LegCo Panel on Trade and Industry

Attendance by invitation :

Item IV

Clerk in attendance :

Miss Odelia LEUNG

Chief Assistant Secretary (1)1

Staff in attendance :

Ms Sarah YUEN

Senior Assistant Secretary (1)1

I Confirmation of minutes of meeting
II Date of next meeting and items for discussion
III Information papers issued since last meeting
IV Competition Policy: The Key to Hong Kong’s Future Economic Success
V Briefing on Registered Designs Bill
VI Copyright Bill

Meeting with KPS Retail Stores Ltd. (KPS)
Meeting with HMV Hong Kong (HMV)
Meeting with the Hong Kong Retail Management Association (RMA)
Meeting with Hong Kong, Kowloon and New Territories Motion Picture Industry Association (MPIA)
Meeting with the International Federation of the Phonographic Industry (Hong Kong Group) (IFPI(HKG))
Meeting with Hong Kong Record Merchants Association Limited (the Record Merchants Assn.)
Meeting with the Administration

I Confirmation of minutes of meeting

(LegCo Paper No. CB(1)688/96-97)

The minutes of the meeting held on 10 December 1996 were confirmed.

II Date of next meeting and items for discussion

(List of outstanding items for discussion (1996-97) tabled)

Members agreed to defer the next regular meeting of the Panel from 11 February 1997 to 25 February 1997 at 2:30 pm. They also agreed to discuss the following items -

1. Community Electronic Trading Service and Trade Declaration;
2. Departmental business study in Trade Department;
3. Briefing on Ministerial Conference of the World Trade Organisation in Singapore; and
4. Trade protectionism.

(Post-meeting note: On the advice of the Chairman, the meeting was further deferred to 4 March 1997 at 8:30 am.)

III Information papers issued since last meeting

(LegCo Paper Nos. CB(1)533/96-97, 638/96-97, 649/96-97 (02) and (03))

Members noted the following papers issued since the last Panel meeting held on 10 December 1996 -

1. The draft declaration of the Ministerial Conference of the World Trade Organisation held in Singapore from 9 to 13 December 1996 and the concluding remarks by the Chairman of the Conference;
2. The Administration’s information paper on the highlights of Tradelink’s business plan;
3. The Administration’s information paper on the Fourth Economic Leaders Meeting and the Eighth Ministerial Meeting; and
4. The Administration’s information paper on Hong Kong’s Individual Action Plan to Implement the Osaka Action Agenda.

IV Competition Policy: The Key to Hong Kong’s Future Economic Success

(LegCo Paper No. CB(1)649/96-97(01) and the Report issued by the Consumer Council)

At the invitation of the Chairman, Professor Edward CHEN briefed members on the Consumer Council’s study report entitled "Competition Policy: The Key to Hong Kong’s Future Economic Success" (the Report). In gist, the Report recommended the adoption of a comprehensive competition policy for Hong Kong to maintain its competitive edge. The recommendation was made against the backdrop of a structural change in Hong Kong from a manufacturing economy to a predominantly service economy, an intensely more competitive international trade environment and an increased link between trade and competition policies. In the Consumer Council’s view, a competition policy would bring about three significant advantages to business, namely, fairness, consistency and reduced regulation. Competition would benefit consumers in terms of more choices, better quality of services, reduced prices and product innovation. It would also encourage efficient management and maintain Hong Kong’s attraction as an international centre for services. International bodies, such as the World Trade Organisation, were increasingly making links between trade policy and competition policy. The adoption of a competition policy would strengthen the negotiation power of Hong Kong in the international arena. To implement a comprehensive competition policy, the Consumer Council strongly recommended the enactment of a competition law to prohibit -

1. explicit agreements between firms that were intended or had the effect of preventing , restricting or distorting competition; and
2. abuse by one or more undertakings in a dominant position that prevented, restricted or distorted competition.

Professor CHEN said that as the administrative framework, the Report recommended the establishment of an independent Competition Authority to investigate into and decide on possible breaches of the competition law and to advise the Government on competition policy. In the light of the findings of investigations, the Competition Authority might propose remedies or undertakings to the businesses concerned. The Report recommended that the Authority should have powers to require firms to cease and desist from breaches of the competition law but it was inconclusive as to whether the Authority should also have injunctive powers or powers to impose fines or award compensation to third parties. The Competition Authority should also be empowered to exempt individual trades from the restrictions of the competition policy. Such exemptions should be strictly controlled in order to be consistent and fair to all industries. Where possible, the Competition Authority should publish a block exemption to remove the need for companies to seek individual exemption. The Report also recommended that an Appeal Body be set up to hear appeals against decisions made by the Competition Authority.

The Secretary for Trade and Industry (STI) supplemented that public consultation on the Report had commenced. More than 110 public organisations and interested parties had been invited to give comments. 40 consultees had responded and half of them requested to extend the consultation period which had expired in early January 1997. The Administration was considering the request.

Dr Hon LAW Cheung-kwok expressed support for the recommendations in the Report. Hon Martin LEE and Dr Hon HUANG Chen-ya were in support of early introduction of a competition policy for Hong Kong to ensure a level playing field. They stressed that the need for consultation should not hold up the enactment of the competition law. They asked the Administration to introduce the legislative proposals as soon as practicable for enactment before the change of sovereignty.

Some members, on the other hand, queried the need for introducing a competition policy. Hon Mrs Selina CHOW was concerned about the implications of the introduction of a competition policy on small and medium businesses, whose operators were worried that such a policy might lead to increased market regulation and interfere with Hong Kong’s free market economy. The Chairman opined that enactment of a competition law might be inconsistent with the well-established laissez-faire trade policy. Hon CHAN Kam-lam said that he would support measures to enhance consumers’ interest. However, he was concerned that a competition law might be tantamount to a Bill of Rights Ordinance in the commercial arena. Should this be the case, such a law would not be conducive to free trade. Hon James TIEN stated that the World Economic Forum and International Institute for Management Development 1995 Global Competitiveness Reports had already ranked Hong Kong as one of the most competitive places in the world. As such, he called into question the merits of adopting a competition policy. Since the Consumer Council’s recommendations would have wide-ranging implications, he considered that the consultation period should be extended.

In response, Professor CHEN made the following points -

1. Domestic competition and international competitiveness were two different concepts. The international competitiveness of an economy was expressed in terms of a country’s ability to compete with other countries in attracting global direct investments. The ranking of a country on international competitiveness depended primarily on macro-economic and structural indicators. Domestic competition, on the other hand, was typically measured by the size and the number of firms in the domestic market, substitutability of like products, contestability, admissibility of industries, and consumer welfare. Hence the competitiveness of a country in the domestic and international dimensions could vary greatly.
2. A lack of domestic competition over a long period could have negative effects on a country’s international competitiveness. International bodies, like the International Monetary Fund, began to perceive problems both in particular areas of Hong Kong’s economy and in the general absence of a competition law. Hong Kong might be competitive in the international arena, but it did not diminish the need for a domestic competition policy. On the contrary, a well-designed competition policy would enhance Hong Kong’s international competitiveness.
3. It was a common misunderstanding that a competition policy was equivalent to regulation. The object of a competition policy was to restore competitive market forces by enforcing clear ground rules to prohibit anti-competitive trade practices. In fact, a competition policy could imply both deregulatory and regulatory actions. Where regulation was deemed necessary, it was not anti-market oriented.
4. While some trades might be wary of the implications of a competition policy, the Consumer Council had received many complaints about the absence of redress channels to rectify anti-competitive market practices. Many enterprises were indeed looking forward to the establishment of a Competition Authority to deal with these complaints.

Professor CHEN and Mrs CHAN WONG Shui noted members’ view on the need for consultation with the business sector on the Report.

V Briefing on Registered Designs Bill

(LegCo Paper No. CB(1)649/96-97(04))

The Deputy Secretary for Trade and Industry (DS/T&I) and the Principal Assistant Secretary for Trade and Industry (PAS/T&I) briefed members on the legislative proposal for the establishment of a new registered designs registration system for Hong Kong before 1 July 1997. They highlighted that the Sino-British Joint Liaison Group had agreed on the proposals for localising the registered designs law in Hong Kong. The Registered Designs Bill was drafted with a view to achieving the policy objectives of localisation, modernisation, compliance with international obligations and provision of a user-friendly operational system. A consultation paper on the draft Registered Designs Bill had been sent to 63 organisations for comments, including design owners and users in the relevant sectors and in the professional and academic fields. The consultation period had expired on 6 January 1997. The Administration had received 14 responses of which 12 made comments on the draft Bill. Consultees in general favoured the establishment of a registered designs registration system for Hong Kong although they had different views on the registrability of a design. The Administration was carefully examining the submissions received and would make modifications to the draft Bill where necessary.

Members note the draft Bill.

VI Copyright Bill

The Chairman welcomed the deputations and invited them to give their views on the Copyright Bill.

Meeting with KPS Retail Stores Ltd. (KPS)

(LegCo Paper No. CB(1)689/96-97(01))

Mr Robin BRIDGE briefed members on KPS’s submission. He stressed that KPS was against any restriction on parallel imports on the following grounds -

1. Parallel imports were legitimate goods made by or to the order of copyright owners overseas and imported into Hong Kong by parties other than the agent or the exclusive licensee of the copyright owner. They were not pirated goods.
2. The Law Reform Commission (LRC) Subcommittee on Copyright made recommendations on parallel imports only after a "long and hard" debate. Whilst copyright interests were well represented, no representatives of the affected industries, namely, the tourist and retail sectors, were members of the Subcommittee. The Director of Intellectual Property was misrepresenting the British position on parallel imports by claiming that the draft Bill was modelled on the UK 1988 Copyright, Designs and Patents Act because sections 27(3A) and 27(5) of the Act, which permitted parallel imports, had been omitted.
3. There was a world-wide trend towards liberalisation of parallel imports of copyright goods. Fifteen European Economic Community countries did not prohibit such goods. Singapore had also amended its copyright law to put it beyond doubt that parallel imports of all copyright materials were lawful. The legislative amendment in Singapore had benefited consumers and at the same time led to increased cinema ticket sales.
4. By injecting competition into the market, parallel imports could prevent over-inflated pricing by Hong Kong distributors.

Mr BRIDGE pointed out that KPS neither rented nor sold Chinese language video materials except those made by exclusive licensees for Hong Kong. As the exclusive licensees controlled both the cinema release and the manufacture and release of video products in the territory, it was wrong to suggest that KPS had been responsible for any of the ills claimed to be suffered by the local film industry. Local film producers should realise that they had other competitors, such as Cable TV and Star TV. KPS parallel imported only non-Chinese language video materials, the majority in English. They did so in response to customer demands as the copyright owners had failed to make their products available through exclusive licensees in the territory. Prohibition of parallel imports would restrict consumer choices. The proposed legislation might even empower distributors to take actions against the import of goods the packaging of which carried copyrights.

Meeting with HMV Hong Kong (HMV)

(LegCo Paper No. CB(1)678/96-97(01) and HMV’s presentation outline tabled at the meeting and circulated to members not present vide LegCo Paper No. CB(1)705/96-97)

Mr Philip Kung briefed members on HMV’s submission and put forward the following arguments for deregulation of parallel imports -

1. HMV fully supported the fight against piracy. However, parallel importation was fundamentally different from piracy. Parallel imports were legitimate goods made by the copyright owner in a place other than Hong Kong and subsequently imported into the territory. Royalties for these goods had been fully paid up at the country of origin before they were imported.
2. Restrictions on parallel imports artificially reduced consumer choices. It was unfair to grant exclusive import rights to local suppliers who had already demonstrated that they would not supply certain products to Hong Kong consumers and to deny Hong Kong consumers’ access to these products.
3. The rights of the exclusive licensee vis-à-vis the copyright owner and third parties were defined by commercial contracts. It was wrong to turn contractual rights into statutory rights. Doing so would interfere in the operation of free market economy and was counter-productive.
4. There were practical problems in taking actions against parallel imports as it was difficult to determine the place and the time when importation took place.

Ms Anna WU supplemented that the Customs and Excise Department had not taken any criminal actions against parallel imports since 1990. This reflected that parallel imports and pirated goods were different. The benefits of deregulating parallel imports in overseas countries were self-explanatory. The results of a survey in Singapore showed that since Singapore lifted the restrictions on parallel imports in 1994, sales on different kinds of products had gone up while prices had gone down. Parallel import of books into Australia had not jeopardised the growth of the local publishing industry. Quite the contrary, increased competition had enhanced its development.

Regarding the effects of restricting parallel imports on HMV, Mr KUNG said that as a leading international retail specialist of pre-recorded music and associated products, HMV had to maintain an active inventory of over 100,000 titles/selections in its stores at any point in time to satisfy consumer demands. For the past two years, HMV had had to source products both through local and overseas suppliers to maintain this level of wide selection for its customers. So far HMV relied on overseas sources to supply approximately 30%, i.e. about 30,000 titles, to make up for the shortfall in products made available by local suppliers. HMV also offered individual order services to its customers to source from its overseas affiliates and suppliers any title which was not available in Hong Kong from HMV or its local suppliers. It had processed a total of 4,000 such orders in 1996, 80% of which had to be imported directly from overseas. Restrictions on parallel imports would thus seriously affect HMV’s business. As an interim step towards total deregulation of parallel importation, HMV called for an amendment to the draft Copyright Bill (the draft Bill) to partially deregulate parallel importation in areas where restrictions had blocked consumers’ access to the products they demanded.

Meeting with the Hong Kong Retail Management Association (RMA)

(LegCo Paper No. CB(1)689/96-97(02)

Mr Rick BAILEY briefed members on RMA’s submission and highlighted the following salient points -

1. Hong Kong’s success was built on the free market principle. No regulation should infringe on this principle in any way. If further restrictions were placed on parallel import of legitimate products, prices might go up and the choices of films, music and many other products would be severely restricted in Hong Kong. Moreover, it was wrong to restrict the freedom of choice of Hong Kong consumers or the ability of Hong Kong retailers to anticipate and satisfy that choice.
2. It was of vital importance that Hong Kong should maintain its position as a renowned shopping centre in the world. A free and open market with diverse choices of merchandise and services at competitive prices should be maintained for the interest of Hong Kong.
3. RMA fully supported the combat against piracy and called on the Customs and Excise Department to step up enforcement actions in this regard. RMA considered that the draft Bill was not in the right direction and should therefore be opposed.

Meeting with Hong Kong, Kowloon and New Territories Motion Picture Industry Association (MPIA)

(Submission tabled and circulated to members not present vide LegCo Paper No. CB(1)705/96-97)

Mr MA Fung-kwok briefed members on MPIA’s submission. In gist, MPIA was against the decriminalisation of parallel imports. He highlighted the following points -

1. If parallel importation was decriminalised and border control measures were no longer enforceable, Hong Kong would be flooded with imported low-priced products from neighbouring countries to the detriment of copyright owners. Pirated copies might be imported into the territory under the guise of parallel imports. Although the copyright owner or the exclusive licensee could take civil actions against parallel imports, such actions would be futile if the parallel importer was a shell company. The Hong Kong movie industry was already struggling hard to survive against piracy and escalating production costs. Decriminalisation of parallel imports would strike a further blow to the industry. This would inevitably result in significant loss of revenue and jobs in the local movie production, distribution, retail and support industries.
2. Royalties mechanism was rarely instituted in the local movie industry. Under the current practice, copyright owners normally sold their rights to overseas licensees at a certain price for a certain period of time. In the absence of restrictions on parallel imports, overseas licensees could export these products to Hong Kong without paying any extra fees to Hong Kong copyright owners.
3. It was an industry-wide consensus that digital video discs (DVD) would be the future dominant format for multi-media entertainment including movies. However, the draft Bill had come short of coping with the DVD development. By decriminalising parallel importation, Hong Kong was in effect disregarding the interests of copyright owners and would be looked upon by the future global alliance of copyright owners and hardware manufacturers as a region where intellectual property was not protected and respected.

Mr MA requested the Administration to re-examine the LRC Subcommittee’s recommendations regarding rental rights for films.

Meeting with the International Federation of the Phonographic Industry (Hong Kong Group) (IFPI(HKG))

(LegCo Paper No. CB(1)689/96-97(04)

Mr Ricky FUNG briefed members on IFPI(HKG)’s submission and elaborated its opposition to decriminalisation of parallel imports as follows -

1. The reclassification of parallel importation as a civil offence would have significant implications as the Customs and Excise Department would no longer have the authority to intercept parallel imported records. Counterfeits and pirated goods might easily be disguised as parallel imports. This would have a devastating effect on the sale of popular records which usually lasted only a few weeks. Any follow-up actions taken by the copyright owner would be too late since the damage had already been done.
2. The record business in Hong Kong was no longer an agent’s business. More than 68% of records sold in Hong Kong were local productions. The local record industry relied heavily on overseas markets, especially the mainland market. To promote sales in China, a manufacturer had to sell his products at a low price. If there was insufficient protection against parallel imports, parallel importers could take advantage of the situation by parallel importing from China such products for sale in Hong Kong at a competitive price.
3. Due to keen competition in the record business, the marketing cost usually made up the major cost of a product. The low successful rate of new products necessitated a relatively large profit margin. Parallel importers enjoyed another unfair advantage over record investors in Hong Kong since they did not have to incur marketing costs nor to shoulder the risk of failure of new products.
4. The local record industry was an integral part of the Hong Kong economy. Over 12,000 employees worked in the record industry. The music and audio-visual hardware industries together accounted for 1.7% of Hong Kong’s GDP, i.e. HK$15 billion. Decriminalisation of parallel imports would affect not only the local record industry but also 27 related trades.
5. Relaxation of control over parallel importation would not necessarily bring about lower retail prices nor broaden consumer choices. Even without such relaxation, the record industry had and would continue to exhaust all commercial means to provide the widest possible catalogue to consumers at a reasonable price.

In passing, Mr FUNG expressed concern about the technological advancement in the field of digital audio/visual production and the possibility of abuse. He said that in devising any regulatory scheme in the area the interests of the local industry, consumers and investors must be fully considered.

Meeting with Hong Kong Record Merchants Association Limited (the Record Merchants Assn.)

(LegCo Paper No. CB(1)689/96-97(03)

Mr LAM Yiu briefed members on the Record Merchants Assn.’s submission and drew members’ attention to the following points -

1. The deregulation of parallel imports would lead to a sharp increase in the sale of such products in the street and to monopoly by international chain stores. Both developments would affect the local record industry and result in closure of businesses.
2. To enhance consumer choices, local record merchants had already been making an effort to introduce different types of musical products into Hong Kong.

Meeting with the Administration

Members acknowledged the merits of deregulation and liberalisation to a certain extent for the enhancement of consumer welfare, competition and free trade. They however considered it of equal importance that local investments in the production and distribution of films, sound recordings, books and computer softwares should be properly protected. The draft Bill must strike a balance between commercial and public interests. Members called on the Administration to step up enforcement actions against piracy, in particular against notorious black spots for selling pirated goods. The Administration was requested to clarify the right of exclusive licensees to take civil actions against parallel importers in breach of exclusive license agreements. Members suggested that the Administration should consider addressing the issue of parallel imports in the context of contractual rights.

Representatives of the Administration noted members’ views and suggestions. They stated that enforcement actions against pirated goods had already been strengthened. The value of seized goods in the first ten months of 1996 increased by 130% as compared with that over the whole year of 1995. The Customs and Excise Department was taking nearly daily enforcement actions in the black spots. However, there were difficulties in taking legal actions against pirated goods as some copyright owners were reluctant to co-operate in giving evidence. The draft Bill, if enacted, would provide additional legal tools to facilitate enforcement. These included, inter alia, the release of samples of seizures to copyright owners, the forfeiture provisions, additional presumption for prosecution, and clarified provisions for the use of affidavits. There was an international trend to deregulate parallel imports. In recognition of such a trend, the Administration had decided to adopt the LRC’s recommendation to decriminalise parallel importation but maintain civil sanctions. Exclusive licensees might take civil actions against parallel importers involved in parallel importation in breach of exclusive license rights.

The meeting ended at 4:30 pm.

Legislative Council Secretariat
27 February 1997