Podcast: Chinese Antitrust Exceptionalism, With Dr. Angela Zhang

July 26, 2021

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Antitrust policy provides a perfect lens to see the systematic differences between China and Western liberal democracies, according to Dr. Angela Zhang, director of the Center for Chinese Law at the University of Hong Kong. In her book Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation, Zhang argues China leverages antitrust law to achieve industrial policy objectives—including in the tech sectors that are crucial to its rivalry with the United States—but it does so through an insular bureaucracy that is surprisingly fragmented and therefore difficult for outsiders to understand. Rob and Jackie sat down with Dr. Zhang to discuss the internal power dynamics that shape China’s regulatory environment and how it affects the competitive balance of power in the global economy.

 

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Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, Founder and President of the Information Technology and Innovation Foundation. We’re a DC-based think tank, that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for Science and Technology Policy.

Rob Atkinson: This podcast is about the issues we cover at ITIF, from the broad economics of innovation, to specific policy and regulatory questions about new technologies. And today, we’re talking about Chinese antitrust policy, and how Chinese exceptionalism, as manifested by the way China regulates and is regulated, is shaping global antitrust regulation.

`Jackie Whisman: Today we’re talking to Dr. Angela Zhang, who is an Associate Professor of Law and the Director of the Center for Chinese Law at the University of Hong Kong. She’s an expert on Chinese law and has written extensively on Chinese antitrust enforcement. Her new book, Chinese Antitrust Exceptionalism: How the Rise of China Will Challenge Global Regulation, was published by Oxford University Press in March. And we’re going to get into it. Thanks for being here, Angela.

Angela Zhang: Thanks for having me.

Jackie Whisman: Why did you write this book?

Angela Zhang: Well, I think antitrust is a very good lens for us to see the systematic differences between China and the Western liberal democracies. And although my book focuses on antitrust, it is essentially a book about globalizations and about impact of China’s rise to the global regulatory order. And I actually end the book with a hopeful note, that I think, even though China can potentially hold hostage of foreign firms through its aggressive antitrust enforcement, I think foreign governments can also hold hostage of Chinese companies, not just through antitrust, but also through other areas of law, like investment and national security laws. And this mutual exchange of hostage I think, is conducive to peace from both sides.

And actually, that leads me to the conclusion, that it’s very important for Western governments to continue to welcome Chinese investment. Because, the more Chinese investment that they have, the more leverage they will have against China. Whereas, on the other hand, if they keep blocking the Chinese investment, which leads to greater decoupling, that will actually make foreign investment in China more vulnerable. Think about companies like Qualcomm, or Tesla, or Apple. I think these companies will have a hard time co-operating and working with the Chinese regulators.

Rob Atkinson: That’s a really interesting framing, because it really is not one, I think that most US policymakers, or even the policy dialogue in Washington has thought about. It’s really been either just open, free trade for the sake of doing that, or more decoupling and limiting China. But, what I hear you saying, is by allowing Chinese investment, although clearly there’s certain limits on that we would have to have. But, allowing Chinese investment gives us leverage, which is exactly what the Chinese have. The Chinese government has now, over foreign firms, they have leverage. And your point, is you could have mutual leverage. I think there’s a really interesting point. Can you say a little more about that?

Angela Zhang: Right. So, my book actually, is composed of three parts. The first part, I talk about how China regulates. And there, I elaborate in detail, what are the idiosyncrasies of the Chinese regime and how they can hold hostage of the foreign firms, because of all this distinctive features of the Chinese regulatory process. It’s not just antitrust, actually. You can similarly apply the same framework to analyze and understand other areas of administrative regulation in China. Because, just think about what is happening very recently to Chinese big tech, right? I mean, you see all these companies receive very hefty fine and none of them dared to challenge the government, right? So, there is very strong power imbalances between government and business there. These companies don’t even think about going to court. That’s not even an option on the table, right? I mean, they just immediately see to the regulatory demand, and then just move on, right?

So, this is a very different dynamic in China that you don’t see in other Western countries. And that’s the rules of the game for foreign companies as well, right? When we think of Elon Musk, right? I mean, he was laughing at the US regulators, but I bet he will not dare to behave like that in front of the Chinese regulators. So, on the other hand, the second part of the book talks about how China is regulated. And we’re seeing a clear trend, that in the past five years, the Chinese company have been subject to much greater scrutiny in both the EU and the United States. Not just in antitrust, but also in all the essential law in Western law. So, Chinese companies do face a lot of regulatory challenge from Western governments and precisely, because of this elusive connection with the Chinese government, make it very hard for foreign regulators to disentangle the relationship of the government.

So, because of that lack of independence, it makes them vulnerable to foreign regulations. So, in some sense, they are also held hostage by the foreign governments. In the last part of the book, I talk about regulatory interdependence, precisely the point that you make, that because the world is so closely inter-connected, that both the Chinese companies have a lot of investment overseas, whereas US and European companies have so much investment in China, right? So, both sides have so much leverage against each other, and that actually helps smooth out all this conflicts and ease tension. Whereas, if you think about a scenario where all the Chinese company would just get out of the door, if there was a complete decoupling, I would think that there was no way that US business can survive in China, right? I mean, they will become very isolated and much more vulnerable.

Rob Atkinson: Your point about the big tech companies, nobody really challenges the Chinese government positions, because there’s a power imbalance. I was invited over to Beijing one time, by the government, for a set of meetings. And as part of that, we visited a major Chinese technology company, I won’t say who it was. And so, we go over there and we hear from one of the senior executives about what they’re doing. And so, I ask a question that’s, a little bit to the point, and the gentleman says, “Well, let me have the Chinese government official here in the meeting, answer that question for you.” And it was really a question about, as an executive of this company, what do you think? And he was uncomfortable in answering what he thought, he wanted the government official to say what he thought. I thought, you’d never see that in an American company. They would tell you immediately what their position was.

Angela Zhang: But, on the other hand, I want to point out that these companies are not just passive actors. Whether we are talking about the private companies, or the state-owned firms, or foreign companies operating in China. I mean, these companies were nurtured in the Chinese institutional environment. So, they also know how to adapt to that environment. Although, on the surface, they don’t say no to the governments, but behind they work very hard, trying to seek for the best legal treatment for themselves. I mean, including seeking regulatory arbitrage, given the fact that particularly in the tech sector, in the past 10 years, it had been really relaxed. It was only until last Autumn, that the wind suddenly shifted. That we see a complete change of the pendulum swing. But, before that, it was almost the Wild West. So, Chinese companies know how to take advantage of that. And that explains one of the reason why you see these companies have flourished and grown so rapidly.

Jackie Whisman: Your book uses the term, Chinese exceptionalism. And I would love for you to explain, what you mean by that and how it plays out in the antitrust realm?

Angela Zhang: All right, that’s a very good question. So, this antitrust exceptionalism really stems from the phenomenon we call, the power imbalances between government and businesses, where you see the government clearly has the upper hand. And not in terms of how China regulates, but we just talk about firms don’t challenge. So, almost the whole administrative process is more or less internalized within the bureaucracy. And that explains why outsiders, when they deal with Chinese regulators, they feel the system is very opaque, it’s very difficult to understand. It’s because, there is no external constraint. Everything is internalized, within the bureaucracy. So, that makes it very important for us to understand how the bureaucracy operates. So, there are formal in the text rules, within the bureaucracy. And in the book, I elaborate in detail, what are the missions? What are the cultures? And the structure of your credit departments, will influence how they form the enforcement agenda, how they approach cases and how they ultimately decide cases.

Because all this nuances do play a pretty important role in influencing the final case outcome. And this is a detail that I guess, a lot of the Western observers tend to overlook, because they tend to see the Chinese government as a monolith. But, actually the Chinese bureaucracies, it’s quite fragmented. And there are many different agencies, sometimes with completely different missions and objectives. So, they do behave very differently and that makes it very important for petitioners and businessmen to understand the nuances. And then, the power imbalances, we also talk about, it has an implication on how China is regulated, right? Because of the foreign government suspicion over the Chinese government, over the Chinese firms’ independence.

So, that’s why they tend to apply much stricter scrutiny over Chinese firms, whether they are selling to foreign markets, or they are making investments in foreign markets. Now, how China regulates, will have impact on how China is regulated, because the greater control the Chinese government exerts on its own companies, the greater suspicion it might add to the foreign policy makers in scrutinizing Chinese firms. Now, Chinese big tech is an example, right? I mean, the recent crackdown on these companies and these firms’ very obedient response, will leave the impression that these companies are within the control of the Chinese government, right? And on the other hand, how China is regulated will also affect how China regulates, because of the point we just talked about, the interconnectedness of the economy. If foreign regulators take a very aggressive approach in targeting Chinese firms, think about companies like Huawei and ZTE, then that might prompt China to retaliate with counter measures, including antitrust law. And so, those are the clear interdependence between these two.

Rob Atkinson: Yeah, no, it’s interesting that while we’re going to be posting this, sometime in the near future. What’s interesting, yesterday in the US, the Facebook case that the FTC, the Federal Trade Commission brought against Facebook, was actually thrown out by the court. They didn’t even take the case, because they argued that FTC didn’t really make a valid enough case, that they hadn’t been on market power. I shouldn’t say you don’t really see it, you don’t see that in China. And that’s one of the big differences here, is we have a judiciary that has its own rule of law and legal tradition and case law and all. But, I think your point, is some of those things get fought out in China. You have SASAC, which is controlling the SOEs, and then you have a Ministry of Information in Industry Technology, and you have various industries that are vying for influence here. And how does that all work out? Or, shape out?

Angela Zhang: Right. I mean, so the SASAC that you’ve mentioned is the state assets regulator. So, they do play a very important role in managing the assets for the Chinese government. And SASAC itself, has about 800 employees. And right now, their major task is to manage the 96 centrally state-owned firms. But, at the local level, there are replicas of SASAC, at each level of the Chinese government. So, the number of just state-owned firms in China is huge, but the most important ones are those centrally-owned firms. People tend to have the impression that Chinese government can control all these big Chinese state-owned firms. I think that’s also a misconception, because think about a 800 employee commission, like SASAC. It’s impossible for this small commission to control all the massive and the largest state-owned firms in China. So, the reality, is that SASAC only releases very general guidelines and control their profits. But, for the most part, these state-owned firms do enjoy a lot of autonomy in running their business.

And that explains why there’s a lot of corruption in China, because why did Xi Jinping want to crack down on corruption. Precisely, because of the autonomy and the oversight over these companies. Whereas, MIIT has been a long standing telecom and technology regulator, they’re not an antitrust regulator, but they do get involved occasionally, when some of the cases involve the telecom sector, because they are the sector regulator. For instance, in 2011, so there’s two big telecom companies, China Telecom, and China Unicom that were investigated for antitrust violation. And MIIT played a very important role in lobbying against this case. Actually, in a very unprecedented move, it even used its affiliated newspaper to release negative comments, attacking the positions from the antitrust regulators. So, the case almost become, what the Chinese media called, a fight among the gods. You see, these two ministries were fighting with each other, over the legitimacy of the case. And ultimately the case was suspended, it didn’t get anywhere. And the firms offer some compromise, some concessions to the case, and then there’s no penalty imposed.

Rob Atkinson: That’s really interesting, because a book that I wrote with Mike Lind for MIT, Big Is Beautiful: Debunking the Myth of Small Business, we looked at antitrust history of the US and there was actually a longstanding fight between the Department of Commerce, which is essentially MIIT, if you will, and the DOJ, when it came to breaking up AT&T. Where the Department of Commerce was like, “No, no, no, don’t break it up. It’s a national champion.” And the Justice Department, break it up. So, it’s interesting, that you have those same dynamics going on in China, although probably more amplified, as you said about the battle of the gods.

Angela Zhang: Right. And then, that reinforced the point that I said earlier, that how this ministry operates, for most part, is closely related to what they are set up for. What is the mission and objective, right? I mean, the MIIT is there to help with all this Technology Information sector, to grow the sector. So, clearly as a sector regulator, have an interest in protecting these companies. Whereas the antitrust regulator would want to expand a turf and even want to go after state-owned firms. That was regarded as a milestone case, because they do also want to boost the legitimacy, the antitrust regulators want to show the world that, “We also, can go after our biggest and most powerful state-owned firms.” Right? But, to some extent, that was a very bold attempt by the regulator.

Jackie Whisman: Well, that set up my next question. Which was, one of the main differences between the West’s approach and the Chinese approach, seems to be that, China’s less focused on the consumer welfare standard and thinks about antitrust more from a competitiveness perspective. Would you agree with that?

Angela Zhang: Well, I mean, there is some controversy regarding whether the Chinese antitrust law can provide exemption for state-owned firms. Because, if you look at article seven of the antitrust law, which talks about state-owned firms, the law is very, very vague. And in the past, what we observe, is that for some larger transactions involving state-owned firms, these cases were notified to the Chinese government. However, the Antitrust Authority, did clear these deals without imposing any conditions. And that, echoes the point that Jackie made, that it seems that the Chinese government places a higher priority on competitiveness than the consumer welfare standard.

However, what happens, is that once these state-owned firms merge to become a monopoly, what I observe, is that they are actually subject to tighter regulation. So, on the one hand, you see where the Chinese are coming from, they do want to grow the companies bigger, particularly in this current geopolitical environment, where the government needs to count on this companies to compete better internationally. But, on the other hand, they don’t want the domestic consumers to suffer, because of the empowerment of these firms. So, they subject them to stricter pricing regulation. So, actually, these companies, even after they merge, they were loss-making, because the price regulation was very harsh.

Rob Atkinson: You go back to Teddy Roosevelt, who really was a champion in their early antitrust days, after the Sherman Act. And his whole view was that he said, “We have bad trust and good trust.” Which is the antitrust notion. And his argument was, “We want to encourage law firms to get large, but we want to use some kind of regulation, or limitation. So, we want to try to get the benefits of both. And it’s really interesting, that China’s doing that. On the other hand though, the firms are not as constrained when they go out in global markets. A monopoly firm like CRRC, the big Chinese train company, which was two state-owned companies encouraged to merge to get to have scale, to go out and compete against the Siemens and the other companies.

So, it’s striking right now that in the US, we’ve almost the exact opposite narrative, where there’s a rise of what is called the Neo-Brandeisian Movement, where lots of people, mostly on the left are saying, “Big companies are bad.” My interlocutor, Matt Stoller, who is a big activist in there, he’s actually in debates with me, he’s denied that economies of scale even exist. And clearly economies of scale, economies of scope, network effects, all of these things exist and they matter. My sense is the Chinese government recognizes this and wants to take advantage of it.

Angela Zhang: Right. And that’s why some of the Silicon Valley firms were trying to defend themselves and say, “Hey, bringing us down actually makes the United States less competitive, because it will actually open up the opportunities for the Chinese tech companies to come in and flourish in the US market.” And so, that was one of the defense that they have.

Rob Atkinson: I did want to ask you about the AML, what’s called, the Chinese Anti-Monopoly Law, which I don’t know how long ago that was. It seems like a decade now. There was a big concern in the US, particularly in the antitrust community and the trade community that this would be used in unfair ways where China would bring cases against foreign companies. And there certainly have been cases. I mean, I’ve read cases where the Chinese authorities would go into an American company at 6:00 AM and demand the information and all. And I don’t know, any sense on that? Is it now going more towards a balance of both Chinese and foreign? Or, how’s that playing out?

Angela Zhang: Right. I mean, there have been perennial concerns about protectionisms in Chinese antitrust enforcement. But, the problem of antitrust, is that it is an area of enforcement that’s very hard to observe the performance, to evaluate the performance of the regulator, particularly when these cases were never challenged, right? I mean, so the little public information that you have is extremely limited. So, it’s very hard to verify any source of this discriminatory claims of the Chinese agency. Now that said, in reality, I don’t think that the Chinese antitrust agency had this grand idea to promote a unifying national agenda to target foreign firms. I don’t think that’s where they’re coming from. The problem is these agencies, although they are seldom subject to judicial challenge, they do operate with quite significant bureaucratic constraints. And as we talked about earlier, it’s just very difficult for them to go after those powerful state-owned firms, who have very strong allies within the bureaucracy, like at MIIT, who can back them, right?

Whereas, for the Chinese big tech, for a really long time, they did not go apply the antitrust law, to deal with the complaints in the sector, because there have been a very clear policy initiative from the central government that we need to promote entrepreneurship and innovation. And the government explicitly encouraged the regulators to take a tolerant and cautious approach in regulating the sector. So, being a small bureau, they need to adhere to this central initiative and that explains why they take a much more lenient approach in dealing with the Chinese big tech. So, what are they left with then? They are left with the foreign firms, right? I mean, the foreign firms have less allies in the Chinese bureaucracy, and there’s no clear overriding national agenda that are protecting them. So, then the reality is just, it’s easier to go after foreign companies. But, at the end of the day, it’s just hard to verify these claims.

Rob Atkinson: When there’s a battle of the gods, is it a story of the most powerful god wins? Or, does the ultimate god ever intervene? In other words, how do those get resolved? Is it the State Council that ultimately makes the intervening decision? Or, just bureaucratic politics, and one wins and one loses?

Angela Zhang: Well, I mean, in the case of the China Telecom and China Unicom case, the case actually had been investigated for six months, before it was made public. And at that time, the fight among the gods were more internal, right? I mean, it was the only internal fights among the gods. And then, the antitrust regulators have realized that it was very hard to push forward with this case, because the other gods are very powerful. So, what they did was that they make a very bold move, in announcing the investigations on Chinese Central Television Network, which shocked everybody, because that was completely a surprise to all the other regulators. And the reason why they did that, is that they know they can mobilize the public sentiments and gather the public support to push forward this case. And the public sentiments were overwhelmingly supportive of them bringing a case against these big telecom monopolies.

And that explains that ultimately these companies were willing to offer some concessions, because before they were not taken seriously. I mean, they have a small—the antitrust authority is a small bureau, even though it’s housed within a powerful central ministry to NDSE. But still, it’s really hard for them to take on two very large telecom companies. But, the use of the media and the mobilization of the mass, was the key factors for them to ultimately win the support. Maybe, also from the higher up as well, to push forward this case.

Rob Atkinson: Politics matter in these gangs, it’s not just state action, whether it’s the US, or China. So Angela, one of the things that we’ve talked about, is how the Chinese authorities are focusing on big tech in China, what’s called the BATs, the Baidu, Alibaba, Tencent. And we hear a lot about that, but it’s not really clear how much of this is at the surface and how much is real. As opposed to the US, where I think there is a real push, particularly among the more progressive side of our politics to systemically break up our large technology companies. Thoughts on that? And how China is looking at it, maybe differently?

Angela Zhang: Well, I mean, the Chinese government is applying the antitrust law to achieve a variety of policy goals and with regards to big tech, what I see, what the Chinese government is doing, is not only to adjust the standard consumer welfare issue, but also to try to leverage its antitrust law to achieve some industrial policy objectives. Including, to nudge its big tech towards a more innovative path. So, that they don’t just focus on consumer internet business, but also those hardcore innovations that China desperately needs in its tech rivalry with the United States. Because that is the biggest priority of the Chinese government. And that’s why the People’s Daily were having this commentary, chiding the big tech, but you guys shouldn’t just focus on selling cabbage. You need to look at the stars.

Rob Atkinson: Angela, I’m really looking forward to reading your book. I have to say, I haven’t read it yet, but I’m really looking forward to reading it. Boy, it sounds so, so fascinating. And so, with that, I really want to thank you for being with us today.

Angela Zhang: Thank you so much, Rob and Jackie. It’s great to be here.

Jackie Whisman: Thank you. And that’s it for this week. If you liked it, please be sure to rate us and subscribe, feel free to email show ideas, or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website, ITIF.org and follow us on Twitter, Facebook and LinkedIn, @ITIFdc.

Rob Atkinson: We have more episodes and great guests lined up. New episodes will drop every other Monday. So, we hope you’ll continue to tune in.

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Podcast: Chinese Antitrust Exceptionalism, With Dr. Angela Zhang