The extent to which US courts should enforce antitrust laws against state-led export cartels has been the subject of intense debate among academics, courts and policymakers for decades. While defendants often invoke the state compulsion defence, which is based on comity and respect for foreign sovereigns, these doctrines have long been criticised for their ambiguity and inconsistent application. The recent Supreme Court decision regarding the Chinese state-led Vitamin C cartel – reviewed here – highlights a number of challenges with the way these doctrines have been applied in the US.

Yale Journal International Law

The author’s argument in this paper, available here, is that the application of both comity and foreign state compulsion defences are susceptible to political considerations, and that the Supreme Court decision is a good example of this. The author argues that the Supreme Court proactively solicited the opinion of the executive branch before hearing its case, and its final ruling is exactly in line with the opinions and suggestions proposed by the executive. This indicates that comity and the foreign state compulsion defence needs to be examined in light of the specific context of state-led export cartels, where antitrust law issues are entwined with trade policy and domestic politics in both exporting and importing countries. Since the executive branch is in the best position to consider and balance the competing interests, it makes sense for US courts to accord a high level of deference to the executive.

This argument is developed as follows:

Part II sets the stage by explaining why antidumping policies adopted by importing countries is often the impetus behind the organization of export cartels by foreign sovereigns.

Many jurisdictions tolerate export cartels. The incentive for exporting countries to exempt export cartels is obvious: consumer welfare loss is borne by consumers from importing countries, while the producers from exporting countries can reap the gains from monopoly rents. Despite attempts to deal with this classic trade externality, no instrument currently exists to deal with export cartels. One problem is that antitrust issues raised by export cartels are entangled with trade policies, in particular antidumping laws that prohibit imports sold at less than “fair value”. Antidumping laws condemn low pricing in order to shield domestic industries from foreign competition, which is in obvious tension with antitrust law’s encouragement of low pricing to promote consumer welfare. In effect, a possible reaction to antidumping rules is for a foreign government to impose export restraints or encourage domestic firms to agree among themselves to restrict output or raise prices.

The Vitamin C case provides a good example of this. Excess capacity is a perennial challenge facing the Chinese economy. Intense price competition among Chinese exporters has sparked accusations from foreign counties that Chinese companies are dumping their goods into foreign markets. This has led to a spate of foreign antidumping actions against Chinese exporters, and to the adoption of industrial policy measures by the Chinese authorities. Most of these measures have taken the form of “industrial self-discipline”, whereby major companies in a specific industry reach agreements to limit competition in order to stabilise the economy. Trade associations, many of which are converted government ministries, play a pivotal role in facilitating such cartels. In order to avoid antidumping measures, in 2003 the Chinese authorities required that the exports of a number of industries – including Vitamin C, which had 60% of the world market and 80% of the US market in 2001/2002 – be approved by a trade association.

Part III discusses the Vitamin C case.

In January 2005, a group of US purchasers filed claims against Chinese manufacturers of vitamin C, accusing them of fixing prices via a trade chamber and of limiting the quantity of sales to the United States. The defendants did not deny that they had fixed prices. However, they contended that they had acted pursuant to Chinese regulations regarding export pricing, and that the Chamber is a government-supervised entity through which the Chinese government had compelled their collusion.

In the District Court, the inquiry focused on whether the cartel was actually compelled by a foreign sovereign. In an unusual move, MOFCOM – the highest central ministry in charge of overseeing Chinese international trade –filed an amicus brief in 2006 acknowledging that the challenged conduct was directed by a regulatory pricing scheme. The District Court asserted that MOFCOM’s statements were entitled to substantial deference, but found that the record contained conflicting evidence as to whether the Chinese defendants’ actions were compelled by the Chinese government. After a lengthy and detailed discovery, the court found that the Chinese government merely encouraged the cartel as a policy preference, but that MOFCOM’s conduct did not rise to the level of compelling the vitamin C manufacturers to fix prices. On trial, the defendants were ordered to pay treble damages for committing an antitrust infringement.

This decision was appealed all the way to the Supreme Court, but in the meantime the United States launched a WTO suit against China for violation of its WTO commitments by imposing export restraints on certain raw materials. Although the WTO proceeding involved different export goods and a different trade association, the US trade representatives used MOFCOM’s statements in the vitamin C case as evidence that the Chinese government imposed “minimum export price requirements”. The District Court had paid little attention to this dispute, since vitamin C was not a product at stake in the WTO proceedings. However, in two export cartel cases brought before US courts regarding raw materials subject to WTO proceedings, other District Courts adopted much more deferential approaches to the views expressed by both the US and Chinese Government. Indeed, the District Court’s decision in the vitamin C case generated much controversy, as many commentators criticised the court for its failure to consider its implications on American trade policy.

Going back to the appeal in the vitamin C case, the Second Circuit Court evaluated whether the District Court should have abstained from exercising its jurisdiction on international comity grounds. This question relates to the application of the Timberlane balancing test mentioned in the article above, which recognises the need to weigh the interests of the United States against the countervailing interests of the foreign entity when determining whether to exert jurisdiction over extraterritorial conduct affecting US commerce. Unlike the District Court, which focused its analysis on a factual inquiry into the existence of compulsion by the Chinese government, the Circuit Court gave conclusive deference to the official statements by MOFCOM. It noted that US courts are bound to defer to such official statements when a foreign government directly participates in a US court proceeding and there is reasonable evidence presented under the circumstances. The Court also noted that even though the plaintiffs may not be able to obtain remedy under the Sherman Act, they could make complaints to the executive branch of the government and the WTO.

This decision was then subject to a further appeal before the Supreme Court – which judgment I reviewed here. The author’s focus is on how the Supreme Court relied extensively on the US Solicitor General’s submissions. These emphasised that, under the US Federal Rules of Civil Procedure, the determination of foreign law is a “question of law” for the courts, which may consider any relevant material or sources in determining foreign law and are not bound by statements from foreign governments in this respect. It enumerated a list of factors that courts should consider when weighing a foreign government’s statements, and noted that the Second Circuit had failed to take them all into account. The author notes that: ‘The final decision of the US Supreme Court is exactly in line with that proposed by the executive branch. In fact, the reasoning and arguments in the Court’s final ruling are strikingly similar to those proposed by the executive in the amicus brief, and in some places there seems to be verbatim copying.’ According to the author, this shows that the Supreme Court has adopted a highly deferential approach to the executive branch in deciding this case, in a fundamental shift from pre-existing case law under which courts focused on the factual issue of whether a foreign sovereign had compelled the cartel.

Part IV discusses the difficulties in applying the foreign sovereign compulsion doctrine in practice.

In export cartel cases, a focal point of the litigation often revolves around the issue of whether foreign sovereign compulsion exists. This issue frequently poses a significant challenge for courts as the information gap between the exporting country and the importing country can be very wide. When defendants attempt to invoke a comity-related defence, U.S. courts and agencies face the additional task of understanding foreign laws and legal practices. The complex factual circumstances of the Chinese vitamin C case offer a good illustration of the difficulties faced by courts in trying to uncover the conditions of compulsion. One way to address these difficulties is through trial discovery. However, factual evidence is often ambiguous, due to the covertness of the cartels and the foreign state’s deliberate attempts to disguise its imposition of export restraints to avoid potential trade violations.

Furthermore, conceptual difficulties arise regarding whether compulsion actually occurred even when factual evidence is available, as is made clear by both the Chinese Vitamin C cases and a number of 1980s cases regarding Japanese export cartels. These difficulties arise from the inherent difficulty of identifying the extent of state control over domestic companies For example, does evidence of close involvement and guidance amount to evidence of compulsion? Where is the line between voluntary acquiescence and compulsion? Is successful enforcement of conduct evidence of compulsion, or even a necessary condition of it?

The other way to address the difficulties with determining whether cartel conduct was compelled by a foreign state is to rely on the foreign sovereign’s interpretation of its own law. The simplest way for the exporting country to convey information to the United States is by directly communicating with it. However, a state may be concerned that the other is mendacious or that others may not take them for their words. The exporting country may have the incentive to protect its domestic manufacturers who have solicited government statements in the hope of receiving immunity from antitrust liabilities, particularly if stating that it compelled its companies to cartelise has zero or negligible direct costs. In practice, because trade is a repeat game, an exporting state faces costs both if it protect its companies and if it fails to protect them. If the Chinese government refuses to defend its domestic firms in US courts, it would lose its credibility among Chinese exporters and its ability to direct them. If it protects them, it may face costs in terms of reactions from importing countries. In legal terms, the question is put in terms of what weight one should put on statements from foreign states regarding their national laws.

While the Supreme Court’s decision in the vitamin C case has clarified that US courts are not bound to treat such statements as conclusive, the question remains: when the factual evidence is ambiguous, how should courts set the benchmark for determining whether a foreign sovereign’s involvement in the cartel has risen to the level of compulsion?

Section V contends that courts should accord a high degree of deference to the executive branch when factual evidence is ambiguous.

The author argues that simply focusing on the factual evidence of a foreign sovereign’s involvement in export cartels is misguided, because it tends to obscure the fundamental question: is granting a comity-based defence to foreign exporters in the best interest of the importing country? Export cartels pose an externality on importing countries and harm their consumers. Despite their harm to consumers, export cartels can potentially benefit domestic producers. During a trade crisis, the government may feel  pressure to protect domestic producers from foreign competition.

Since the 1960s, the US executive branch has negotiated a number of voluntary restraint agreements with foreign governments as a mean to resolve certain complicated trade problems, which have had the effects of encouraging foreign export cartels. In fact, such a tactic was used in the 1960s with Europe regarding steel exports, and during the 1980s during the trade war between Japan and the United States. In this latter case, the US promoted cartels by Japanese car manufacturers in order to limit the impact of competition on the American car industry – going as far as to request the Japanese government to limit its exports in infringement of its GATT obligations. To address Japanese concerns, the DOJ even issued a letter stating that Japan’s voluntary export restraints would not be subject to US antitrust law under the foreign state compulsion doctrine.

Ultimately, the question is who should determine the role that competition law should play in governing cross-border state relations – and hence, what role should comity play in this matter. The first step towards answering this question must grapple with the existence of alternative tools to deal with foreign export cartels: diplomacy, trade law and competition law.  The United States can deal with export cartels through a multilateral treaty network such as the WTO, through direct diplomatic negotiations with the foreign sovereign, or via antitrust actions against foreign producers. While these could be seen as alternative tools to deal with export cartels, on occasion they are mutually exclusive: in the Vitamin C case, foreign compulsion would infringe trade law but immunise the relevant conduct under antitrust law. Furthermore, relying on antitrust can have detrimental effects on foreign relations. On the other hand, while trade remedies and diplomacy are likely to prove more effective at addressing the immediate concern created by an export cartel, they are not as well suited to deal with the effects on consumers created by them – which means that antitrust may operate as a complementary tool to trade policy and diplomacy in such cases.

This means that the optimal response from the United States as regards comity claims is never as fixed as a specific formula. Rather, it is contingent upon changing political and economic conditions. Thus, courts should be alert to the risks that their judgments concerning state-led export cartel cases could cause international tensions, especially when the underlying factual circumstances are unclear. However, courts are not institutionally well equipped to make such a cost-benefit analysis. This implies that US courts should generally defer to the position of the executive branch which possesses the requisite foreign expertise and is in the best position to balance the different competing interests. Furthermore, this approach of deferring to the executive would greatly simplify the current case law.

Comment:

I very much enjoyed this paper, if nothing else because I think it focuses on an important and oft disregarded question regarding comity and the pursuit of antitrust cases against foreign companies: what is the role of antitrust in the context of the wider trade and foreign policy dynamics that often arise in such cases? While for a few decades we have been able to ignore how competition law fits within wider societal, economic and diplomatic frameworks, these past few years have made quite clear that such questions are likely to come back to prominence.

At the same time, I have some reservations about the normative part of the piece, which assumes that the objective of comity is merely to maximise the pursuit of selfish national interests. While the author does not say so, this view seems to build on a very specific approach to trade and foreign policy – realism, with its focus on nation states as rational actors seeking to maximise their self-interest. This doctrine is controversial on its own right; the problem with invoking it to deal with the application of legal principles is that such principles are, by definition, not reflections of arbitrary and transient government policy. Furthermore, one of the goals of comity is to avoid international conflict. If comity were to be applied as merely an extension of governmental policy, it could be used to promote as much as to avoid conflict. This points to the limitations of a ‘realist’ approach, at least in this area – and the need to adopt a more ‘liberal’ approach that takes into account the need for co-operation and the reality of interdependence in determining the reach of competition laws around the world.

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