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Anti-monopoly review is not protectionism

By Guo Li/Renee Yik Chi Cheung | China Daily | Updated: 2019-05-25 09:00

Containers are organised in stacks at the Yangshan Deep Water Port, part of the Shanghai Pilot Free Trade Zone in Shanghai on Feb 13, 2017. [Photo/VCG]

In view of the emerging challenges for globalization, the rise of trade protectionism seems inevitable. "National security" also poses a challenge to globalization. As for the US-China trade frictions, they can be blamed on the trade protectionist policy of the United States.

In the field of cross-border mergers and acquisitions, too, nationalistic sentiments and rhetoric have been growing.

Anti-Monopoly Law promotes competition

China promulgated the Anti-Monopoly Law in 2008 which implements the anti-monopoly review to regulate, among other things, possible business concentrations that have or may have eliminated or restricted competition.

Western countries, especially the US, have criticized China's regulations on mergers as a protectionist tool to shield domestic industries or local economic interests. China has also been censured for relying on non-competition factors, namely industrial policy and public interests in anti-monopoly analyses and enforcement actions, to protect competitors rather than competitions.

Thomas Hemphill and George White III, of the University of Michigan-Flint, have said the language of the Anti-Monopoly Law indicates that it "will include protection of existing competitors and the effect on the national economy in addition to the effect on competition as such". In fact, many Western observers view China's national industrial policy to foster "national champions" in strategic industries as an example of protectionism.

Not surprisingly, previous merger clearance decisions have sparked concerns about how Chinese anti-monopoly authorities, the Ministry of Commerce and the State Administration for Market Regulation, use industrial policy in anti-monopoly review to pursue non-competition goals.

In 2009, the Ministry of Commerce rejected Coca-Cola's proposed acquisition of China Huiyuan Juice Group, saying the acquisition would squeeze out domestic small and medium-sized enterprises from the fruit juice market, harming the competition among, and weakening the innovation capabilities of, domestic companies.

Welfare of all stakeholders taken into account

The ministry might have taken into account the interests of other domestic businesses. The authorities were concerned about not only consumer welfare, but also the effect of the acquisition on other stakeholders, and the ministry consulted upstream fruit juice suppliers and downstream fruit juice retailers before making the decision.

But since the ministry didn't provide much information about the merging parties' market shares and concentration level in the fruit juice market, some Western observers were not satisfied with its analysis.

However, the decisions to clear mergers in the last four years-2015 to 2018-show the merger control regime in China is hardly a protectionist tool, as the anti-monopoly authorities have taken into account, in most cases, competition factors including market share, market concentration, market entry conditions, customer preferences and buyer power in the substantive competition assessments.

During the last four years, the Ministry of Commerce and the State Administration for Market Regulation have taken into account market share and/or market concentration in every case, which suggests the anti-monopoly authorities have made use of complete economic data in substantive competition analyses.

Special index to measure market concentration

In particular, the measurement of market concentration using the Herfindahl-Hirschman Index, resembling the approach of Western countries, has become more frequent. In 2015-16, the acquisition of St. Jude Medical Inc by Abbott was the only one among four cases in which the HHI was used. However, the HHI was referred to in four out of seven cases in 2017 and three out of four cases in 2018.

The Ministry of Commerce took into account other factors, too, such as innovation and technological research and development in the acquisition of Freescale Semiconductor by NXP in 2015; Monsanto by Bayer in 2018; and elimination of tight competitive relations in the acquisition of Siliconware by Advanced Semiconductor and the merger between the Dow and DuPont in 2017.

The ministry applied the same method for customer preferences in the NXP/Freescale case as well as damage to the interests of downstream customers in Abbot/St. Jude, Advanced Semiconductor/Siliconware and Bayer/Monsanto cases.

It is therefore clear that the Ministry of Commerce and the State Administration for Market Regulation have largely based their decisions on competition factors, which are often deemed appropriate by antitrust agencies in jurisdictions with mature antitrust practices and experiences such as the US and the European Union. Especially, the consideration of customers' interests is in line with one of the main objectives of the Anti-Monopoly Law.

Decision supported by competition factors

Therefore, the ministry and the market regulation administration have pursued competition, not noncompetition, goals. Even in some cases related to industrial policy, the decisions were supported by competition factors. For example, in the Nokia/Alcatel case, the ministry found that in the market of 2G and 3G standard-essential patents (SEPs) licensing, the proportion of patents would increase from 25-35 percent to 35-45 percent, thus strengthening Nokia's market presence.

The ministry also took into account the lack of countervailing power since SEPs licensing is a major barrier to accessing the downstream market, that is, manufacturing of mobile terminals and wireless communication equipment, and the merging parties as patent holders could misuse their rights by, for example, refusing licenses, overcharging licensing fees and issuing licenses discriminately, thus harming fair competition in the downstream market.

The objective of the Anti-Monopoly Law is to encompass both competition and non-competition goals. EU legal expert and lawyer Laura Parret once suggested that multiple objectives have also been attributed to the EU competition law. Industrial policy, protection of SMEs and consideration of justice, fairness and non-discrimination have been identified as non-competition goals of the EU competition law. And in the US, protection of SMEs was considered legislative intent of the antitrust policies for a long time.

Unconditional approval for majority of cases

In fact, after the implementation of the Anti-Monopoly Law 11 years ago, the Ministry of Commerce and the State Administration for Market Regulation have dealt with 2,495 cases. Among them, more than 2,400 cases were approved unconditionally. Only 39 cases were approved with conditions and two were prohibited. In other words, the majority of cases were approved unconditionally and only a few were subject to intervention by the anti-monopoly authorities.

Moreover, the Chinese government has been taking measures to further open up the economy to the outside world and create an environment for fair competition between domestic and foreign-funded enterprises.

The issuance of the Notice of the State Council on Several Measures for Expanding Opening-Up and Vigorously Using Foreign Capital in 2017, which advocates equal treatment of domestic enterprises and foreign-funded enterprises, is a move aimed at creating such an environment.

China's approach to cross-border merger and acquisition cases reflects the differences in not only the market and economic conditions, but also the policy orientation of antitrust laws in China and Western countries. The implementation of the anti-monopoly review delineates the Chinese government's earnest efforts to perfect the socialist market economy.

As such, when China's socialist market economy reaches a more developed stage, non-competition factors will have a much smaller role to play in regulations on mergers as well as in other sections of the Anti-Monopoly Law.

Guo Li is a professor at the Law School of Peking University, and Renee Yik Chi Cheung is a postgraduate student in the university.

The views don't necessarily represent those of China Daily.

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