[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] IMPACT OF CHINA'S ANTITRUST LAW AND OTHER COMPETITION POLICIES ON U.S. COMPANIES ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON COURTS AND COMPETITION POLICY OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ JULY 13, 2010 __________ Serial No. 111-117 __________ Printed for the use of the Committee on the Judiciary Available via the World Wide Web: http://judiciary.house.gov U.S. GOVERNMENT PRINTING OFFICE 57-430 PDF WASHINGTON : 2010 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON THE JUDICIARY JOHN CONYERS, Jr., Michigan, Chairman HOWARD L. BERMAN, California LAMAR SMITH, Texas RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr., JERROLD NADLER, New York Wisconsin ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina ELTON GALLEGLY, California ZOE LOFGREN, California BOB GOODLATTE, Virginia SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California MAXINE WATERS, California DARRELL E. ISSA, California WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia STEVE COHEN, Tennessee STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr., TRENT FRANKS, Arizona Georgia LOUIE GOHMERT, Texas PEDRO PIERLUISI, Puerto Rico JIM JORDAN, Ohio MIKE QUIGLEY, Illinois TED POE, Texas JUDY CHU, California JASON CHAFFETZ, Utah TED DEUTCH, Florida TOM ROONEY, Florida LUIS V. GUTIERREZ, Illinois GREGG HARPER, Mississippi TAMMY BALDWIN, Wisconsin CHARLES A. GONZALEZ, Texas ANTHONY D. WEINER, New York ADAM B. SCHIFF, California LINDA T. SANCHEZ, California DANIEL MAFFEI, New York JARED POLIS, Colorado Perry Apelbaum, Majority Staff Director and Chief Counsel Sean McLaughlin, Minority Chief of Staff and General Counsel ------ Subcommittee on Courts and Competition Policy HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina RICK BOUCHER, Virginia JASON CHAFFETZ, Utah CHARLES A. GONZALEZ, Texas F. JAMES SENSENBRENNER, Jr., SHEILA JACKSON LEE, Texas Wisconsin MELVIN L. WATT, North Carolina BOB GOODLATTE, Virginia MIKE QUIGLEY, Illinois DARRELL ISSA, California DANIEL MAFFEI, New York GREGG HARPER, Mississippi JARED POLIS, Colorado Christal Sheppard, Chief Counsel Blaine Merritt, Minority Counsel C O N T E N T S ---------- JULY 13, 2010 Page OPENING STATEMENTS The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in Congress from the State of Georgia, and Chairman, Subcommittee on Courts and Competition Policy............................... 1 The Honorable Howard Coble, a Representative in Congress from the State of North Carolina, and Ranking Member, Subcommittee on Courts and Competition Policy.................................. 2 WITNESSES Mr. Shanker A. Singham, Partner, Squire Sanders, LLP, on behalf of the United States Chamber of Commerce, Washington, DC Oral Testimony................................................. 4 Prepared Statement............................................. 6 Mr. Tad Lipsky, Partner, Latham & Watkins, LLP, Washington, DC Oral Testimony................................................. 18 Prepared Statement............................................. 20 Ms. Susan Beth Farmer, Professor of Law, Pennsylvania State University, Dickinson School of Law, University Park, PA Oral Testimony................................................. 27 Prepared Statement............................................. 29 The Honorable Thomas O. Barnett, Partner, Covington & Burling, LLP, former Assistant Attorney General of the Antitrust Division, United States Department of Justice, Washington, DC Oral Testimony................................................. 39 Prepared Statement............................................. 42 APPENDIX Material Submitted for the Hearing Record........................ 71 OFFICIAL HEARING RECORD Material Submitted for the Hearing Record but not Reprinted Submission entitled: Symposium, Fourth Annual Latin American Round Table on Competition & Trade, Barriers to Entry in Mexican Telecommunications: Problems and Solutions This submission is available at the Subcommittee and can also be accessed at: http://www.brooklaw.edu//media/PDF/LawJournals/BJI_PDF/ bji_vol27i.ashx IMPACT OF CHINA'S ANTITRUST LAW AND OTHER COMPETITION POLICIES ON U.S. COMPANIES ---------- TUESDAY, JULY 13, 2010 House of Representatives, Subcommittee on Courts and Competition Policy Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to notice, at 4:10 p.m., in room 2237, Rayburn House Office Building, the Honorable Henry C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee) presiding. Present: Representatives Johnson, Jackson Lee, and Coble. Staff Present: (Majority) Christal Sheppard, Subcommittee Chief Counsel; Eric Garduno, Counsel; Rosalind Jackson, Professional Staff Member; (Minority) Stewart Jeffries, Counsel; Tim Cook, Staff Assistant; and John Mautz, Legislative Director. Mr. Johnson. The hearing on the impact of China's Antitrust Law and Other Competition Policies on U.S. Companies will now come to order. And without objection, the Chair is authorized to declare a recess. We have called this hearing because there is concern within the U.S. business community that China's new anti-monopoly law, AML for short, might be applied or interpreted in a discriminatory manner. The net effect of this would weaken the ability of U.S. companies to compete in China. If this is happening, it would contribute to the uneven balance of trade we already have with China and ultimately lead to more American jobs shipped overseas. China is a sovereign nation entitled to design its laws the way it wants. At the same time it is unfair for Chinese companies to benefit from our antitrust laws which do not discriminate against them, while at the same time, applying their AML in a discriminatory manner against U.S. companies. In these troubled economic times, we must be vigilant in ensuring U.S. companies and entrepreneurs are not discriminated against, particularly in markets as big and important as China. This is why Congress and the Administration have given so much attention to examining a variety of Chinese economic policies, including its currency valuation, intellectual property enforcement and indigenous innovation rules. We today are adding to this effort by focusing upon China's anti-monopoly law. The results regarding the AML that have been expressed to date and which our witnesses will focus on include the seemingly uneven application of the merger review requirement, the potential for the abuse of dominance provisions to encompass normal business activity and the ambiguity in how the AML's abuse of intellectual property provision will be applied. Our witnesses will also focus upon the status of State-Owned Enterprises, SOEs, under the AML. I understand that up to 50 percent of China's GDP comes from SOEs and that generally China's SOEs operate as commercial entities like the Verizons and Fords of the world rather than, say, a state run utility. I think it is important that the AML is applied to China's SOEs like any other businesses, though I am told this is not the case. I look to the witnesses today to verify this and for them to elaborate on how SOEs and the concept of a planned economy fit into the antitrust regime. I also want to note that I am planning to lead a congressional delegation to China during the August recess to see firsthand various aspects of how the Chinese competition laws and their enforcement affect American business. I am very much looking forward to the trip and the opportunity to interface with Chinese competition policymakers on these issues. Lastly, while it is important that China establish a level playing field with regard to its antitrust laws it should also be mentioned that the AML is brand new. The Chinese should be commended for updating their antitrust law. This is a positive development for all businesses in China, both Chinese and foreign. And an important step as China becomes a key player in international economic relations. Because the AML came into effect less than 2 years ago, the Chinese government is still developing and implementing regulations for most of the AML's provisions. That is why at present I see no reason to start ringing bells over the AML. Nevertheless, we must keep our attention on how China goes about applying and enforcing the AML. I also think we should make it a priority to continue working with the Chinese to ensure discrimination based upon country of origin and the closing off of the Chinese market to American businesses does not occur. To this end, I hope the witnesses can provide constructive advice on how best to engage Chinese policymakers to ensure that the AML isn't applied in a discriminatory manner. I will now recognize my colleague, Howard Coble, the distinguished Ranking Member of the Subcommittee, for his opening remarks. Mr. Coble. Thank you, Mr. Chairman, for calling the hearing. Good to have our panel of witnesses with us today. Our trade philosophy is that the United States can and should compete in the global market. By opening trade and competition with other countries, those countries have a new opportunity to prosper economically and build new long lasting relationships that are driven by mutual interests. We have benefited from our trade with China, but we have also experienced some serious difficulties, mainly job losses. While I firmly believe, Mr. Chairman, that the United States can compete with any country, this only applies if there is a level playing field. That means the equivalent rules and standards and ensuring matters such as product safety, accurate currency rates, rights and protections for workers, intellectual property protection and enforcement, environmental protection, nuclear nonproliferation and most importantly human rights are paramount. The United States and China have engaged in a constructive dialogue for nearly 3 decades. We have not always agreed but we work through our disagreements to forge a strong relationship it seems to me. During this time, China has moved from a state controlled economy to an economy and society that reflect mutual interests embodied in its trade policies. In North Carolina, trade with China has had a significant impact. Many of our textile plants sit empty and many other products including furniture that were once manufactured in our district are now either a symbol or shipped to North Carolina retail stores from China. North Carolina is rebuilding and retooling, but we also need a level playing field where we can compete against other countries, not unlike China. To that end, we have the opportunity today to discuss competition policy in China and how it impacts the United States. The United States was the first country to codify a competition law, the Sherman Antitrust Act of 1890. Since that time, over 100 nations have implemented some form of competition act. These laws have the potential to lower prices and increase innovation for products and services around the globe but if they are implemented improperly, they can unfairly benefit comic companies at the expense of foreign rivals. In 2007, China, as you pointed out, Mr. Chairman, adopted the Anti-Monopoly Law. While the AML bears all the hallmarks of a modern competition statute, we have yet to see how it will be implemented. I look forward to hearing from our panel of witnesses today about the potential of the AML. I am also interested to learn what more Congress and the Administration can do to ensure that China can benefit from our experiences developing competition policies. A sound and effective competition policy is in our mutual interest in seems to me. And I am hopeful that today's hearing will help us understand China's AML and why it is in our mutual interest. I yield back the balance of my time, Mr. Chairman. Mr. Johnson. Thank you, Mr. Coble. Without objection, any other Members' opening statements will be included in the record. And at this time, I am now pleased to introduce the witnesses for today's hearing. Our first witness is Mr. Shanker Singham, a partner at Squires Sanders law firm where he specializes in antitrust and international trade law, including WTO and market access issues. Mr. Singham is speaking on behalf of the global regulatory cooperation project of the U.S. Chamber of Commerce. Mr. Singham is also the chairman of the International Roundtable on Trade and Competition Policy. Welcome, sir. Our next witness is Mr. Tad Lipsky, a partner at the law firm of Latham & Watkins where he specializes in U.S. and international antitrust and competition law. I also want to note that from 1992 through 2002, he served as the chief antitrust lawyer for the Coca-Cola company, a company which is close to my heart. And welcome, sir. Next we have Professor Susan Beth Farmer, a professor of law at Penn State's Dickinson School of Law where she teaches courses in American and comparative antitrust law. She was also a Fulbright scholar in 2008 at the University of International Business in Economics in Beijing, China, where she researched and studied the Chinese legal testimony, particularly the AML. Welcome. And last but not least, we have Mr. Thomas Barnett, a partner at the law firm of Covington & Burling where he specializes in global antitrust and competitive law. From 2005 through 2008, he was the assistant attorney general of the Antitrust Division of the United States Department of Justice. I want to thank you all for your willingness to come and participate in today's hearing. Without objection, your written statements will be placed into the record and we would ask that you limit your oral remarks to 5 minutes. You will note that we have a lighting system that starts with the green light and in 4 minutes it goes to yellow and then in 5 minutes red. After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions subject to the 5- minute limit. Mr. Singham, please begin. TESTIMONY OF SHANKER A. SINGHAM, PARTNER, SQUIRE SANDERS, LLP, ON BEHALF OF THE UNITED STATES CHAMBER OF COMMERCE, WASHINGTON, DC Mr. Singham. Chairman, Members of the Subcommittee, I am honored by the opportunity to address you today on the subject of China and competition policy on behalf of the U.S. Chamber of Commerce. As we noted in our written testimony, China's transition to a market economy where competition on the business merits is the norm continues to be a challenging one. It should not surprise anyone given the history, but China's attempts to move in this direction should be applauded. However, there are some systemic issues that the U.S. Government must consider in developing a responsible approach to China and its transition. First, China's transition is not yet complete. And there are profound challenges in the operation of a competition agency embedded in an economy that has not yet fully accepted competition policy as a normative organizing principle. In these cases, there is a danger that competition agencies may become another tool in the hands of an industrial policy focused government to distort markets rather than to ensure their competitiveness. We have seen evidence of a number of policies, such as compulsory licensing in China's new patent law and China's indigenous innovation policies that are focused on skewing the marketplace away from business competition on the merits and toward preferring certain technologies and certain firms. China's competition law, the AML, will not operate in isolation. Indeed it would not be surprising if China's competition agencies were used to achieve some of the industrial policy goals that some of the more recent developments in intellectual property and indigenous innovation are intended to express. While we generally applaud the development of the competition law in China, which is a significant part of China's transition to a market economy, we note that in the unique market that is China, there remain concerns as to whether the AML will deliver on its goal of ensuring that firms of all nationalities operating in China will find a competitive marketplace there. We have summarized these concerns in our written testimony and they are broadly one. Will China's state- owned enterprises as well as its state privileged private firms be subject to the same disciplines as other private enterprises? The AML, as written, suggests differential treatment will be applied and this will lead to anti-competitive market distortions. Currently, China is forcing a number of administrative mergers without competition review to better position certain China SOEs in the market. Two, will China use its AML to erode intellectual property rights of U.S. and other foreign firms in order to give advantage to that China competitiveness? Based on the revisions to the patent law which increase the scope for the use of compulsory licensing and other methods of technology transfer, as well as China's recent indigenous innovation policy, this danger is real. Three, is there a danger that China will rely on discredited antitrust doctrines to promote industrial policy goals in the areas of merger control and unilateral conduct by giving greater weight to the welfare of competitors as opposed to consumers. Of particular concern is the use of discredited doctrines to build an anti-competitive approach to refusals to deal at essential facilities that would be completely outside the mainstream of international best practice. The type of analysis that the Chinese competition agencies are pushing with respect to unilateral conduct in particular, which involves branding certain firms dominant and then severely restricting their scope of action is very problematic. In response to this concern, the U.S. Government should be careful and consistent in its own messaging on domestic policy as only departure from consumer welfare and business competition on the merits however slight will likely be seized on by China to justify its own policy. Four, there is concern about China's approach with respect to activates in both public and private sector where cartels formed in China have significant impacts on U.S. and other foreign markets. We believe as we make clear in our written testimony that all of the distortions referred to above some of which may emanate from the application of the AML have some which come from other laws and policies are anti-competitive market distortions, ACMDs which incidentally are not necessarily unique to China. But in China, these affect both U.S. firms, as well as Chinese consumers in the Chinese economy. It is, therefore, in both the interests of the U.S. and China to limit ACMDs and we suggest in our written testimony ways in which this can be done. To summarize, one, we suggest a new intra-agency process built around ACMDs. This process would involve key stakeholders in the U.S. Government that have vested interest in their reduction, as well as sound application implementation and enforcement of the AML. We suggest this group report to Congress on the competition effects of ACMDs. We suggest evaluation of the potential for international agreements on ACMDs and we support the excellent technical assistance programs that the FTC and DOJ already provide to recognize the fundamental reality in the Chinese market. In summary, we are very willing to help the Committee as it tackles this subject and we can respond to any questions the Committee has. Mr. Johnson. Thank you, Mr. Singham. Next, Mr. Lipsky, please. [The prepared statement of Mr. Singham follows:] Prepared Statement of Shanker A. Singham__________ TESTIMONY OF TAD LIPSKY, PARTNER, LATHAM & WATKINS, LLP, WASHINGTON, DC Mr. Lipsky. Thank you, Mr. Chairman. Thank you very much to the Subcommittee for this opportunity to appear. Shanker in his written testimony and in his brief oral statement, has just summarized the matter very effectively and it is also obvious from your own introductory statements that the level of knowledge you have about the development of the AML and the current situation we are in is already pretty well developed. We agree that the law is new and many of the potential problems have been identified are largely questions of implementation and I would identify myself very strongly with the Chairman's statement that we need to--I don't recall his exact words, but the feeling was we need to continue and intensify our engagement with the Chinese agencies and the Chinese officials who concern themselves with antitrust enforcement in China and who develop policy. And Congressman Coble, you have asked the very simple question, what can we do? So let me, in my very brief oral summary of my statement, try to contribute to that question because I support the idea of continuing and intensifying our engagement. First, the United States should have a coherent message about what antitrust law is all about. We stand, I think, first in the world in identifying ourselves with the purpose of antitrust being to encourage competition on the merits, policy that rewards innovation, efficiency, productivity and competitiveness to maximize the wealth that our societies can create with our scarce resources. I think other nations are either--do not implement or do not implement as effectively that approach to antitrust, and I think the United States has a lot to say and why this is a policy that makes sense and why a failure to unify antitrust policy around the concept of competition on the merits renders the enforcement of the law incoherent, unpredictable and susceptible to parochial influence, ultimately dragging down economic performance and conflicting with many of the economic and trade goals that you identified in your opening statements. So the United States, number one, should be a vigorous advocate of competition on the merits as the central focus of antitrust. As Shanker mentioned, this makes it imperative that the U.S. antitrust agencies conduct themselves with great care when they present views on issues of antitrust policy to the business community and the public. The whole world watches these 100 jurisdictions that now have be antitrust enforcement when the United States speaks about antitrust because we have still, by far, the longest and strongest tradition of antitrust enforcement. When we put forth new ideas, we have to make sure that great care is taken to make sure that abroad where there is much less experience with antitrust, things are not taken the wrong way. Our current policy discussion on the possibilities of extending the reach of section 5 of the Federal Trade Commission Act I submit would stand as an example of how we might have been a little bit careless in conducting a domestic dialogue without thinking very carefully about how that dialogue is heard at foreign antitrust agencies. Once we have a coherent message, we neat advocacy and we need engagement with the Chinese agencies as has been mentioned. Shanker mentioned the possibility of an interagency task force with regard to China. I support that. Let me just mention one other idea here in my brief time. So far as I am aware, even though we rely on our antitrust agencies to have dialogue with China and other foreign antitrust agencies, so far as I am aware there is no direct recognition in the statutes that authorize our antitrust agencies to act in their organic statutes or in their appropriation statutes. There is nothing that directly authorizes them to engage in these activities of having dialogue with the Chinese officials, nor with the officials of any other antitrust agency around the world or with the international organizations that concern themselves with antitrust policy. This would be the international competition network, the competition committee of the OECD and some others that have been mentioned. There is an excellent recommendation in the Antitrust Modernization Commission Report that there be some specific budgetary and recognition and some recognition in the authority for the agencies so that they are encouraged to engage because Congress has, in effect--if Congress would, in effect, certify and approve and fund efforts of this nature, I think they would feel much more at liberty to be presenting the kind of dynamic advocacy that I think it sounds like all of us here recognize is required. Let me conclude my remarks there. Thank you very much for the opportunity to appear. And, of course, I will be glad to answer any questions. Mr. Johnson. Thank you, Mr. Lipsky. [The prepared statement of Mr. Lipsky follows:] Prepared Statement of Tad Lipsky
__________ Mr. Johnson. Next, Professor Farmer. TESTIMONY OF SUSAN BETH FARMER, PROFESSOR OF LAW, PENNSYLVANIA STATE UNIVERSITY, DICKINSON SCHOOL OF LAW, UNIVERSITY PARK, PA Ms. Farmer. Thank you. Chairman Johnson and Ranking Member Coble, I appreciate the invitation to discuss the developments of the Chinese antitrust law and their effect on American business. International competition law and enforcement certainly raises important policy issues and congressional attention is appropriately focused on these considerations. The AML, however, is only 2 years old. It went into effect in 2008 and in that short time, three separate agencies have been organized to enforce the various aspects of the law. They have issued many rulings, guidelines and procedures and have begun to investigate and take decisions on individual cases. Of course, the AML had been in development for more than a decade. So the 2-year life of the law may understate its actual development. Importantly, a number of the decisions and the regulations will affect and have affected American businesses operating in China. In order to assess the impact of the AML, I would start with the words of American Justice Oliver Wendell Holmes. He explained that the life of law has not been logic, it has been experience and these experiences included the felt necessities of the time, the prevalent moral and political theories and intuitions of public policy. He concluded that the law embodies the story of a nation's development through many centuries and it cannot be dealt with as if it contained only the axioms found in a math book. China's experience shows the difficulties of moving from theory to law to implementation rules to the construction of the efficient apparatus for implementation and then finally to enforcement within a system that has frankly grown far more quickly than its administrative capacities. Based on that background, I would like to comment on a few features of the AML that you both raised as important considerations. First, the AML considers the same kinds of categories of businesses as the American Sherman and Clayton Acts. The general prohibitions concern anti-competitive agreements, monopolization or abuse of the dominant position and anti-competitive mergers. However, the AML goes further and because there are Chinese characteristics to be considered and it has separate sections on the important category of the Chinese economy state-owned enterprises and administrative monopolies. In addition, China has chosen to have three enforcement agencies enforcing separate sections of the law which however are not airtight. It is important that they be able to communicate with each other and that their regulations are both consistent and transparent. There are some overlaps and there may be some differences of concern. Finally, unlike current American policy, Chinese law explicitly incorporates other noncompetition factors into the analysis. This is found in Article 1 and Article 4. The sections on merger control and abuse of dominance regulated by MOFCOM and the SAIC probably affect American business more than other of the provisions of the AML. During the first year of the AML, MOFCOM reviewed 52 transactions. There is no official statistics available for the second year, but if the review is moving along at the same pace, the Commission may have reviewed up to 100 mergers. During the first year, out of the 52 transactions, only one was prohibited and 5 were approved with conditions. All of these mergers involved one or more American parties. The abuse of dominance section and the merger control provision both contain explicit statements that national security, economic development, noncompetition issues may be considered in deciding the merger and determining whether or not a firm with a large share of the market has dominance. This is a concern. However, it is important to note that both of the agencies have been busy issuing their own rules and regulations and SAIC is a good example in that it has issued 2 regulations, one in 2009 a revision just a few months ago asking for and receiving comments from American experts, including some sitting at this table and they were listened to. So while there are some important differences between the American antitrust law and the Chinese, it appears that they are committed to capacity building. And while the development certainly involves Chinese characteristics, there is a trend toward viewing antitrust through a lens of consumer welfare along with the majority of jurisdictions, including the American. Thank you. Mr. Johnson. Thank you, Professor Farmer. [The prepared statement of Ms. Farmer follows:] Prepared Statement of Susan Beth Farmer
__________ Mr. Johnson. Now, Mr. Barnett. TESTIMONY OF THE HONORABLE THOMAS O. BARNETT, PARTNER, COVINGTON & BURLING, LLP, FORMER ASSISTANT ATTORNEY GENERAL OF THE ANTITRUST DIVISION, UNITED STATES DEPARTMENT OF JUSTICE, WASHINGTON, DC Mr. Barnett. Thank you, Mr. Chairman, for the opportunity to address the Subcommittee on this important topic. I should say I am testifying in my personal capacity today. I view the AML as holding great promise. The adoption of this competition law regime in China is part of the transformation of the Chinese economy from a centrally directed economy to a market- based economy and that is a very critical change. My experience with the AML principally comes from my time as the head of the Antitrust Division. During that time, we were heavily engaged with the Chinese officials who are drafting the AML. I spent time on two trips in Beijing meeting with various senior Chinese officials as well as many of my staff meeting in Beijing as well as in the United States. Our impression was uniform, that the Chinese officials were well informed, open to exchanging ideas and sincerely focused on crafting a first- class competition law regime. They understand what the U.S. Supreme Court has explained. Our competition laws rest on the premise that unrestrained interaction of competitive forces yields the best allocation of resources, lowest prices, highest quality and greatest material progress. On a closely related point, the U.S. Antitrust Modernization Commission which this Committee helped to establish has underscored that regulation or governmental control can be the antithesis of competition, tending to preserve monopolies and other noncompetitive market structures. Accordingly, by reducing barriers to entry and encouraging investment and innovation, the AML and the market oriented approach that it represents should promote economic growth in part by providing greater opportunities for U.S. businesses in China. With respect to the AML itself, as many people have noted, the Chinese government succeeded in crafting a competition law that generally falls within international norms. And I would like to think that our consultations made a difference. They listened to our comments and as various iterations of the AML came out, they incorporated those comments and improved the final product. I would particularly commend the AML for including a prohibition on the use of administrative powers to create a monopoly or restrict competition. These are some of the most enduring and harmful types of restrictions on competition. There are provisions in the AML which do not necessarily reflect an international consensus, Professor Farmer has pointed out the three different agencies. There are also prohibitions on dominant firms charging too high or too low a price, something that is very difficult to administer and that can be counterproductive. The key question as many have noted is implementation. It needs to be enforced in a way that promotes economic growth with a focus on efficiency and improving welfare. This fundamental challenge is as true in China as it is here in the United States and around the world. The short version is it is too early to tell how it is being enforced in China. To take an example that the Chairman pointed out, Article 55 of the AML talks about the right to exercise intellectual property rights, but also talks about how it can be an abuse without defining where the line is. That is a line that we are still looking to see drawn. Our focus, I suggest, should be on helping the Chinese agencies to implement the law in a principled and effective manner that will spur economic growth and which should have the effect of opening opportunities for U.S. and other businesses operating in China. Specifically, the U.S. agencies should continue to exchange ideas and best practices with Chinese agencies, both in general and in specific enforcement matters. Second, private businesses operating in China need to ensure their compliance with the AML, but they should also participate in the policy discussions. Both the Chinese agencies and the business community can learn from each other in this process. Third, we should encourage further agency guidance. Each of the agencies has been issuing guidance. Indeed the NDRC issued something today with a call for public comment for which I commend them. Fourth, we should encourage participation by the Chinese agencies in international organizations such as the International Competition Network. That very dialogue can help promote better practices and convergence. As I said, the AML holds great promise. If implemented in a manner consistent with international norms, the AML should provide a win-win-win situation for all involved including not only Chinese consumers, but U.S. businesses. Mr. Chairman, thank you for the opportunity to participate in the hearing. [The prepared statement of Mr. Barnett follows:] Prepared Statement of Thomas O. Barnett
__________ Mr. Johnson. Thank you, Mr. Barnett. We will begin questioning. This question is for all of the panelists. It has been asserted that China's state-owned enterprises are not subject to the AML. Do you believe this? Let me ask you this question also. If China's state-owned enterprises are not subject to the AML, what recourse, if any, do other countries have in addressing competitive distortions that are created by non-application of the AML to state-owned enterprises? Mr. Singham. Mr. Chairman, I think the application of the AML to state-owned enterprises, the language could be at best somewhat ambiguous and at worst there is a direct equivalent application between private firms and state-owned enterprises. However, the Chinese agencies do have the right to conduct competition advocacy directly with state-owned enterprises and with administrative agencies to promote competitive outcomes, and I think one of the things that we could be encouraging the Chinese competition agencies to do is to engage in complete and effective competition advocacy with state-owned enterprises. It is certainly important that there is a level playing field and that competition law apply to state-owned enterprises as well as private firm, but it is important to note that that does not necessarily mean that exactly the same antitrust tests would be applied as between private enterprises and state owned firms. State-owned firms are revenue maximizers at best. They are able to sustain low cost pricing for long periods of time. They gain benefits from their connections to government and therefore the tests that you might apply would be different and we would encourage the Chinese agencies to bear that in mind as they conduct that type of advocacy. But we would certainly think that it is very important for the agencies to engage in constructive competition advocacy and that we take advantage of our technical assistance programs that the FTC and DOJ are engaged with the Chinese on to stress the importance of advocacy. Mr. Johnson. What is the difference between advocacy and enforcement in this context? Mr. Singham. The difference is under the law, a different approach will be applied between private firms and state-owned enterprises in terms of actual implementation. So what the Chinese have done through the AML is create a vehicle for the Chinese competition agencies to directly advocate competition and advocate pro competitive solutions to state-owned enterprises. Every country's competition agency ought to be conducting competition advocacy with respect to domestic regulation as well as actual state-owned enterprises and so forth. Mr. Johnson. But what about enforcement? Mr. Singham. Well, we certainly would like to see enforcement both with private firms and state-owned enterprises. As you pointed out in your opening statement, China's state-owned enterprises are operating as commercial companies. In China, they have effects in the U.S. market, they have effects in third country markets and U.S. firms that are competing against China state-owned enterprises in China, in the U.S. and in third-country markets need to have some assurance that the benefits and privileges that state-owned enterprises are receiving as a result of their connections to government do not lead to artificial reductions in cost and therefore an advantage that does not derive from business competition on the merits. I should point out that there is a spectrum of state owned enterprises in China. You have one extreme, a fully government owned company; on the other extreme, you have a private firm that simply benefits from state privileges and tax preferences and so forth. And so the real problem with respect to state-owned enterprises and competition in China is the network of anti-competitive market distortions that benefit certain firms in China and disbenefit other firms and obviously have been impact on U.S. firms as well. So you can't really answer your question without developing some tools that the U.S. Government would be able to deploy to deal with these anti-competitive market distortions. Be they tax distortion, be they special regulatory exemptions, however the distortion occurs. But we need to develop some tools to be able to deal with those from a competition perspective. Mr. Johnson. All right. Thank you, Mr. Lipsky. Mr. Lipsky. Thank you. I think Shanker has dealt very effectively with this question. I think a way to consider a way to think about the problem, think back to the days when our own aviation air transportation industry was heavily regulated. There was an administrative agency, the Civil Aeronautics Board, airlines could not enter a route or leave a route without the permission of the Civil Aeronautics Board. They could not merge without permission. They could not make agreements without permission. As a matter of fact, they couldn't even have a discussion about a potential agreement without the permission of the CAB. In that format, the only thing that was left to the competition agencies was actually to appear before the Civil Aeronautics Board and say please allow more competition, allow prices to be more flexible, allow more carriers to enter and leave routes. So this is a very long-term process. We should think of this as the beginning of a very long road to implement all of the things that China needs to do to make the full transition from the legacy of central planning to a competitive economy that much more resembles the United States, other OECD jurisdictions. This is why we need to get organized for advocacy with the Chinese and the same could be said with some other countries because if you look at all of the steps necessary for the transition, it not only involves placing more and more assets and productive activities in private hands, reducing the involvement of the government, the government ownership, the government financing, the government management, the presence of government officials in private firms. That is a very tall order and a very grand transformation. There is no silver bullet or magic words we can say. We need to think of this as a long-term prospect of making the transition complete. And that would be my recommendation. Mr. Johnson. So you are pretty much saying just kind of stay the course, wait and see what develops? Mr. Lipsky. I don't think I am saying wait. I am saying we need to ramp up our involvement. We need to ramp up the dialogue, the commitment, the way that we articulate, the very good values and economic principles and legal approaches that are already reflected in our law. I am not saying they translate directly to the Chinese case. In many respects they won't. But we need to keep focus on the issue, keep dialogue with the officials, keep proving to them again and again this lesson of history that the free market competition is the best way to get a productive and innovative and progressive economy, creating benefits for all of the consumers, both the Chinese and the countries like the United States with which the Chinese trade. So I guess it would be constant pressure constantly applied is maybe the way I would put it. Mr. Johnson. All right. Thank you. Professor. Ms. Farmer. Thank you. I agree that reducing the state- owned enterprises is an important goal and China has been working on that, making slow but some steady progress because frankly a state owned enterprise may not be as efficient as a privately owned one. Mr. Johnson. I am sorry. Would you say the last part? Ms. Farmer. An SOE may provide large employment, but it may not be as efficient. There are a couple of tea leaves that we may be able to read. Just recently, the State Council has adopted a policy encouraging foreign investment. And since a number of the large industries are currently state-owned, this may indicate some opening wedge. State-owned enterprises are not limited to railroads and public utilities. They include construction, salt and tobacco. Two recent cases send mixed messages. There was a private monopolization case filed against China Netcom. The case was settled in favor of the private individual. So that suggests that the AML may well apply. On the other hand, there was a recent telco merger which apparently was not notified to MOFCOM and the justification was apparently that the telcos are state-owned enterprises and they were regulated by the sector regulator. So there is still a little bit of flux in the system. But I certainly agree with the other panelists that continued progress on lowering state ownership would be a positive development. Mr. Johnson. Does that include state-owned ownership? Does that include ownership by persons who are in key positions within various units of Chinese society? Ms. Farmer. Yes, I think Mr. Singham was quite correct in explaining that it is a fairly complicated picture. It is not just ownership by the central government. Mr. Johnson. Mr. Barnett. Mr. Barnett. Mr. Chairman, I think it is important to keep perspective here in that it is quite clear that 2 years ago, none of these state-owned enterprises were subject to any anti- monopoly law. Today you have a law that on its face says that they must comport or operate their businesses in accordance with the law. And certainly that is a position that the United States should encouraging to the extent that they are engaged in commercial enterprises, they should be subject to the same competition laws as any other commercial enterprise. From my perspective, though, I am going to dissent slightly from Mr. Lipsky's predicate, although I agree with his conclusion. The U.S. Government, I think, to commend it has been very engaged with the Chinese on this front on a multiprong effort, everything from the trade folks over at USTR to the competition agencies, the FTC and the DOJ, as well as the Department of Commerce, USAID in part working with the Chamber. There has been an intensive focus on trying to encouraging the Chinese to explain to them, as Professor Farmer was saying, these state-owned enterprises, if you protect them, you are going to protect inefficiency. If you want to promote and maintain the kind of economic growth that you have enjoyed for the last 15 years or so, you are going to need real competition to drive innovation, drive costs down. And there are officials in China who, I believe, understand that and who are pushing toward the application of these competition laws to all entities, including state-owned enterprises. Is it clear that they have accomplished that yet? No. And that is why I agree with the conclusion that the U.S. Government should--and the U.S. business community should remain very focused on trying to encouraging them in that direction. Mr. Johnson. So you believe that they are headed in that direction. What is your suspicion as to the outcome? Mr. Barnett. I suspect it is going to be a slow process that will not an steady process it may well be, you know, 3 steps forward, 1 or 2 steps back. As I think Mr. Lipsky was pointing out, these are complicated issues. Even in the United States they are complicated issues. And so in the long run, though, I believe that you will see more and more of these state-owned enterprises probably both becoming more private and in any event more subject to competition law discipline if you will. And so I am an optimist on this front. But I do think patience and persistence are called for. Mr. Johnson. Will that process lead to more individual freedoms in China? Mr. Barnett. That is the a fascinating question. There are certainly many who believe that economic liberty and other liberties, political liberties often go hand in hand. I guess what I would focus on is to say if the AML is implemented in the way it is set up to be implemented, that it will lead to greater economic liberty, greater material wealth for Chinese consumers, Chinese citizens and that that is ultimately a good on multiple fronts. But how it plays out in other realms, I leave that to other experts. Mr. Johnson. Anyone care to give an opinion about that? Mr. Singham. Well, I would agree with Mr. Barnett's comment there that economic freedom is derived from the kind of competition policy, competitive marketplace where consumers are empowered and become real economic actors in their own right. It doesn't answer the question. It doesn't tell you that this will lead ultimately to greater freedom measured by other indicia. But certainly this is a pathway to greater levels of economic liberty for Chinese citizens and for Chinese firms. Mr. Johnson. All right. I will now yield to questions from Mr. Coble, the Ranking Member. Mr. Coble. Thank you, Mr. Chairman. I thank the panel again for being with us. Mr. Barnett, you referenced the tension between China's recognition of intellectual property rights and its condemnation of the abuse thereof. How do you see this balance playing out today, A? And, B, are you concerned that China may try to appropriate U.S. companies' intellectual property for their own use? Mr. Barnett. I do think that there is a risk that the Chinese competition agencies, as well as other competition agencies around the world can look at the normal exercise of an IP right, a refusal to license or a request for a royalty rate that the licensee views as too high as something that violates their competition laws. From my perspective, that would be an unfortunate and counterproductive implementation of the AML. We have not really seen that yet, but it is something that we should very much keep an eye on because the agencies, I don't believe, have indicated clearly where they will draw the line. On this point, I want to underscore something that Mr. Lipsky said. This is an issue in the United States and Europe and elsewhere as to what is a lawful exercise of an IP right and what is an abuse. In having our domestic dialogue and/or our dialogue with our European counterparts and other, it is very important that we keep in mind that others, including the Chinese agencies are watching carefully what we say and do. And that that should be part of the thinking as we engage on these issues. Mr. Coble. Thank you, sir. Professor Farmer, in our discussion of state-owned enterprises, some of you raise concerns about prominent Chinese officials owning Chinese companies. Does this mean that you have concerns about U.S. officials owning or having significant ownership in U.S. companies? Ms. Farmer. That is a difficult question to answer. Mr. Barnett. If I understand the question, there is the issue that the U.S. Government has in the last couple of years become a major shareholder for example in a number of large U.S. corporations. And that is an issue that while it may have been necessary given the circumstances at the time, in my own view that is something that the U.S. Government should be trying to get out of as quickly as possible so that it can then let the market, the private market continue to work without direct governmental involvement. Mr. Coble. By the same token, Mr. Barnett, or Professor Farmer, do you think that the Chinese should also withdraw? Mr. Barnett. I would say if you are talking about commercial activity as opposed to traditional governmental activity, I believe it is better to have that kind of activity in the private sector. It is ultimately, as Professor Farmer was alluding to, likely to lead to more efficient companies, higher quality products, lower prices to consumers. Mr. Coble. I got you. Thank you. Mr. Barnett. In both countries. Mr. Coble. Thank you, thank you, Professor. Mr. Lipsky, you alluded over 100 countries have some sort of antitrust or competition law, including the European union. Today's hearing focuses on concern that China could use its recently enacted anti-monopoly law to discriminate against modern competitors. Have United States companies faced this kind of discrimination from other nations with antitrust regimes and if so how was it handled or how it was disposed of? Mr. Lipsky. Let me answer this way, not necessarily focusing specifically on the European union's competition law, but competition laws of general applicability, which is what most antitrust laws are, applying to restrictive agreements, mergers acquisitions and all kinds of structural transactions. These are extremely broad and powerful systems of law. And to the extent they are enforced seriously, you have tremendous potential for very serious effects on the structure of particular industrious and on trade in particular commodities and services. In many jurisdictions, we find a lot of the same issues that we have been discussing with respect to China today, namely the potential that these very powerful legal tools will be applied in a way that is not transparent, that tends to favor parochial interests, rather than to pursue competition on the merits. So we have had a lot of issues trying to get--just as we are trying to do with China today, trying to get other jurisdictions to clarify, to commit themselves to nondiscrimination, to non-protectionist policies. And a good place may be to look for a kind of catalog as to how to go about this. The antitrust section of the American Bar Association has for at least about 18 years now had a regular program of becoming aware of and commenting upon the adoption of antitrust laws, amendments to antitrust laws, the issuance of regulations pursuant to antitrust law, including in China, and under a certain authority of the American Bar Association, the section of antitrust law in combination with other sections like the section on international law has commented and has made specific recommendations with respect to the laws, the regulations and the procedures, remedies, virtually any topic you can think of. And so there is a very broad menu of jurisdictions and legal principles and procedures and remedies where this very same potential that we are discussing with respect to China today also exists and there again, the solution is engagement. We can't force these other jurisdictions to conform their antitrust laws to our ideas. But we can persuade. We can show them the lessons of history. So that is a concern in many, many jurisdictions throughout the word. Mr. Coble. Thank you, Mr. Lipsky. Mr. Singham, what rights and remedies does a U.S corporation have for anti-competitive conduct in China by a Chinese company? And does China recognize private rights of action? And, finally, if so, has any non-Chinese company brought suit or initiated suit against a Chinese company for violation of the AML. Mr. Singham. There have been private cases in China involving violations of the AML. A number of those cases have sort of fallen on technicalities, but your question raises another serious point, to what extent can U.S. companies and other foreign companies rely on Chinese courts and how does that system operate in conjunction with the AML? And certainly there are some concerns about the ability of the courts to, A, grasp these issues and, B, to operate in ways that aren't distorted by protection of Chinese companies' type interests. That's not unusual, and that's not unique certainly to China. That's the case in many, many countries that are new to competition law. I think training of judiciaries has been an effective way of engraining competition principles and competition culture into judiciaries of many countries. I think that's something we would certainly recommend with respect to China. Mr. Coble. I thank you. I thank the panel. Mr. Chairman, I yield back. Mr. Johnson. Yes, if it's okay, I would like to engage in another round of questions. Mr. Coble. Yes. Mr. Johnson. All right. Thank you. Mr. Singham, I believe you mentioned that there had been 100 cases filed within the last couple of years in China. Was that you or was that Mr. Lipsky? Or that was you, Ms. Farmer? One hundred cases, and I think five had been approved with conditions, and one had been denied. Ms. Farmer. Yes, that's the merger control regulation. We don't have official statistics for the full 2 years, but we know that 52 cases were notified and reviewed over the first year. And of those 52, one, the Coke Huijuan Juice merger, was prohibited and five additional were approved with additional conditions. And of those five they involved one or both parties that were non-Chinese firms. So if the number of pre-merger filings is approximately the same, then MOFCOM may have reviewed up to 100 mergers, but the statistics have not been released yet. Mr. Johnson. Are they going to be released or is that a matter of secrecy? Ms. Farmer. Obtaining information in a timely manner can be difficult, because these are relatively new agencies that are still engaged in capacity building, but the information does become available. Mr. Johnson. Anyone else have any comment about how the U.S. can actually monitor the progress of the application of the AML? Yes, sir. Mr. Barnett. Well, Mr. Chairman, it is difficult to get specific information, but one of the things that I encourage the U.S. Government to focus on when engaging the agencies is the importance of transparency and good process in their decision making. And that includes not only during the review process, ensuring that the parties know what's going on, know what the issues are and understand what the evidence is but when you make a decision that you explain the decision to the parties and to the world. That type of sunlight, if you will, can be a good disciplining force on the decision-making process and can help others understand what you're doing, I think. And I commend the current Attorney General, Christine Varney, who has made this one of the centerpieces of her international dialogue, the importance of this kind of transparency in merger review and other cases; and I couldn't agree more with it. Ms. Farmer. If I could turn from merger cases to monopolization or dominance cases. Five--at least five have been filed, not by the government but private parties. It's interesting to note that they are occurring in Beijing and Shanghai. The Supreme Court of China has determined that these cases are so complicated that they should be filed at the immediate court level or in the intellectual property section of the lower court because these courts are experienced in dealing with complex cases and economic consideration. So I think that's a salutary feature of the law going forward. Mr. Johnson. Mr. Singham. Mr. Singham. I think we've talked a lot in this hearing about the importance of persuasion and persuading the Chinese competition agencies to adopt an economic-welfare-oriented approach to competition policy implementation. I think that's very important, and we should continue to do that. But I would agree with Mr. Barnett that I think the agencies have done a very good job of trying to persuade the Chinese about the benefits of economic welfare and consumer welfare as a guiding light for competition policy enforcement. But I think we also have to be realistic. And China's competition policy and the AML does not sit in a vacuum. It doesn't rely entirely on academic niceties. I think Professor Farmer alluded to this. And in view of that realism I think what we need to do is have greater tools for accountability so that where there are divergences from those types of normative principles, especially whether there are that are beyond international best practice. And I think there is a serious risk that we may well see this in the area of intellectual property and competition policy. Mr. Johnson. What kind of tools are you talking about? You mean for U.S. companies or outside companies or what are you referring to? Mr. Singham. I think the starting point--and I think Mr. Lipsky made this comment as well--is---- Mr. Johnson. I'm sorry to keep asking questions about what others have gone over. Mr. Singham [continuing]. The need to really organize ourselves on how we address competition policy not just in China but in other countries as well in terms of how we express our views best in the interagency process. We have a history of being very successful with countries that have newly incorporated competition laws or antitrust laws in terms of technical assistance, but many of those countries are countries that have basically accepted competition policy as an organizing principle in the economy. And the China of today is not necessarily the China of even 5 or 6 years ago. I think it is very important that we therefore reorganize or at least organize an additional interagency process around these kinds of anti-competitive market distortions. Simply because a competition agency is doing something does not mean that it is pro-competitive. There may be many examples of competition agency action that actually take you away from a competitive market, and we need to ensure that where that occurs we have tools for engaging the Chinese in a dialogue and that we have a metric-based, rule-based way of doing that so we are not sort of constantly playing whack a mole with each new regulation or decision or whatever comes out of China but we have a consistent policy that's based on persuasion certainly, persuading people of what the normative principles ought to be in competition policy enforcement and why it is good for their own economies but also with a bit of a stick as well. Mr. Johnson. Yes, Mr. Lipsky. It just seems like we're dancing tenderly. We're tiptoeing in terms of testimony, I'm saying. This is not getting right to the--I suppose this is a tough issue to deal with with a sledgehammer. Mr. Lipsky. It is tempting to look for a silver bullet or something concrete to do that will materially advance things. I wanted to just address there's a mild suggestion that has crept into the remarks here that I was perhaps critical of previous U.S. Government in action on this issue, and I want to remove any such suggestion by saying that there should be--I think we're all saying there should be additional focus, there should be additional resources, there should be encouragement, there should be recognition, there should be better structure and organization to monitor what's happening in China; and the same could be said elsewhere. I didn't mean to cast aspersions, but, nevertheless, I believe it is still correct to say that there's no place in the statutes of the United States or in the statements that accompany budgetary appropriations or authorization, there is no place that says, Department of Justice Antitrust Division, Federal Trade Commission, please do this, please monitor how these other antitrust laws affect U.S. business. It is I think perhaps indirect, and it's implicit. It has certainly become a custom and a very creditable custom in the agencies to engage in these matters. And yet I have to say that, having been at this for a while, every time there is a change in leadership at the Antitrust Division or at the Federal Trade Commission, the officials that we would expect to really take the opportunity and spearhead the American interest in foreign antitrust enforcement and how it affects the global economy and U.S. business, there is always a momentary--a moment of butterflies in the stomach where you hear, well, I hear he doesn't like to travel or I hear she won't participate in the Japan-U.S. bilateral because she won't eat sushi under any circumstances. There's always a question as to how the personal preferences and predilections of the senior officials will affect the way that the United States agencies participate in this very, very important dialect. Well, it shouldn't be a question of personal predilection. It should be a welcome responsibility. Mr. Johnson. Should that come through some form of legislation or some regulatory rule? Mr. Lipsky. Well, certainly the first step would be simply to recognize that it is a proper activity, an activity that the Congress is aware of and acknowledges. And I don't know---- Mr. Johnson. I hear you right now and--but I'm just wondering, in your view, what would need to be done in order to ensure that we have some continuity in this area between changes in our personnel? Mr. Lipsky. I believe that even the simplest expression of recognition, support, and encouragement of this activity, whether it was in the authorization legislation or report or many flexible ways that Congress could deal with this short of enrolled legislation it seems to me. I'm confident that the agencies--I would be very interested in Mr. Barnett's view on this, but I'm confident that an explicit congressional recognition of the value and importance of this function would be embraced eagerly by the officials of these agencies. Mr. Johnson. Yes, sir. Mr. Barnett. I heartily endorse the sentiment that the agencies should be engaging with many other countries, but China in particular in many ways, one of the most important. I guess I would say to me it's mainly a question of making sure they have adequate resources. I believe and it was certainly my perception at the time that I understood quite clearly that Congress was interested in our focusing on that. There are multiple ways for Congress to do that. There was certainly not an authority or lack of authority to do it, given the amount of time and resources that we devoted to it. But it could well be that even more resources are valuable. In that respect, and also to address the continuity point, one specific thing that probably could use more--even more focus or more opportunity is not so much the exchange between senior officials but opportunities to interact at the career level, at the staff level. And I'll use the example of the relationship between the U.S. agencies and the European Commission. There used to be a lot--well, there can be divergences, but there used to be a lot more. The agencies have now developed a relationship so they talk on almost on a daily basis on major matters, and they educate each other, and they end up coming to more convergent results. And we've not seen the same sort of divergence we saw 10 years ago. It's very dif--it's harder to do that with the Chinese agencies, but if we can find ways for career staff to spend time with the career staff of the Chinese agencies--and, remember, Professor Farmer talked about capacity building. These are complex issues, and you're asking people who grew up in a centrally directed economy to apply a set of principles that derive from a market-based economy that's not necessarily intuitive to them. It's hard to overestimate the importance of training the rank and file on these principles, on the economics and how to do this best. That I think is largely a matter of resources. Mr. Johnson. Are the Chinese receptive to that kind of dialogue? Mr. Barnett. They were. I certainly raised this expressly with them when I was in Beijing even before the AML was enacted, looking ahead and realizing that implementation would be key. And we talked about--they seemed very open to it. In that regard, I will commend--I think it is in Mr. Singham's testimony--there is, for example, one program with the USAID that sets up a series of conferences and seminars, and that's a positive thing. But I'm talking about more of this and more person-to-person interaction. I think they will be cautious about it, but I think they are eager to learn. And if you structure it in the right way I think they will be open to it. Mr. Johnson. Yes, sir. Mr. Singham. I think there's one issue that we haven't addressed necessarily here that we need to address in order to do all these things more effectively, and that is there is a disconnect between the level of authority of the competition agencies in the U.S. with respect to other members of the U.S. Government. And particularly in countries that are new to competition or new competition agencies, those agencies are not very powerful at all. They have very little political power within their own systems. And so there is a slight disconnect there in terms of our expectations of them. And particularly in China there are many decisions that are really competition decisions that are not made and will not be made by the competition agencies in China going forward. They will be made by other branches of the government, and they will be imposed to some extent the Chinese competition agencies. And for that reason, while I agree with everything that everyone has said here in terms of the persuasion, the technical assistance, the--even to the extent Mr. Barnett suggested the placement of resident advisors, which I think is one of the best methods of technical assistance that you can find generally--we also need to have some tools--and these may be legislative tools--that gives some measure of accountability where an anti-competitive market distortion occurs either because the competition agency is engaged in it or because it is going on in the Chinese market and the competition agency is doing nothing about it. That enables us to be more effective in our advocacy of competition policy concerns. We suggested in our written testimony reform of the interagency process and also congressional reports by that interagency group, the reports from that interagency group to Congress on anti-competitive market distortions, measurable market distortions that have welfare-damaging impacts. Because that is also a tool that can be used in China and in other countries to demonstrate that a particular anti-competitive market distortion visits a certain amount of harm on that country's own consumers and their own economy. And that would enable us to build up those forces and people within countries not just in China but around the world who want to have competition policy implementation enforcement based on economics and not on support of national champions or what have you. Mr. Johnson. All right. Mr. Coble. Mr. Coble. Thank you, Mr. Chairman. I have two questions, Mr. Chairman. Mr. Singham, how would you would rate the current Administration's engagement with China on the issues of competition policy? Mr. Singham. I would commend the current Administration as well as the previous Administration on engagement with China on a very, very difficult issue. I think everyone is agreed that the transition of a country from a completely centrally planned economy to a market economy is a hugely challenging task, and I think the current Administration is doing a good job of engaging in the technical assistance area and engaging in other dialogues with the Chinese to persuade them to adopt a competition policy that is more in line with international best practice than was the case 2 or 3 years ago in our ongoing discussion with them which has been going on for about 15 years on this competition law. I would say, though, that the Administration is limited in its ability to be effective because of the paucity of tools that it has. In our written testimony, we suggest increasing the toolbox to enable actors not just in DOJ and the Federal Trade Commission but in other agencies that have a stake in a competitive market in China to also engage. Mr. Coble. Thank you, sir. Mr. Lipsky, finally, it is virtually impossible to discuss China without talking about the country's human rights situation. Google recently had its licensed renewed in China despite a very public dispute with the country regarding censorship. In the meantime, Google's share of the Chinese market seems to have fallen relative to its Chinese competitor Baidu. While the licensing issue does not seem to implicate China's AML per se, it seems possible that China could pursue a lengthy and costly legal campaign against a company that is critical of any of China's internal policies. Is this a real concern and, if so, how should it be addressed? Mr. Lipsky. Well, the--I am not privy to the details of that particular dispute---- Mr. Coble. And nor am I. Mr. Lipsky. But the generic issue of mixing these different policy considerations always has the potential to lead to the perception that the competition aspect has been inappropriately mixed with a non-competition policy and thus that the competition enforcement standard has been distorted. And I would point out that the history of monopolization proceedings in the United States has also from time to time raised this question, abuse of dominance proceedings in the European Union have raised this question, and we need to be vigilant. We need to urge transparency. That really is the only way to control the inappropriate or the abusive reliance on competition law proceedings to achieve what is not an economically efficient result. The case United States vs. IBM lasted 13 years. There were some very lengthy, expensive, and complex proceedings brought under section 5 of the Federal Trade Commission Act against the breakfast cereal makers and against the oil companies. And that same potential always exists, and it will exist under the cognate provisions of the Chinese law. And so I think we just have to be vigilant, urge transparency, insist on accountability, and continue to pursue that over time. Mr. Coble. Thank you. Mr. Chairman, I yield back. Mr. Johnson. Thank you. Sheila Jackson Lee, our distinguished congresswoman from Houston, Texas. Ms. Jackson Lee. Mr. Chairman, thank you so very much; and my apologies to the witnesses. I have just landed, flying into Washington, D.C. But I am delighted that I was able to make the hearing before it had concluded. I want to thank the Chairman and the Ranking Member for what is a vital discussion; and I hope that you will engage me as I pursue some issues that I think are very, very important. I have been engaged in this issue for a number of years ago the Member of the Judiciary Committee when Chairman Hyde was a Member and a Chairman, of course, and raised a number of issues about the abuse of intellectual property. And certainly as I respect our friends and allies in China and have marveled at the ability to develop a very thriving middle class, one that is continuing to grow, I've also been appalled at the extensive abuse of intellectual property, much of it coming from the United States. Many of our friends are prone to talk about the trillions of dollars of debt that we have--I think $14 trillion may be the number at this point--and look awry at any efforts that our present government, my party, has engaged in to invigorate the economy which sometimes calls for stimulating it. But part of our crisis, if you will, goes a lot to the imbalance of export and import. And, frankly, I do not want to be quoted to suggest that the abuse of intellectual property is such a cause of it, but I would say that the inequities in markets like China and China having a large part of our debt, which makes me enormously unhappy because I think the playing field in China is not even uneven. It doesn't exist. We were advocates of China getting into the World Trade Organization as I understand that they are in. But, more importantly, this Congress went against its better judgement and supported the PNTR, the Permanent Normal Trade Relations, and I think the U.S. Chamber of Commerce might have been enthusiastic about it. We thought it was going to be a quid pro quo. Now all we get from China is lost jobs and closed doors. We get the sanctioning and censorship of Google and others. As the Ranking Member mentioned, we get continued human rights violations. And we get a big, empty bank account where we are losing money, even more so now with the approach that they are taking on trade, but, more importantly, over the years where they have abused intellectual property, where they have gained their economic edge because they have stood up on the backs and shoulders of Americans, from my perspective. So my question to the--I am not interested in soft-pedaling this potential crisis, meaning the AML laws that may, in essence, make us more than second-class international citizens. It may not even put us on the ballpark, if you will. Probably be something like some of the soccer games that we saw and the rulings of some of those referees that ruled us out. So I would like to pose to Mr. Singham, who is with the U.S. Chamber of Commerce, that we may find it a grand opportunity to be in alliance. Why is everyone soft-pedaling some of the legal schemes that are being proposed? And if these AML laws thrive, then they'll have some other laws, which is, knock three times at our door, we'll think about it and let you know in about 10 years whether you can do business in China or whether you can do it in an even playing field. So I would like to know some real solutions to laws that can be passed by a sovereign entity, which China is, to make them part of the international arena and, to be very frank with you, to get back some of the bounty that they've taken from the American people and others around the world that have advanced them to our disadvantage. Mr. Singham. Mr. Singham. Congresswoman, you make some excellent points; and I'd like to--and you make your point that it is sort of way beyond the narrow scope of the AML, but I agree and I said in my oral testimony and the written testimony that it is very important that we do not regard the AML in a vacuum, that in China it is not in a vacuum. Other policies and other laws in China do affect the implementation of the AML, but you raise a much, much greater and bigger point which is the issue of trade liberalization and competitive markets, which is essentially trade liberalization only really works when you have competitive markets inside the border and how can we get there with respect to China. One of the things that we absolutely have to do--and I would agree with you on this point--it is to ensure that we are not competing--U.S. firms are not competing with firms that have their costs artificially reduced through anti-competitive market distortions, whether they are in China or anywhere else, quite frankly. And so I would agree with you that we need to have a much more proactive approach to the issue of anti- competitive market distortions. When trade barriers were high, it didn't really matter what happened inside markets that we were trading with. As trade barriers have come down, these kinds of behind-the-border barriers, these kinds of anti-competitive distortions have become much, much more significant. I would certainly argue that they are just as if not more important now than the sort of traditional border trade barriers, and that's one of the reasons that the U.S. Chamber has set up a global regulatory corporation project to try to align some of these policies and try to deal with this particular problem, which affects not only U.S. firms but it affects U.S. jobs, it affects--because it is not just a competition in China or in the U.S., but it is a global competition, and U.S. firms are competing globally, and supply chains are competing globally. And where there are these kinds of distortions you are going to have an effect on the profitability of U.S. firms and their ability to employ U.S. people. I agree with you. There's a complete alignment here between U.S. firms and U.S. workers on this point. We ought to be able to say that business competition on the merits is the way that economies grow. And we ought to be able to agree that that is how economies develop, that is how consumers are empowered, and that's how the global economy grows. We all have a vested interest in that. While we say that, we ought to be able to say to our people, let competition decide our outcomes. Business competition on the merits, let that be the decider of outcomes. But we will be aggressive if we see that countries or government departments are artificially distorting their markets and, therefore, lowering the costs in an artificial way of businesses that are competing directly or indirectly with U.S. firms. So in our written testimony we've advocated a revision of the interagency process around anti-competitive market distortions, a way of measuring anti-competitive distortions so that we are actually dealing in real data and metrics. We've talked about looking at evaluating international agreements on anti-competitive market distortions. Many of these provisions already exist in existing trade agreements or the beginnings of them exist. We are debating now in the Trans-Pacific Partnership Agreement a chapter on competition policy that deals with some of these issues. If the AML is used by Chinese competition agencies in the way that you fear, we ought to have a set of tools to look at that interference, which is what it would be in the market as an anti-competitive distortion, and we ought to have a way of dealing with that. So I think there we are in a lot of agreement. Just on your point about intellectual property abuse--and this is critical because, as other members of the panel have noted intellectual property abuse--many competition agencies are taking the view, not the U.S. but other country's competition agencies--many other country's competition agencies are taking the view that refusal to license the intellectual property is by itself an abuse, is by itself a competition problem that the competition agency should get involved in. And we see some of that certainly in the provisions of the SAIC and other parts of the Chinese government in terms of how we will apply Article 55 on abuse of intellectual property. But I would make this point. For those competition agencies, competition policy and intellectual property are intention. But if you have a welfare-enhancing economic approach to competition policy and implementation, there is no tension between competition policy and intellectual property policy. Both policies have the same innovation and welfare- enhancing goals. So if we can succeed--however we do it, with whatever tools we can use, but if we can succeed in getting and insuring that the AML is applied in ways that make economic sense, that are welfare enhancing, then we will not have a situation where the AML is being essentially abused to erode the intellectual property rights of U.S. and other firms. Now there are certainly cases where firms do abuse intellectual property rights, and I'm not talking about that right now. But the key here is to ensure that the AML is implemented in a way that is based on economics, sound economics and consumer welfare. If you do that, then all the provisions that could be used--could be abused, I would say, to erode intellectual property rights won't be used in that way. So I think that's the key with respect to intellectual property. Ms. Jackson Lee. Mr. Chairman, if you would indulge me for a moment, I'm on a line of questioning. I think intellectually, Mr. Singham, you're absolutely right, if we analyze it in the way that you've analyzed it. And of course I think the modems and policies that you're speaking of I assume is policies that the U.S. Chamber of Commerce is looking at as you engage in doing business or helping your members do business--a lot of your members are very large companies--as they do business internationally around the world. I'm reading just a paraphrase of the language of AML, and what strikes me is language that says monopolistic conduct and economic activities within China, which is what AML is supposed to apply to, and foreign conduct that eliminates or has a restrictive effect on competition. Now, if you have one judge, then any foreign business that comes out of a climate of capitalism versus government-owned, directed, controlled businesses as China does could be found to be in violation of the AML, and it could be in violation on the basis of they are getting too much of the market share and making too much money. And so if I might--if someone else wants to launch in and let me yield to any of the other persons about the danger of language that, in essence, would close the door. Our companies that might make the first trip over--and I'm, obviously, using metaphors because we've been over--would be large companies to a certain extent and could be easily accused of conduct that eliminates or has a restrictive effect on competition and be a foreign entity. My thought is the Chairman has held this hearing and what are we doing in terms of protective laws from our perspective? We're in the WTO. We've got the PNTR. I have not seen major--I shouldn't say that. I assume the existence of Google and others--there is probably a long litany of companies, obviously, doing business there. The question is, where is the balance? But do we now need to look at laws that would match the laws that China has if they are laws that are preventative or blocking rather of our businesses from the United States--and that's what I'm framing my question around--loss of jobs and the businesses that have either gone there or not been able to thrive because they have been blocked from coming into China. Do we not need laws that respond to that kind of litmus test? Mr. Lipsky. Mr. Lipsky. Let me address this concern as follows: The law that you referred to, the provision of the AML that you've referred to, is in many respects consummate with legal norms that have emerged in other jurisdictions. In other words, in the United States, we have a statute which says that foreign conduct can be reached under U.S. antitrust law so long--I'm paraphrasing and simplifying quite a bit--but essentially as long as that conduct has a substantial direct and foreseeable effect on U.S. commerce. Ms. Jackson Lee. Just for a moment, I understand that we interpret our laws differently or at least in a more open manner than I perceive a law like this as it relates to China. So I think we're talking about two different approaches in interpretation of individual laws. Mr. Lipsky. Well, to the extent that the law is interpreted to create the kind of disadvantage for U.S. companies or foreign companies, we do have some historical experience with a somewhat similar situation where trade remedies were proposed. There was a provision of our trade act--I am not a trade expert, Shanker is, and he may wish to comment--but I think it was referred to as Special 301. It was a provision--as far as I know, there was never a successful proceeding invoked under that provision. There was a very intense, competitive battle reflected in the Kodak/Fuji case. Ultimately, I think a trade complaint was filed on behalf of Kodak. But, as I recall, it was not a Special 301 complaint. It was--they stepped right to the brink of invoking that provision but never invoked it. So we can certainly consider similar provisions to the extent we are encountering tilting of the playing field under the guise of competition law enforcement. Or, in that case, I think it was actually an accusation of lack of competition law enforcement in Japan. My own feeling, having not studied the matter carefully but just based on my own experience with this and similar disputes of this nature, is that what we are advocating is probably more likely to work out better for all parties in the long run. I think if we think of our relationship to China with respect to trade and related matters primarily and a partnership, I mean, our success is bound up with theirs and vice versa. If they do hold a lot of debt, that means they have a great percentage in our success. So we're going to be in this dialogue for the very long run, and I'm not saying we shouldn't use sticks. If there is serious trade distorting--unjustified trade distorting conduct, wouldn't discourage Congress from applying the appropriate stick. But you can't use only sticks. You have to feel your way through the dialogue. It's like any long-running, important partnership. Both parties have to give and take. There are a huge number of issues on the table in the bilateral relationship between the United States and China, and I---- Again, we're kind of at the inception of the AML. A lot of jurisdictions go through tremendous adjustments. When the European Union implemented its rules on restrictive agreements in 1962, it was kind of a bureaucratic catastrophe, because they elicited thousands and thousands of petitions from businesses who were afraid that their arrangements were going to be condemned, and then they had bureaucratic gridlock for years and years. So I'm sure I could think of examples of United States enforcement. Our initial experience with the Sherman Act and the Clayton Act was not an entirely happy experience. So I think the door has in a sense just opened, and we need to look at the record as it rolls out and pay close attention and try to insist on transparency and accountability and impose a little discipline and encourage our executive branch to get on it and stay on it and see where we are as time progresses. Mr. Johnson. Mr. Barnett. Mr. Barnett. If I could make expand slightly on that, to put it in perspective. You raise a lot of very important issues, but one way to think about this is should we view the AML itself as something that's good or something that's bad for U.S. businesses? In my view, it should by viewed as generally something good. There is certainly the potential for it to be applied in a way that could be protectionist or harmful to U.S. businesses and Chinese consumers, but, importantly, it is substituting for a regime that before had much more direct ways to exclude U.S. businesses from operating in China. It is an instrument to open up the markets there. There is a long ways to go, as Mr. Singham has pointed out. And you've not heard the witnesses say that the AML has been abused in very clear circumstances. What you've heard is that it may be in the future. A lot of the examples that have been pointed to of concern are other laws in other areas. In that respect, there is an additional potential benefit to the AML. Not everyone in China thinks the same way. You now have individuals at the various agencies, to the extent that they are persuaded that a market-based economy is the way to encourage growth and a focus on opening up markets to competition, including foreign competition, they can be a voice within the government to advocate for opening up and bringing down trade barriers. We have seen that type of advocacy be effective in other countries. So without minimizing your point that those are very serious issues and agreeing that we should bring a lot of different tools to bear on it, I just want to put in perspective that the AML itself can be an engine for good. Mr. Singham. Yes, I think that's right. One of the most important provisions in the AML is the provision that deals with advocacy and competition advocacy by Chinese competition agencies with other branches of the Chinese government. Now if you look at--as Mr. Barnett said, if you look at what we had before the AML, there was really no way that there would be a voice of competition or a voice for competition in any branch of the Chinese government. So we shouldn't underestimate how important that is. Now that it is there, it doesn't mean it will be a force for positive pro-competitive markets necessarily, but I think it is incumbent on us to try to work with the Chinese, recognizing the efforts that have been made and to develop the kind of individuals who can lead the charge on promoting competitive markets in China. It's interesting that in the field of competition what a difference individuals can make. I did a lot of work with Brazil when Brazil was starting its road on competition policy and happened to have some very, very good heads of competition agencies in Brazil who made huge inroads into what was also a-- perhaps not as planned as the Chinese economy but was emerging from import substitution and a sort of command economy in Brazil. So I think we shouldn't underestimate the power of these competition agencies to be a force for pro-competitive markets. I would say, in answer to your question about laws and so forth, that there are a number of laws already on the books that apply--could be applied in this area. Mr. Lipsky mentioned the Kodak/Fuji case. Where there are anti-competitive practices in foreign markets that have an effect in the U.S. under the Foreign Trade Antitrust Improvements Act, you can rely on U.S. antitrust law. There was a case in New York involving a vitamin C cartel where the Chinese government essentially said that it was a state-owned enterprise and the state basically forced the anti- competitive activity. And this was a defense in the case that was brought in New York. I think those are cases where, under the FTAIA, our antitrust agencies could meaningfully be involved. And on the trade side, many of our trade laws, section 337, section 301, the GSP preferences that we have, there are many, many trade laws that apply disciplines where there is anti- competitive activity. Now, historically, that has been rarely used; and it tends to be contained to private anti-competitive activity. I think the one area where legislative--some analysis of potential legislative solution could be explored is the area of where you have a market where the anti-competitive activities are primarily in the public sector or primarily government anti-competitive activities. But we ought to include those within what we count as anti-competitive practices for the purposes of those laws. So I think that certainly could be done. That would require us to apply the same discipline as to ourselves. And the Antitrust Modernization Commission, which has been mentioned on this panel, did make a recommendation to look at the state action exemption. The state action exemption protects state activity and allows states to essentially get away from anti-competitive activities where they are acting as states, as opposed to market participants. We need to revisit that, quite frankly. But there's a lot of those types of laws that we refer to in our written testimony where we can do that. But I do agree with what Mr. Barnett said, is we need to bear our problems. We do need to address the problems and develop tools to address the problems, but we also need to take a 25,000-foot look and say, well, there has been progress here. Let's try and build up---- Ms. Jackson Lee. If you could wrap up, and I appreciate it. Professor, I didn't know if you want to finish. Let me just thank the Chairman and indicate and comment to the answer to my question is, of course, I think, Mr. Barnett, you're right. The underlying premise of anti-monopolistic laws is good. I mean, our laws, our antitrust laws started with a framework to enhance competition opportunity. Those of who are still practicing law--I practiced law previously--know that, depending on what side of the case you are, sometimes our antitrust laws are paper tigers. You've seen mergers come and go and meet a basic standard and most people say how in the world could we allow these two entities to merge? They've obviously created an anti-competitive marketplace. I would only offer that this is a very important hearing; and I think all of these variables have to be integrated-- deficits, the abuse of intellectual property, the potential-- and I use that example because it is the most consumer-based, glaring example of when technology and design and talent that is taken from another and is utilized in this instance by China with anti-monopolistic laws if misinterpreted or used in a one- sided manner. No matter what country or what company is attempting to interact with China it is to the disadvantage of the overall market or the overall economy as we look at the world economy. And my point is let us not tiptoe through the violence. I would like to help China have a vigorous marketplace that has its doors open to all of us, and I'd like for the United States in particular to benefit from its partnership with China. My disappointment is that--and maybe I need a 10-year or 20-year view. I voted on the PNTR in the late '90's--is to actually look at what the benefit is bringing to the United States when we engage in the PNTR. It seems that we always get a lopsided impact when we engage in---- Mr. Chairman, I think that we should continue to be cautious. I think this review is very important. We want an invigorated market, but we don't want a lopsided market. I look forward to more extensive testimony and considering legislation or not depending upon how we see the future. I thank the Chairman and I thank the witnesses very much for their testimony. I yield back. Mr. Johnson. Thank you. I thank the gentlewoman from Texas. I also thank the witnesses. This has been a relatively long hearing, but at least there were no breaks and so you could keep moving along with the discussion. So I want to thank you all for contributing to it and for coming. This is a very important hearing, and I look forward to this Committee following up on some of the recommendations that have been made by you. Thank you very much. Let me see, I'm getting a little ahead of myself here. Members will have 5 legislative days to submit any additional written questions which we will forward to the witnesses and ask that you answer as promptly as possible to be made a part of the record. Without objection, the record will remain open for 5 legislative days for the submission of any other additional materials. With that, this hearing for the Subcommittee on Courts and Competition Policy is adjourned. [Whereupon, at 6:02 p.m., the Subcommittee was adjourned.] A P P E N D I X ---------- Material Submitted for the Hearing Record
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