Foreign direct investment, trade, and China's competition laws.

• Author: Blodgett, Mark S.

"Whether a cat is black or white makes no difference. As long as it catches mice, it is a good cat." Deng Xiaoping

1. INTRODUCTION

   The People's Republic of China, or the PRC, known more widely simply as China, holds nearly one-sixth of the world's population. It possesses one of the fastest growing economies in the world. In 2007, China experienced a growth rate of 11.4%. (1) As a result of its strong economy and growing population, China has the ability to greatly influence the global economy. It is not surprising, therefore, that the newly adopted Chinese Anti-Monopoly Law, or AML, has been the subject of much interest, discussion, and debate. The legislation, which became effective August 1, 2008, has a variety of purposes: to safeguard competition in China; to protect the Chinese economy against monopolistic conduct; to improve economic efficiency; and, perhaps most importantly from the Chinese perspective, to promote the healthy development of its "socialist market economy." (2)

   Minister of the National Development and Reform Commission, Ma Kai, has underscored the contextual importance of China's transformation and transition in the development of the AML. The Minister noted on July 12, 2005, that China had essentially completed the transition to a socialist market economy from a highly centralized planned economy "after 26 years' endeavor on reform." (3) Minister Ma asserted that China had successfully established the fundamental basis of an economic system in which public ownership of the economy plays the "leading role and co-exists and shares opportunities with the economy in various other ownerships." (4) Indeed, by the end of 2004, more than fifty percent of the nearly 3,000 state-owned or state-controlled large major enterprises had turned into stock-sharing (so-called joint stock) companies. (5) As an indication of the pervasiveness of market forces in the "new Chinese market," the private sector now provides "four-fifths of new job opportunities and generate[s] one-third of Chinese GDP." (6) In this context, the drive for both foreign direct investment and foreign trade--key aspects of the Chinese economy that would rely heavily on the proper functioning of a truly competitive market--occupy unique positions of importance.

   The Chinese AML was drafted within the context of three principal international concerns relating to the restrictive or monopolistic nature of competition within the Chinese market: regional monopolies, enjoying local or regional protection; certain sectoral monopolies by established Chinese firms and state-owned enterprises (SOEs), termed administrative monopolies; and the perception of significant abuse of their dominant positions by some multinationals operating within the Chinese market. (7)

   While the legislation represents yet another significant step towards China's transition to a full market economy and away from one that is centrally planned, (8) many commentators have expressed concern over the vague and inefficient mechanics of the proposed legislation. (9) One specific concern is that China will reserve to itself the ability to review any transaction affecting its "national security," which may provide China with unreasonable control over multinationals operating in the Chinese market.

   This article will analyze several of the concerns raised by the new legislation. In order to accomplish this purpose, the article will first discuss the history and progression of the legislation, beginning with the circumstances that led to initial discussions on the issue which began as early as 1994. Information on the background of the legislation from a comparative systemic viewpoint--that is, from the standpoint of Poland, itself a "transition economy"--will be offered. The article will next review several of the most important provisions of the new law and will discuss similarities and differences between the final draft legislation and the competition laws of other nations. Finally, the article will conclude with an analysis of why the legislation may prove unworkable for China in the long run in the global business environment without significant refinement or amendment by raising several of the persistent concerns raised by its implementation.

2. CHINA 1N TRANSITION--THE CONTEXT

   In 1978, Chinese President Deng Xiaoping began a series of initiatives in order to transform China's economy from a traditional command-and-control economy into China's version of a "market economy," later termed a "socialist market economy." In fact, the Chinese Constitution itself was amended in 1988 and 1999 to incorporate the concept of a "socialist market economy," rather than one based solely on state central planning. (10) The initiatives carried out were a part of a pursuit of Four Modernizations in the areas of industry, agriculture, science and technology, and the military. (11) During this transition period, China became more and more reliant on international trade and foreign investment for its growth. Professor Mark Williams has noted:

   The expansion of China's participation in international trade has been one of the most outstanding features of the country's economic development. Chinese exports rose on average 5.7 percent in the 1980s, 12.4 percent in the 1990s, and 20.3 percent between 2000 and 2003. By 2003, China's exports growth rate was seven times higher than the export growth rate recorded by the world as a whole. Foreign direct investment has also soared, and currently over a billion dollars in FDI are invested in China each week. (12) With the development and growth in international trade and international investment, China recognized a need to ensure that its domestic market would be free from price fixing, monopolization, and the effects of invidious agreements between suppliers and/or competitors that restricted competition. There was also a strong perception that China needed to curtail foreign economic dominance and to transform poorly performing state-owned-enterprises (SOEs) into fully-functioning private enterprises. Attorney Stephen Harris noted: "These policies and many subsequent structural reforms have been pursued in an avowed effort to transform China's centrally planned economy, dominated by state-owned-enterprises, to a system that embodies free market characteristics but retains certain socialist attributes." (13) An early attempt at reform was the enactment of the Enterprise Act of 1988. This law promised that factories would no longer be able to depend on state subsidies and state support and would face the real prospect of "bankruptcy if they failed to adapt to market competition." (14) This law, seen as revolutionary in its time, was described by Zhang Yanning, Deputy Minister of the State Commission for Restructuring the Economy, as moving away from direct control of central government departments or authorities over industries toward a system in which "the state regulates the market, which in turn guides the enterprises," in large part by making managers responsible for profits and losses. (15) However, the effect of this law was problematic. Harris notes that "it [was] broadly agreed that entrenched government monopolies and local and regional protectionism have hampered any wholesale transition to market competition." (16)

   Perhaps reflecting this lack of real progress, China engaged in a wholesale revamping of its legal system in areas dealing with monopolistic conduct. One of the first laws enacted was the Law Against Unfair Competition. (17) This law was enacted in 1993 and would be administered by the State Administration of Industry and Commerce (SAIC). The major significance of this legislation was that while it prohibited a broad range of anticompetitive acts, in practice, the law only applied to the protection of trademarks. (18)

   The next significant piece of legislation was the Price Law, which became effective in 1997, and was administered by the National Development and Reform Commission (NDRC). (19) Similar to the Law Against Unfair Competition, this legislation had a broad scope--namely, to outlaw all price fixing. Yet, in a similar fashion, the Price Law was applied in a more narrow fashion. In particular, the Price Law merely provided local authorities with the power to control prices and thus served goals other than ensuring free competition. (20) In addition, China enacted other laws, such as the Protection of the Rights of Consumers Act (1993) and The Company Law (1994)--but these laws too were narrowly construed. (21) General confusion seemed to reign among the various governmental agencies as to which agency would enforce which laws, (22) different remedies were provided for the same underlying actions, and perhaps most importantly, Chinese officials lacked the expertise to fully appreciate the complexities of market forces and the harmful effects that certain other seemingly minor actions might have on the creation of an otherwise competitive market.

3. CHINA AND THE WTO

   China concluded negotiations with the World Trade Organization (WTO) on September 17, 2001, concerning China's terms of membership. Among the commitments undertaken by China were the following:

   * China will provide non-discriminatory treatment to all WTO Members. All foreign individuals and enterprises, including those not invested or registered in China, will be accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade.

   * China will eliminate dual pricing practices as well as differences in treatment accorded to goods produced for sale in China in comparison to those produced for export.

   * [P]rice controls will not be used for purposes of affording protection to domestic industries or services providers.

   * [T]he WTO Agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation fully in compliance with the WTO...