May 23, 2019 / 12:03 PM / 25 days ago

Breakingviews - Cox: “China does it” is a bad antitrust argument

LONDON (Reuters Breakingviews) - Facebook can make reasonable arguments about why the $530 billion internet company shouldn’t be broken up, either through regulatory pressure, legislative fiat or shareholder desire. The least persuasive of them is that the social network’s Chinese digital rivals won’t ever face the same fate.

An attendant walks past EU and China flags ahead of the EU-China High-level Economic Dialogue at Diaoyutai State Guesthouse in Beijing, China June 25, 2018. REUTERS/Jason Lee

That didn’t stop Chief Operating Officer Sheryl Sandberg from making that very case last week. “While people are concerned with the size and power of tech companies, there’s also a concern in the United States with the size and power of Chinese companies, and the realization that those companies are not going to be broken up,” Sandberg told CNBC, when asked about a call from one of Zuckerberg’s co-founders to split Facebook into a few smaller components.

Setting aside the fact that Tencent and Alibaba have respectively spun off their music and financial arms, the “but China does it” argument is becoming a familiar refrain from business and political leaders in the developed world. The extraordinary rise over the past decade of many private and state-backed companies in the People’s Republic is frightening competitors and freaking out policymakers. While their fears may be understandable, the danger for free-market economies is that they will respond in ways that effectively allow the Chinese Communist Party to shape the rules on competition at home.

Though antitrust policy in the United States and Europe is far from flawless, it has been guided primarily by a focus on fairness for consumers and competitors, with Washington tending more towards the former and Brussels the latter. The rise of China, largely since it joined the World Trade Organization at the start of the century, is challenging that. But the right rejoinder is to adopt effective mechanisms that force Chinese companies to play by the rules of competitive dynamism, not to sanction the creation of new monopolies at home.

America already has a few blunt tools, such as the Committee on Foreign Investment in the United States, to manage the incursion of companies into its marketplace. Recently the Trump administration’s Commerce Department used another one, the so-called Entity List, to hamstring telecom juggernaut Huawei Technologies and its affiliates. The order requires companies like Alphabet, Broadcom and Qualcomm that sell products overseas to the Chinese company to obtain a special licence.

Canada has a similar instrument that allows it to assess whether foreign takeovers of domestic assets will bring benefits to the country. Europe is still struggling to deal with the Middle Kingdom’s economic challenge. That’s why redrafting antitrust rules will be one of the first orders of business for the new European Parliament following elections, which kicked off this week.

Thus far, the European tendency has troublingly resembled Sandberg’s remarks. The European Commission’s decision in February to block the merger of Alstom with Siemens’ rail business became a rallying cry in Paris, Berlin and beyond for relaxing competition policy to make it easier to create European champions. French Finance Minister Bruno Le Maire pushed hard for the Alstom-Siemens deal to strengthen the companies against looming competition from CRRC, a domestic monopoly created by a Beijing-blessed merger of rival railroad equipment manufacturers.

Competition Commissioner Margrethe Vestager doesn’t regret resisting the pressure. As she argued in a recent interview with Breakingviews, the decision was consistent with existing law, and reflected the current state of competition in certain sensitive markets like high-speed rail. At present CRRC doesn’t produce such fast trains outside of its home market, so there was no basis to argue for the pre-emptive creation of a European monopoly in the sector.

She admits there could in future be a threat to European manufacturers, and eventually to consumers, she says. But that’s a matter the bloc’s rules need to address more clearly, with a view to ensuring greater access to China and elsewhere in return for opening the European market.

“If you come here to do business, you will expect us to do business with you. I think it’s an obvious first step and a good signalling to global market players,” she told Reuters’ The Exchange podcast. “There is plenty of room for a more confident Europe to take a harder approach.”

Manfred Weber, a German member of the European Parliament and the lead candidate for the European People’s Party coalition, agreed that Vestager’s decision was aligned with the current legal framework. But he’s also keen that the new commission, which he hopes to lead as president, will revisit the antitrust question. “I’m a man of competition and the free market, but I think the law must be upgraded to the global aspect,” Weber told me in an interview at the European Parliament’s Strasbourg complex. Noting the success of Airbus, which was cobbled together from a handful of aerospace firms, he said: “Europe must get the right to allow also the merger of such companies if we really see a global dimension behind it.”

As with the case for European high-speed trains, there’s little hint of Chinese competitors eroding Facebook’s dominance outside the Great Firewall. It’s probably true that Alibaba and Tencent may never face the same sort of pressures at home as Facebook does. But the moment that influences the way legislators examine the company’s potentially deleterious impact on competitive markets would be the surest sign yet that China is winning.

Breakingviews

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