Chinese Antitrust Law: The New Face of Protectionism?

China's new Antimonopoly Law goes into effect today. This comprehensive antitrust makeover is celebrated in some quarters as a significant step in China's transition to a market economy. But the new law is also worrisome, for it could be used to protect national corporate champions while keeping foreign corporations out of the Chinese market. And if China follows this course, the options for the rest of the world are grim.

On its face, the new Chinese law is neutral. It subjects both foreign and domestic corporations to antitrust scrutiny. The law purports to promote economic efficiency and advance consumer welfare, which are appropriate goals of antitrust law. But the law also contains several ominous provisions, including a clause subjecting foreign acquisitions of Chinese corporations to a "national security review." The law further defines "national security" to include economic security, opening the door for the Chinese officials to block any foreign transaction that significantly impacts the structure of the Chinese economy or, as some fear, that Chinese authorities simply do not like. An antitrust law that on its face is designed to open markets can be a powerful tool to close them.

As its legislative history suggests, the law reflects the resurgence of protectionist sentiments in China following the increase in foreign acquisitions of Chinese corporations. Some domestic groups favored the law as a tool to control the conduct of state-owned enterprises and to abolish trade barriers among different regions within China. Others saw the new law as an opportunity to challenge foreign multinationals that are increasingly controlling the Chinese economy. Only a track record of enforcement will show which motivations will ultimately prevail.

How should the United States respond to China's new law? A wait-and-see attitude is unwise, given the high stakes. Other options are limited but have some promise.

First, the United States can try to pressure China into a fair and free trade order. Congress has been hectoring the President to unleash its arsenal of trade sanctions. But the US has few effective coercive tactics at its disposal. China retains its sovereign right to interpret its antitrust laws, just as the US zealously guards the right to interpret its. Aggressive unilateralism has not been a viable option against China's unfair trade practices since China joined the WTO in 2001. Any trade retaliation would therefore require WTO's authorization.

There are, however, limitations to challenging Chinese antitrust practices in the WTO. The mere threat of trade sanctions is unlikely to deter China. China is not as vulnerable to trade retaliation as the many developing countries with small domestic markets and fewer export opportunities. Thus, the US would most likely have to litigate the case in the WTO, with only uncertain prospects of success. The pursuit of trade sanctions could also lead to counter-suits against the US. Finally, the WTO is an imperfect venue to litigate antitrust matters. Antitrust rules largely fall outside the WTO framework so the WTO can at most examine trade effects of a few antitrust violations.

Reforming the WTO to hear a broader set of antitrust suits remains a possibility. Thus far, efforts to negotiate antitrust rules in the WTO have failed primarily due to a longstanding disagreement between the European Union and the US. When faced with the prospect of a "Beijing consensus" replacing the Washington consensus, the US and the EU may set aside their existing disagreements. Even then, such an agreement would be difficult to accomplish in an organization that struggles to move forward even with its less controversial liberalization agenda.

Second and more promising option for the US is the pursuit of bilateral antitrust cooperation with China. The US could seek to incorporate its concerns about strategic antitrust enforcement into the bilateral investment treaty that the US and China plan to negotiate. This strategy is often successfully used by the EU in trade agreements. This approach would also have the benefit of allowing private corporations directly seek remedies from the Chinese government through arbitration instead of having to persuade the US Trade Representative to take the case to the WTO.

The US could also negotiate a firm bilateral antitrust agreement with China. The US currently has eight such enforcement cooperation agreements, including one with the EU. While the bilateral antitrust agreement would not eliminate potential enforcement conflicts, such conflicts could be predicted and mitigated through the standard mechanisms of information exchange, consultation and comity.

Any such agreement could also lay a foundation for an antitrust dialogue that would allow over time the US's sound enforcement practices to become well-established in China. This is happening elsewhere where the US has employed its soft antitrust power, relying on its deep fount of sound economic analysis. The US possesses over a century of antitrust experience from which China can learn, and China is much more likely to listen if the tone is that of cooperation rather than confrontation.