Memorandum from the Department of Trade
and Industry
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, 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.
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 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[16],
providing a valuable plurilateral link with the countries of South
East Asia, and has opened negotiations aimed at trade liberalisation
with MERCOSUR[17]
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. 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.
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.
Mergers
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 issue before the
end of the year.
15 See also HC 114-v, pp 276-286. Back
16
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
17
MERCOSUR comprises: Argentina, Brazil, Paraguay and Uruguay. Back
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