Regulating Abuse of Administrative Monopoly under the PRC Anti-Monopoly Law

1
Regulating Abuse of Administrative Monopoly under
the PRC Anti-Monopoly Law

• Thomas Cheng
• University of Hong Kong
• Asian Competition Law Conference 2007

2
Abuse of Administrative Monopoly

• What is abuse of administrative monopoly?
• Very broad it can be understood to include three
  categories of conduct
• Public restraints of trade enacted by provincial
  or local governments to pursue protectionist or
  parochial objectives.
• Collusive behavior by trade associations.
• Anticompetitive behavior and/or abuse of
  dominance by state-owned enterprises (SOEs).
• This presentation will focus on the first
  category.
• It is widely regarded as one of the most serious
  competition problems in China.

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Abuse of Administrative Monopoly

• The term is unique to China, however, the
  phenomenon is not.
• Both the U.S. and the European Community have
  tackled this problem, albeit not under
  competition law.
• In the U.S., it is largely a constitutional law
  problem dealt with under the dormant Commerce
  Clause.
• In the EC, a number of EC Treaty articles are
  concerned with this problem, such as Articles 28
  to 30, and Articles 90 to 93.
• Examples of protectionist public restraints of
  trade
• Road blocks
• Discriminatory licensing fees and requirements
• Discriminatory weight limits on highways
• Local purchase requirements

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Relevant Provisions in the AML

• Article 8, Articles 32 to 37 (Chapter V), and
  Article 51.
• Article 8 sets out the general principle
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative power to eliminate
  or restrict competition.
• Article 51 sets out the sanctions for abuse of
  administrative monopoly
• Order by superior authority to repeal/retract the
  offending administrative measure/conduct.
• Disciplinary sanctions for the chief offending
  official.

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Relevant Provisions in the AML

• Article 32
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative powers to require
  or require in a disguised form organizations or
  individuals to deal in, purchase or use the
  commodities supplied by the undertakings
  designated by them.
• Article 33
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative powers and take
  any of the following actions to hinder the free
  flow of commodities among different regions  
• (1) to charge discriminatory fees under separate
  fee categories or at different rates, or fix
  discriminatory prices for commodities originated
  from other regions                  

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Relevant Provisions in the AML

• Article 33 (contd)
• (2) to impose on commodities originated from
  other regions technical requirements or
  inspection standards different from those applied
  to similar local commodities, or cause
  commodities originated from other regions to be
  subject to discriminatory technical measures such
  as duplicate inspection or certification, so as
  to restrict the entry of commodities originated
  from other regions into the local markets
• (3) to implement special administrative
  licensing measures applicable only to commodities
  originated from other regions, so as to restrict
  the entry of commodities originated from other
  regions into the local markets
                     
• (4) to set up checkpoints or take other measures
  to block the entry of commodities originated from
  other regions or the flow of local commodities
  out of the region                       
• (5) other actions that may impede the free flow
  of commodities among different regions.

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Relevant Provisions in the AML

• Article 34
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative powers to exclude
  or restrict the participation of undertakings
  from other regions in local bidding activities by
  means such as prescribing discriminatory
  qualification requirements or standards or by not
  publishing information according to law.
• Article 35
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative powers to exclude
  or restrict investment in their region or
  establishment of branches or subsidiaries in
  their region by undertakings from other regions,
  by applying means such as treatment not equal to
  what local undertakings are entitled to.

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Relevant Provisions in the AML

• Article 36
• Administrative agencies and organizations
  empowered by laws and regulations to have the
  function of administering public affairs shall
  not abuse their administrative powers to compel
  undertakings to engage in any Monopolistic
  Conduct set forth hereunder.
• Article 37
• Administrative agencies shall not abuse their
  administrative powers to make regulations that
  contain provisions eliminating or restricting
  competition.

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Scope of Chapter V

• Three types of public restraints of trade
• Directly discriminatory/distinctly applicable
  measures
• Indirectly discriminatory/indistinctly applicable
  measures
• Non-discriminatory administrative measures that
  impede inter-regional flow of goods/market access
• Should Chapter V be limited to the first category
  of restraints?
• Should Chapter V extend to the last category of
  restraints?
• Pros Achieve greater market integration in
  China.
• Cons Difficult balancing analysis required,
  especially in light of the lack of enforcement
  experience.

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Brief Overview of the US Approach

• Per se illegality for directly and indirectly
  discriminatory measures.
• For non-discriminatory measures that nonetheless
  burden interstate commerce, a balancing test is
  applied.
• Pike v. Bruce Church, Inc., 397 U.S. 136 (1970)
• Where the statute regulates even-handedly to
  effectuate a legitimate local public interest,
  and its effects on interstate commerce are only
  incidental, it will be upheld unless the burden
  imposed on such commerce is clearly excessive in
  relation to the putative local benefits. If a
  legitimate local purpose is found, then the
  question becomes one of degree. And the extent of
  the burden that will be tolerated will of course
  depend on the nature of the local interest
  involved, and on whether it could be promoted as
  well with a lesser impact on interstate
  activities. (emphasis added)
• The Court will weigh the burden on interstate
  commerce against the benefits to the regulating
  state.

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Minnesota v. Clover Leaf Creamery Co., 449 U.S.
456 (1981)

• This case concerned a Minnesota state law which
  prohibited the retail sale of milk in
  non-recyclable plastic container, but continued
  to allow sale of milk in other non-recyclable
  containers.
• The legitimate regulatory interest was identified
  as environmental protection.
• Given that milk was sold in multiple types of
  containers, the inconvenience of having to
  conform to different packaging requirements in
  Minnesota and the surrounding States should be
  slight.
• Even granting that the out-of-state plastics
  industry is burdened relatively more heavily than
  the Minnesota pulpwood industry, we find that
  this burden is not clearly excessive in light
  of the substantial state interest in promoting
  conservation of energy and other natural
  resources and easing solid waste disposal
  problem.

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Brief Overview of the EC Approach

• Discriminatory fiscal measures are governed by
  Articles 90 to 93. Under EC case law, directly
  discriminatory tax measures between similar
  products would be struck down. However,
  indirectly discriminatory tax measures could be
  justified by some objective justification.
• As for quantitative restrictions, distinctly
  applicable measures could be justified under
  Article 30, which permits justifications based on
  public morality, public policy, and public
  security, among other reasons.

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Brief Overview of the EC Approach

• Under Cassis and Keck, indistinctly applicable
  measures that concern physical characteristics of
  a product can be justified by one of the
  mandatory requirements under Cassis.
• Indistinctly applicable measures that concern
  selling arrangements fall outside of the purview
  of Article 28 altogether if certain conditions
  are met.
• The European courts have placed great emphasis on
  proportionality in the balancing analysis.

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Proposed Framework for Balancing under Chapter V

• In considering the applicability of the U.S. and
  the EC framework, two factors need to be
  considered
• Different nature of the political entities
  involved, and hence different degrees of economic
  integration may be expected.
• The gravity of the problem currently.
• On one side of this balancing framework are the
  anticompetitive effects of the administrative
  measure, which can be determined by the
  proportion of the market foreclosed by the
  measure.
• On the other side of the framework are two
  variables the importance of the regulatory
  objective and the fit between the measure taken
  and the regulatory objective sought to be
  achieved.

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Proposed Framework for Balancing under Chapter V

• As the extent of market foreclosure increases,
  the requirements on the importance of the
  regulatory purpose and the fit between the
  administrative measure and the regulatory purpose
  are tightened.
• The sliding scale
• If an administrative measure forecloses more than
  10 of the market, it must be a reasonably
  necessary means for achieving an important
  regulatory purpose.
• If an administrative measure forecloses more than
  20 of the market, the administrative measure
  must be the least restrictive means for achieving
  a compelling regulatory purpose.
• If an administrative measure forecloses more than
  25 of the market, it will be automatically
  struck down.