Antimonopoly Law Legislation in USA and China

This is the essay of CUHK PhD level course Industrial Organization

Abstract: This article explores the facts during the anti-monopoly legislation in the US and China with historical evidences. Small and insufficient firms in the US were more active in lobbying the antitrust legislation, while in China, SOEs and multinational companies were more active. The core problem in the US is whether the country needed an antitrust act at that time, but people in China concerned more about what should be included in the law. The effect of the implementation of the law in both countries is not as good as expected. The unclear definition of concepts in Sherman Act and the inefficient distribution of enforcement power in China are the reasons.

1. Introduction

Faced with monopoly, people have paid increasingly attention to anti-monopoly law to promote technology innovation and free competition. In 1890, the US Congress passed the Sherman Antitrust Act. It was the first time that a national government had taken responsibility to investigate and prosecute monopolies and price-fixing cartels (Peritz, 2008). However, it was until 117 years after the US Congress passed the Sherman Antitrust Act that the Anti-Monopoly Law (AML) was passed by China’s congress, the Standing Committee of the National People’s Congress (NPCSC).

Spanning 117 years, this article explores the facts during the anti-monopoly legislation with historical evidences (letters, congressional records, news reports, etc.) both in the US and China. Just as the Chinese saying goes, we should take history as a mirror, learn from history and face forward to the future. We try to find the similarities and differences in the process of the anti-monopoly legislation, which may help us better understand the provisions of these anti-monopoly laws.

This article is organized as follows. The first section is a brief introduction of this article. The second section mainly discusses the lobbying of the interest groups with their letters and congressional records to figure out the origin of Sherman Antitrust Act. The next section analyzes the competition for enforcement power in China and the legislation lobbying of state owned enterprises (SOEs) and multinational companies. At last, a parallel comparison will be made in different aspects.

2. The Origin of Sherman Antitrust Act

2.1 A Time of Turbulent Industrial Change

After the American Civil War, the standardization of railroad track gauges greatly promoted the construction of a national railway system. In 1876, Alexander Bell was awarded the first US patent for the telephone, after which information could be spread quickly in a more efficient communications network. Therefore, regional markets were connected into a national economy. At the same time, steam engine was widely used, and much more patents were awarded in the US. New technologies were creating a huge revolution in industrial mass production, which were giving birth to big businesses.

While these revolutionary developments were changing the existing mode of production and greatly increasing the economic efficiency than ever before, giant cartels and corporate mergers were shaping throughout the economy. The entire market and many industries were controlling by these “big businesses”. Therefore, the potential harms of these monopolists or cartels to the free competition and new technology development had drawn greater attention in the US society.

As a senator from Ohio concerned about trust and monopoly behavior, John Sherman received many letters from people all around the country, and most of which were from small businesses asking him to introduce antitrust legislation. This section will mainly discuss the lobbying of the small oil refiners which were the most active business group in lobbying Sherman and a manufacturer of agricultural implements concerned about the trust in its upstream industry, which the company believed was caused by high tariffs (The main reference of this section is The Letters of John Sherman and the Origins of Antitrust by Werner Troesken (2002), which studies many Sherman’s letters and mainly discusses the origin of Sherman Antitrust Act).

2.2 Protecting Innovations and Antitrust

During the 1870s and early 1880s, new technology innovations in transportation greatly reduced the cost of shipping oil. Oil refiners started to use pipelines to ship oil from wells to the railway stations instead of teams of horses, and to ship oils by tank cars rather than barrels via railways. Therefore, large oil refiners such as Standard Oil had much more incentive and cost advantage to adopt these new technologies. On the other hand, not only reducing the shipping cost and the price of refined oil, the introduction of pipelines and tank cars also “reduced the likelihood of accidental explosions and fires during transport (Troesken, 2002)” and made the shipping more efficient. Then railroads were willing to give rebates to those oil refiners who shipped their oil via tank cars instead of barrels.

Gradually, the market share of industry-refining capacity controlled by Standard Oil rose from about 10% in 1870, to 40% in 1874, and to roughly 90% in 1880 (Troesken, 2002). Since the situation of those small oil refiners turned to become much worse, they insisted that Standard Oil’s success could not be attributed to the technology innovations and the scale of economy only. Small oil refiners claimed that the extremely asymmetric market powers, unfair advantage brought by the rebates from railroads and its predatory pricing and vertical restraints to forestall entry should also be to blame.

Those small oil companies wrote to Sherman lobbying that the Senator should introduce legislation to prohibit rebates for tank cars (Sherman Letters, Great Western Oil Works, February 8, 1889). As a response, Sherman introduced an amendment to the Interstate Commerce Act of 1887 asking that the Congress outlaw rebates for tank cars in all industries, not just in oil refiners only, which caused an outcry from the Congress arguing that (Congressional Record, 50th Congress, 2nd Session, p.2436, p.2438, p.2441. Hereafter cited simply as Congressional Record):

Tank cars offered “great economy in the distribution” of oil. – Senator Gray

If the antitank car bill was passed “the result would be inevitably that the price of oil to the people of this country, the consumers, would be increased instead of reduced”. – Senator Cullom

“The Standard Oil Company has certainly reduced the price of oil to the people of this country, and in consideration of this subject specially directed towards oil and its transportation this fact should have weight and influence.” – Senator Call

Not only large oil companies, some independent oil companies also opposed to this proposal since the amendment would increase the price of other commodities as well. For example, W.C. Warner, secretary of National Oil Company of Titusville, claimed that (Sherman Letters, National Oil Company, May 14, 1890, p.2):

Very many other fluid commodities are now also carried in tank cars. We used to get all of our sulphuric acid in glass carboys. If a law were passed saying we must pay the same rate in tank cars as in carboys, it would increase the cost nearly 50 percent.

Although Sherman argued that the amendment proposal would preserve competition by keeping Standard’s smaller competitors alive, the anti-tank car bill was killed at last (Congressional Record: p.2437, p.2442).

2.3 Protective Tariff and Antitrust

Until the Pacific War in World War II, the American foreign policy was isolationism, to keep the US out of the conflicts in Europe and Asia. The protective tariff policy is a prominent expression of American isolationism in foreign trade.

However, this policy had harmed some domestic industries. For example, as the tariff was high and many upstream iron and steel companies were forming into a combination, the downstream agricultural implements manufacturers were under great pressure of increasing raw materials prices. On August 29, 1888, an officer of the John Deere Company wrote to Sherman asking for introducing antitrust legislation, otherwise, the government should reduce the tariff (Sherman Letters, John Deere and Company, August 29, 1888, p.1):

While these combinations may not be the direct outgrowth of a protective tariff, it would be impossible in some cases and more difficult in others to form a combination were it not for the tariff… a protective tariff on the ground that it promotes the general prosperity, but [our] fealty is sometimes sorely tried when [we] go to purchase [our] raw material and find the prices controlled by a combination much high higher than they otherwise would be in an open market.

Many supporters or advocates of free trade at that time claimed that the best way to eliminate the problem of trust is to cut the tariff. However, it seemed that Sherman had different opinion. He refused to use tariff reduction as a response to protective tariffs.

A likely explanation for Sherman’s interest in antitrust is that he wanted to protect his party (GOP) on tariff policy, which was the central issue in the upcoming election. Sherman himself just wanted to reduce the pressure to lower tariff barriers from Democratic Party as well as companies like John Deere Company and to assure that whatever legislation was passed was not too radical at the same time (Kolasky, 2009).

The McKinley Tariff (1890) raised the average duty on imports to almost fifty percent, an act designed to protect domestic industries from foreign competition. It was replaced with the Wilson-Gorman Tariff Act in 1894, which promptly lowered tariff rates. Thomas DiLorenzo also linked Sherman’s interest in antitrust with the McKinley Tariff which was passed just three months after the Sherman Antitrust Act (DiLorenzo, 1890):

That so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this Pro-Trust law relating to the tariff… Protectionists did not want prices paid by consumers to fall. But they also understood that to gain political support for high tariffs they would have to assure the public that industries would not combine to increase prices to politically prohibitive levels. Support for both an antitrust law and tariff hikes would maintain high prices while avoiding the more obvious bilking of consumers.

Actually, Sherman in his Recollections also named the McKinley Tariff, not the Sherman Antitrust Act, as “the most important measure adopted” by the 51st Congress (Sherman, Recollections of Forty Years In The House, Senate And Cabinet, 1895).

3. The Legislative Game in China

3.1 The Long and Winding Road

It was until 117 years after the US Congress passed the Sherman Antitrust Act that the AML was passed by NPCSC on August 30, 2007. It has taken twenty years to pass the AML since the former Legislative Affairs Bureau of the State Council set up a drafting group in 1987, and thirteen years since the first time the AML was listed in NPCSC five-year legislative plan in 1994 (it had been listed in NPCSC’s legislative plan three times before it was passed by NPCSC).

The legislation of the AML was a long and winding road, especially in June 2006. On June 7, at the State Council executive meeting, the AML (Draft) was passed and decided to submit to the NPCSC for review. But the situation was reversed on June 20 when three major portal sites in China (Sohu, Sina, and NetEase) posted the headline news that “NPC Postpones the Review of the AML (Draft)” (Chen, 2006). It was curious that several hours later, this piece of news was deleted and replaced by “NPCSC to Discuss the AML Draft as Scheduled”, according to China’s state-run Xinhua News Agency. After nine years in 2015, Kan Ke, former spokesman of the Office of NPCSC explained in newspaper that “This is just because the media misunderstood the NPCSC press release (Kan, 2015).” Although the spokesman had already explained the incident, this reflects the intense interests in antitrust law and the fierce competition in the legislative game of the AML.

3.2 Competition for Enforcement Power

There were three ministries or commissions competing for the AML enforcement power through legislation, i.e. Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC). Each ministry tried to monopolize the legislative power of the AML and even wanted to be the dominant enforcement agency.

In 2004, the competition for enforcement power appeared to be a dead heat. In March 2004, MOFCOM took the lead in completing the draft of the AML and submitted it to the State Council. In this draft, MOFCOM assigned all the authorities on anti-monopoly to its own, but this had not been endorsed by the State Council and opposed by other ministries. In September 2004, MOFCOM set up the Anti-Monopoly Investigation Office whose function was defined as “undertaking related work on international communication in anti-monopoly, anti-monopoly legislation and investigation”.

In the face of the competition with MOFCOM, in May 2004, SAIC quickly released a report, The Performances and Countermeasures of Multinational Corporations’ Anti-Competitive Practices in China, which pointed out that there was a tendency of monopoly in multinational companies including Microsoft, Kodak, Tetra Pak, and some industries including cameras and tires. The reason why SAIC investigated the competition restricting behaviors of multinational companies and released this report at this point of time was that SAIC wanted to declare its authority on anti-monopoly affairs of multinational companies in China.

NDRC also insisted on its dominant role in the AML legislation. Through Interim Provisions on Preventing the Acts of Price Monopoly issued on June 18, 2003, National Development Planning Commission (the former of NDRC) clearly gave its own the authority on the price of monopoly recognition, punishment, interpretation and other authorities. The NDRC report “The Current Economic Situation and 2005 Policy Orientation” released at the end of 2004 also called for the introduce the anti-monopoly law as soon as possible.

MOFCOM, SAIC and NDRC all declared that they had a leading role in the AML. Their fundamental motivation was to obtain the enforcement power of the AML because the AML is involved in a huge market power and interests, and it can constrain not only domestic large enterprise’ and multinational companies’ monopoly behavior, but also the government’s abuse of administrative power to restrict competitive behavior. Therefore, who controls the legislative power, who is more likely to maximize the interests of the department itself (Wang H. H., 2010).

Eventually, the authority responsible for enforcement of the AML was divided into three parts: MOFCOM is charged exclusively with reviewing mergers and acquisitions; NDRC handles the pricing of everything from gasoline and natural gas to drugs and electricity; Like the NDRC, SAIC also tackles cartels and abuse of dominance but only those unrelated to pricing.

3.3 Lobbying of SOEs and Multinational Companies

SOEs is one of the performances of administrative monopoly in China. They are usually considered as large but less efficient companies. Many SOEs argued that they were associated with national economy and people’s livelihood, then should be exempted from the AML. On December 18, 2006, the State Assets Supervision and Management Commission (SASMC) announced that those so-called “strategic industries” (e.g. national defense, electrical power infrastructure, petroleum, petrochemicals, telecommunications, coal, civil aviation and waterway transportation industries) were to be absolutely controlled by SOEs (Ren & Liu, 2006). Yang Jingyu, not only a representative for SOEs but also member of NPCSC and NPC Chief Secretary of the Law Committee, even stated that “administrative monopolies do not exist in China (Lyu, 2007).”

On the contrary, Prof. Wang Xiaoye, member of the drafting group of the AML and also the researcher of the Law Institute of the Chinese Academy of Social Sciences and member of the Anti-Monopoly Committee of the State Council, claimed that (Xu, 2014):

If we do not have anti-monopoly law, it is impossible to regulate the abuse of competition, unfair trade, and administrative monopoly in the market…

If [the AML] only involves the enterprises, but does not involve the government, then the antitrust law is just a vase. I have always advocated that there should be specific provisions about administrative monopoly [in the AML] … Rules are very important, only with specific provisions, the government’s behavior can be “locked into the cage of institution”.

Different from SOEs’ concentration, multinational companies’ interests focused on two aspects: to be treated equivalently as other domestic companies and the provisions about mergers and acquisitions (M&A) restrictions.

When the media focused on the SAIC report that mentioned the monopoly behavior of Microsoft and Kodak, another report “Alert to Multinational Corporations’ Anti-Competitive Practices in China” written by Prof. Shen Jiemin from Peking University Law School caused another burst of attention. Commissioned by a domestic soft drink packaging company, in this report he conducted a case study of Tetra Pak Company which held 95% of the domestic share of sterile flexible packaging in China (Shang, 2004). Since these two reports echoed each other, suddenly, many multinational companies in China including Tetra Pak tensed up. These companies arranged a discussion with Prof. Shen about the direction of the AML legislation (Luo, 2004).

Five months later, at the Fair Competition & Market Economy 2004 Shanghai International Forum in November 2004, representatives of some multinational companies expressed their own views on the AML legislation. Coca Cola hoped that M&A security audits should be limited to those transactions that may have a material impact in the relevant field and that the audits should be excluded for transactions between foreign enterprises and transactions that have less impact on the Mainland domestic market. Henkel Corporation expected that the AML could eliminate local protection and apply the same anti-monopoly standard to the M&A of domestic enterprises (Fair Competition & Market Economy International Forum, 2015).

4. A Parallel Comparison

In this section, a parallel comparison will be made between the legislative progress in the US and China based on the above analysis, including four aspects: Background (When), Powers in Legislation (Who), Concentrations (What), and Influences (How).

4.1 Legislation Background

It was a time of turbulent industrial change when the Sherman Antitrust Act was passed by the Congress. Big companies or organizations had just formed due to technology innovation and scale of economy. People were faced with a tradeoff between the benefits (reducing the products prices and promoting the innovations) and loss (less free and effective competitions in the market) those trusts or combinations brought.

In 1990s, China’s market economy reform pushed the NPCSC to list the AML in its legislative plan, and the pressure after joining WTO had fast tracked the AML legislation in this century. It seemed that the Chinese government did not have the same incentive and determination as the US government to enact the Sherman Act. It can be said that it might be a symbolic legislative work in China to construct her market economy legal system.

4.2 Powers in Legislation

In the US, deep-rooted Jeffersonianism, that is the populism representing the interests of small business owners, farmers, workers, and peasants had a great impact on the legislation (Wang Y. , 2011). Those small and inefficient businesses were much more active to lobby the legislation and Sherman intended to protect them from their larger competitors, regardless of the effect on consumer welfare (Grandy, 1993; Libecap, 1992).

However, in China, SOEs and multinational companies were two main active interest groups lobbying the legislation. Besides, the roles of the government (both central and local), scholars, and the foreign chambers of commerce were also very prominent. But it seemed that the voices from consumers and small business were neglected.

4.3 Legislation Concentrations

The core problem in the antitrust legislation for the US is whether the country needed an antitrust act at that time. In the debates of the congress, people mainly concentrate on two questions: Whether the law would damage the full and free competition (increasing production and lowering prices)? Whether Sherman’s version of antitrust act would harm the technology innovation and free competition?

On the contrary, almost everyone agreed to make an anti-monopoly law to perfect the legal system of the socialist market economy in China. People mainly discussed about what should be included in the anti-monopoly law, for example, whether administrative monopoly should be regulated?

4.4 Legislation Influence

The effects of the implementation of the law in both countries are not as good as expected. The definition of concepts in Sherman Antitrust Act like trusts, monopolies and collusion were not clearly defined, which makes few business entities to be prosecuted under its measures. But in China, administrative monopoly is not regulated effectively in the final version of the AML. In addition, although the Anti-Monopoly Commission was set up according to the AML, the commission is more likely an advisory institution rather than a commission focused on enforcement. Enforcement by NDRC, SAIC and MOFCOM also presents the potential for significant conflicts of interest.

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