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Economy

Angela Huyue Zhang: Who is guarding China's trust busters?

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File photo of visitors walking at Audi's exhibition booth at Auto China 2014 in Beijing in April. China said August 6, it will punish foreign car makers Audi and Chrysler as well as some 10 Japanese spare-part makers for violating the country's anti-monopoly law.   © Reuters

The National Development and Reform Commission, China's forceful economic planner and industrial regulator, has recently grabbed headlines at home and abroad as an aggressive antitrust enforcer.

     In February 2013, two of the commission's provincial units imposed $70 million in fines on well-known Chinese liquor companies Kweichow Moutai and Wuliangye Yibin.

     Last August, the commission launched an antitrust probe into local and foreign infant formula manufacturers, which resulted in a fine of $110 million shared by Abbott Laboratories, Biostime International, Danone, FrieslandCampina, Fonterra and Mead Johnson Nutrition.

     In May, the NDRC announced antitrust sanctions against high-end optical manufacturers, including Bausch & Lomb, Carl Zeiss Meditec, Essilor International, Johnson & Johnson and Nikon.

     The latest to come under the commission's investigation is the automotive industry. Daimler, Fiat Chrysler Automobiles, General Motors and Volkswagen's Audi brand are, among other things, being accused of charging too much and fixing prices at their dealer networks.

     Several common features have emerged from each of these cases that shed light on how the NDRC operates.

     First, the alleged antitrust violations in these cases all involve a practice known as minimum resale price maintenance, which is when a manufacturer restricts the amount of discretion that its dealers have to lower prices beyond a certain level.

     Second, these cases all occurred in sectors that do not seem to be concentrated in the hands of a few companies. Since the NDRC has disclosed little about the investigations and given few reasons for its decisions, it is difficult to evaluate the merit of these cases. But barring evidence of collusion, one wonders how monopolies could arise in these highly competitive industries? And if the companies lack monopoly power, how could their conduct harm competition?

     Despite these unanswered questions, many of the businesses named by the commission promised to quickly rectify matters and agreed to pay the fines. What is even more bizarre is that some of the firms are voluntarily offering to lower their wholesale prices as part of their commitments. This is very unusual in antitrust cases. When manufacturers are accused of conducting resale price maintenance, the most a trust buster can usually do is ask them to stop at once. On what basis can the agency tell companies to lower their prices as well? Doesn't that amount to a form of price intervention?

     The answer to this puzzle lies in the NDRC's history. Its predecessor was the State Planning Commission. Founded in 1952, the SPC played a crucial role in the days when the Chinese economy was centrally planned. Although the agency went through several rounds of restructuring and reorganization to become today's NDRC, its mission has remained largely the same, and it continues to use direct government intervention to solve most economic problems.

     In particular, price control and price stabilization are among its most important objectives, and these responsibilities fall on the shoulders of the NDRC's price department and its price supervision and anti-monopoly bureau. The former is in charge of regulating prices in certain sectors, whereas the latter is responsible for price supervision and antitrust enforcement.

     Since the early 1980s, both departments have seen their power gradually decline as China embarked on market reform and price liberalization. The most recent example is the reform plan announced at last year's Third Plenum of the 18th Congress of the Communist Party of China that further diminished the NDRC's power.

     With market forces replacing the NDRC's traditional ability to enforce prices, it could be seeing antitrust enforcement as a convenient substitute for its loss of control over policy, the lifeblood of any government bureaucracy.

     Indeed, China's 6-year-old anti-monopoly law seems to have become a powerful tool for the NDRC to fulfill its original mission of "price control" without being seen to contradict free market policies.

     As recent cases have illustrated, the NDRC has gone beyond the scope of its antitrust investigations by pressuring manufacturers to reduce the prices of their products in China. This tactic has apparently proven successful, as companies tend to bow to government pressure for fear of hefty antitrust fines and harsh remedies. They know too well that it is not cost-effective to challenge the government's actions in court, given the low success rate of administrative litigation and the potential for state retaliation. As a consequence, judicial supervision was completely absent in these cases.

     This final point is particularly worrying. Without an independent and effective judiciary keeping antitrust enforcement agencies on their toes, public enforcement is bound to be arbitrary and opportunistic. These cases send an alarming signal of how badly checks and balances are needed in China's antitrust enforcement. Indeed, they raise the fundamental question so famously posed by the Roman poet Juvenal: "Who will guard the guardians themselves?"

Angela Huyue Zhang is a lecturer in competition law and trade at King's College London. She is the author of a forthcoming article in the Cornell International Law Journal, "Bureaucratic Politics and China's Anti-Monopoly Law" (http://ssrn.com/abstract=2391187)

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