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Wednesday, January 13, 2010

China’s Antimonopoly Law—One Year Down Part 7 - “The Emperor is Far Away”: Administrative Monopolies in China

Posted by Wentong Zheng

A discussion of antitrust in China would not be complete without discussing the problem of “administrative monopolies,” or anticompetitive conducts by government agencies.  Because of the ubiquity of administrative monopolies in China, it is befitting to devote my final post in this blog series to this very subject. 

As many commentators have noted, one salient feature of the AML is that it devotes one entire chapter to the prohibition of administrative monopolies.  Administrative monopolies in China take many forms, including mandated use of products or services of specific providers designated by government agencies, discriminatory treatment of non-local firms or products by local governments (known as “regional blockades” in China), and other anticompetitive measures by government agencies.  All of these forms of administrative monopolies found their way into the list of prohibited governmental acts under Articles 32 through 37 of the AML.

To be sure, administrative monopolies are not a problem unique to China.  Anticompetitive state action—or public restraints on competition—exists in every country to varying degrees.  But administrative monopolies are particularly problematic in China, perhaps due to three reasons.  First, governments at different levels in China still wield enormous power in intervening in the economy, creating more room for anticompetitive abuses than in developed countries.  Second, government agencies in China do not always act pursuant to statutory authority in promulgating regulations or taking specific regulatory actions.  Finally, in Western countries, there are certain mechanisms, typically outside of antitrust law (such as the Dormant Commerce Clause under the federal constitutional law in the United States), that rein in at least some forms of public restraints.  But as I will discuss in more details below, administrative monopolies in China do not really have an effective solution, at least not within China’s current political framework.

Although the AML explicitly prohibits administrative monopolies, the enforcement provisions of the AML indicate that the drafters of the AML had no intention for the courts to play any role in enforcing the prohibition.  Article 51 of the AML provides that administrative monopolies are to be “corrected by superior government agencies,” with the antimonopoly enforcement agency serving a role of “providing suggestions to superior government agencies as to punishment in accordance with law.”  Article 50 of the AML, the lone provision that grants private right of action under the AML, states that “undertakings that are engaged in monopolistic conducts and cause damages to other parties assume civil liabilities in accordance with law.”  The term “undertakings” (jing ying zhe), or more precisely “business operators,” apparently does not include government agencies.  So, essentially, the AML in one breath condemns administrative monopolies as illegal, and then in the next throws the ball right back to the court of China’s political bureaucracy to deal with the problem.

The drafters of the AML shunned China’s judiciary in the enforcement scheme for administrative monopolies for good reasons.  It is now a cliché to say that China lacks an independent judiciary, but that is indeed one of the main problems with having the courts arbiter disputes involving administrative monopolies in China.  Furthermore, even if the courts were perfectly willing and able to render independent judgments in suits against administrative monopolies, having the judgments enforced would be an even more difficult task.

Despite that the drafters of the AML wanted to keep the courts out of the enforcement process for administrative monopolies, Chinese citizens filed private lawsuits against administrative monopolies in courts anyway.  On August 1, 2008, the very first day the AML took effect, four companies filed a lawsuit in Beijing No. 1 Intermediary People’s Court against China’s General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”), China’s standard setting agency, for allegedly requiring companies in China to use the anti-counterfeiting products of a company partially owned by AQSIQ.  But given the institutional constraints on the courts mentioned above, the courts are not all that eager to get involved in such lawsuits.  About one month after the suit against AQSIQ was filed, in September 2008, the Beijing court dismissed the suit on grounds that the statute of limitations for raising claims against AQSIQ under China’s Administrative Litigation Law had already run by the time the plaintiffs filed the suit (see here for a report in English of the lawsuit and its dismissal).  There is an interesting question about whether China’s Administrative Litigation Law provides an alternative cause of action against administrative monopolies despite that the AML does not provide one, a question I will not discuss in details here.  Those who are interested can see here for a compilation of email discussions on the AQSIQ case between me and several others on the Chinalaw listserv.  As I also argued there, assuming that the Administrative Litigation Law does provide an alternative cause of action against administrative monopolies, the Beijing court’s dismissal of the AQSIQ case on statute-of-limitations basis lacks support in the Administrative Litigation Law.  It seems, to me at least, that the reason given for the dismissal is little more than a pretext for avoiding taking up the suit.

So back to the court of China’s political bureaucracy the ball is.  Now the question is: does China’s political bureaucracy have an effective solution to administrative monopolies?  In other words, will “superior government agencies” be able to “correct” administrative monopolies created by government agencies at lower levels?  This is where I depart from the optimistic views on this issue.  One such view (see here) holds that although China does not have an independent judiciary, the AML’s ban on administrative monopolies may nonetheless succeed because, in part, China has “recourse to a binding central enforcer—China’s central government.”  For reasons I will explain below, this view is simplistic at best and is based on a misinformed understanding of how China’s political bureaucracy works (or not work).

In my view, the AML’s ban on administrative monopolies may not or even will not succeed precisely because it relies on China’s central government as the enforcer.  For decades, China’s central government has been trying to rein in administrative monopolies, particularly “regional blockades,” but to little avail.  It is hard to imagine that simply adding a provision in the AML declaring administrative monopolies to be illegal will help change matters.  The reason for the inefficacy of the central government’s efforts is that, contrary to the optimistic view cited above, enforcement through China’s central government is anything but “binding.”  As a matter of fact, China’s central government has many problems controlling local governments and, to a lesser extent, its own lower-level agencies.  It seems to be the ultimate paradox that a bureaucratic system built on authoritarian control cannot effectively enforce its administrative orders, but that has been the case in China for almost as long as history has been recorded.  Chinese sayings dating back to times immemorial are vivid illustrations of this problem: “the mountain is high and the emperor is far away” (shan gao huang di yuan); “where there are policies from above, there are counter-policies from below.” (shang you zheng ce, xia you dui ce). And more recently, “policies and commands stop at the gate of zhongnanhai (the central government’s compound in Beijing)” (zheng ling bu chu zhongnanhai).

Making sense of China’s political bureaucracy would perhaps require a book-length treatise, but let me try to explain in a couple of paragraphs what I understand to be the root cause of China’s bureaucratic noncompliance as it relates to administrative monopolies.  Between China’s central and local governments, their relationship on the surface is one of domination and subordination.  But indeed, the relationship between the two should be best viewed as a symbiotic one, with both relying on each other to maintain their collective legitimacy.  The central government can, and does, order local governments to carry out its policies, sometimes against the latter’s self-interests.  But the central government can only go so far in its push against local governments without risking cooperation of the latter.  When disputes between the two arise, they usually can work out their differences, but not without gives and takes that meet each other’s demand somewhere halfway.  When the two cannot resolve their differences, in extreme cases they do not turn to courts, but turn to use of force or even war.  One of the most dramatic episodes of the perpetual struggle between China’s central and local governments in history is the Revolt of Three Feudatories, an almost decade-long civil war led by the Kangxi emperor of the Qing dynasty against three generals who were granted enormous power at the local level but later went rebellious against the emperor.

The same dynamics also exists as to the relationship between China’s central government and its own lower-level agencies, only to a lesser extent.  Long story short, the central government does not always get its way even when dealing with its supposedly “subordinate” agencies.  The important point to make here is that no one in China’s political bureaucracy—not even the head of the central government—has absolute power.  To see examples of this Chinese-style checks and balances, I recommend the book 1587, A Year of No Significance by the late great historian Ray Huang.  If you do not want to read the entire book, be sure to review the colorful account in chapter three of how the Wanli emperor of the Ming dynasty boycotted his emperor’s duties for thirty years in protest of the oppositions of his high officials to his plan to choose his third oldest son, rather than his oldest son, as the heir to the throne.  The Wanli emperor’s case is an extreme one since he is considered a particularly weak emperor in Chinese history, but I think most China historians would agree that the institutional constraints the Wanli emperor was facing are present in China’s political bureaucracy throughout most periods of Chinese history, including today.

With this I conclude this blog series on the first year (or the first seventeen months by now, to be more precise) of the AML.  I want to thank Danny and Shubha again for inviting me to guest blog on this space, and I look forward to sharing more of my thoughts on issues related to antitrust in China as future developments unfold.

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