Antitrust in China: The Problem of Incentive Compatibility

This paper reviews China’s recent efforts to enact a competition policy (antitrust) law. We focus on three issues: (1) What is the substance of the proposed law, and how does it differ from existing antitrust law in other countries, (2) How will the law be implemented or enforced, and how will those who must implement this law interpret their mandate, and (3) What will be the likely effects of this law given China’s unique history and cultural heritage. We emphasize China’s economic, legal and regulatory contexts in which an antitrust law may be enforced. Our central focus is the problem of establishing a substantive and procedural legal framework that is incentive-compatible with economic efficiency and growth. The policy debate on antitrust within the Chinese government is not public. An unofficial draft of the proposed law was widely circulated outside China in 2003 and was the subject of a public commentary by the American Bar Association. A slightly revised draft was submitted for deliberation to the State Council in March 2004.2 The changes from the prior draft seem to have chiefly to do with which agency of the government will administer the law. At this time, no further information is available to us. Our comments on the “proposed law” are therefore based on the version that has already circulated. We find a number of respects in which the draft law could be improved, both to increase its clarity and to make its enforcement more consistent with the goal of achieving improvements in economic efficiency. We also find much merit in the draft, especially its strong focus on reducing anticompetitive practices of state owned enterprises (SOEs) and other government bodies. However, our major difficulty with the new law is that, in the absence of a tradition of reliance on the rule of law, Chinese and foreign enterprises will find it very difficult to rely on the antitrust statute or the actions of the courts in China as a basis for predicting the antitrust liability that might result from various business practices. Therefore, the principal vector by which antitrust law (or indeed any law) affects economic behavior is absent from the Chinese scene. Unless the bureaucracy that enforces the new antitrust law actively pursues a policy of consistent enforcement based on written guidelines, stare decisis, or other sources of predictability, the substance of the statute itself will have little significance. That outcome would represent a significant loss for the economic welfare of the Chinese people.