2018

Competition Policy and Industrial Policy: Is there a need for a new balance?

CCP 14th Annual Conference, 7-8 June 2018

Welcome to this year’s CCP Conference on ‘Competition Policy and Industrial Policy: Is there a need for a new balance?‘.

For many years there has been a wide consensus that competition policy should not be used as an instrument to achieve industrial policy goals, but this consensus has been increasingly challenged since the global financial crisis. New questions are taking centre stage in the academic and policy debate: Is competition policy too focused on prices instead of broader economic and social outcomes? Does the focus on competitive markets impede the competitiveness of UK and European industries? Is the strong position of US Internet companies creating bottlenecks that bias the playing fields of the future industrial landscape?

To delve deeper into these issues, CCP’s 14th Annual Conference explores a broad range of topics concerning the tensions between competition policy practice and new goals for industrial policy. It brings together insights from legal, political science and economic perspectives on how to rebalance policy goals and how to design the competition regime of the future in light of these challenges.

Session 1 | Keynote speaker: Gert Jan Koopman (European Commission)

Gert Jan Koopman, Deputy Director-General for State Aid at DG Competition, took the opportunity to highlight the importance and relevance of the conference theme in his keynote address. He observed that the conference could not have been better-timed to address the topic, given the ongoing policy debate around our understanding of the role of industrial policy. Market competition is a major driver of productivity growth, and competition policy has a crucial role to play in promoting competition within the EU. Industrial policy, on the other hand, can have multiple objectives. In September 2017, the EU Commission released its Industrial Policy guidelines to promote a “modern, clean, and fair economy”. Koopman highlighted the potential contradictions that can arise by promoting innovation and structural technological change (e.g. “green” technologies) without compromising competition via the discretionary act of picking “winners” through State aid. Against this backdrop, Koopman guided us through the EU State aid guidelines, which are intended to promote a framework in which subsidies and other types of government programmes are accommodated within competition law. The main objective of the Commission is to utilise incentives mechanisms instead of discretionary enforcement, and to esnure these mechanisms are proportionate and transparent. He concluded that both industrial and competition policy can, and must, be accommodated.

Session 2 | Shaping the Data Economy: Using Legal Rules for Industrial Policy?

Karen Mc Cullagh, Lecturer in Law at the University of East Anglia, outlined the reasons why the UK has made the decision not to be part of the EU’s Digital Single Market, after referring to the UK’s pre-Brexit plan regarding the personal data economy and the economic value of personal data in general. The focus of her analysis was on service industries which, as she underlined, contribute to 80% of the UK economy. Karen discussed whether the General Data Protection Regulation (GDPR) will apply to UK businesses after Brexit, as global firms outside of the EU are taking GDPR as a norm, and she explained the options that the UK will have as a third country regarding personal data transfers with the EU. She highlighted the legal challenges arising from the Data Protection Act 2018 (particularly Schedule 2, para. 4(1) of the Act), the UK’s surveillance laws, the Investigatory Powers Act 2016 (IPA 2016) and the subsequent IPCO Advisory Notice 1/2018.  Karen concluded that the UK will probably seek more than an adequacy arrangement, and that the key to ensure post-Brexit economic success is to manage the arising regulatory divergence.

 

Howard Shelanski, Professor of Law at Georgetown University, used his talk ‘Innovation and Regulatory Design’ to explore the problem that technological change poses to regulatory systems. He specifically picked up on themes from the other two talks in the section (given by the UEA Law School’s Sabine Jacques and Karen McCullagh) and targeted his remarks to data and regulation of data as factors of innovation and competition. The regulation of tomorrow is, and can only be, based on knowledge of behaviour today.

Whether aiming to set strong prohibitions or mandates, or more flexible goals or principles, regulators and policy makers may struggle to foresee problems that arise in the future and the way society handles them. Therefore, the “collateral consequences” of design and regulation should be carefully considered in regulatory design, which “in its ideal form should be neutral to winners and losers”. This talk used a discussion of specific regulations in relation to data protection and privacy in the US to demonstrate how flexible regulation can be used to promote the incentive to innovate, given that “innovation [being a rule breaker rather than a rule taker] is hard”.

Session 3 | Directed Technological Change and the Energy Sector

Ralf Martin, Associate Professor of Economics at Imperial College London, talked about innovation and investment in clean R&D actives as playing a central role for mitigating climate change and leading the market equilibrium from dirty energy, using fossil fuel, to clean energy. However, will the market provide the right level of incentive for clean innovation and investment? Ralf presented an interesting picture of the energy industry.

Due to externalities of pollution and knowledge that widely exist in this industry, the right level of innovation is difficult to achieve, and policies and interventions are necessary. Instead of the traditionally used direct subsidies, which are very costly, Ralf suggested that industry policies promoting economic growth of the clean energy sector would be ideal in speeding up innovation.

On the other hand, Ralf suggested that the growth of the sector is affected heavily by technology spill-overs. In fact, over the last decade, the innovation in radical clean technology is growing faster than fossil fuel based technology, which is mainly driven by high technology spill-overs in the former sector. He concluded that although the current degree of competition in the clean energy sector is lower than dirty energy, economic growth in the former is considerable, and industry policy and competition policy should work together to promote the growth of clean energy sector.

 

Justus Haucap, Director of DICE, Heinrich-Heine-UniversitĂ€t DĂŒsseldorf, shared the German experience of achieving higher fractions of renewable energies in electricity supply system, known as the Energiewende (energy turnaround). The two main objectives of the Energiewende –‘reduction of GHG emissions’ and ‘exit from nuclear power’ – have led to efforts to encourage the generation and use of green energy (e.g. produced with solar PV and wind). The main instruments adopted are feed-in tariffs and network operators’ obligation to purchase electricity generated through renewable energies, regardless of the amount. Due to the differentiation in technology, more than 5000 different feed-in tariffs have been designed.

Justus summarised the Energiewende as highly effective in boosting green energy, but at enormous costs. The direct costs include subsidies paid, generating a massive redistribution from some consumer groups to others, with house and land owners as the main beneficiaries. He considered the broad goals behind the Energiewende to be not well-defined or consistent over time, making it difficult to measure actual effectiveness. In order to achieve significant climate policy or industrial policy objectives, Justus suggested that cost efficiency and competition between green technologies need to play bigger roles.

 

Environmental regulations can have compelling effect on industry sales, according to recent research by Eugenio Miravete which analyses the effects of environmental regulation on diesel automobile industry in EU. Eugenio, Professor of Political Economy at the University of Texas and Professor of Industrial Organisation at the University of East Anglia, assesses key environmental regulations passed by the EU and US in the early-1990s. Whereas the US emission policy is strong in NOx and PM, the EU is more strict on CO and CO2. However, in the 1970s, the European Fuel Tax Directive made the diffusion of diesel engine cars in the EU possible as tax on diesel is lower. On the other hand, diesel produces more NOx and PM, which could constitute an emerging problem for the environment.

Eugenio’s research evaluates the possible policy outcome if the EU were to impose the same emission standard as the US. His key finding is that the sale of diesel cars would reduce significantly. Moreover, his results also suggest that such a policy may also protect domestic producers from competition posed by imported cars. Finally, by comparing the automobile markets in Portugal and Spain, he suggested that the “cash-for-clunker programs” may have unwanted effects.

Session 4 | New Industrial Strategy and Industry 4.0

Tony Curzon-Price, Economic Advisor at the Department of Business, Energy and Industrial Strategy, argued that there is no necessary tension between industrial strategy and competition policy. Government intervention can resolve coordination failures without creating problem markets if market design is placed at the heart of industrial policy. Industrial strategies from 50s-60s can be instructive; successful industrial strategies would use competitive mechanisms to discipline firms. In accordance to this lesson, we need the design of a system that permits the most productive firm to rise. Tony used illustrations from climate change policy and other industrial strategy challenge areas to illustrate the market design problems and solutions.

 

Hans Friederiszick, a Director and founder of E.CA Economics, discussed the pros and cons of the measures envisaged by the German Economic Affairs Ministry regarding the regulation of digital platforms in the future. The measures include, among others, (1) mingling ex ante regulation with existing ex post competition law enforcement; (2) extending existing horizontal rules, rather than creating new sector-specific rules; (3) fostering German/European digital champions by harmonising legal provisions and incentivising infrastructure investments through deregulation. Hans argued that a modern competition law regime could define markets with “winner takes all” characteristics as “vulnerable” and aim to protect rivalry in the race for such markets. In that aim, specific types of behaviour – e.g. multihoming, leveraging market power to related markets and exploiting customers excessively) – could be considered as abusive conducts.

Session 5 | Supporting Industries – How have we done?

Carlo Scarpa, Professor of Economics (Department of Economics and Management, University of Brescia, Italy), opened Session 5 by exploring the increasing complexities with respect to EU control over State aid, with specific reference to the automotive sector. He enlightened the audience of the challenges involved in measuring State aid and distinguishing its effects from that of normal grants, in the first instance, and then disentangling the composite effects of EIB loans. Carlo’s main results indicate that countries that receive State aid have seen increasing values of car production. He also notes that, on average, State aid along will EIB loans appear to stabilise car sales, which have otherwise been variable over the past 2 decades.

In his conclusion, Carlo states that while State aid is here to stay, EU scrutiny has decreased the amount of State aid disbursed over the years. Although, on the other hand, State aid has immensely improved in quality and countries have been using it to strengthen their poorer regions and industries. Additionally, State aid does not appear to impede competition. Finally, Carlo suggests that it is regional development aid where country-level competition intensifies and, therefore, an updated identification of merit areas to this end may be useful.

Following on from Professor Scarpa, Tuomas Takalo, Senior Research Advisor (Bank of Finland), discussed his recent research into the welfare analysis of innovation policies. His purpose was to measure the effect that R&D support policies have ultimately had on R&D investment levels and to assess whether it leads to stronger spill-overs in additional to fostering productivity growth. He builds on the idea using a structural innovation model which considers social externalities (such as consumer surplus and firm profits) , financial market imperfections and a fixed cost of R&D, before proceeding to estimate key parameters using actual R&D project level data. The main result that Tuomas highlights is that while increased R&D support significantly encourages R&D investment levels and spill-overs vis-a-vis a laissez-faire scenario, the net welfare effect is seemingly negligible.

In his closing remarks, Tuomas makes two valuable suggestions. He posits that there may be a need to look at the effect of innovation policies in a small open economy context, which has not received much attention in the literature thus far. Finally, a need for EU-wide coordination in innovation policies also appears increasingly pressing. A CEPR Discussion Paper associated with Tuomas’ presentation is available here.

Session 6 | Panel – The Future of State Aid

With Brexit, the UK will be one of a few single countries to have a State aid regime. The European Union (Withdrawal) Bill will implement the EU regime in a post-Brexit UK. We now know that the Competition and Markets Authority (CMA) will be the designated authority for the regime. To discuss the future of State aid in the UK in a post-Brexit world, we were delighted to be joined by a panel of experts for our final session of the Conference. The panel consisted of Simon Coward (Managing Director, Hethel Innovation Ltd), Sheldon Mills (Senior Director, Mergers, CMA), Jenny Sugiarto (Director, Competition Economics, KPMG) and our very own Bruce Lyons (Professor of Economics, School of Economics & Centre for Competition Policy, UEA).

The discussants put forward views on whether and why we should have a State aid regime in the UK; the benefits of aid; some practical challenges to CMA’s implementation of new system; and  the future relationship with the EU. A shared view surfaced around the belief that continuing a State aid regime in the UK would be beneficial. However, the design of the regime will have to overcome a number of issues to ensure a robust and credible regime.

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