International Merger Review and BH Pinto

Many Americans may not know that a business deal of unseen proportions may soon occur on the other side of the world. Two of the world's largest mining companies, BHP Billiton and Rio Tinto, could soon merge into an economic powerhouse. Given the market shares at stake, as well as the amount of natural resources under the control of the two entities, agencies charged with competition policy have taken notice.

The Chinese government is also understandably worried about the transaction. A combined "BH Pinto," as I like to call it, would control nearly a third of the world's iron-ore market, which concerns China because iron is a key input to steel, because China is the top global consumer of steel, and because China is the largest customer of both companies. The deal "would also include a stake in the world's largest copper mine, Australia's largest underground mine and assets in aluminum, diamonds, and silver around the world." Some analysts therefore predict that China could face increases in the price of iron ore of between 25% and 50%.

Small wonder, then, that Hong Kong has antitrust on the mind. As noted by Dan Ryan, lawmakers in that government are seriously considering whether to institute a vigorous structure of antitrust regulation in Hong Kong, in the form of a proposed "Fair Competition Law." Ryan, however, argues that anti-corruption measures would better combat the evils of consolidation and wealth transfer than antitrust regulation. In essence, he believes that increased regulation will only lead to more anti-competitive behavior, stating that "The real problem is the laws themselves. They end up only enriching the lawyers, imposing unnecessary costs on business and result in a less diverse range of products being offered in the market."

I'm all for reduced government regulation of business, and I do worry that as developing nations begin to flex their legal muscles, economic growth could be stymied when international businesses have to navigate an increasingly complex minefield of economic regulation and protectionist measures. But I also know that monopolists have a natural tendency and incentive to generate dead-weight loss and undermine economic welfare. On a side note, I'm also quite tired of the "blame it on the lawyers" argument being trotted out every time someone seeks to protect people from exploitation through laws and regulations. This is not to say that lawyers are entirely blameless for the evils of the corporate world, but that lawyers do not operate in a vacuum; with the exception of professional groups like the ABA, business lawyers work for business people, not for other lawyers. And last I checked, businesspeople do not have to pass a standardized national exam on ethics before they start work in corporate America.

That said, what bothers me most about Ryan's editorial is how he seeks to argue that we shouldn't regulate monopolies because of regulations just create them. This is a little like saying, "theft is only a crime because we define it as such, so we should just eliminate laws against theft, so that there won't be any thieves." Surely there is a better solution than eliminating competition regulation entirely, particularly when world economic history and economics itself demonstrate that monopolists will monopolize.

If anything, Hong Kong's consideration of a competition law regime highlights the continued need for a global antitrust treaty that would minimize the impact of merger reviews on global businesses--much like how the Madrid Agreement streamlines international trademark registrations--particularly now that a country of China's size has joined the ranks of the 70 some-odd other nations with laws on this subject. I think it's safe to say that a truly unified review process will never emerge, given that China included enforcement exemptions for state-owned monopolies in its Anti-Monopoly Law that would never fly with other non-Communist countries. But I do think that there's an opportunity to streamline out some of the global inefficiencies in the process. Perhaps the studies that the OECD has done on this issue, or the work of Canada's Competition Bureau could be used to formulate an effective international arrangement. Robert Pitovsky, formerly Chairman of the FTC, also did some work in this area, but it may be time for a fresher look.

I smell dissertation fodder...