible, routine data (such as in paragraph 2.1) and the lost of cases set out in Annex B[16], the main revisions have been to paragraphs 2.5 to 2.7, Section 4 and the end of paragraph 5.2.

  We have also taken the opportunity to add a brief note on British Trade International in the new Annex C[17].

Department of Trade and Industry

September 2001

1.   Introduction

  1.1  The Department welcomes this opportunity to submit an updated Memorandum to the Committee. Although not sponsoring the drinks industry (the summary background note at Annex A[18] on the industry structure has been provided by the Department of the Environment, Food and Rural Affairs—DEFRA), the DTI has for many years had particularly close contact with the Scotch Whisky Association (SWA) on issues and individual problems arising in the context of international trade. There is substantial day-to-day contact between the SWA and the Department on aspects of individual cases. We hold senior level meetings once or twice a year with officials from the SWA and the Gin and Vodka Association, which DEFRA and the Scottish Executive also attend, to discuss matters of strategic importance and agree priorities. The industry has ready access to DTI Ministers.

  1.2  There has been much less contact on trade matters with the beer, soft drinks and bottled water sectors, although we remain ready to progress any cases as the need arises.

  1.3  Dialogue between all sectors and the DTI and Office of Fair Trading on General competition issues is primarily through their UK trade associations, such as the Brewers and Licensed Retailers Association. However, in particular cases—such as a merger or a European Commission investigation—the relevant officials are in close contact with the companies concerned.

  1.4  Competition and overseas market access are both key to the DTI's objective of creating strong and competitive markets by taking action to improve the openness, efficiency and effectiveness of markets at home, in Europe and across the world.

2.   Overseas Trade Policy

  2.1  The UK is the fourth largest trading nation and we rely more than many other countries on our ability to trade and invest freely. In 2000 the UK exported around £187 billion of goods and £67 billion of services. This was equivalent to more than 25 per cent of GDP—in comparison with, for example, Japan, whose exports are equivalent to around 10 per cent of GDP and in 2000 the stock of inward direct investment in the UK was around £324 billion, while UK companies had direct investments overseas of £604 billion, making the UK one of the world's major inward and outward investors.

The International Context

  2.2  The overarching framework for international trade is provided by the World Trade Organisation (WTO) Agreement. This was established at the end of the Uruguay Round of multilateral trade negotiations and entered into force on 1 January 1995. It has substantially wider scope than the General Agreement on Tariffs and Trade ("GATT"), of which the UK was a founder member, and a new binding dispute settlement mechanism. The current membership of the WTO is 142.

  2.3  The GATT, now WTO, Agreement is based on the three main principles of non-discrimination, transparency, and uniform administration of rules. In the context of market access, non-discrimination is arguably the most important of these and comprises two aspects:

    —  not treating any one member more or less favourably than any other—for example, if tariffs against one country's imports are reduced, so must equally those against all other WTO countries. This is the principle of "Most Favoured Nation (`MFN') Treatment". (Special arrangements apply for duties and other barriers reduced between countries forming a Customs Union or Free Trade Area, and for preferences given to developing countries under schemes such as the EU's Generalised System of Preferences);

    —  not treating goods imported from another member, or firms or nationals of another member, less favourably than domestically produced like goods eg, in terms of taxation or standards. This is the principle of National Treatment.

  2.4  While the GATT provided for dispute settlement against breaches of its rules, its enforcement provisions were weak. The WTO Agreement established, for the first time in international trade, binding procedures under which WTO members must comply with rulings within a specified reasonable timeframe. This is important as it encourages effective implementation of WTO rulings and a mechanism for resolving disputes between WTO members. At the same time, there remains an emphasis on sorting out disputes through mutually acceptable solutions rather than recourse to formal dispute settlement procedures.

  2.5  A key trade priority for the UK Government and its EU partners is securing the launch of a new Round of trade negotiations which we hope will be agreed at the Fourth Ministerial Conference in Doha, 9-13 November 2001. Over the past few months, WTO members have refocused attention on a new Round—engaging in detailed discussion of their objectives and concerns—and, as a result of these efforts, support for launching a Round this year has grown significantly. As we enter the final stages before Doha, continued consultation with all others who have a stake in trade, including industry, will also be an important factor. The Committee may be interested to note that the priorities of the SWA for the Round fit extremely well within those which the Government wishes to secure.

  2.6  We remain committed to a broad-based, inclusive agenda believing this to be the best means of delivering substantial trade liberalisation consistent with sustainable development. We believe that such a comprehensive approach is also the best way to ensure the Round delivers benefits for developing countries. However, recognising developing countries' concerns, the EU has sought to refresh its approach in an attempt to bridge gaps, in particular, on competition and investment, and to strike an appropriate balance between environmental concerns and those of developing countries. Against the backdrop of increased commitment to launching a Round, efforts to achieve consensus on the agenda must now intensify as we enter the run-up to Doha.

The European Context

  2.7  The EU's Common Commercial Policy carries with it exclusive Community competence for international trade in goods and cross-border services. Following the Inter-Governmental Conference in Nice in December 2000, which will lead to a new Treaty of Nice, the scope of the Common Commercial Policy is being extended to cover trade in services. However, due to various exceptions (notably audio-visual), the Community position on broad service negotiations under the GATS will continue to be agreed by consensus. In practice, the Commission negotiates with third countries on trade policy and individual cases on behalf of the EU as a whole, on the basis of a common position established with the member states. The UK plays an influential role in shaping EU trade policy, both broadly and in respect of individual cases. Within the Community's institutional framework, the EC Treaty Article 133 Committee of officials meets weekly to consider external trade matters and presents an important forum for ensuring that UK priorities are taken on board. The DTI also has close contacts, and regular written communication, with Commission officials. As appropriate, we also discuss matters of common interest bilaterally with other member states.

  2.8  The long-term nature of trade policy is such that it is important that issues are raised with trade partners on a regular basis. The EU has bilateral trade agreements with a wide range of countries. These offer a framework within which views can be exchanged, policy developed, and solutions to problems sought bilaterally. Particularly important are: the European Economic Area ("EEA") Agreement, establishing a single market with the EFTA countries (except Switzerland); the Europe Agreements, which the EU has entered into with the countries wishing to join the EU; the Partnership and Co-operation Agreements with several countries of the former Soviet Union and "Stabilisation and Association Agreements" currently under negotiation with western Balkan countries. The EU also maintains an active dialogue with the US under the Transatlantic Economic Partnership; additionally, it is a member of ASEM[19], providing a valuable plurilateral link with the countries of South East Asia, and has opened negotiations aimed at trade liberalisation with MERCOSUR[20] and with Chile.

  2.9  Where it is not possible to resolve matters bilaterally in this way, then as regards countries already within the WTO, the EU can raise issues in the course of the WTO's periodic reviews of individual members' trade policies (the Trade Policy Review Mechanism). Where a country's legislation is in breach of its WTO obligations, and that country is not able to revise it, dispute settlement action can be brought. The EU has done so in a number of cases—for example, as regards alcoholic beverages with Japan, Korea and Chile (see paragraph 3.4 below).

  2.10  For trade partners not yet in, but seeking to join, the WTO, the EU's bilateral market access negotiations in the context of WTO accession provide the opportunity to ensure that such countries provide open markets on, or as soon as possible after, their WTO accession. All concessions negotiated bilaterally are applied to all WTO members when the aspirant member accedes. Current examples of such prospective commitments include agreements by China to reduce tariffs on Scotch Whisky; and to improve trading rights for spirits. Croatia and Georgia joined recently, opening up those markets. Russia and Vietnam are examples of countries at an earlier stage in the negotiating process, where we hope to achieve greater liberalisation. In a rare example of a WTO aspirant implementing a commitment before accession, Taiwan removed its discriminatory tax regime in January 1999. Such commitments are in addition to applicants' acceptance of the broader WTO requirements on non-discrimination, transparency, and uniform administration which themselves bring substantial benefits to our producers seeking to export to or invest there.

  2.11  The UK also raises issues directly with countries, at Ministerial (especially during inward and outward visits) and official level—the DTI has a senior official level trade policy dialogue with major partners (US, Canada, Japan, Korea, China, Taiwan and Australia); spirits are frequently on the agenda. We also frequently raise matters of topical interest through out diplomatic posts abroad and with other countries' embassies here in London.

3.   Trade Barriers

  3.1  A principal focus of Europe's approach to the removal of trade barriers in third countries is through the EU's Market Access Strategy (Council Decision 98/552/EC refers). The Strategy was launched in 1996, with strong UK support, for identifying and resolving market access barriers experienced by European industry in third countries. A further important element was the setting up of the market access database, which includes details of some 1,300 specific barriers to European exports covering 58 countries, as well as basic information of interest to EU exporters. A new development is the creation of an exporters' guide to import formalities applied by third countries and it currently covers 40 countries.

  3.2  Complementing the strategy is the Community's Trade Barriers Regulation (EC) 3286/94, providing a mechanism for the Commission to investigate alleged breaches by third countries of Community rights under international trade rules, in particular the WTO, so as to establish the economic and legal facts of the case, and the possible injury to EU producers.

  3.3  In the past, a recurrent concern of the SWA was the use by certain third countries of the description "Scotch Whisky" for their domestically produced brands. Such instances have lessened in recent years—and the 1995 WTO Agreement on Trade Related Aspects of Intellectual Property Rights ("TRIPS") provides for particular protection of geographical indications for wines and spirits.

  3.4  But discriminatory taxation and duties by third countries remain a key problem. In recent years, we have successfully pressed the EU to seek redress in the WTO against Japan, Korea and Chile in respect of their discriminatory treatment of imported alcoholic beverages and spirits. The first of these complaints (Japan) was won in 1997 (the Panel findings were confirmed on appeal in 1998): the Japanese were taxing whisky six times as much as domestically produced Shochu. The successful result of this case was estimated at the time to be worth £75 million per annum to British spirits exporters. In the case against Korea, which the EU won in 1999 (again, the Panel's findings were upheld on appeal), the domestic spirit (Soju) was taxed at 35 per cent of the rate applied to imported spirits, on which an import duty of 20 per cent was also imposed. In Chile, whisky was subject to a special sales tax of 65 per cent, compared with 25 per cent on domestic Pisco and 30 per cent on other spirits. Again, the WTO Panel's finding, confirmed on appeal, went in favour of the EU. The Chilean government has introduced legislation that will see the end of discrimination against whisky and other imported spirits in favour of Pisco by end March 2003. We shall look to build on these results, not only through checking that all the three countries comply with the rulings of the WTO, but, ideally, do so in a way which will ensure maximum market access—and also by seeking EU action in the WTO against other countries exercising similar discrimination.

  3.5  A list of trade cases of concern to the UK spirits industry is at Annex B[21]. This illustrates the range of difficulties faced by the industry, the importance we attach to resolving them, and the variety of ways used to do so. Frequently our Posts abroad play a key part in the process, and we liaise closely with them. A brief note on the work of British Trade International, the joint DTI-FCO organisation within which they work, is attached at Annex C[22].

4.   Competition in the Scottish Drinks Industry

  4.1  The Office of Fair Trading (OFT) keeps competition in UK markets under review and is the first point of contact for complaints about anti-competitive agreements and abuses of market dominance. The OFT is not aware of any current competition issues in the soft drinks, bottled water or spirits industries in Scotland. However, concerns have been expressed about some local concentrations in Scotland of the ownership of licensed premises by large brewing companies. The OFT, recognising the importance of choice of beers and value for money in pubs, has recently considered these concerns as part of its monitoring of the Beer Orders (see paragraphs 4.8-4.11 below).

Background on competition policy

  4.2  The Government believes that free and competitive markets provide the best means of improving economic efficiency, encouraging wealth creation and delivering better choice and value for money for consumers.

The Competition Act 1998

  4.3  The Act came into force on 1 March 2000, and is modelled closely on the EC competition rules as contained in Articles 81 and 82 of the EC Treaty. It introduces prohibitions of anti-competitive agreements and abuses of market dominance. The Director-General of Fair Trading (DGFT) has been given much stronger powers of investigation and enforcement. Companies in breach of the prohibitions risk financial penalties of up to 10 per cent of their UK turnover and will also be liable to third party actions.

  4.4  Competition is a reserved matter under the Scotland Act 1999, and the Competition Act 1998 therefore applies across the UK. The general policy of the Government in relation to devolution has been to treat the UK as a single market, with business to be subject to the same competition regime throughout.

  4.5  The Government is committed to modernising and strengthening the UK's competition laws, ensuring that effective and dynamic competition is delivered across the economy, as part of its wider agenda for promoting competitiveness and growth.

  4.6  On 31 July 2001, the Government published a White Paper, "Productivity and Enterprise—A World Class Competition Regime" (Cm 5233). The White Paper sets out a consultation process, concluding on 5 October 2001. The White Paper proposals include reforms to the merger and monopoly regimes with decisions being taken by independent competition authorities, new duties for the Office of Fair Trading to promote competition and consultation on criminal penalties for those involved in cartels. The White Paper also includes the proposal, originally announced in the White Paper "Opportunity for All in the World of Change" (Cm 5052), to give the OFT and other competition regulators a new role to access when laws and regulations might create barriers to entry and competition, or channel markets in a particular direction.

European competition rules

  4.7  European competition rules may apply where an anti-competitive agreement or practice or an abuse of a dominant position has an appreciable effect on trade between member states. The European Commission has granted a series of individual exemptions for the beer supply agreements of large UK brewing companies which would otherwise have been prohibited by Article 81 of the EC Treaty. The Commission does not consider that the beer supply agreements of UK regional brewers and pub chains are caught by Article 81 EC Treaty.

The Beer Orders

  4.8  The UK brewing industry was referred to the Monopolies and Mergers Commission (MMC) for investigation in 1986. That investigation resulted in a number of measures, from 1989 onwards, being taken to weaken the links between brewers, especially large national brewers, and pubs. These are known as the Beer Orders. The main provisions are contained in The Supply of Beer (Tied Estate) Order 1989 and The Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989. The Tied Estate Order required national brewers owning more than 2,000 pubs to release from tie half the pubs they owned in excess of that number by 1 November 1992. It also gave national brewers' tied tenants the right to serve a guest beer and source wines, spirits and soft drinks from any supplier of their choice from 1 May 1990. The Loan Ties Order: enabled recipients of brewers' loans to terminate them without penalty on giving three months' notice: required brewers to publish wholesale price lists for their beers; and prohibited brewers from imposing restrictions on the future use of licensed premises when they are sold.

  4.9  The OFT monitors the brewing and pub industries closely and investigates any suspected anti-competitive practices: structural changes in the industry (such as the closure of breweries) or contractual matters (such as the treatment of tied tenants by breweries and pub chains) cannot be addressed by competition law. There have been some developments in the industry since 1989, including the growth of pub chains as a counterweight to the market power of the large national brewers, and the DGFT announced a review of the Beer Orders on 14 January 2000. The DGFT submitted his report of the review to the Secretary of State on 31 July 2000.

  4.10  The DGFT recommended that some parts of the Beer Orders—the provisions relating to loan tie agreements, the prohibition on refusing to supply beer for resale and the requirement to publish wholesale prices—should be retained. But he recommended that others—the cap on the size of brewers' tied estates, the requirement on large brewers not to tie drinks other than beer, the guest beer provision and the ban on brewers preventing a pub continuing to be used as a pub when sold—were no longer necessary and should be repealed. The then Secretary of State announced on 1 December 2000 that he was minded to revoke the cap on the size of brewers' tied estates and the requirement on large brewers not to tie drinks other than beer. He was also minded to keep the guest beer provision and the ban on brewers preventing a pub continuing to be used as a pub when re-sold. As a result DTI has been consulting interested parties on a draft amending Order.

  4.11  The Beer Orders will next be reviewed by the DGFT in 2005.


  4.12  In the event that a merger qualifies for investigation under the Fair Trading Act 1973, in the first instance it is for the DGFT to assess its likely impact and then advise the Secretary of State whether or not the merger should be referred to the Competition Commission for further investigation. In preparing his advice, the DGFT takes into consideration the views of all interested parties. All cases are considered by the Secretary of State on their own merits in the light of the independent advice of the DGFT. However, very large mergers affecting more than one EU member state may instead by investigated by the European Commission.

  4.13  Over the last few years there have been two qualifying mergers which have involved the Scottish drinks industry. On 9 November 1999 the then Secretary of State announced that the acquisition of Highland Distillers (whose principal brands are The Famous Grouse and The Macallan) by the Edrington Group and William Grant & Sons would not be referred to the Competition Commission. This was in accordance with the advice of the DGFT.

  4.14  In August 2000, the Belgian brewer Interbrew acquired the entire UK brewing interests of Bass, which included Bass Brewers in Scotland (whose principal brand is Tennet's Lager). On 3 January 2001 the then Secretary of State announced that he had decided to require Interbrew to divest the whole of Bass Brewers, following the Competition Commission's findings that the merger would operate against the public interest. After a successful application for judicial review by Interbrew, the Secretary of State asked the OFT to consult and advise on the appropriate remedy. The OFT consulted interested parties on four alternative remedies: under two of the options Interbrew would divest the Scottish business of Bass (in one option, with the whole of Bass Brewers; in the other, with part of Bass); under the other two Interbrew would retain the Scottish business of Bass (in one option, with the whole of Bass Brewers; in the other with parts of Bass). On 18 September 2001, having considered further advice from the DGFT, the Secretary of State announced that she had decided to require Interbrew to dispose of either Bass Brewers or Carling Brewers to a buyer approved by the DGFT to remedy the adverse effects of the Interbrew/Bass Brewers merger.

  4.15  The Government announced in 1999 its intention to reform the UK merger regime by taking most decisions out of the political arena. Following consultations on the proposals, on 31 July 2001 the Government announced its main conclusions on the way forward. The two main elements are that, first, decisions on the vast majority of mergers will be transferred from Ministers to the OFT and the Competition Commission. In the second place, the test against which mergers are assessed will be changed from a broad-based "public interest" test to a new competition-based test. These reforms will be implemented by the forthcoming Enterprise Bill.

  4.16  In the meantime the Secretary of State's interim policy is to accept the advice of the DGFT on merger reference decisions, save in exceptional circumstances.

5.   Pricing of Soft Drinks in Pubs, Restaurants and Similar Establishments

  5.1  The pricing of soft drinks in pubs and similar establishments has prompted consumer complaints to the Government. To establish the scale of the problem, the Government commissioned research on price display practices for soft drinks in pubs and other establishments across Great Britain. The survey found that the difference between what consumers pay in off-licences and supermarkets, compared with what they pay in pubs and restaurants, was considerably greater for soft drinks than for beer and lager and that 70 per cent of pubs were not displaying their prices adequately. This is clearly unsatisfactory. The Government believes that price information should be readily available to allow consumers to make informed and unpressurised choices and to facilitate competition between outlets.

  5.2  Accordingly the Government decided to review the Price Marking (Food and Drink on Premises) Order 1979—the legislation which regulates price displays in pubs, restaurants and similar establishments. A formal consultation on the Order has been conducted and, following analysis of the responses, discussions have been held with trade and other interests on how price transparency can best be improved in these outlets. A revision of the 1979 Order, which will simplify and clarify its provisions, is in preparation and the intention is that it will be supplemented with trade best practice guidance. The expectation is that the best practice guidance and the proposed revisions to the Order will be issued before the end of the year.

15   See also HC 114-v, pp 276-286. Back

16   See evidence pp 307-313. Back

17   See evidence pp 313-314. Back

18   See evidence pp 306-307. Back

19   ASEM (Asia Europe Meeting): which consists on the European side of the 15 member states individually plus the European Commission in its own right, and on the Asian side, of China, Japan, South Korea, Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. The last seven countries are also members of ASEAN (the Association of South East Asian Nations), with whom the EU has a separate Trade and Co-operation Agreement. Back

20   MERCOSUR comprises: Argentina, Brazil, Paraguay and Uruguay. Back

21   See Evidence pp 307-313. Back

22   See Evidence pp 313-314. Back

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