From Brussels to Beijing

By RONALD A. CASS
FROM TODAY'S WALL STREET JOURNAL ASIA

The Beijing Summer Olympic Games begin next week, but a very different sort of event kicks off tomorrow when China's new antimonopoly law takes effect. The critical question is whether the new law in practice will be closer to Olympic contests such as sprinting, where there are clear rules and little question about who wins, or to gymnastic and skating competitions, which often turn on the particular views of the judges.

At a formal level, China's new law is comparable to laws in the United States, the European Union and elsewhere. The substantive provisions spelling out constraints on market behavior are organized under the same three major headings used in other nations' laws: regulating agreements between firms, abuse of dominant position, and excessive concentration through mergers or acquisitions. Most of the provisions of China's law closely parallel approaches taken in other antitrust and competition laws, or in the decisions applying them. Its prohibitions on price-fixing agreements or on contracts among competitors restricting output or allocating market segments, for example, follow similar prohibitions that have developed out of more general language in the Sherman Antitrust Act in the U.S. and in Article 81 of the EU's Charter. So far, so good -- up to a point.

The major problem with antitrust law concerns its implementation. Surface similarities among competition laws mask considerable differences in application. U.S. antitrust law increasingly looks to economic analysis in assessing actions by firms that dominate a particular market sector. That is why, for instance, American courts and enforcement agencies generally find conduct such as "tying" -- requirements that customers buying one good also purchase another -- consistent with market competition, especially "tying" through integration of product features rather than by contractual fiat.

A well-known example is the 2002 court decision reviewing the major U.S. antitrust case against Microsoft for tying its Internet Explorer browser to its Windows operating system. The court decided that "technological tying" arrangements should not automatically be found unlawful because there are substantial economic justifications for tying product features together to make integrated products less costly, more attractive to customers or easier to use. Similarly, U.S. courts critically evaluate the economic rationality of claims that a dominant firm has sold products at "predatory" prices, analyzing the realistic prospects for recouping losses from such a strategy. That was the basis for rejecting a suit against Matsushita in the 1980s for low-priced sales of television sets.

In contrast, Europe resists giving prominence to economic considerations and has found tying an abuse of dominant position under Article 82 of the EU Charter, even where there is ample evidence of market demand for the tied product and little if any demand for separating products. The EU's 2004 and 2007 decisions respecting Microsoft's integration of its Media Player features with Windows struck a starkly different tone -- and reached an opposite decision -- from the American version of the case, even though all major operating systems also integrated media players and consumers showed no interest in a version of Windows stripped of Media Player. The same divide characterizes other differences between the U.S. and EU. Whether the issue is tying, cost allocation or the scope given to a firm to exploit its intellectual property, Brussels has followed a more interventionist and less predictable path.

The point isn't just that the U.S. generally allows businesses to compete in the marketplace while the EU tries to keep successful businesses from being too successful. More importantly, laws anchored in economics tend to have greater predictability and less variance at the discretion of government decision makers -- which supports the rule of law, helps keep markets efficient and attracts increased business investment.

China's law clearly has both feet in the EU camp, starting with its goals. Article 1 announces the law's purposes as "prohibiting monopolistic conduct, safeguarding fair market competition, improving economic efficiency, protecting the interests of consumers and public interests, and promoting the healthy development of the socialist market economy." Article 4 directs those charged with the law's administration to formulate and implement competition rules that advance "the socialist market economy, macroeconomic control, and a unified, open, competitive and orderly market system."

Rather than simply promoting efficiency-based competition, administrators are to embrace a set of goals that often will be incompatible. Given the size of the state sector, giving weight to the socialist side of a "socialist market economy" could undermine effective safeguards for private firms seeking to compete on an even footing. While China's law expressly recognizes that dominant firms can have justifications for conduct such as tying, it does not explain how its complex set of goals will be used to evaluate proffered justifications. Nor does it explain how to decide what makes prices unreasonably high or low, though it forbids dominant firms from selling or buying at unreasonable prices.

More troubling, although adoption of rules is separated from enforcement authority and enforcement is divided among several government agencies, there is no separation of investigation, prosecution and decision-making powers. The combination of functions follows the EU's lead. Unlike the U.S., where officials in the Department of Justice or Federal Trade Commission who investigate and prosecute violations of antitrust law must make their case to other decision makers, the EU's competition authority, known as DG-COMP, wields all three powers. That arrangement further increases scope for administrative discretion and reduces prospects for an effective check on protectionist -- or simply biased -- enforcement. Given the frequency of complaints about opaque and uneven discretionary decision making in China, an organizational structure reinforcing those tendencies isn't going to inspire confidence in the new regime.

Discretionary and nationalistic enforcement will be particular problems under Article 55's declaration that firms may exercise "legitimate" intellectual property rights but cannot restrict competition by abusing IP rights. Intellectual property's importance to rapidly growing sectors in China and in Western nations -- and the continuing, acrimonious conflicts between China on the one hand and the U.S., Europe and Japan on the other over lax or protectionist Chinese enforcement of IP rights -- make this provision a likely flash point for disputes. Any nation struggling with the concept of free speech won't easily persuade skeptics it has free markets down pat.

Finally, China's new law underscores the problem of multiple antitrust authorities with cumulative jurisdiction over international business -- expressed most often as anxiety over what yet another merger review in yet another nation will do to the difficult process of negotiating and implementing deals in an increasingly fluid, global economy. More bureaucracy isn't high on business's wish list -- much less an unpredictable, potentially interventionist one.

So, while everyone else is watching the jumps, twists and turns of talented athletes in the coming weeks, business leaders should wonder whether the administrators deciding their fate under China's new law will have them executing similar moves -- or will reward them if they do.

Mr. Cass is chairman of the Center for the Rule of Law, dean emeritus of Boston University School of Law and former commissioner and vice-chairman of the U.S. International Trade Commission.