China: The Emerging Monopoly?
December 3rd, 2008
Submitted by: Eric White
A recent WSJ article ‘China Defends Price Fixing by Vitamin Makers’ discusses a case ‘recently cleared for trial’ whose result will have significant meaning to antitrust practices in international trade, namely China. In this specific case, the four Chinese vitamin manufacturers do not dispute that they acted together to set artificially high prices. They are, however, arguing that they did not break the law and China?s Ministry of Commerce is willing to back the price-fixing efforts of these companies. Apparently, China’s defense is based on a loophole of international law known as the doctrine of sovereign immunity. That is, ‘If a government orders a company to take a specific action, it generally is considered an act of state that can’t be prosecuted in foreign courts’.
After enacting domestic antitrust laws for the first time this year that restrict monopolistic practices including price fixing, one must wonder about the message China is trying to send. China is clearly acting in its own self-interest - trying to get the best of both worlds by establishing a market economy at home while ignoring those rules abroad.
After years of undercutting their competitors and gaining substantial market share, these vitamin companies, along with many other Chinese companies manufacturing everything from drugs to sweeteners to steelmaking materials collude to set artificially high prices. Could this be the international business strategy of China? Though most would consider it to be unethical, I have to admit that it is clever and it is working.
If this is China’s international business strategy, what does that mean to global consumers? Will they be forced to pay high prices? What does this mean to global manufacturers? If international antitrust rules don’t apply to China, how can they compete?
Entry Filed under: Pre-Departure, Beijing, China
10 Comments Add your own
1. Chris Carr | December 3rd, 2008 at 7:29 pm
As I have monitored this issue and other price fixing situations coming out of China, I have concluded the following:
There remains an absence of a “culture of the market” in China. I don’t think the Chinese government or industry players are bad per se or have the intention of breaking the law or doing something inappropriate. Rather, when profits fall we often see the Chinese take collective action to maintain profit levels, such as that described in Eric’s article.
It will take them time to learn more about “orderly markets” that we take for granted in the West — I predict at least 10 and more likely 20 years … about the time many of you will be in the prime of your business careers.
2. Matthew Neal | December 3rd, 2008 at 10:51 pm
I tend to agree with Dr. Carr in his assessment of the issue. However, I believe China is already trying to go to a more market based economy as the article states. There is even an example of the Chinese government already stepping in to encourage traditional orderly market dynamics, by restricting some monopolies that do exist. This type of economy will not allow companies to hide under the shroud of government protection, but instead require the companies to be “team players” under the regulations and control of the world markets just like every other world market player.
As China grows to become a world superpower they are slowly becoming more accustomed to the “culture of the market” and therefore will slowly need to become more market driven in all areas of the economy. I agree that this process will take some time though. After all, habits are hard to break, especially those of a government where everything is protected and regulated strictly by the state. It will be very interesting to see how quickly China changes, and how China continues to handle the decline in the world economy.
3. David McKinnon | December 4th, 2008 at 11:22 am
It will be interesting to see how price fixing affects exports, especially as the world feels the economic crunch. According to an article in The Economist ( http://www.economist.com/world/asia/displaystory.cfm?story_id=12641750 ), China has experienced a 10% decrease in production. It will be interesting to see if and how this changes their pricing strategy.
4. David McKinnon | December 4th, 2008 at 11:29 am
It will be interesting to see how price fixing affects exports, especially as the world feels the economic crunch. According to an article in The Economist ( http://www.economist.com/world/asia/displaystory.cfm?story_id=12641750 ), China has experienced a 10% decrease in production over the past year. It will be interesting to see if and how this changes their pricing strategy.
5. James McMillan | December 4th, 2008 at 2:59 pm
I tend to believe that the Chinese govenment and industry players know they are breaking international antitrust laws but just don’t always have the motivation to enforce it. They must know there is good reason for these type’s of antitrust laws but would rather risk the possible detrimental effects price fixing can have on a market in order to keep certain businesses profitable. I agree that it will probably take 10 to 20 years before they really start to see the problems that can arise out of these type’s of business practices. Unfortunatly they will most likely hurt other international businesses in the process.
6. Dan | December 4th, 2008 at 11:38 pm
Who cares if they “know” or not? Either they did it or they didn’t. This is law, not psychology.
7. Andrew Welborn | December 5th, 2008 at 12:13 pm
It should not be surprising that they are taking advantage of a loophole, even though it may be unethical. Many international businesses take advantage of loopholes each year, some ethical, some not. It just shows that the Chinese are finding new ways to keep profits and market share up. They just haven’t learned yet that unethical methods may come back to haunt them. It does appear that this price fixing strategy may be the short term solution for continued profitability and growth in some export industries. Only when exports begin to fall as the world begins to shift its business to cheaper and potentially more ethical markets, will China have political incentive to migrate to policies that protect foreign consumers.
It is interesting to see that China is beginning to take a stand in their domestic markets regarding antitrust activity. This is evidence that they see the need to keep things competitive for growth and consumers within their borders. Outside their borders, they currently have little incentive to expand these same sentiments to provide fair and balanced trade laws in an international marketplace. As a result, global consumers will be forced to pay higher prices due to these price fixing strategies until other markets in developing countries begin to flood consumers with cheap products. It is just a matter of time before the “new” China appears to begin seriously undercutting Chinese products.
As for international businesses, they either have to wait out the price fixing phase of Chinese international business strategy, join the strategy, or develop new, ethical ways to keep profits up. I personally see the third scenario the most likely result, as international businesses have already established their own norms and regressing to price fixing will only hurt them in the long run. Eventually the Chinese strategy will run its course and move on to the orderly markets, and when they do those businesses that adopted new strategies will be there to take advantage of the head start they have over the Chinese.
8. Andrea Muntzel | December 8th, 2008 at 12:34 pm
After reading this article I couldn’t help but think about US subsidies and the parallels between them and this government-lead price fixing in China. I must add, however, that I am somewhat ignorant about subsidies and the complicated legislation that back them. In order to educate myself, I went to my trusted friend Google to research them a little bit. One of the first articles that came up was from the Washington Post.
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/01/AR2006070100962.html
Although somewhat dated—from July 2006—the article talks about how some people are getting subsidies regardless of whether they are farming or not. Donald Matthews, the man the article focuses on simply lives on land that was once farmed for rice. He gets a check each month for, essentially, doing nothing. Those of us who have spent time recently in Economics class know that this check is an incentive not to farm. In line with this view, many farmers that once farmed rice now collect their subsidy and use their land for higher-profit uses like commercial timber. With incentives not to farm rice, less people farm rice. With less people farming rice, supply is low. If demand is constant then prices rise. Is this not just another way for the government to artificially keep prices high?
I’ll admit there are some holes in this argument. First of all, the government has been trying to get rid of farm subsidies for awhile now. In fact, the negative effects of this particular subsidy were the result of legislation attempting to phase out farm subsidies. In addition, these subsidies are allowed under international trade rules, unlike those in China. Lastly, the US doesn’t have a monopoly on rice production so artificially high prices wouldn’t affect the rest of the world who could import rice much cheaper from places other than the United States.
We can also consider subsidies for green auto manufacturing. Instead of forcing car manufacturers to increase their prices in relation to their costs, the government slips them money so they can keep their prices low and competitive. Perhaps I am oversimplifying a complicated situation, but regardless, the comparison stands to be made. Our government messes with the natural forces of the market also (bailouts anyone?).
The whole situation seems fishy to me. Did anyone else think it was obvious that the companies colluded on their own and then the government stepped in to save them when they came under international scrutiny? Perhaps this is where the ethics problem comes in. There’s a difference (or is there?) between controlling the market with a good reason versus lying to cover up big companies’ indiscretions.
Either way, if China wins this case, there could be a very problematic precedence set for international trade.
9. Justin Miller | December 12th, 2008 at 10:23 am
I agree with Andrew that China’s price fixing will only work until a competitor comes and undercuts their prices. In this new global economy that we live in, it has become much easier for competition to exist. While these vitamin makers may be able to artificial maintain a high price for a little while, this strategy will not last. Ultimately they are going to have to lower their prices or develop new products in order to compete with other companies who will be willing to do the same thing.
As far as the ethics of the situation, I think you are going to find unethical companies and governments in every country. Look at Enron from the United States and the governor from Illinois. The difference between our government and China’s is that our government usually does not protect those who break the law. But China is just beginning to enter the world market. It is obvious that they want their own companies to succeed in the global market, and they were protecting their own interests in this situation, but I believe this will not continue to happen. I agree with what Dr. Carr said, it may take 10 to 20 years, but eventually their government will handle these situations without their own interests at heart.
10. Logan Travis | December 12th, 2008 at 12:23 pm
Along the same lines as Andrea, I have to wonder how we can point our fingers at China and say, “You’re unethical to fix prices.” not question ourselves or our business partners in other countries. Case in point: the oil industry. Would you consider OPEC’s price collusion unethical? They certainly reap the benefit of prices above market equilibrium and cause a certain level of harm to those in “need” of gasoline. We all felt the pinch of over $4 per gallon here along with exorbitant prices across the globe. Why do we tolerate them forcing us to pay exorbitant prices at the pump? Or maybe a better question, why do we let our government(s) pile on taxes? California charges us ~$0.45 per gallon; that is almost 10% at the highest prices this year and over 20% at current prices.
Now, that money goes toward public goods and services so I wouldn’t label such a tax unethical maybe just unfair. And I suppose that is my point: I don’t find China’s price fixing of pharmaceuticals unethical just as I don’t find OPEC’s collusion nor our government taxation unethical. They all have a resource (power) they can leverage and they will do so until we as consumers push back.
The ethics question for me arises with non-market exploitation, say of underpaid workers or the environment. We willingly pay more for drugs and gas as a choice weighing benefit vs. cost. What choice does a sweatshop working have? Maybe we should agree to let China’s government set drug prices if they agree to increase the wages and benefits of their workers. I think that compromise will work better than us playing Two-Face.
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