In Defence of Consumers & Competition

I make reference to the public debate on the merits and demerits of continuing the suspension the common external tariff (CET) on imported cement. The Government will decide in September 2009 whether to re-impose the 15 percent CET. In an article published in the Daily Observer of Friday, July 3, Mr. Dennis Chung advanced the quality of the debate while presenting the different positions held by members of the business community regarding the issue.

The purpose of this article is to advance the debate even further, by highlighting the consumers’ interest in the matter. The competitive process provides the greatest incentives for businesses to supply at reasonable prices, products desired by consumers. Ensuring a competitive marketplace, therefore, is consistent with protecting consumer welfare. As an advocate for competition, the Fair Trading Commission (FTC) favours renewing the suspension of the CET. I will now summarise and debunk the two main arguments offered in favor of re-imposing the CET.

Argument #1: Guaranteed stability in supplies. CCCL argues that the public should not fear a re-imposition of the CET since by the end of July 2009, it will have the installed capacity to supply the entire market making it unlikely for any re-occurrence of the 2006 crisis which resulted from a shortage of cement.

Counter-argument Supporters of this argument underrate the potential benefits of the competitive process. In addition to stability, competition results in lower prices, greater quantities, greater varieties and faster rates of innovation relative to a market in which competition is stifled. This means that even if the CCCL could guarantee stability, consumers would still be deprived of the other benefits of competition. For example, the FTC recently completed a study to assess the effect of the Government’s decision in March 2006 to suspend the 40 percent tariff on imported cement. The study estimates that, among other things, the ensuing competition from imported cement resulted in prices being approximately 3.3 percent lower than they otherwise would have been. The lower prices resulted in an estimated $694 million reduction in consumer expenditure
during the period March 2006 through June 2008. From the perspective of the consumers, tariffs do not make it more difficult only for imports to gain access to domestic markets; it also prevents consumers from obtaining lower priced goods.

Re-imposing the CET because of CCCL’s guarantee of a stable supply, therefore, would deprive consumers of the opportunity to enjoy the maximum benefit offered by the market.

Argument #2: Too big to fail. Mr. Chung indicates that the local producer of cement, Caribbean Cement Company Limited (‘CCCL’) employs about 439 persons and pays out $8 billion annually in salaries, taxes, statutory payments and purchases. He argues that if the CET is not re-imposed, CCCL would most likely have to “…scale down [its production] considerably…” leading to economic consequences in the form of layoffs (242 production workers); increased cement production costs; increased pressure in the foreign exchange market; reduced tax revenues; and reduced demand for electricity.

Counter-argument Supporters of this argument misunderstand the role of the competitive process in a market economy. The competitive process serves the role of a messenger, directing the resources of the economy to their highest valued uses. While everyone has the opportunity to operate businesses, continued operation must be thought of as a privilege to be earned; rather than as a right to be protected through the powers of the State. The competitive process grants this privilege only to businesses which offer the best products to consumers at reasonable prices.

As demonstrated above, the price of cement is higher when competition is stifled. Higher prices of cement reduce the demand for, say, new residential buildings which use cement as an input. This in turn, results in fewer persons being employed to the construction and installation sector in Jamaica. Accordingly, encouraging competition in the cement market would stimulate employment in other sectors of the economy, which could offset the number of persons laid off by CCCL if the CET is not re-imposed.

If the CCCL is unable to compete with imported cement, the competitive process is merely sending a message that CCCL’s factors of production (land, labour, capital) would best be utilized in some other economic activity. While there could be economic fallout from discontinuing the production of cement in Jamaica, the economic fallout from ignoring the message would be even greater; as demonstrated by historical developments in the local sugar industry. Stifling competition would be akin to shooting the proverbial messenger (and consumers) while ignoring the message.

Re-imposing the CET because of the current economic contribution of CCCL, therefore, would result only in an inefficient utilization of Jamaica’s scarce productive resources.

The Role for Competition in National Development

A fundamental issue to be recognised is that these arguments will inform a wider debate that should be taking place publicly to address the role for competition in national development. Should the national development plan for Jamaica be based on a competitively organized economy, or would it be best to implement a plan where competition is stifled?

As part of our role as advocates for competition, the FTC facilitates discussions on matters relating to competition through our open annual Shirley Playfair Lecture Series, customarily held in September. This year’s theme will cover these and related issues.