Subcommittee on Courts and Competition Policy
THE IMPACT OF CHINA’S ANTITRUST LAW
AND OTHER COMPETITION POLICIES
ON U.S. COMPANIES
Written Testimony of Susan Beth Farmer
Professor of Law
Pennsylvania State University
Dickinson Law School
2237 Rayburn House Office Building
The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy ... have had a good deal more to do than the syllogism in determining the rules by which men should be governed. The law embodies the story of a nation's development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics.
1. The Chinese Anti-Monopoly Law (the AML) concerns the same categories of business conduct as the American Sherman and Clayton Acts: horizontal cartels, anticompetitive mergers, monopolization and unreasonable restraints on distribution. Unlike the situation in the U.S., three government agencies are responsible for enforcing separate provisions of the AML. Also unlike American antitrust policy, the Chinese law explicitly incorporates other, non-competition factors into the analysis.
3. American antitrust law prohibits monopolization. The AML prohibits abuse of dominant market positions and “monopoly agreements” (market power is not a prerequisite). These offenses may be defined so broadly in regulations that they limit the ability of firms to make independent decisions, for example choosing their business partners, under the first provision, or prohibit purely parallel behavior under the latter. The Abuse of Dominance regulations also appear to include a non-competition factor into the analysis, requiring consideration of the “impact of relevant actions on the economic operation efficiency, social public interests and economic development.”[5 The Chinese agencies have not yet brought cases charging abuse of dominance and the private cases to date have not involved American firms. Further experience is needed to know whether the application of Chinese competition law in these areas is consistent with mainstream analysis.
4. Even after decades of liberalization and privatization, thousands of State Owned Enterprises (SOEs) may account for as much as half the economy. These Chinese firms include traditional utilities as well as industrial sectors of the economy. Although SOEs meet the definition of “business operators” under the AML, they may be subject to different standards and sectoral regulations, even if they possess a dominant share of the market.
BACKGROUND AND STRUCTURE OF THE CHINESE COMPETITION LAW
Globally, competition laws have been developing at a rapid pace over the past several decades, supported by technical assistance and recommendations from a diverse collection of organizations including the OECD, the United Nations Conference on Trade and Development (UNCTAD) and the International Competition Network (ICN). China adopted the Anti-Monopoly Law (AML), its first comprehensive antitrust law of general application in 2007, and it became effective on August 1, 2008.. It is part of important legal reforms that began as early as the “reform and opening up” of 1978, and implementation of the “socialist market economy” in 1992..
Antitrust law comprises distinct types of trade restraints including horizontal agreements, both hard core cartels and other procompetitive price and non-price cooperation agreements; vertical price and non-price distribution restraints, including resale price maintenance and tying arrangements; monopolization; and mergers. Overall, the touchstone of antitrust law is the protection of consumer welfare and promotion of competition, but not special deference for particular competitors.
It is unsurprising that global competition laws diverge in substance and process, analysis and fundamental approach to a greater or lesser degree. The AML follows approach of the majority of antitrust laws, dealing separately with agreements in restraint of trade, monopolization, and mergers. The prohibitions of anticompetitive agreements and monopolization borrow heavily from the language of Articles 101 and 102 of the European Union treaty, with important Chinese characteristics. There are special provisions covering State Owned Enterprises and Administrative Monopolies, both of which are especially relevant in the Chinese economy. Intellectual property rights are addressed specifically. The American standards on pre-merger notification and substantive analysis have been influential worldwide, and they are clearly the ancestor of the Chinese merger law.
However, AML Articles 1 and 4 diverge from the traditional model of antitrust analysis that is based solely on competition principles. These provisions suggest that interpretation and application of the Chinese antitrust law may differ in some important respects from American standards. Article 1 provides that “[t]his law is enacted for the purpose of preventing and curbing monopolistic conduct, protecting fair market conditions, enhancing economic efficiency, maintaining the consumer interests and the public interests, and promoting the healthy development of socialist market economy.” Article 4 empowers the State to promulgate “and implement competition rules suitable for the socialist market economy, perfect the macro control, and improve a united, open, competitive and well-ordered market system.”
Since 2008, three separate government agencies have been established and assigned responsibility for individual antitrust issues under the AML: the Ministry of Commerce, Anti-Monopoly Bureau (MOFCOM), the State Administration for Industry and Commerce (SAIC), and the National Development and Reform Commission (NDRC). MOFCOM is responsible for reviewing proposed mergers, referred to as “concentrations” in the AML and enforcing the antimerger articles of the law. SAIC has responsibility for enforcing the prohibitions against abuse of dominant positions, monopoly agreements and anti-administrative monopoly regulation. The NRDC is responsible for price agreements and has issued regulations on anti-pricing monopoly regulation. These categories are not airtight, so it is important that the regulations are consistent and applied transparently.
The agencies have been busy drafting and adopting rules and regulations, reviewing mergers, including transactions involving multinational firms, and rendering decisions in the nearly two years since the law became operational. Some of the proposed regulations have invited comments from interested parties, including the American legal experts testifying today, and the ABA Antitrust Law and International Law Sections and the American Chamber of Commerce - People’s Republic of China (AmCham) have provided extensive analysis and recommendations that have been reflected in some revised regulations.
Most recently, SAIC disseminated three regulations on May 25, 2010, concerning monopoly agreements, abuse of a dominant market position and abuse of administrative powers. Comments were invited and provided by the ABA Sections of Antitrust Law and International Law, among other parties. These documents were revisions of earlier drafts and reflect some of the previous recommendations. On July 5, 2010, MOFCOM released a set of provisional rules concerning divestitures in merger cases, but did not seek comments at this stage. The openness of the Chinese enforcement agencies to considering views and recommendations of international competition experts is salutary. International benchmarking and promulgation of recommended practices have become features of effective antitrust enforcement in this era of global competition. Much of the networking now occurs in organizations such as the International Competition Network, but there is an important place for bilateral consultation and sharing of expertise among agencies and with non-governmental advisors. Future consultation on these and other draft regulations should be encouraged and should involve a variety of experts. Ultimately, clear rules based on sound economic principles will benefit the agencies enforcing the law, businesses seeking to comply, and the ultimate consumers. Beyond agency regulation, investigation and enforcement, Chinese courts have rendered a number of decisions in private actions under the dominance articles of the AML, none involving U.S. businesses.
The trend towards a market economy in China carries the promise of continuing harmonization with modern antitrust analysis, but the AML’s application of non-economic factors, undefined national security considerations in merger review, and potential special treatment of SOEs indicate that there may be some important divergences. American businesses operating in China are subject to the Chinese antitrust law for the “conduct of economic activities within the territory of the People’s Republic of China” and for extraterritorial activities that have “the effect of eliminating or restricting competition on the domestic market of China.”. Indeed, American firms that meet the threshold turnover in China are subject to the mandatory pre-merger notification requirements for transactions that may, or may not, have a significant impact in China.
The SAIC Regulations on the Prohibition of the Abuse of Dominant market Positions (draft for comments, May 25, 2010), article 8, may have incorporated one such non-economic consideration into the list of justifications for firms charged with abusing a dominant market position. These listed factors include competitive effects and business justifications (both traditional economic considerations) but also the effect on “social public interests and economic development.” This provision is in accord with the AML legislative purposes, but is not generally within the mainstream of modern antitrust analysis.
2. MERGER REGULATIONS AND DECISIONS
The prohibited merger of Coca Cola / China Huiyuan Juice Group is an early but instructive example of the merger control process. Huiyuan, the Chinese target firm, was founded in 1992, in Shandong Province and, by the date of the proposed transaction, had a national distribution network. It was the largest privately owned juice-producer in China, selling juice, water, tea, dairy and nectar drinks. The acquirer, Coca Cola had marketed carbonated soft drinks in China since 1976, and Minute Maid juice since 2007. The proposed transaction was a $2.4 billion all cash offer, made in 2008. The reaction of Chinese netizens to the proposed acquisition was strongly negative. A Sina.com poll found that 80% of 229,000 responders voted against the proposed merger because foreign firms should not take over Chinese “pillar brands.”
The first step in merger analysis, both in the United States and under the AML, is a determination of the product and geographic markets. The firms had less than 10% of a hypothetical market that included “all beverages.” Huiyuan was the largest juice firm in China, with under 46% of the 100% pure juice market. If the merger had been approved, the merged firm would have possessed approximately 37% of a market defined as “juice drinks,” but only 18% of a market defined as “carbonated soft drinks.” Coke itself had 16.3% of “carbonated soft drink” market premerger, less than the 17.9% market share of the largest firm in the market, Groupe Danone.
The parties to the transaction notified MOFCOM under the pre-merger notification requirement and the review proceeded through a second stage review, which stated that the investigation was proceeding under AML and not the foreign M&A law. On April 18, 2009, MOFCOM prohibited the transaction and published a brief analysis finding that there was a threat to competition, which was not offset by any justification in the AML. The decision does not provide a detailed economic analysis of the product market, defined as “fruit juice.” The threatened anticompetitive harm, according to the decision, was Coke’s power to use its dominance in the carbonated soda market to limit competition in the juice market, resulting in higher prices and fewer choices for consumers, a monopoly leveraging theory. In an official statement, the agency stated: “If the acquisition went into effect, Coca-Cola was very likely to reach a dominant position in the domestic market and consumers may have had to accept a higher price fixed by the company as they would not have much choice.” Additionally, the decision found that power of the brands in the transaction would raise barriers to entry and threaten small and medium juice firms. The Foreign Ministry rejected concerns that the decision was based on national protectionism. The case raises several issues not yet clearly answered under the AML and the merger regulations: did the transaction implicate national security? Does acquisition of a famous domestic brand threaten economic security?
3AML Art. 31.
4Unlawful monopolization requires more than merely a large share of a market. The elements of the offense are (1) monopoly power and (2) predatory or anticompetitive conduct. Sherman Act §1 also prohibits horizontal and vertical conspiracies and agreements in restraint of trade, but discussion of those agreements is beyond the scope of this statement 5Regulations on the Prohibition of the Abuse of Dominant Market Positions by Industrial & Commercial Administration Authorities (Draft for Comments) (May 25, 2010 (unofficial translation by Freshfields Bruckhaus Deringer LLP).
6See Joel R. Samuels, “Tain’t What You Do”: Effect of China’s Proposed Anti-Monopoly Law on State Owned Enterprises, 26 Penn State Int’l L. Rev. 169 (2007).
11AML Art. 2.
12Regulations on the Prohibition of the Abuse of Dominant Market Positions by Industrial & Commercial Administration Authorities (Draft for Comments) (May 25, 2010)(translation by Freshfields Bruckhaus Deringer).
14Id. The conditional approvals were InBev/Anheuser Busch, Mitsubishi Rayon/Lucite, Pfizer/Wyeth, GM/Delphi, and Sanyo/Panasonic.
18This is in accord with the recent Supreme Court decision in Illinois Tool Works, Inc. v. Independent. Ink, Inc., 129 U.S. 1109 (2006). Although the case concerned a tying arrangement and not a monopoly, the issue was whether market power should be presumed when a product is patented. The Court rejected the presumption of power and held that proof of power was required.
19For brief summaries, see Kristina Sepetys and Alan Cox, Intellectual Property Rights Protectionin China: Trends in Litigation and Economic Damages, (NERA 2009), Righard S. Gruner, Intellectual Property in the Four Chinas, 37 Int’l Law News (ABA Section of Int’l Law, Spring 2008).