Angela Zhang on why the West should pay more attention to Chinese antitrust law

While antitrust law may sound like an obscure and dry topic, Angela Zhang, author of Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation published by Oxford University Press in 2021, persuasively advances the idea that it is essential to understand in today’s climate of geopolitical tension between China and the West.

In this interview, Angela provides background on antitrust enforcement in China and we also discuss how China’s antitrust regulations can be strategically leveraged as a potent economic tool to offset sanctions from the United States and other countries.

While Chinese antitrust agencies hold vast power, they do operate within the constraints of bureaucratic rules and norms. Reforms in China’s administrative litigation law have made it easier to sue the government but the fundamental power dynamics remain unchanged and companies are hesitant to strain relationships with powerful Chinese agencies and only opt for litigation when they feel extremely penalized.

Below is an edited transcript of our discussion interview that provides insights into the complexities of antitrust law in China, its domestic and international implications, and in particular how this type of law is shaping domestic Chinese and foreign businesses.

Christopher Marquis: Thanks so much for joining me today Angela, first, in a few words, can you explain what the book is about? What makes China’s antitrust regime exceptional, as your title expresses?

Angela Zhang: Chinese antitrust enforcement is exceptional because Chinese antitrust agencies are rarely subjected to legal challenges. As a result, they hold significant authority, often overseeing the entire administrative enforcement process by serving as the investigator, prosecutor, and judge. However, this centralization of power doesn’t mean they operate without constraints. They are part of extensive central ministries and are bound by both explicit and implicit bureaucratic rules. Even though there might be an apparent absence of formal checks and balances, internal bureaucratic norms and motivations play a pivotal role. Essentially, an informal system of oversight exists within the bureaucracy that influences antitrust enforcement outcomes.

Christopher Marquis: That’s interesting and I appreciate you shining light on this often overlooked topic. But what accounts then for the rise of active antitrust enforcement in China? Chinese antitrust law has developed at a rather late stage. Is there any influence from the U.S. and E.U., where the antitrust law is more mature? Are there any differences between the different systems?

Angela Zhang: My book delves into the grassroots initiatives driving antitrust enforcement in China. At the forefront are regulatory agencies that leverage antitrust to broaden their policy influence and elevate their bureaucratic status. Additionally, the proactive role of lawyers, who fervently lodge antitrust complaints, cannot be overlooked. While the frameworks of U.S. antitrust law and E.U. competition law have been influential, often serving as foundational references or templates for Chinese regulators, China has also carved out its unique path in this arena. I discuss in the book how this divergence is intricately linked to China’s unique institutional design governing merger control processes. In China, multiple central ministries holding industrial policy mandates actively participate, thereby allowing the antitrust authority to engage in a comprehensive consultative process with various other agencies. This collaborative approach facilitates consensus building, which is a significant determinant in the final outcomes of cases.

Christopher Marquis: You mentioned the agencies and let’s discuss a bit deeper the mission and culture of the three enforcement agencies (MOFCOM – merger enforcement; NDRC, SAIC – conduct investigations) and how they merged into one in 2018. I understand there are a lot of ambiguities when it comes to law enforcement in China. What are the benefits and challenges of merging the three agencies into one SAMR?

Angela Zhang: Each of the three agencies — the NDRC, MOFCOM, and SAIC — has its own unique mission and organizational culture. Historically functioning as the state planning commission, the NDRC has a strong interventionist stance, primarily overseeing industrial policy planning and inter-agency coordination. In contrast, MOFCOM has a more liberal orientation, with its chief objective being the advancement of trade and fostering international collaboration. The SAIC, on the other hand, is often perceived as having a lower bureaucratic stature, attending to day-to-day administrative functions like enterprise registration, trademark protection, and addressing unfair competition. Indeed, the NDRC’s legacy as a state planner occasionally conflicts with its role as an antitrust regulator. This has led the agency to initiate various antitrust cases, pushing companies to reduce prices to align with its traditional role in price regulation. The unification of these three agencies into the SAMR streamlined their operations, minimizing inter-agency disputes and, importantly, marking the end of the NDRC’s role in antitrust regulation. Thus this move was widely perceived as a positive shift towards more legal-oriented antitrust enforcement.

Christopher Marquis: Regarding the influence of these laws on business, you used the luxury car manufacturers cutting prices in response to the NDRC investigating the resale price maintenance (RPM) practice in 2014 as an example of businesses being taken hostage by the government. This raised some questions for me. Do antitrust regulators elsewhere see this high level of cooperation? Will we continue to see such acquiescence to Chinese antitrust agency in the future? Does the level of cooperation from firms under investigation vary by industry? What makes it difficult to launch an administrative appeal against a Chinese antitrust authority?

Angela Zhang: Indeed, the level of cooperation from businesses with the command from the antitrust authority in China is extremely rare in other jurisdictions. I foresee that major corporations will maintain a cooperative stance with the Chinese authority, taking a confrontational approach only when pushed to such extremities that appealing becomes an inevitable recourse. The reason lies in the institutional setup of the Chinese antitrust authority, which is embedded within large central ministries that operate like a conglomerate. Businesses which anticipate the likelihood of continuous interactions with the agency, are reluctant to strain relations through administrative litigation. Recently, however, there have been instances where Chinese companies initiated administrative appeals against central authorities, primarily driven by exorbitant fines that were unsustainable for these entities. In such scenarios, the agency is confronted with genuine threats of appeal from businesses that feel they’ve been unjustly penalized.

Christopher Marquis: Interesting to hear the government can even be held accountable at times. How about foreign multinational companies who in particular have felt that Chinese regulatory enforcement has become a major source of unfair treatment and discrimination. With the Chinese economy slowing down and in more need of foreign investments, do you foresee the regulations becoming more favorable, in line with some of the discourse from leaders? You used the concept of path dependence to explain how the history matters in China’s antitrust law enforcement. Will the SAMR adopt a similar aggressive approach, using informal and formal regulatory tools, to push ahead with its enforcement, like its predecessor (particularly NDRC) did?

Angela Zhang: In the past couple of years, I have noticed a trend of regulatory actions becoming restrained, potentially as a response to the slowdown of the Chinese economy and the increasing geopolitical tensions. So it is quite possible that regulation will become more favourable to businesses. However, the policy environment is very volatile and there remains a lot of uncertainties in regulatory risks. A case in point is the SAMR’s scrutiny of Alibaba towards the end of 2020. In response to the direction from the central government, the agency took a very harsh stance against the e-commerce giant, seemingly with an intent to strategically inflict reputation sanction on the firm. On the eve of Christmas that year, the antitrust regulator strategically released a succinct announcement that it had initiated an antitrust investigation into Alibaba. Remarkably, a mere ten minutes after this announcement, a comprehensive commentary supporting the investigation was published by the People’s Daily, indicating a coordinated effort possibly planned well in advance. This seems to be a calculated move to seize the narrative early on and steer the discourse surrounding the case in a desired direction. The market impact of this announcement was immediate and substantial: Alibaba saw a sharp 13% decline in its stock value in just a single day, resulting in a staggering erosion of over USD $100 billion from its market capitalization.

Christopher Marquis: Although your book is about antitrust enforcement in China, it has broader implications on the relations between business and government in China, and you have provides some color on this already. More generally, how do you view the power imbalance between these two sectors? What would be an ideal relationship, and is China’s recent administrative law reforms working toward that ideal?

Angela Zhang: At its core, my book delves into the power imbalances between the business sector and the Chinese government, with the latter wielding a distinct advantage. In 2014, we witnessed a pivotal change when China amended its administrative litigation law, making it considerably easier for plaintiffs to challenge the government in court. This amendment triggered a noticeable uptick in the number of lawsuits. However, even with such progressive reforms, which indeed have had a positive impact in certain types of cases, the fundamental power dynamics between large enterprises and the state remain the same. So I am sceptical that further reforms to administrative law will bring about any significant shift in these dynamics. As mentioned earlier, Chinese companies generally are very reluctant to sue the government, primarily due to the apprehension of offending the governmental agencies. This results in a lack of effective judicial constraint over agency action.

Christopher Marquis: The Vitamin C case you discuss, where U.S. purchasers sued Chinese manufacturers of fixing prices and limiting the quantity of sales, spans from 2005 to 2017. It made it all the way to from the District Court to the Second Circuit and ultimately to the Supreme Court, during which the Chinese government was involved in the litigation proceedings. Can you explain why this case is important? On what grounds are the courts’ decisions made and changed? What are the challenges of ruling such state-led export cartel cases? What does it say about the relationships between trade and antitrust issues in the U.S.?

Angela Zhang: In export cartel cases like the Vitamin C situation, U.S. courts find themselves in a predicament. The United States essentially has two avenues to address such issues: either by pursuing trade remedies or by initiating antitrust lawsuits against the foreign manufacturers. However, these two strategies can be in direct conflict. A successful trade proceeding mandates clear evidence of China’s enforcement of export restrictions. On the other hand, triumph in an antitrust suit depends on establishing the absence of such governmental directives. In the Vitamin C case, the Chinese government argued that it has directed the cartel, and thus the manufacturers should be exempt from antitrust sanctions. This posed an important issue about comity—to what extent does a US court need to defer to the statements from the Chinese government? Historically, U.S. courts tend to fixate their attention on the factual question of whether there exists state compulsion, which is extremely difficult to identify. However, in the Vitamin C case the Supreme Court decided to adopt a deferential approach to the executive branch, so it doesn’t necessarily have to defer to the statements from the foreign governments. I believe the court made a pragmatic decision here because the executive branch is indeed better situated to balance American interests in determining whether to pursue trade or antitrust remedies.

Christopher Marquis: I have just one more specific question, which relates to the situation today, how did the Anti-Monopoly Law (AML) become a crucial piece for China to deploy a tit-for-tat strategy against U.S. in the trade war? Is AML working as a countermeasure?

Angela Zhang: The Anti-Monopoly Law, like antitrust laws in many countries, has extraterritorial reach. This means China can potentially intervene in merger transactions that occur offshore as long as parties sell to the Chinese market. As such, the AML can be strategically utilized as a tit-for-tat strategy against trade sanctions or export control. During the trade war, China proposed several broad countermeasures in response to U.S. sanctions. However, these measures were seldom deployed due to the government’s concern about potential significant backlash. In contrast, using the antitrust law to intervene in mergers in strategic sectors is deemed more targeted and flexible. Indeed, in recent years, foreign multinational companies, particularly in the semiconductor sector, have faced significant obstacles in getting their merger clearance in China. Several merger attempts involving US semiconductor companies were delayed by the Chinese merger review and subsequently collapsed. For instance, Intel’s bid to acquire the Israeli semiconductor firm, Tower, failed because they couldn’t secure Chinese merger approval in time. A similar fate befell Qualcomm’s effort to acquire NXP.

Christopher Marquis: Thanks so much Angela for joining me on China Book Chats, I really appreciated you sharing these details of an important and overlooked area!