In recent weeks Chinese regulators have launched a string of anti-monopoly investigations against well-known Western companies, such as Microsoft and Qualcomm. Hit especially hard by Beijing’s vigorous crackdown are multinational automobile and auto parts makers. Leading brands like Daimler, BMW, Chrysler, General Motors have all been visited by investigators from China’s National Development and Reform Commission (NDRC), which is the country’s chief anti-trust enforcer. Should the regulators find these targets in violation of China’s six-year old anti-monopoly law, the penalty could be stiff. Ten Japanese auto-parts manufacturers that were recently found guilty of such violations by the NDRC were collectively fined $200 million, a record sum in the history of China’s anti-trust enforcement action.
Naturally, the Chinese government’s anti-monopoly crackdown has raised questions about its motives and worries about its impact on foreign companies doing business in China’s fast-growing consumer market. The European Chamber of Commerce in China, a Beijing-based trade group, has issued a rare and defiant statement accusing the Chinese anti-trust authorities of intimidation and protectionism.
At the moment, it is difficult to determine the true merits of the cases brought by the Chinese authorities against the targeted foreign companies – or the charges of intimidation or protectionism voiced by representatives of Western firms. The firms that were found guilty typically choose not to speak in public, let alone contest these cases or fines in Chinese courts. They fear doing so would further antagonize the Chinese government. In any case, given the lack of judicial autonomy in China, it would be futile to mount a vigorous self-defense in Chinese courts. That is why the ten Japanese auto-parts makers, like the six Western baby-formula makers that were fined $100 million in February 2013, simply paid up – and shut up.
The relative success enjoyed by China in punishing foreign firms for anti-trust violations may encourage the Chinese government, which has taken a less welcoming attitude toward Western firms in recent years, to believe that it now has the upper hand against these firms, which now increasingly rely on China’s vast consumer market for growth. This mindset may embolden some officials to further escalate regulatory pressures on foreign firms.
This would be a costly mistake. The Chinese anti-trust authorities will be wise to proceed with caution and exercise restraint.
The battle over the issue of monopoly practices by foreign firms in China will be fought on four fronts: the Chinese administrative-legal system, the court of public opinion in the international business community, China’s domestic market, and the markets of developed economies that are China’s key trading and investment partners.
Of these fronts, China enjoys an absolute advantage in only the Chinese administrative-legal system, and suffers, by all accounts, huge disadvantages on all the other three. In the court of public opinion in the international business community, China’s anti-trust actions are widely viewed as protectionist and taken primarily to advance China’s goal of establishing domestic champions in what the government deems strategic sectors. It is not by coincidence that the most aggressive anti-trust enforcement actions are taken in dairy, automobile and high-tech sectors – all key industries Beijing hopes to dominate with domestic, not foreign, firms.
On China’s domestic market, overly aggressive anti-trust enforcement can also backfire. In the past, the Chinese government has successfully pursued a policy of using domestic market share as enticement for technology transfers from Western multinationals. But recent anti-trust enforcement actions cast the credibility of this policy in doubt. Western firms will now legitimately worry that their future business in China will be vulnerable to arbitrary and unpredictable regulatory actions if it becomes too successful, just like Western baby formula-makers and automobile companies. This fear will undoubtedly make these firms more reluctantly to transfer technologies China needs to upgrade its economy.
China should worry even more about the consequences on the fourth front – the markets of developed economies. Beijing must remember that these Western firms have powerful voices in their respective capitals and can ask their governments to retaliate against what is perceived as unfair enforcement actions. About two-thirds of Chinese exports go to the developed markets (Japan, Europe, and the U.S.). In addition, China hopes to increase its investments in these countries dramatically. If it alienates the Western business community with its aggressive anti-trust actions and other protectionist measures, it is a near certainty that it will pay a huge price in terms of political backlashes against trade with China.
It is not clear whether Chinese policy-makers have thought through the implications of their recent anti-monopoly actions. If they have not, they should — and the sooner the better.
Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States.