Monday, January 11, 2010
Posted by D. Daniel Sokol
The Role of Competition in Public Policy
Joint conference of the ESRC Centre for Competition Policy and Regulatory Policy Institute
8th March 2010
One Great George Street, Westminster, London
Writing about the purposes of the conference, Professors Catherine Waddams and George Yarrow have said: “We are firmly of the view that it is important to be clear about the role of competition within the more general portfolio of economic policies, and about what competitive markets can and cannot reasonably be expected to achieve. Following the financial crunch, and in the context of the increasing importance of climate change policy, there has been a tendency toward greater scepticism about the virtues of the competitive markets. This poses significant risks, since the command -and-control/heavy regulation alternatives often create other distortions and unintended consequences. At the same time, some analysts have claimed rather more for competition than is warranted by the evidence, particularly in relation to short-run consumer benefits but also more generally in relation to the achievement of various public policy ‘targets’. Such over-claims can only add to scepticism, and may, when seen to be false, have the unintended effects of promoting anti-competitive regulation and of undermining competitive processes. It is against this background that the conference seeks to bring together leading thinkers and practitioners in the area to consider and discuss the role of competition in public policy, both generally and in a few, more specific, sectoral contexts.”
Professor Carl Shapiro - Chief Economist, Antitrust Division, US Dept. of Justice
John Fingleton - Chief Executive, Office of Fair Trading
Peter Freeman - Chairman, Competition Commission
Damien Neven - Chief Economist, DG Competition, European Commission
Professor Sir John Vickers - former Director General, Office of Fair Trading
Professor Catherine Waddams - Director, Centre for Competition Policy, UEA
This conference is arranged jointly by the Regulatory Policy Institute (www.rpieurope.org) and the ESRC Centre for Competition Policy, University of East Anglia (www.ccp.uea.ac.uk)
China’s Antimonopoly Law—One Year Down: Part 6. Bigger is Better? Tensions Between Industrial Policy and Antitrust in China
Posted by Wentong Zheng
As I mentioned in my previous post on this space (see here), one challenge China faces in implementing the AML and more generally its competition policy is that promoting competition is not always the only or the most important goal of many of China’s economic policies. In this post below, I will discuss one of the major competitors of antitrust law and competition policy in China, i.e., industrial policy.
Although China’s economic success so far can be largely attributed to market-oriented reforms, China has managed to preserve an active role for the state in its economy. Aside from owning and managing a vast number of state-owned-enterprises (“SOEs”), the Chinese government often employs industrial policy to promote the development of specific sectors or industries. Industrial policy in China takes a variety of forms, including direct government subsidies, tax incentives, special regulatory measures, and market entry liberalization measures. In recent years China has proposed or implemented various industrial policy plans for a number of industries, such as coal, cement, paper, steel, and automobiles.
As a general matter, industrial policy is not necessarily incompatible with competition policy. While competition policy ensures the full functioning of market by removing private and public restraints on competition, many forms of industrial policy as applied to particular industries may be justified on grounds of correcting market failures. In China, industrial policy has a particularly close relationship with competition policy, as many of China’s economic policies serve the function of both industrial policy and competition policy. For example, the market entry liberalization measures discussed in my previous post are a form of industrial policy, yet they are also the quintessential competition policy because they, perhaps more than anything else in the context of China, promote competition in the sectors in question.
However, there is one aspect of industrial policy as exercised in China that does create tensions with the fundamental purpose of competition policy. Namely, in many of its industrial policy plans China has emphasized the government’s intention to promote mergers and acquisitions that will lead to concentration of market power in a few extra-large companies, or “national champions.” To be sure, policies favoring the creation and support of national champions are not unique to China. Many other countries, particularly developing countries, have long used such policies, and in some cases quite successfully. But perhaps nowhere than in China has the creation and support of national champions been made such a centerpiece of industrial policy for so many sectors. China’s extensive reliance on national champions is best illustrated in its overall SOE restructuring plan. In December 2006, China’s State-Owned Assets Supervision and Administration Commission (“SASAC”) issued a document entitled the Guidance Opinions on Advancing the Restructuring of State Capital and the Reorganization of State-Owned-Enterprises (see herefor the document in Chinese). In that document, one of the primary policy measures announced by SASAC for the restructuring of SOEs is to “push for mergers and acquisitions among large SOEs” to form “a group of extra-large companies that are internationally competitive.” In an interview given shortly after the issuance of the SASAC guidance document (see herefor the interview in Chinese), the director of SASAC elaborated that China’s goal is to maintain absolute control by SOEs of “strategic sectors,” including national defense, electrical power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, and waterway transportation. The leading companies in those sectors, the SASAC director further stated, should become “world class” companies, an apparent reference to what the SASAC guidance document called “extra-large companies that are internationally competitive.”
The adoption of the AML and specifically its merger control provisions in August 2007 did not reverse China’s emphasis on national champions in its industrial policy, as one would be inclined to believe. In two industrial restructuring plans issued by China’s State Council in March 2009 concerning the steel and automobiles industries respectively (see hereand herefor the texts of the plans in Chinese), China again announced that its top priority in the two industries is to push for mergers and acquisitions among the largest companies to form “extra-large companies that are internationally competitive.” China went a step further in the two industries’ restructuring plans than in the aforementioned SASAC guidance document, setting specific market share targets for the largest companies in the two industries. The restructuring plan for the steel industry states that after mergers and acquisitions, the top five steel companies should account for forty-five percent of the total capacity of all steel producers in China. The restructuring plan for the automobiles industry states that China aims, again through mergers and acquisitions, to reduce from fourteen to less than ten the number of automobile companies that have a market share of more than ninety-percent in their respective product market. The restructuring plans for both industries do not mention how the planned mergers and acquisitions would comport with the merger control provisions of the AML. As a matter of fact, neither restructuring plan mentions the AML at all.
So there appear to be tensions, if not outright conflicts, between the AML’s merger control provisions and China’s goal of forging “extra-large companies” in various industries through government-guided mergers and acquisitions. China’s emerging de facto dual-track competition regime discussed in my previous post may be one way for China to get around the tensions. Since the largest companies in industries targeted by China’s industrial policy tend to be all SOEs, by effectively not enforcing the AML against the largest SOEs, China for all practical purposes will have elevated industrial policy above competition policy for those industries.
China’s obsession with “extra-large companies” in many of its industrial policy plans is likely not the only or the greatest impediment for antitrust law and competition policy. Arguably, the political and cultural bias in favor of concentration of power underlying that obsession poses more fundamental challenges for the implementation of antitrust law and competition policy in China. In the United States, where modern antitrust law originated, one thing that has aided the implementation of antitrust law is the deep-rooted skepticism of concentration of power, be it political or business (leaving aside the question of whether the implementation of antitrust law is always desirable). By contrast, China has almost the exact opposite: the Chinese system prizes centralized power and centralized control, and in China anything big tends to elicit pride, not fears. This bias in favor of “bigness” partly explains the bigger-is-better mentality manifest in many of China’s industrial policy plans. It is true that China has enacted its antitrust law in the same style as the antitrust law of the United States, but it remains to be seen how the spirit—or even the letters—of antitrust law will be implemented in a country whose broader political and cultural frameworks are not exactly compatible with the spirit of antitrust law.
In my next and final post for this blog series, I will survey the latest developments of “administrative monopolies,” or anticompetitive conducts by government agencies, under the AML. Stay tuned.
Posted by D. Daniel Sokol
Bernard Ascher and Albert A. Foer, both of the American Antitrust Institute have a new working paper on Financial Reform and the Big 4 Audit Firms.
ABSTRACT: The world’s audit industry is concentrated in the hands of four big accounting firms: PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte Touche Komatsu (the Big 4). These firms are in a strong position in that they audit the financial statements of nearly all the global public companies in the world and, arguably, are the only audit firms able to do so. They are huge, privately-owned, international networks with robust revenues, vast resources, and expertise. The firms have two major burdens. They are heavily regulated by governments, and they are vulnerable to massive lawsuits when investors and creditors suffer large losses due to fraud or error. Since the dual shocks of the collapse of Arthur Andersen (reducing the Big 5 to 4) and the enactment of stringent regulations by the U.S. Congress in 2002 in reaction to corporate accounting scandals, there is great concern in the financial community that another of these companies could be forced out of business, further reducing the choice of auditors for multinational corporations and causing disruptions in the marketplace.
First, this paper briefly reviews the regulation of audit firms and their exposure to massive lawsuits. Then it takes a fresh look at various proposals intended to avert loss of another major audit firm, to reduce concentration and to stimulate greater competition in the audit industry. Until smaller competitors or new competitors can build viable networks and reputations for high quality audits, global public companies will continue to face a limited choice of auditors. The paper suggests that it would be appropriate for the U.S. Congress to include consideration of the Big 4 audit firms in its review of regulation of banks and other financial institutions, particularly those regarded as “too big to fail.” The paper proposes that, if the Congress were to consider limiting the liability of audit firms, no such relief should be granted without setting conditions that are likely to make the auditing of public companies more competitive. One way to do this would be to set incentives for voluntary structured divestitures as a means of reducing heavy concentration in the audit industry in an orderly manner. This could serve as a starting point for determining how the open season for divestiture would operate and how to deal with the inevitable questions and issues as they arise during the legislative process.
Posted by D. Daniel Sokol
Kathryn McMahon, University of Warwick - School of Law has a new paper on Developing Countries and International Competition Law and Policy.
ABSTRACT: The breakdown in the negotiations for the adoption of multilateral competition rules through the WTO in 2003 is most commonly attributed to the opposition voiced by developing and least-developed countries who were suspicious of attempts to facilitate market access and permit possible interference with their domestic industrial policy. It is not always evident however that such a regime would have been counter to their interests. Greater efforts to co-ordinate the detection and elimination of global cartels, for example, would have been highly beneficial to developing countries where these cartels have a disproportionate impact. This paper will examine some of these issues within the context of the utility of global and domestic competition law and policy for developing and least-developed countries. While developing countries may have been right to question the overall benefits of a multilateral scheme, the enactment of a domestic competition law, which is mindful of the contextual issues at stake in these economies, may make an important contribution to economic development.
Sunday, January 10, 2010
Posted by D. Daniel Sokol
Thanks to all of our participants for their comments:
Part 1. Josh Wright (George Mason)
Part 2. Keith Hylton (BU)
Part 3. Bob Lande (Baltimore)
Part 4. Dan Crane (Michigan)
Part 5. Geoff Manne (Lewis & Clark)
Part 6. Sean Heather (US Chamber)
Part 7. Herb Hovenkamp (Iowa)