Chinese Readers Upset Over No-Discount Rule

On January 8th, the China Publishers Association(中国出版工作者协会),the China Book Distribution Industry Association(中国书刊发行业协会)and the China Xinhua Bookstore Association(中国新华书店协会)(collectively the “Three Associations”) jointly published the “Book Fair Trade Rules” (“BFTR”). Its enactment generated widespread outcry at its suspected violation of China’s Anti-Monopoly Law (“AML”). BFTR became effective upon its release.

At the center of the controversy is one article that puts a ban on discount for books within first year of publication. Only under several limited circumstances can discount be offered for books published within one year, but by no means over 15%. In addition, all distributors are required to seek supply from licensed suppliers and refrain from placing orders to, among others, retailers and individuals. Suppliers are also required not to sell to retailers, online bookstores, non-profit organizations and individuals at prices lower than general distributors and retailers. Noteworthy is that BFTR is non-enforceable, because the Three Associations don’t have legislative powers and Chinese book publishers and distributors are only called upon to abide by the rule in doing business. Where book suppliers and distributors violate the rule, they are subject to sanctions no more serious than being refused to pass annual inspection by publication authority, as recommended by the Three Associations. Under BFTR, an entity will be established to implement the rule. 

The above cited rules are a clear violation of Article 16 of AML, which explicitly prohibit trade associations from organizing members to engage in monopolistic conducts. Under Article 14 of AML, undertakings are prevented from entering into vertical agreements that fixes price or puts a floor on the price of products sold to third parties. AML also prohibits competitors to engage in collective refusal to deal. If the Three Associations are found to violate AML, it will be subject to fine of RMB500 thousand and in serious case, being de-licensed from operation. Where undertakings operating in the book industry adjust their competitive conducts in respond to BFTR, they may also be found to have entered into monopoly agreement and are subject to fines ranging from 1% to 10% of the turnover of the preceding year. According to the rule of work division among Chinese antitrust enforcement authorities, the National Development and Reform Commission will have the jurisdiction to investigate and impose sanctions.

To a large extent, the opposition to BFTR centers on its effect of hurting the interest of Chinese readers. It is argued that Chinese readers are denied the opportunities to purchase books from outlets that offer competitively low price. The enactment of BFTR is nothing more than a naked attempt by dominant book publishers and distributors to prevent their business from being encroached by low cost book distributors, such as online bookstores. BFTR also furnishes opportunities to companies in book industry to engage in concerted action that diminishes or eliminates competition between them.

The Three Associations responded to the criticism by launching a massive, high-profile campaign to justify BFTR. On January 22, the Three Association called on a press conference, in which the Deputy Secretary-General at the Publishers Association, Huang Guorong, said that the no-discount rule is necessary to protect the interest of readers in the long run. He explained that when books are sold at discounted price, retailers often use their “monopolistic position” to get as many discounts as possible from book suppliers. It hurts book suppliers and authors alike, because their incentives to publish and write books would be diminished. It in turn hurts the interest of the readers. He also cited that ban on discount in first year publication of books is also common practice in western countries. Mr. Huang’s theory seemed to have been lent support by media report that nowadays, bricks and mortar book shops are increasingly becoming “display rooms” for new books—readers read books in the shops and buy them online. The thriving online book shops are a massive threat to traditional book distribution system.

The above-cited justification reminds one of the “evil competition” argument familiar in countries well experienced in antitrust law enforcement. However, it has been rejected as false many times by courts and enforcement authorities, because competition is generally held to be the most effective means of production and distribution. Innovation is the very thing protected by antitrust law, because it spurs the development of business and technology. By all means, antitrust law doesn’t give room for leisure over hard work. Technically speaking, vertical agreements have been increasingly scrutinized under the rule of reason in countries like United States and Europe, because sometimes their pro-competitive values outgrow anti-competitive effects. However, China’s AML condemns vertical agreements that fixes resale price as per se illegal, unless they can be exempted under Article 15 of the law. Among the rigorous conditions required to be met before a monopolistic agreement can be found to be exempted is that consumers must get their share of benefit from the agreement. Then it becomes clear that the issue, inter-alia, is whether BFTR’s purported consumer protecting value measure up to the mandate of the AML that consumers also benefits from monopolistic agreements? At the time of writing, no report has been made that the National Development and Reform Commission has responded to BFTR.