Economics, Law & Institutions: The Shaping of Chinese Competition Law

China has been considering enactment of an anti-monopoly (antitrust) law since 1993, and it has now enacted such a law. Given the potential importance of this legislation, there is much uncertainty about what the enactment means and what roles it is likely to play in influencing the development of the Chinese economy. This article applies a neo-institutionalist analysis in examining some of the factors that have influenced the shaping of the legislation and that are likely to influence the operation of competition law and its organizations. The main argument is that the central dynamic in both the creation of the statute and its structuring has been the interaction of Chinese economic policy institutions with foreign pressures (institutional mechanisms intended to “push” the Chinese decision makers in certain directions) and foreign cognitive influence (cognitive factors that accord influence to foreign organizations, experience, and laws). These interactions also provide insights into how the law is likely to be applied. The paper also explores these two concepts—foreign pressure and foreign cognitive influence—in relation to the theory of institutional change. ∗ Distinguished Professor of Law, Chicago-Kent College of Law. This Article is based on a presentation at the annual meeting of the International Society for the New Institutional Economics, Boulder, Colorado, September 2006. An earlier version was presented at a conference of the East Asian Law Center at Harvard Law School in May 2006. I would like to thank participants at both conferences for their valuable comments on the presentation. Washington University Open Scholarship p 271 Gerber book pages.doc 7/29/2008 10:39:00 AM 272 Journal of Law & Policy [Vol. 26:271 China has been considering enactment of a competition law since 1993, and in August of 2007 it finally enacted such a law. Enactment and enforcement can be expected to impact the Chinese economy, perhaps in significant ways. As a result, there is considerable interest and concern in many countries, especially the United States, about what to expect from the new law. In particular, there is speculation about how such a law is likely to be interpreted and enforced. Questions such as “Will it be enforced seriously?”, “Who will enforce it?”, and “Will it be enforced primarily (and perhaps discriminatorily) to the conduct of foreign firms?” are commonly heard. There has, however, been little systematic study of how these questions might be answered or even of how useful insights into these developments might be generated. The internal workings of legal and political decision processes in China are far from transparent, especially for those viewing the situation from outside China. As a result, there is often little information available for use in assessing the dynamics of those processes. In this Article, I offer some analytical tools that can provide insight into the evolution of competition law in China and thereby into the factors that are likely to influence its operations in the future. These tools have potentially far broader application. I expect them to prove valuable for analyzing any situation in which a national or local law is or may be influenced by legal developments or factors beyond its borders, especially in the context of economic globalization, but I leave that topic for future exploration. 1. Zhong Hua Ren Min Gong He Guo Fan Long Duan Fa, at http://www.5dka.cn/ flfg/2007-08/30/content_732591.htm. For an English translation, see Nathan Bush, The PRC Anti-Monopoly Law: Unanswered Questions and Challenges Ahead, ANTITRUST SOURCES, Oct. 2007, available at http://www.abanet.org/antitrust/at-source/07/10/Oct07-Bush10-18f.pdf. For detailed discussion of the development of the legislation, see H. Stephen Harris, Jr., The Making of an Antitrust Law: The Pending Anti-Monopoly Law of the People’s Republic of China, 7 CHICAGO J. INT’L L. 169, 174–83 (2006). 2. An indication of this interest is the American Bar Association’s submission of a detailed set of comments on the proposed anti-monopoly law to the Chinese. See JOINT SUBMISSION OF THE AMERICAN BAR ASSOCIATION’S SECTIONS OF ANTITRUST LAW AND INTERNATIONAL LAW AND PRACTICE ON THE PROPOSED ANTI-MONOPOLY LAW OF THE PEOPLE’S REPUBLIC OF CHINA (2003), http://www.abanet.org/antitrust/at-comments/2003/0703/jointsubmission.pdf. http://openscholarship.wustl.edu/law_journal_law_policy/vol26/iss1/12 p 271 Gerber book pages.doc 7/29/2008 2008] Chinese Competition Law 273 My basic claim here is that in seeking to comprehend the development of competition law in China, there is much value in an analysis that identifies the following three sets of factors and that accounts for their interaction. These three sets of factors have interacted to influence the development of the Chinese competition legislation thus far, and are likely to influence its implementation going forward. Each set operates on domestic decision makers; the relative force of the sets and their inter-relationships shape the decisional landscape that the decision makers inhabit. First is the domestic incentive structure—i.e., the set of incentives derived from and created by domestic institutions, particularly, the need for political support. The second set of factors is “cognitive” or “epistemic.” It refers to the knowledge base in foreign law and general experience that is available to Chinese decision makers in this area. Competition law is new to China, and thus foreign influence has been particularly instrumental in creating legislation and shaping thought about issues relating to it. The third set of factors includes foreign institutional pressure. Chinese decision makers must respond not only to domestic-source incentives, but also to incentives from the external political, legal and institutional contexts within which they must act. The analysis I use here provides explanatory and predictive force by identifying such factors, tracing their roles in the creation and shaping of the legislation, and showing how they can be expected to influence its implementation. This analysis applies and further develops tools that I have sketched in previous work, and also draws on analytical insights from scholars in the area of new institutional economics in the sense that it focuses on analyzing the interests and incentives of individuals and institutions. It uses these tools, 3. See, e.g., David J. Gerber, System Dynamics: Toward a Language of Comparative Law, 46 AM. J. COMP. L. 719, 726–33 (1998). 4. For recent leading work in this field, see, e.g., THE FRONTIERS OF THE NEW INSTITUTIONAL ECONOMICS (John N. Drobak & John V. C. Nye eds., 1997). The foundational work of Douglass North has been of particular value in this context. See generally DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990); DOUGLASS C. NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY (1981). Washington University Open Scholarship p 271 Gerber book pages.doc 7/29/2008 10:39:00 AM 274 Journal of Law & Policy [Vol. 26:271 however, in ways that have not, to my knowledge, been systematically explored. This brief Article first sketches these sets of analytical tools. It then applies them to the development of competition legislation in China, probing the factors that have been at work there. It looks at the impetus for competition law, then the process of shaping the legislation, and, finally, the factors that are likely to influence the operation of the system created to implement the legislation. I. ELEMENTS OF THE ANALYSIS A. Competition Law: Identity and Basic Roles “Competition law” here refers to a legal regime in which the stated objective is to prevent restraints on the competitive process by economic actors. Such a regime typically contains norms that are intended to deter economic actors from engaging in conduct that reduces the effectiveness of market processes. It may, for example, prohibit cartels—i.e. agreements among competitors to reduce competition between themselves—and contracts in which a manufacturer or distributor controls the conduct of actors further down the distribution chain in ways that harm competition. Merger controls are also common in competition law systems, as are controls on certain forms of unilateral conduct by dominant firms. This form of law plays a unique role in the sense that it creates and enforces 5. Bruce Carruthers and Terry Halliday have done valuable work in related fields that contribute to understanding the relationships between domestic legislation and globalization processes. See Terence C. Halliday & Bruce G. Carruthers, The Recursivity of Law: Global Norm-Making and National Lawmaking in the Globalization of Corporate Insolvency Regimes, 112 AM. J. SOC. 1135 (2007); Bruce G. Carruthers & Terence C. Halliday, Negotiating Globalization: Global Scripts and Intermediation in the Construction of Asian Insolvency Systems, 31 LAW & SOC. INQUIRY 521 (2006). The theme is also developed in PITTMAN B. POTTER, THE CHINESE LEGAL SYSTEM: GLOBALIZATION AND LOCAL LEGAL CULTURE (2001). 6. In the United States, this type of legal regime is referred to as “antitrust law”, but in much of the world, including China, the preferred term is “competition law.” In some contexts the latter term is used more broadly to cover both “antitrust law” and “unfair competition law.” 7. For comparative discussion of competition law, see David J. Gerber, Comparative Antitrust Law, in THE OXFORD HANDBOOK OF COMPARATIVE LAW 1193 (Mathias Reimann & Reinhard Zimmermann eds., 2006) and David J. Gerber, Competition Law, in THE OXFORD HANDBOOK OF LEGAL STUDIES 510 (Peter Cane & Mark Tushnet eds., 2003). http://openscholarship.wustl.edu/law_journal_law_policy/vol26/iss1/12 p 271 Gerber book pages.doc 7/29/2008 2008] Chinese Competition Law 275 public norms that interfere with the “free” competitive process in order to deter or prevent private interferences with that process. When implemented, competition law can shape both the market and the state. It not only shapes the incentive structure of business firms, but it also gives public officials particular forms of authority for influencing markets, which can influence relationships both among public agents and between public institutions and private actors. Moreover, competition law has a potentially powerful symbolic-expressive function. It represents symbolically the relationship between economic and political processes, articulating the political system’s normative claims about the proper relationship between the market, society and the political system. Competition law often has a transnational dimension, even when it does not intend specifically to influence transnational conduct. Such a regime may have direct influence, for example, where a state applies its competition law to conduct outside its territory and thus directly affects the incentives of firms that fall within its jurisdictional orbit. In addition, however, it may have indirect effects. Markets are economic institutions, and as such they are in themselves not limited by political boundaries. The incentive to sell extends to wherever there are potential buyers, and the incentive to purchase extends to wherever there are potential sellers. A state may use its control of its own borders to create artificial, political boundaries for markets, but without government intervention market incentives are not coterminous with political borders. As a consequence, where a competition law regime alters market incentives and the conditions of operation in one part of a transnational market, it indirectly influences all participants in the market. For example, it may alter investment incentives within its territory, thereby influencing the flow of capital to other markets and areas. It may also deter certain forms of conduct within its sphere of application (or “jurisdiction”) thereby changing incentives to engage in such conduct outside its