People talk outside a Walmart store in Bentonville, Arkansas, on May 5. The retail giant sells more than half of all groceries in some areas of the US. Photo: Reuters
Opinion
Inside Out
by David Dodwell
Inside Out
by David Dodwell
Don’t blame China for monopolies that threaten economic security
While some concerns about the state of the world’s supply chains are driven by paranoia, others are legitimate and must be addressed
Rather than criticise China, countries in the West should examine the deregulation and weak enforcement of antitrust laws which allowed monopolies to emerge
One of the most alarming lessons from the Covid-19 pandemic and Russia’s invasion of Ukraine is that even modest supply-chain snarls have exposed extraordinary vulnerabilities in surprising places, triggering global concern over national economic security. Some of this concern has been driven by paranoia, but some is wholly legitimate and needs to be addressed.
Yes, supply chains need to be shortened and simplified, and many can be made more local. Companies should seek to diversify wherever possible to ensure they are not reliant on a single supplier for key inputs. Resilience also implies compromise on “just-in-time” models, and a realisation that building “just-in-case” capacity is likely to add to costs for companies and their customers.
But, as Rana Faroohar wrote in the Financial Times last week, much of the freshly discovered vulnerability arises from a creeping concentration of corporate power both within and between economies. Much of it is the result of several decades of lax application of anti-monopoly laws.
That, in turn, reminded me of the extraordinary value of the “rule of four”, elaborated more than a decade ago by anti-monopoly advocate Barry Lynn at the Open Markets Institute. The rule says that no country or individual company should make up more than a quarter of a market, whether that market is global or within an individual country.
There will undoubtedly be lots of cases – including “natural monopolies” where extraordinary concentrations of producer power might appear inevitable – where the rule of four cannot work. But the simple, consistent practice of scrutinising our supply chains in terms of the rule of four would provide valuable early indicators of dangerous or unacceptable vulnerability.
As concerns over national economic security have exploded, it has become fashionable to blame China for our most serious vulnerabilities. Who would not be worried that China is home to 76 per cent of global electric vehicle battery production capacity and 60 per cent of global rare earth mineral production?
Worry is also natural when the world relies so heavily on China’s pharmaceutical raw materials, a wide range of industrial chemicals and the photovoltaic cells essential to solar panels. It makes sense to be concerned over the Chinese business model that puts state-owned enterprises (SOEs) – which almost by definition break the rule of four – at the heart of an industry policy that has made China a fierce competitor in key strategic industries.
However, blaming China without looking at home-grown vulnerabilities is misguided. As Faroohar wrote, “Deregulation and weaker enforcement of antitrust laws in the US since the 1980s has led to extreme corporate concentration.” She notes that Walmart sells more than half of all groceries in some areas of the United States, Amazon dominates e-commerce and a single railroad ships 47 per cent of all grain.
She could add the role of Abbott Laboratories, which accounts for 43 per cent of baby milk formula sold in the US. The closure of its Michigan plant in 2021 led to a crash in supplies nationwide. She could also add the pantheon of Silicon Valley tech giants that have generated alarm in the US and around the world through insidious market domination.
As the International Monetary Fund noted in 2021: “The market disrupters that displaced incumbents two decades ago have become increasingly dominant players that do not face the same competitive pressures from today’s would-be disrupters … Our analysis shows that M&A by dominant firms contributes to an industry-wide decline in business dynamism.”
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Meta opens a physical retail store where customers take a first look at virtual reality
Meta opens a physical retail store where customers take a first look at virtual reality
The subsidies, tax breaks and other forms of preferential treatment China gives its SOEs might draw widespread complaints, but even Beijing take steps to ensure fierce competition in its domestic market – a task made easier by its colossal size. That is why it is now home to a wide array of wind turbine manufacturers, electric car makers, battery manufacturers and more.
Take its recent focus on the development of hydrogen power. Support for research institutions, electrolyser companies and hydrogen distribution grids have proliferated, with support being progressively withdrawn from the least successful firms and biasing towards “green hydrogen”.
As a study by Germany’s Mercator Institute recently observed, China’s ambitions in hydrogen are a “blessing and a curse”: “By the time green hydrogen begins to establish itself as an important part of China’s energy supply from 2030 onwards, China will have champions in related technologies all along the value chain, leading to increased competition within China and in third markets.”
Hydrogen power features prominently in China’s 2060 carbon neutrality plan because of its eco-friendly applications and potential support for its energy security needs. Photo: Bloomberg
It also noted that, “Chinese technology developers and producers will likely make a valuable contribution to global efforts to combat climate change by driving down the cost of related technologies, but they will also increase competition for foreign players.”
Which is worse: formally taking advantage of SOEs but regulating fiercely, or insisting on free-market competition without acknowledging or adequately regulating against concentrations of corporate power? Whatever the market model, regulators will always need to stay vigilant for market concentration, monitor choke points and ensure backups that provide resilience.
Lynn’s rule of four has value in managing problems intrinsic to both economic models. As Faroohar noted: “This is not a perfect solution. But it’s a way to start shifting focus away from trade wars, cold wars and class wars to the main culprit – too much power in too few hands.”
David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades
