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China, Japan Prepare New Antitrust Rules

Nagano Yuriko | November 27, 2007

Companies jockeying for dominant positions in Asian markets, beware: Regulators in China and Japan are launching new efforts to strengthen their antitrust policies.

The two countries are taking starkly different approaches. Japan wants to bring its competition laws up to Western standards, and to that end the Japan Fair Trade Commission has proposed revising the major overhaul it implemented less than two years ago. The latest reforms would broaden the scope of who can be fined by the JFTC for violating the rules, a move that could work in foreign companies’ favor.

China’s efforts, however, are much less clear. The country passed landmark antitrust legislation in August, which so far has been well received. But as often happens with China, details on how the law will be enforced (it goes into effect next August) and how to comply with it remain undisclosed. Furthermore, it’s unclear whether the law will work to the advantage of foreign companies, or, potentially, against them.

Japan Strengthens Its Rules

The JFTC released a framework last month for its proposed antitrust revisions (which are often known as “anti-monopoly” rules there). The agency is fine-tuning the proposal it plans to submit to lawmakers next spring, but it is likely to face opposition from powerful business groups such as the Keidanren, and its passage is uncertain.

The latest proposal includes expanding antimonopoly penalties on large firms that abuse their dominant market position to force smaller companies to swallow unfair trade practices. The agency also wants companies that are acquiring stocks for mergers to report their intentions before the stock purchase happens.

“The law may be helping foreign companies gain more access to Japan’s business market,” says Nobuaki Fujii, senior planning officer at the JFTC. “That may be the case as a result.”

The agency will not increase the penalty fees just yet. That will come in another set of revisions sometime in the future.

The reforms follow a major overhaul implemented in January 2006, and are part of increased action at the JFTC generally. The agency today employs 765 people, up from 643 five years ago—at a time when most government agencies in Japan are trying to shed workers. Fujii says the JFTC is hiring about 30 people per year, primarily to increase enforcement operations.



Grondine

Robert Grondine, former president of the American Chamber of Commerce in Japan, says the JFTC’s proposals are welcome news. “For many years we’ve supported these efforts,” he says. “There has to be more significant penalties in Japan, and as the penalties become higher there needs to be improved due process in JFTC procedures.”

Grondine would like to see more transparency in how the JFTC conducts investigations. He points to the example of “dawn raids,” where prosecutors commonly storm a suspected violators’ office at first light and cart boxes of paperwork away to protect evidence. Equally ambiguous in Japan is access to legal counsel. “There are questions about right to counsel and how you’re supposed to get access to your legal advisers,” Grondine says.

Japan could dedicate more resources to legal support for investigations, given the size of its economy. For example, he says, the United States has the Justice Department, the Federal Trade Commission, and 50 state attorneys general, “whereas in Japan all you’ve got is the JFTC.”

Fujio Mitarai, chairman of the Keidanren business lobbying group, says the problem of transparency stems from the JFTC acting both as the tekihatsu agency that detects antitrust violations and the shimpan agency that adjudicates the offender’s fate.

Keidanren spokesperson Hiroshi Makuuchi says the business group is still gathering information on the proposed revisions and declined further comment. But Grondine is critical of Keidanren’s overall stand against the law. “I don’t think we have much sympathy at all for that Japanese argument by Keidanren that the penalties are getting both too high and duplicative,” he says.

The China Question Unanswered

China’s antitrust law, also known as the Anti-Monopoly Law, is a much more elusive concept to grasp. Of about 11 million companies operating there today, some 600,000 are under foreign ownership. But Guohui Fan, with the law firm White & Case in Tokyo, says many of those foreign companies are large businesses such as Microsoft and Intel, and they could find themselves swept into the AML’s reach.



Fan

“Depending on the sector, some foreign companies are becoming quite large, and those companies will come under the radar with the new Anti-Monopoly Law,” he says. “Some people think of this law as an ‘anti-foreign company’ law, as the law may work to protect the interests of domestic companies in China.”

Fan says the AML is well conceived and places restrictions on government monopolies—a critical issue as China moves away from its communist past. “That’s been something wanted by the Chinese and private companies here,” Fan says. “Under dictatorship, the mass suffered. The law underwent several revisions, but that part remained intact and the public approves that accomplishment greatly.”


“Some foreign companies are becoming quite large, and those companies will come under the radar with [China's] new Anti-Monopoly Law.”


— Gouhui Fan

Lawyer

White & Case



Most energy and other key businesses in China including gasoline, water, gas, electricity, and steel are monopolized by companies related to the government, Fan says. Plus, protectionist policies abound at the regional level in China, and “any business mergers that may be a threat to national security will be scrutinized,” he adds.

China may, however, find enforcing the AML and prosecuting violators to be challenging. He gives the example of a separate law enacted last year to govern how foreign companies buy out Chinese ones. That law somewhat overlaps with the AML. The result: “There’s been a lot of violations because the central government still has operational problems,” Fan says.



Clark

Doug Clark, a partner at the Lovells law firm in Shanghai, says the AML is pretty general right now. “We’re waiting for the implementing regulations that will explain the specifics of the law,” he says. Those may be released by the end of the year or may not be released until next summer, Clark says.

He disagrees with others such as Fan who say prosecution may be a problem for Chinese authorities. “It’s going to be difficult to start off with, but the enforcement will come along,” Clark says. “They haven’t created an agency to enforce the law, but that will be done. For the first few years, the law may be enforced spottily. In the long run, they will definitely be able to enforce this law.”

Clark expects the Chinese prosecution body will be an independent government entity similar to the JFTC. (Like Japan, China models its legal system on European law, and specifically on Germany’s legal and regulatory framework.) Penalty for violations will be fines, although the amount is yet to be set.

Clark says his clients are already making changes, such as with their supplier and distribution contracts. “The law has a very clear provision that you cannot limit, without good reason, who your distributors can sell to and provisions such as that,” he says.

Clark is also skeptical about contentions that the AML will ultimately be used against foreign companies to help Chinese ones prosper. “That may be true, but there’s no evidence to support that at the moment,” he says.