Anti-Trust & Unfair

Our shenzhen lawyer is frequently engaged in business transactions. More than twelve years have elapsed since China began its efforts to enact a comprehensive antitrust law. Today, drafts of the law are still being debated, with no real signs of enactment. Such a protracted legislative process is highly unusual in China, and can only be explained by the controversy the draft law generates. After a brief review of China’s current competition policy and the new draft antitrust law, this paper discusses the fundamental issues in China’s economy that give rise to the challenges facing China’s antitrust policymakers in enacting the new antitrust law. These issues include the role of state-owned enterprises, perceived excessive competition in China’s economy, mergers and acquisitions by foreign companies, the treatment of administrative monopolies, and the enforcement of the antitrust law. While those controversies create significant policy issues for China, they do not constitute valid objections to the enactment of the new antitrust law. Meanwhile, it will be important for China to recognize that the new antitrust law alone will not be sufficient to fully realize its goal of promoting competition in its economy; other reforms will be necessary as well. China will be better off by moving swiftly to enact the new antitrust law, while keeping the momentum to engage in those other reforms.

The anticipated enactment of the PRC Antimonopoly Law will be a major milestone in China's legal development. The real drama, however, should unfold as China's central government seeks to implement the new law.

China's antitrust ambitions

The endgame to the decade-long drafting of China's Antimonopoly Law may finally be at hand. The Ministry of Commerce (MOFCOM) submitted a final draft to the State Council earlier this year, and the State Council is reportedly vetting the law for adoption by the National People's Congress (NPC). Chinese observers now predict the law's enactment in the near future, possibly in 2006. (Past predictions, however, have been wrong.) Though the law has been heralded as a new "economic constitution," its enactment is just a first step toward a credible competition policy. The course of Chinese antitrust law will be set through implementation.

Competition laws in the United States, Europe, and Japan focus on agreements or coordinated activities between companies that restrain competition, such as price-fixing cartels; unilateral efforts by firms with "market power" to exclude competitors; and concentrations, such as mergers, acquisitions, and joint ventures, with potential anticompetitive effects. While the Anti-Unfair Competition Law, Price Law, Foreign Trade Law, and many other Chinese laws and regulations touch on some of these issues, existing measures are not enforced as a coherent competition policy. Proposals for a comprehensive Antimonopoly Law surfaced in 1987, and drafters from various agencies and academic institutions began drafting in 1994. The resulting draft reflects divergent, often inconsistent goals. The same motives will color the final decisions of the State Council and NPC and guide the law's implementation.

Protecting competition vs. protecting competitors

US and European competition policy aims to safeguard the competitive process for the good of consumers. Consumers benefit when competing firms cut prices, improve efficiency, and innovate. Antitrust law is not supposed to make marketplace life easy, particularly for the inefficient. One US federal judge noted that "inefficiency is precisely what the market aims to weed out," bluntly adding that US antitrust law "contemplates some roadkill on the turnpike to Efficiencyville." Although Washington and Brussels sometimes disagree over the treatment of efficiency and market structure in antitrust analysis, both jurisdictions ultimately favor consumers. Accordingly, the stated goals of the July 2004 draft PRC Antimonopoly Law include "protecting the legitimate rights and interests of consumers."

China's most conspicuous market leaders—and hence most promising targets for antitrust enforcement—are foreign.But China's draft also provides grounds for protecting competitors at the expense of consumers. "Public interest" exceptions perforate the draft law's restraints on anticompetitive conduct. Public interest exceptions can play a valid role in the regulatory schemes of many jurisdictions, such as South Korea, that blend competition rules with industrial policy, but these loopholes may also be exploited to prevent inefficient local companies from deservedly winding up as "roadkill."

A shield against foreign competitors

Although the draft Antimonopoly Law does not distinguish foreign and domestic firms, its initial targets are likely to be foreign firms with prominent positions in Chinese markets. In March 2004, the State Administration of Industry and Commerce (SAIC) released a controversial report entitled Competition-Restricting Behavior of Multinational Companies in China and Possible Countermeasures. It alleged that many leading multinationals exploit financial and technological advantages to dominate markets, suppress competition, and injure competitors and consumers. (Several of the listed "anticompetitive" practices, however, would not necessarily violate US or European Community [EC] rules.) Although Chinese officials insist that the Antimonopoly Law will be enforced even-handedly, the fact remains that many of China's most conspicuous market leaders—and hence most promising targets for antitrust enforcement—are foreign.

A sword against internal protectionism

At the same time, the central government aims to brandish the Antimonopoly Law against internal protectionism. Government entities at the national, provincial, and local levels routinely shield favored companies from competitors, adverse actions by other government agencies, and competitors in neighboring provinces or municipalities.

The draft Antimonopoly Law thus targets administrative monopoly—the abuse of power for anticompetitive ends. It prohibits government entities from compelling purchases from designated vendors, restricting "proper business activities" or entry into markets, directing anticompetitive conduct by third parties, or issuing measures that "exclude or restrict competition" or impede the establishment of a "united and orderly market system." The enforcement agency can order the cessation of anticompetitive administrative conduct, recommend the repeal of anticompetitive rules, or report matters to a "competent" authority (such as the State Council). Collusion between companies and officialdom is deeply entrenched in China, and the central government's past efforts to eliminate it yielded only tepid results. Rooting out administrative monopoly may prove to be the most formidable challenge facing PRC competition authorities.

Recent drafts

The PRC government has not published official drafts of the proposed law, but an unofficial draft dated July 2004 circulated widely last year. A new draft dated March 2005 surfaced recently; it reflects targeted revisions to the July 2004 draft. Though the final version may differ in places, the March 2005 draft reveals the probable form and scope of the final law.

Most provisions of the draft derive from EC competition rules or Germany's Act Against Restraints on Competition. Europe's agency-driven model may be more compatible with China's civil law system than the judge-driven US approach. The law covers domestic conduct plus activities outside China that "restrict or affect market competition" within China.

  • Monopoly agreements
    The draft prohibits all agreements and coordination among firms with the purpose or effect of eliminating or restricting competition. Parties may, however, apply to exempt specific arrangements from this broad prohibition. Authorities may exempt activities that improve product quality or technology, enhance efficiency, reduce cost, or develop new products and markets; respond to economic crises; or boost the efficiency and competitiveness of small and medium-sized companies. Authorities may also exempt other activities that promote national and public interests. European rules allow similar exemptions. Unlike the July 2004 draft, the March 2005 draft requires that exempted agreements benefit consumers, that restrictive terms of exempted agreements be indispensable to their beneficial goals, and that exempted agreements not eliminate all competition within affected markets. Certain blatantly anticompetitive agreements (such as pacts to fix prices, divide markets, or rig bids) cannot be exempted. These revisions, derived from EC rules, may limit the anticompetitive effects of exemptions.
  • Abuses of dominant market positions
    Again following European practice, the draft law prohibits "abusive" practices by "dominant" firms. Listed abuses resemble foreign concepts of predatory pricing, discrimination, refusal to deal, and exclusive dealing arrangements. The draft defines "dominance" as the capability to control prices or eliminate or restrict competition in a given market and outlines tests for gauging dominance based on German law.
  • Merger review
    The draft tracks the basic US and EC procedures for assessing the competitive effects of mergers, acquisitions, and joint ventures. The rules cover both domestic and wholly offshore transactions. Chinese authorities must be notified of proposed transactions that trigger specified thresholds: where "the market share of any transaction party exceeds 20 percent in China" or "the consolidation will lead to the market share of any party in China exceeding 25 percent"; where the transaction value exceeds ¥200 million ($24 million, limited to domestic transactions under the March 2005 draft); or where the combined worldwide assets or sales of the parties exceed ¥3 billion ($364 million), at least one party has assets or annual sales in China exceeding ¥1.5 billion ($192 million), and the transaction value exceeds ¥100 million ($12 million). Parties must wait 45 days after filing before consummating a transaction. The authorities may extend the investigation period for 90 days while deciding whether to approve or block the transaction or may allow it to proceed without action. In certain cases, the investigation may last 180 days. Transactions that create or strengthen a dominant market position or eliminate or restrict competition should not be approved, but such deals may be permitted if they benefit economic development and public interests.
  • Administrative enforcement
    The draft empowers enforcement authorities to investigate violations and conduct hearings as necessary. Investigated parties must receive "sufficient" opportunity to advance arguments and evidence, and the authorities must accept their positions if proven to be "justified." Aggrieved parties may request reconsideration or challenge decisions in court. Proposed penalties for violations include fines of ¥100,000 to ¥100 million (about $12,000-$12 million), the invalidation of agreements concluded in violation of the law, and the unwinding of anticompetitive mergers. The March 2005 draft also allows fines equaling 10 percent of the offender's annual sales from relevant markets.
  • Private litigation
    The draft allows persons injured by violations of the Antimonopoly Law to bring private actions in a Chinese court to recover "compensatory damages," plus legal expenses. In a recent significant case, Colgate-Palmolive Co. prevailed in a Shanghai court on claims that Procter and Gamble Co. (P&G) violated Chinese advertising rules with advertisements comparing Colgate and Crest tooth whitening products, even though P&G defeated similar claims under US law in US courts. The Antimonopoly Law may similarly open Chinese courts to the litigation of worldwide antitrust disputes between multinational companies. Chinese courts may be ill-prepared for antitrust issues, which often vex senior US judges.
  • Intellectual property
    The interface between intellectual property (IP) and competition policy is extremely controversial in other jurisdictions. Chinese actions against "dominant" foreign firms may raise cutting-edge issues of IP licensing (and refusals to license), patent pools, and mergers among IP holders. The SAIC report condemned foreign firms' refusals to license patents or deal with competitors. The draft Antimonopoly Law provides little guidance; it cryptically states that it "does not apply" to the "exercise of legal rights" under China's IP laws but does apply to "abuses of intellectual property rights" in violation of the Antimonopoly Law.

Convergence with foreign practices?

Encouragingly, successive drafts have steadily imported additional foreign antitrust concepts and shed untenable provisions.

The draft law—like most foreign competition laws—hinges on abstract concepts like "market," "dominance," and "exclusion." Foreign courts and enforcement agencies turn to advanced economic theories to define these terms and develop elaborate doctrines to apply them. Moreover, sound competition policy is a moving target. Former Deputy US Attorney General William Baxter suggested that competition policy be "based on whatever it is we know at any particular moment about the economics of industrial organization." Antitrust law keeps up with economic theory through reinterpretation of laws and revision of regulations—often without legislative action.

For example, market definition is the first step in most antitrust inquiries. Many US and EC competition rules focus on the dangers of market power: the capability to profitably raise prices, reduce output or quality, diminish innovation, or otherwise influence the "parameters of competition" without discipline by competitors (which may win customers with better deals) or consumers (which may turn to substitute products or alternative suppliers). The legality of many business practices under US and EC rules depends on the market power of the firms involved.

Market power, in turn, depends on how the relevant market is defined. US and EC rules focus on "economically meaningful" markets—groups of products manufactured or sold in a given area that might be subject to the exercise of market power. Many jurisdictions use similar economic methods to identify the smallest relevant combination of products and areas that could plausibly be subject to the exercise of market power. The draft PRC law defines "market" as a geographic area where given products compete. This captures the product and geographic dimensions, but remains silent on market power. Chinese authorities might embrace established methods for defining "economically meaningful" markets. More intuitive or political approaches, however, might lead authorities to define smaller markets. Smaller markets make it easier to show "dominance," and many restrictions in the draft law apply only to dominant firms.

The Chinese draft omits many key elements of foreign antitrust doctrines. For example, the draft confronts "predatory pricing" by barring dominant firms from setting "unfair or competition-restricting low prices" to "exclude or injure competitors." To prevail under predatory pricing claims under US law, a plaintiff must prove that the predator firm charges prices below "an appropriate measure" of its actual costs with a "reasonable prospect" or "dangerous probability" of recouping its investment in below-cost prices. It is unclear whether Chinese authorities will read similar elements into the Antimonopoly Law.

The draft also incorporates some disfavored practices. For example, it requires notification of mergers based, in part, on the participants' market shares. Triggers based on market share are problematic, because defining relevant markets is subjective and complex and transaction parties often lack accurate data. Although a few jurisdictions (including Germany) use market-share-based triggers, most jurisdictions (including the United States, European Community, and Japan) use objective triggers based on assets or sales.

Other provisions are more difficult to square with modern antitrust practices. For example, the draft bars dominant firms from charging "monopolistically high prices." US and EC competition rules generally permit firms (even dominant ones) to maximize profits as long as they do not resort to prohibited methods of competition. The PRC prohibition may derive from the Price Law, which prohibits "exorbitant profits" made "in violation" of other laws or regulations. This blunt rule against monopolistic pricing might cow leading firms into concessions on price or other terms.

Moreover, conducting antitrust inquiries in China will be extraordinarily difficult. Sound antitrust analysis requires reliable data about market dynamics; bad data yield bad results. Chronic unreliability of official statistics, spotty accounting practices, fragmentation into local or regional markets, and poor cooperation at local levels may frustrate efforts to obtain useable market data. Moreover, antitrust enforcement demands enormous human resources—particularly industrial economists and attorneys with antitrust expertise. The US Federal Trade Commission and the Antitrust Division of the US Department of Justice together employ more than 130 industrial economists devoted to antitrust analysis. Although Chinese students and scholars are flocking to study antitrust law, China may be unable to muster enough qualified personnel to enforce the new law. As a top shenzhen law firm, we sincerely hope you consult us on any questions you have.

Competing agencies

Ultimately, the convergence of Chinese competition policy with international practice will depend on the competence and political stature of the enforcement authorities. In most leading jurisdictions, the meat of competition policy lies in judicial precedent and agency practice rather than in legislation. China's legal system endows PRC agencies with even greater discretion than their foreign counterparts. Chinese statutes typically entail broad statements of purpose and imprecise rules. Bureaucrats have great leeway to interpret laws through formal regulations, internal rules, and case-by-case judgments. China lacks a strong tradition of judicial review, and Chinese judges are loath to second-guess agency interpretations of complex laws. In many respects, agency implementation of new antitrust rules will matter more than the legislative process.

It remains to be seen, however, which authorities will be charged with enforcing the new Antimonopoly Law. One proposal designates different agencies to enforce different provisions. SAIC, which currently enforces the Anti-Unfair Competition Law, would investigate abuses of dominant market positions. The National Development and Reform Commission (NDRC), which administers the Price Law, would police bid-rigging and anticompetitive agreements. MOFCOM, now responsible for China's pilot merger review program under the 2003 Provisional Regulations on Foreign Investors Merging with or Acquiring Domestic Companies, would review mergers and tackle administrative monopoly (see the CBR, May-June 2004, p.60). This harnesses the existing agencies' capabilities, but their conflicting agendas and constituencies might compromise competition policy.

Some drafters thus advocate a new ministry-level "Antimonopoly Authority" answering directly to the State Council. Though a new agency might be more independent, its political clout would be in doubt. The March 2005 draft designates "the competent anti-monopoly agency under the State Council" to enforce the whole law; the July 2004 draft charges MOFCOM with creating a new agency.

The question remains open, and MOFCOM and SAIC are jockeying for antitrust leadership. Even if the final draft names a single enforcement agency, the turf war could persist. If the Anti-Unfair Competition Law, the Price Law, and the Interim Price Monopoly Rules all survive the enactment of the Antimonopoly Law intact, different agencies may even seek to regulate the same conduct using different standards under different laws.

Chinese competition policy and the WTO

World Trade Organization (WTO) rules generally do not govern domestic competition policies. But discriminatory enforcement of Chinese antitrust laws might, in certain cases, violate China's WTO accession commitment to extend national treatment to "foreign individuals and enterprises and foreign-funded enterprises" with respect to "the conditions under which their goods are produced, marketed or sold, in the domestic market and for export."

PRC competition policy may yet emerge as a scalpel for removing truly anticompetitive practices, a cudgel for threatening competitors of favored firms, a gaping sieve that fails to catch anticompetitive conduct, or all three.WTO rules also permit challenges to policies that violate no specific WTO obligation but nevertheless "nullify or impair" the benefits of the WTO to other countries. In 1998, a WTO panel rejected US claims that Japanese administrative measures nullified and impaired US rights by facilitating the exclusion of Eastman Kodak Co. from Japan's film market. The panel confirmed, however, that nullification and impairment claims may arise from domestic industrial and economic policies, including measures taken by competition authorities. If China's antitrust policies block hard-won access to China's domestic markets, WTO proceedings could ensue.

Scalpel, cudgel, or sieve?

The United States and Europe took decades to develop coherent competition rules, and China cannot be expected to do so overnight.

PRC competition policy may yet emerge as a scalpel for removing truly anticompetitive practices, a cudgel for threatening competitors of favored firms, a gaping sieve that fails to catch anticompetitive conduct, or all three. It is too soon to tell. At this stage, foreign firms active in China should begin assessing their own business practices (and those of their competitors) in anticipation of the Antimonopoly Law's enactment. Conduct barred by foreign competition rules may eventually be actionable under the Antimonopoly Law. Enforcement may depend more on the context—the industry, locale, the affected parties, and their political sponsors—than on the literal antitrust rules. Capricious enforcement and unclear rules will chill competition, undermining its benefits to China's consumers. In the end, the credibility and effect of Chinese antitrust law will depend on the choices made by China's fledgling antitrust authorities.

China has come a long way since the drafting process of the AML began in 1994. Compared with China’s current antitrust laws, the draft AML made significant progress in terms of comprehensiveness, clarity, and consistency with economic principles. Despite the progress, China’s antitrust policymakers still face significant challenges in reforming the country’s competition policies. Those challenges implicate many of the most fundamental issues arising from China’s transformation from a centrally-planned economy to a market economy. The resolution of those issues, however, needs not precede the adoption of the new AML. Meanwhile, while the AML will be an important tool to carry out China’s competition policy reforms, it is not the only one. Other reforms, such as SOE reforms, market entry reforms, constitutional and government structure reforms, and legal reforms, to name a few, will be indispensable to China’s goal of promoting competition in its economy. In light of thecomplexity of the issues in China’s competition policy reforms, it will be important for China’s antitrust policymakers to not expect the AML to cure all evils in one swoop. Rather, China will be better served to take an incremental approach and enact an AML that is tailored to China’s current realities, while keeping the momentum to engage in other reforms necessary to fully implement China’s competition policy goals.

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