I. Introduction

    

    At the Economic Minister Conference involved Association of Southeast Asian Nations (ASEAN) and China, Japan and Korea which was held in Malaysia in the late August 2006, a economic agreement covered total East Asia was discussed. According to the proposal, in addition to the tariff elimination, a single integrated seamless market in this region should be promoted in order to achieve the broader goal of the region becoming a free trade area. If this cooperative agreement be successful, a great free trade area will emerge in the world in which the total output value amounts to 7 ~ 8 trillion. [1]

    No doubt, China, Korea and Japan as three countries in the Northeast Asia will play a key role in the East Asian Free Trade Area. That is not only out of the consideration of their geographical proximity, their similar traditional culture, but also the fact that they are economic powers in the East Asia. In 2004, China, Japan and Korea as a whole had a combined GDP of more than seven trillion US dollars, accounting for one-fifth of the world's total; and the trade among the three nations exceeded two trillion US dollars, of which 58 percent came from intra-regional trade, higher than the 55 percent for North America Free Trade Area, but a bit lower than the 65.5 percent for the European Union.[2] Obviously, a trade chain composed of China, Korea and Japan has taken shape in Northeast Asia based on their interdependence with each other. In this case, strengthening economic cooperation among the three countries is very important for the economic development of them. Therefore, “Joint Declaration for Promoting Tripartite Cooperation among China, Japan and Korea” was published as early as in October 2003 and a proposal for establishment of a free trade area covering them was also put forward. [3]

    Regardless of the FTA covering ASEAN + 6, or ASEAN + 3, or composed only of China, Japan and Korea, it is absolute necessary to take measures for promoting the free movement of goods and services cross the borders between the signatories. That means that it is absolute necessary for governments, enterprises and scholars of the related countries to be seated together to dialogue. For example, the governments make strategic decisions and mutual concessions for the achievement of FTA, the enterprises find out their common interests brought about by the FTA, and the scholars propose their structural opinions for promoting the FTA. I believe, today’s conference is very important, because it puts forward historical mission to our lawyers to take legal measures to establish the FTA covering China, Japan and Korea in order to realise free movement of goods, services and investments in this area as soon as possible.

    

    II. Competition Policy – the Cornerstone of FTA

    

    Today, China, Korea and Japan are confronted with such a challenge how to increase and develop their trade and investment through a FTA in the Northeast Asia. In my opinion, the most important precondition for the potential signatories to establish a FTA is to implement a market economic system with open and free competition. Without this factor, it would be not possible to realise the free movement of goods, services and investments in the so-called FTA, and there would be no real FTA. Secondly, the signatories should work out a treaty or an agreement as a foundation to achieve the FTA to promote the free movement of goods and services, to remove the direct and indirect barriers to trade between them. Even through the agreement should be WTO-consistent, because the FTA is toward regionalism, there must be some exceptions for the regional trade. Thirdly, there should be a commission in the FTA in order to coordinate the signatories and a body to settle the dispute among them.

    In addition to the preconditions mentioned above, there should be a coordinated competition policy in FTA. Otherwise, there would be no free movement of goods and services, even through the barriers of tariff or of non-tariff between the signatories be removed theoretically. For example, if one party in the FTA is tolerant of exporting or importing cartel, there must be serious restrictive effects on the markets of other parties. From this perspective, the coordinated competition policy should be one of the cornerstones and a key precondition for the achievement of FTA.

    At today, the most successful and influential trade community in the world is the European Community. As stated in the original Article 2 of the Treaty of European Economic Community, “The Community shall have as its task, by establishing a common market and progressively approximating the economic policies of Member States, to promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living and closer relation between the states belonging to it.” Since 1958, the Community activities necessary for the purposes set out in article 2 have been expanded to 21 items, and the establishing “a system ensuring that competition in the internal market is not distorted” is only one item, but the competition policy has been playing a fundamental role in the development of the Community.

    That was in particular reflected in the Commission’s 23rd (1993) Annual Report on Competition Policy which discussed the relationship between competition policy and industrial policy. It said that competition policy has a central role to play in the Community’s strategy for achieving a lasting recovery in growth and employment. The priorities which the Commission has set itself as regards competition are largely determined by the contribution which competition policy can make to the Community‘s objective of growth, competitiveness and employment. Competition encourages the efficient allocation of resources and stimulates research and development, innovation and investment. It is the mechanism by which the resources and jobs are redirected towards growing sectors and away from ones with less promising futures.[4]

    According to this report, the importance of the role of competition policy has been reinforced in the European Community in two ways. Firstly, its part in marking a reality of the internal market which will create jobs, and stimulate growth and competitiveness is widely recognized. Secondly, it is central to the Community’s Industrial policy. The completion of a genuine internal market and an effective industrial policy has received first priority in the White Paper. This in itself implies the need for renewed vigor in the competition policy in areas where it complements and enhances these objectives. As a conclusion, the commission considers that, far from being the direct opposite of Industrial policy, competition policy is an essential instrument, with clear complementary between the two policies. [5]

    Competition policy is also a very important part in the North American Free Trade Agreement (NAFTA) of 1994. NAFTA agreement provides not only the legal measures for establishment of the FTA in order to eliminate barriers to trade in, and facilitate the cross-border movement of goods and services between the territories of the signatories, the principles and rules to promoting the free movement of goods and services, including national treatment, most-favored-nation treatment and transparency, but also the legal measures for promoting fair competition in the FTA by Articles 1501-1505 of the Chapter 15.

    Surely, competition policy, compared with other policies, plays a fundamental role not only for protection of consumer welfare by maintaining a high degree of competition in the FTA, because the competition leads to lower price, better quality, faster technological innovation and more choice of goods and services, all in the interest of consumer, but also for achievement of the FTA in which there is a competition order to maintain and protect market competition. In this sense, we can conclude that even through the competition policy is not the whole of a FTA, but without competition policy there would be no existence of the FTA.

    

    III. The Contents of Competition Policy of FTA

    

    Based on the 47 agreements analyzed by the OECD, [6]the competition provisions in the FTA agreements could be classified by the following 8 matters: (1) “Measures”[7] relating to the adoption, maintenance and application of competition law; (2) provisions relating to the cooperation and coordination of activities by competition law enforcement bodies;(3) Provisions relating to anti-competitive acts and measures to be taken against them; (4) Provisions relating to non-discrimination, due process and transparency in the statement and application of competition law;(5) Provisions to exclude the use of anti-dumping measures against the commerce of signatories;(6) Provisions concerning the circumstances and conditions under which recourse to trade remedies (such as anti-dumping measures, countervailing duties, and safeguards) are permitted; (7) Provisions relating to the application of dispute settlement procedures in competition policy-related matters;(8) Provisions relating to flexibility and progressivity, sometimes referred to as special and differential treatment (SDT) provisions.

    Obviously, some of classifications above overlap one another, for example the no.1 and 3, and some of them as competition provisions are not indispensable in the agreement of FRA, for example the no. 5 and 6. In my opinion, and based on the experiences of European Community and North American Free Trade Agreement, there are three kinds of provisions indispensable as competition provisions in the FTA agreements. First is the provision relating to anti-competitive conducts and legal measures to be taken to combat against them. That means that each signatory shall enforce a domestic competition law to proscribe anticompetitive business conduct and take appropriate action with respect thereto, recognizing that such measures will enhance the fulfillment of the objectives of the establishment of FTA. Second is the provision relating to the cooperation and coordination of the activities by the competition authorities in order to further effective competition law enforcement in the FTA. Third is the provision relating to the dispute settlement mechanism for the unreasonable public restrains.

    1．Unified competition policy among the signatories

    Despite the different competition policies of the different countries, the majority of countries in the world has reached a common understanding that the undertakings with market dominant position has an inherent tendency to increase the price, to limit the output, and no motive to innovate. Out of this consideration, competition policy or competition law of the signatories shall provide themselves at least with following substantive provisions in order to combat against the restriction on competition in the FTA:

    A. Prohibition of Hard Core Cartel

    Market competition can be unreasonably restricted or eliminated through the agreements among competitors, the decisions of undertaking groups or concerted practices. The legal measure for combating these restrictions is to prohibit cartel, particularly to prohibit the price fixing, output control and market division that have been called as“hard core cartel”.

    B. Merger Control

    The undertaking can get dominant market position through merger and acquisitions. Because any undertaking with dominant position, no matter how to reach that position, is inclined to abuse its market power and hence to restrict competition, merger and acquisition should be controlled in order to maintain competitive market structure and prevent abusive behavior in advance.

    C. Prohibition of Abusive Conducts

    In spite of M&A control, it is still inevitable to create dominant position or to strength such kind of position due to the granted special or exclusive rights by the government, or internal growing of the enterprise through technical innovation or improvement of the management. Because any enterprise with market dominant position, no matter how to get such a position, is inclined to abuse and impair economic efficiency and consumer welfare, prohibition of abusive conducts of the undertaking with market dominant position is an important pillar of the competition policy.

    D. Prohibition of Administrative Monopoly

    Based on experiences of European Community, combating against administrative monopoly should be an important part of competition policy and competition law. Particularly in today’s China, the most serious restriction on competition is not from the enterprises, but from the government itself, for example the local protectionism and the department monopoly.

    On the other hand, in spite of the competition policy of the FTA, the signatories shall still be allowed to take restrictive measures out of consideration of public interest or general economic interest, for example to authorize monopoly position to the state-owed enterprises or give them privileges or subsides which normally are based on so-called industrial policy. But in accordance with the principle of market economy, the implement of industrial policy should not become a tool to distort the free and fair competition. In this respect, the experiences of the EU and NAFTA are valuable. NAFTA stipulated that the Agreement shall not be construed to prevent a Party from maintaining or establishing state enterprise, but each Party shall ensure, through regulatory control, administrative supervision or the application of other measures, that any state enterprises that it maintains or establishes acts in a manner that is not inconsistent with the party‘s obligations under the agreement (particularly in the fields of investment and financial service) wherever such enterprises exercises any regulatory, administrative or other governmental authority that the Party has delegated to it, such as the power to expropriate, grant licenses, approve commercial transactions or impose quotas, fees or other charges. Each Party shall ensure that any state enterprise that it maintains or establishes accords non-discriminatory treatment in the sale of its goods or services to investments in the Party’s territory of investors of another Party. [8]

    2. Cooperation among the enforcement agencies

    In the case of globalization or regionalization, the anticompetitive conduct in one country is quite possible to impair the market competition of other countries, in particular in the case of exporting cartel, importing cartel or cross-border M&A. That means that the enforcement agencies of the FTA signatories shall cooperate with each other in order to deal with the restrains effectively and maintain a free and fair competition in the FTA. The North American FTA indicates that each party recognizes the importance of cooperation and coordination among their authorities to further effective competition law enforcement in the free trade area; The Parties shall cooperate on issues of competition law enforcement policy, including mutual legal assistance, notification, consultation and exchange of information relating to the enforcement of competition laws and policies in the FTA.[9]

    Of course, in the case of common market, the cooperation among the enforcement agencies of the parties shall be more close than of in the FTA. In the European Community, it is European Commission as a unified agency to enforce European competition law and lead the European competition network.

    3．Dispute Settlement Mechanism

    It is very common that private restrains mix with public restrains in the international trade. For instance, an exclusive right granted by the government will not only restrict and eliminate competition in domestic market, but also restrict and eliminate competitor from other signatories. According to North American FTA, no Party may have recourse to dispute settlement under this Agreement for any matter related competition policy.[10] But due to the fact that it is difficult for the enforcement agency of the signatories to deal with the restriction on competition by its government with sovereignty, the settlement dispute body of the FTA should assume the mission to settle the dispute related anticompetitive conducts involved with the governments of the signatories. WTO dispute panel has decided the first antitrust case of WTO in 2004,[11] and resolved the matter in favor of the United States’ claim that Mexico had restrictively facilitated exploitative prices and a cartel that raised the price of terminating cross-border telephone calls in Mexico and thereby harmed trade and competition.[12] Every body knows that competition law is the other side of the coin of liberal trade law. Without competition law to open market and eliminate the barriers in FTA, there would be no free trade in FTA. Mexican Telecom case is a good example how to discipline combined public and private restrains.

    

    IV. The Perspective of Chinese Antimonopoly Legislation

    

    Compared with Japan and Korea, today’s China is still a developing country in the regards of economic development and the competition policy as well. Till today, China has not finished the antimonopoly legislation and has not promulgated a systematic antimonopoly law. In the beginning of 2004, the Commerce Ministry submitted a draft to the Legal Affair Office of the State Council. In 2006, the Legal Affair Office of the State Council submitted the reviewed draft to the Standing Committee of National People’s Congress. In June of 2006, the draft was read for the first time before the members of the Standing Committee of the NPC. In accordance with the legislative procedure, every law before its enactment has to be read at least 3 times before the Standing Committee of the NPC or the NPC, and the space between readings is at least two months. In this case, it will be possible for the Antimonopoly Law to be adopted in 2007. Anyway, Chinese antimonopoly law should be adopted during the term of 10th National People’s Congress, which will terminate by March 2008, in order to realize the goal that China will complete a comprehensive legal system with specific Chinese characteristics by 2010.

    In the process of drafting, as an expert in the field of competition law, I personally lectured on antitrust law twice for the Standing Committee of 9th NPC in 2002 and for the 10th NPC in 2005. As I know, Chinese lawmaker has not only paid great attention to this legislation, but also collected lots comments nationwide and from abroad.

    Generally speaking, it is a draft with real substance. There are four pillars in respect of substantial law, inclusive of the provisions prohibiting monopoly agreements, prohibiting abusing dominant position and controlling mergers. The most notable characteristic of the Chinese antimonopoly draft is the provision prohibiting administrative monopolies, since the most serious restrictions on competition in China come not from enterprises, but from governments themselves. Additionally, there are also provisions concerning enforcement authority and procedures and legal liabilities, inclusive of administrative, civil and criminal liabilities.

    Here is especially worth mentioning that some good experiences from the US, Germany, EU are introduced in the draft, for instance the “effect doctrine” [13]reflected in Article 2. It provides, “This law shall apply to the activities conducted outside of P. R. China that eliminate or have restrictive effect on competition in the domestic markets of P. R. China.” According to Article 45, the undertakings involved in monopoly agreement shall be given a mitigated punishment or be exempted from punishment, if they report against the monopolistic conduct and provide important evidence to the Anti-Monopoly Law Enforcement Authority. Obviously, that is based on the leniency policy originally from the US. Similarly, Article 49 provides that conduct in violation of the law constituting crime shall be subject to criminal liability in accordance with relevant laws and regulations. It seems that the criminal punishment is also introduced in Chinese antimonopoly draft.

    Chinese antimonopoly draft absorbed also a lot experiences from Europe. For instance, Article 42 provides that where an undertaking subject to investigation admits the suspect monopolistic conduct being investigated by the Anti-Monopoly Law Enforcement Authority and undertakes to take specific measures within a certain time limit to eliminate the effect of the monopolistic conduct, the Anti-Monopoly Law Enforcement Authority can make the decision to suspend the investigation; if it is subject to punishment pursuant to this Law, the punishment shall be reduced or eliminated. This provision is similar to some extent to Article 9 on commitment in the EC Regulation No.1/2003. Article 10 titled “exemptions of monopoly agreements”, Article 13 titled “factors for determining the dominant market position” and Article 14 on “direct determination of dominant market position” obviously used the experiences from German Cartel Law (GWB).[14]

    But on the other hand and from a critical perspective, in the draft submitted to the Standing Committee of NPC by the State Council there is still a lack of progress in some areas, and in my opinion, the most serious problem is in the regard of enforcement agency. According to the explanation of the Draft by the State Council, the enforcement power for the antimonopoly law will be divided into the hand of the Commerce Ministry, the State Administration of Industry and Commerce, and the State Commission of Development and Reform, just like today’s situation based on exiting Unfair Competition Law and Pricing Law. Of course, the separation of the enforcement power into three institutions would be not only a waste of resources, but also inevitably create conflicts and frictions between different agencies.

    As mentioned above, in view of the globalization and emergence of FTA, one of the important functions of the enforcement agency is to conduct international exchanges and cooperation with the agencies in other countries and the international organizations, and to be responsible for the negotiation of bilateral and multilateral agreements in the field of Competition. If In China there would be three parallel enforcement agencies, it would be not only difficult for these agencies to join in international cooperation effectively due to lack of financial resource, but also troublesome for the enforcement agencies in other jurisdictions, because they have to contact three Chinese institutions as antitrust enforcement agencies.

    I believe, therefore, the issue here is critical: On the one hand, without a unified antimonopoly authority, it will be difficult for Chinese antimonopoly law to be enforced effectively in domestic market; On the other hand, without a unified antimonopoly authority in China, it would be difficult for other parties in the FTA to cooperate with Chinese enforcement agencies. But anyway, I am still confident that China is moving forward in the direction of pro-market reform, and I am convinced that China's growing and developing economy requires a strong watchdog to keep market order, and economic globalization is the important motive force of Chinese lawmaker to establish an effective antimonopoly authority in the near future.

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    * This paper was presented at The 1st International Conference on Emergence of the Globalization and Blocs: Lawyers Perspective, Feb. 23-24, 2007, Seoul, Korea.

    ** Professor of Law at Chinese Academy of Social Science. iur. Dr. of Hamburg University

    [1] See Cankao Xiaoxi (Information Daily) of October 10, 2006, The East Asian Free Trade Area discussed among 16 countries.

    [2] According to statistics from Japan, the country's trade with China stood at 213.28 billion US dollars in 2004, or more than 20 percent of Japan's total external trade. China has surpassed the United States to become Japan's largest trade partner, and Japan has become the third biggest trade partner of China, next only to the European Union and the United States. The trade between China and ROK is robust also. In 2004, the two registered 90 billion US dollars in bilateral trade, a year-on- year growth of more than 40 percent. See http://www.hq.xinhuanet.com/boao2005/2005-04/25/content_4123194.htm

    [3] Joint Declaration of China, Japan, and South Korea on Promoting Tripartite Cooperation, 7 October 2003 in Bali, Indonesiahttp://www.nti.org/db/china/engdocs/prc_jpkr_1003.htm

    [4] The 1993 Delors White Paper on Growth, Competitiveness and Employment: the Challenges and Ways Forward into the 21st Century, COM (93) 700.

    [5] Ibid.

    [6] Simon J. Evenett, What can we really learn from the competition provisions of RTAs? In UNCTAD, Competition Provisions in Regional Trade Agreements: How to Assure Development Gains, 2005, p 41.

    [7] The word “measures” here is taken to mean “best endeavor ” clauses and other promises as well as formal commitments to enact and enforce certain competition laws.

    [8] See Article 1503 of NAFTA.

    [9] See Article 1502 of NAFTA.

    [10] See Paragraph 3 of Article 1501 of North American Free Trade Agreement.

    [11] Panel Report, Mexico: Measures Affecting Telecommunications Services, WT/DS204/R, adopted 1 June 2004.

    [12] Eleanor M. Fox, The WTO’s First Antitrust Case – Mexican Telecom: A Sleeping Victory for Trade and Competition, Journal of International Economic Law 9 (2), 271, 2006.

    [13] United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir 1945).

    [14] See Articles 2, 3 and 19 of German Cartel Law revised on July 15, 2005.