CTC NEWSLETTER 2024 1SSUE 22

CTC NEWSLETTER 2024 1SSUE 22

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CRITERIA FOR ASSESSING TARIFF ADJUSTMENT REQUESTS

CRITERIA FOR ASSESSING TARIFF ADJUSTMENT REQUESTS

The Competition and Tariff Commission plays a pivotal role in shaping industrial and trade policies by administering the trade tariff mandate outlined in the Competition Act [Chapter 14:28]. Through its Tariffs Investigations Unit, the Commission conducts investigations into tariff (customs duty) charges to assist and protect local industries facing competitiveness challenges from import competition. It reviews tariff adjustment applications from local industry and makes recommendations to the Ministry of Industry and Commerce, which subsequently forwards these to the Ministry of Finance, Economic Development and Investment Promotion, for a final decision. Recommendations therefrom influence implementation of measures by Government designed to shield domestic industries from import competition, with significant implications on industrial development and economic growth.

Types of Tariff Adjustments

The Commission oversees two types of tariff adjustments:-

1. Increases in Ordinary Customs Duties – This measure is employed to protect domestic producers from threatening import pressures. By raising customs duties, the Commission allows local industries time to adjust and restructure, aiming for long-term international competitiveness. The duty increase is capped by World Trade Organization (WTO) bound rates, ensuring that duty rates do not exceed internationally agreed limits. These increases are also governed by trade agreements that Zimbabwe is signatory to namely the Common Market for Eastern and Southern Africa (“COMESA”), SADC and iEPA.

2. Reductions in Ordinary Customs Duties- Reductions are considered when goods are not produced locally or when domestic production is unlikely to meet future demand. Lowering customs duties reduces prices for raw materials, intermediate or capital goods, fostering a more competitive market and promoting industrial growth.

The following assessment criteria are used in the analysis of requests/applications submitted by industry, forming the basis for recommendations made by the Commission: –

• Product and Product Classification
  • The product’s description and tariff code should be identified using the World Customs Organization (WCO) Harmonized System (HS) of classification. Applicants must specify both the current applicable duty rate to the product and the new duty rate being requested.

• Challenges Being Faced and Justification for Assistance
  • Applicant should clearly outline challenges being faced and provide justification for the assistance being sought.

• Local Production of the Product
  • A key consideration is whether the product is manufactured locally. If the product is a raw material or intermediate product not produced locally, the general rule is to reduce duty, as a high duty increases costs for local industries, making them less competitive. Conversely, if the product is produced locally and is threatened by an imported equivalent, an increase in duty may be warranted. The imported product may also be a substitute for the local product, necessitating a duty increase to protect domestic producers.

• Method of Production and Value Addition Estimation
  • The Commission operates within the framework of Zimbabwe’s Industrial Development and Trade policies, which prioritize job creation. Tariffs can protect high-value-added and labour-intensive industries, retaining and creating new jobs. Therefore, it is essential to establish whether the applicant employs labour or capital-intensive production methods and to measure the value addition of the product in question.

• Market and Trade Analysis
  • For upward duty applications, the volume and rate of imports over a specified period (usually three years) must be determined to assess the industry’s potential injury. The market share held by the applicant is compared to that of imports to evaluate, and whether imports are eroding the local market. Other factors considered include capacity utilization, export volumes and values, and employment figures.

• Competitiveness
  • Assessing competitiveness of the industry is critical in deciding whether to grant a tariff adjustment. Key factors include price disadvantages against imports and productivity. A price disadvantage can indicate whether domestic industries are being undercut by imports and help determine the appropriate duty level. Productivity, measured by the ratio of output to production costs, indicates how efficiently the firm uses its resources to produce quality products.

• Effective Rate of Protection
  • Calculating the effective rate of protection(ERP), which considers value addition, is essential to determine the actual level of protection to be granted to the applicant. This goes beyond the nominal rate of duty applied to the imported product.

These criterion ensures a comprehensive evaluation of tariff adjustment requests, balancing industry protection with broader economic considerations.

Conditions for Customs Duty Support

Customs duty adjustments, whether in the form of increases, or reductions, are contingent upon the beneficiaries’ commitment to meeting government-set policy objectives. Reciprocity commitments must be submitted to the Commission at the time of application. Industries receiving tariff support must demonstrate progress in several key areas, including: –

• Economic Performance: Beneficiaries are required to show measurable improvements in economic indicators such as production efficiency, competitiveness, and overall financial health.
• Job Creation and Retention: One of the primary objectives of tariff support is to safeguard and create jobs. Beneficiaries must meet targets related to employment growth and job sustainability.
• Adherence to Policy Goals: Support is aligned with broader government policy goals, such as fostering industrial growth, enhancing technological innovation, and improving global competitiveness.

Review and Adjustment

The aim of tariff support, in the form of increased duty, is to provide local industry with the opportunity to adjust their processes, enhance efficiency and become globally competitive. Consequently, industry must develop and implement a clear development plan and strategy to achieve these objectives. This plan should outline how the industry will adjust and improve its competitiveness. Over time, protective duties are reviewed to ensure they are no longer needed once the industry has achieved the desired level of competitiveness. The review process involves:-

• Performance Evaluation: Regular assessments are conducted to evaluate how well beneficiaries are meeting set objectives. This includes analyzing economic performance, job creation metrics and other relevant indicators.
• Conditional Adjustments: Based on performance reviews, tariff support may be adjusted. If beneficiaries do not meet the agreed-upon conditions, the support may be reduced or withdrawn. Conversely, successful performance may lead to extended or enhanced support.

For any further clarification please contact the undersigned.

The Director

Competition and Tariff Commission

23 Broadlands Road

Emerald Hill

Harare

Tel: +263-242-853127-31

E-mail: director@competition.co.zw

Twitter: @CTCZimbabwe

WhatsApp: +263715905651

www.facebook.com/ctczimbabwe

Website: www.competition.co.zw

DECISIONS MADE DURING THE BOARD MEETING HELD ON 23 JULY 2024 AND THE  9TH OF AUGUST 2024

DECISIONS MADE DURING THE BOARD MEETING HELD ON 23 JULY 2024 AND THE  9^TH OF AUGUST 2024

UNDERSTANDING HORIZONTAL MERGERS

UNDERSTANDING HORIZONTAL MERGERS

1. Introduction

A merger occurs when one or more firms acquire direct or indirect control in the business of another entity. Such acquisition of control may be achieved through acquisition of shares or assets, the lease of assets or joint ventures between two or more independent enterprises. There are three types of mergers which are i)horizontal, ii)vertical and iii)conglomerate. In recent years, horizontal mergers—where two companies operating in the same industry combine forces—have become increasingly prevalent. While these mergers can bring about efficiencies and growth opportunities, they also pose significant challenges for market competition. As a competition authority, the role of Competition & Tariff Commission (Commission) is to scrutinize these transactions to ensure they do not stifle competition and harm consumers. This article explores horizontal mergers, their potential anticompetitive implications, and the Commission’s approach to evaluating these transactions.

2.     Definition of Horizontal Mergers

Horizontal mergers occur between firms that are direct competitors in the same market. The basic concept behind horizontal mergers is set out in the following example. Assume FreshMart – a grocery chain store merges with another grocery chain store SuperSave. Both FreshMart and SuperSave are direct competitors .i.e., they operate at the same level of the value chain or in the same industry. As a result of the merger, the competition that was being ushered by FreshMart to SuperSave, pre-merger, is eliminated as both companies merge into a single entity.

The Commission has handled several horizontal mergers since its inception. A typical example of a horizontal merger is the transaction that took place between Intercape Mainliner Ferreira (Pvt) Ltd (“Intercape”) and Pathfinder Luxury Coaches (Pvt) Ltd (“Pathfinder”) which was approved by the Competition and Tariff Commission in 2018. Both Pathfinder and Intercape were involved in the business of transportation of passengers and goods in Zimbabwe.  The entities were direct competitors as they operated in the same market – provision of luxury coach services. Thus, Intercape acquired its direct competitor and therefore the transaction qualified as a horizontal merger. These transactions can potentially lead to cost savings, improved products, and increased innovation.  Horizontal mergers can reshape industries and influence the choices and prices available to consumers. However, they can also raise serious concerns about reduced competition and higher prices for consumers.

• Competition Concerns Associated with Horizontal Mergers

Of the three types of mergers highlighted earlier, horizontal mergers pose the greatest risks to competition. Such mergers raise competition concerns because they lead to a reduction in the number of competitors in the market, causing increased market concentration. Furthermore, a horizontal merger usually results in the merged entity gaining a larger market share which may possibly result in a monopoly situation which is contrary to public interest.

Owing to its larger combined market share and the reduced number of competitors in the market, the merged firm may have gained “market power”, allowing it to unilaterally raise prices and restrict outputs (unilateral effects). The resultant increase in market concentration makes it easier for market players to co-ordinate and exercise “joint market power” by engaging in interdependent behaviour (coordinated effects). Horizontal mergers, more than other types of mergers, may pose severe competition concerns, and have the potential to contribute most directly to concentration of economic power and may lead to a dominant position of a single player or to market collusions. Therefore, by examining these mergers, the Commission ensures that markets remain competitive, foster innovation and protect consumers from unfair prices and low-quality products.

3.1 Unilateral Effects

As already highlighted,  horizontal mergers result in the merged entity gaining substantial market power or it may significantly increase the market power enjoyed by a firm. Unilateral effects arise when the merged entity due to an increase in its market share, raises its prices above competitive levels, reduces output or quality of its products or services. Such anti-competitive behavior is engaged independently of the reaction of the entity’s competitors. In addition, to the merged entity’s large market power there must be high barriers to entry into that market to prevent new or existing firms from countervailing the anti-competitive effects. The Commission thus assesses the possibility of the merged entity to act unilaterally post-merger.

3.2 Co-ordinated Effects

Co-ordinated effects refer to the harm to competition that may arise post-merger, because of the remaining firms in that market coordinating and modifying their conduct to reduce competition amongst themselves. The key consideration in analyzing coordinated effects is whether the merger substantially increases the likelihood that firms in the market will successfully co-ordinate their behavior or strengthen existing co-ordination. Examples of such coordinated behavior include agreements on price to be charged, customer allocation and geographic market division.

• Conclusion

In conclusion, horizontal mergers are the most anticompetitive mergers out of the three different types of mergers. The Commission’s primary focus is on the reduction in market players caused by horizontal mergers. This poses two main competition concerns: the merged entity’s ability to act independently post-merger, and the potential for post-merger collusion, both of which can significantly harm competition.

UNDERSTANDING VERTICAL MERGERS

UNDERSTANDING VERTICAL MERGERS

Vertical Mergers

Vertical integration is a broader concept, referring to a business establishing control of multiple stages of the value chain. This can be achieved by either establishing a new business or gaining control of an existing independent business at a different level of the value chain. Vertical mergers are therefore a specific type of vertical integration. Examples of vertical mergers include a wholesaler acquiring a retailer of the same product; or a manufacturer of finished goods merging with a producer of raw materials used in the finished good’s production process. This article discusses the benefits of vertical mergers, the Competition and Tariff Commission’s approach to assessing such mergers and provides a practical case handled by the Commission involving a vertical merger that raised competition concerns and how these were addressed.

Benefits of Vertical Mergers

The primary strategic objective of vertical mergers is to achieve operational synergies, reduce costs and exert greater control over the production process. By establishing control over multiple stages of production within a single organizational structure, firms can optimize resource allocation, eliminate redundancies and enhance overall efficiency. This consolidation can streamline operations, improve productivity, and potentially increase profit margins. Despite these potential benefits, vertical mergers can pose competition risks. Controlling a downstream or upstream firm within the same value chain can lead to anticompetitive practices by the vertically integrated company, potentially harming competitors without such integration. The Commission thus becomes important in safeguarding competition when such mergers are proposed.

Assessment of  Vertical Mergers by the Commission

Unlike horizontal mergers, vertical mergers are less likely to immediately remove a competitor from the market. However, they can still lead to anti-competitive effects such as input and customer foreclosure, and monopolistic behaviors that may stifle competition. To address these concerns, the Commission assesses vertical mergers for potential foreclosure of rivals at various levels of the value chain and reduced competition which ultimately leads to diminished consumer welfare. While vertical mergers may offer efficiency gains as discussed earlier, these types of mergers can also concentrate market power and a company’s control over multiple stages of production, potentially leading to reduced innovation, higher barriers to entry and decreased consumer choice. In practice, there are two types of foreclosures associated with vertical mergers namely input and customer foreclosure which the Commission assess.

Input Foreclosure

Input foreclosure arises when a vertically merged entity restricts access to or alters the supply terms and conditions of essential inputs or resources, thereby impeding competitors’ ability to operate effectively in the market. This type of foreclosure typically occurs when a supplier that is part of the integrated entity is a dominant firm and significant supplier in the market with considerable influence over the availability and pricing of essential inputs. There are two main types of input foreclosure: total input foreclosure where the upstream division of the merged entity completely ceases supplying inputs to its downstream rivals, and partial input foreclosure, where inputs are supplied to downstream competitors on less favorable terms than pre-merger. By foreclosing access to inputs, a dominant company can reduce competition, increase its market power, and lead to higher prices, reduced innovation, and higher barriers to entry for new entrants. Consequently, the Commission therefore assesses the ability of the merged entity to engage in input foreclosure post-merger.

Customer Foreclosure

Customer foreclosure occurs when a vertically merged entity’s downstream division sources inputs exclusively or on preferential terms from its upstream division, thereby limiting rivals’ access to customers. This can have detrimental effects, particularly when the firm is a significant or sole customer in the market, degrading competitors’ ability or incentive to compete due to a reduced customer base. Two main types of customer foreclosure exist namely total customer foreclosure where the downstream division ceases purchasing inputs from upstream rivals; and partial customer foreclosure, where the vertically integrated firm acquires products from rival suppliers at a lower price or sells products incorporating the upstream competitor’s input at less favorable terms to the final consumer. Consequently, customer foreclosure is a concern for the Commission, as it undermines firms’ ability to compete and may ultimately lead to reduced competition in the market.

 Vertical Merger Case Handled by the Commission

In July 2022, the Commission received a merger notification of a proposed acquisition of 100% issued share capital in Charles Stewart Day Old Chicks (Pvt) Ltd by Shanksville Farming (Pvt) Ltd. The market affected by this merger was identified as the production and distribution of broiler chickens, as well as broiler and layer day-old chicks(DOC) in the whole of Zimbabwe.

The merger was categorized as vertical since the acquirer and target companies operate at different stages of the poultry value chain. Shanksville – the acquirer, is an investment holding company with interests in two subsidiaries namely Brand-Agro (Pvt) Ltd which manages a poultry out-grower scheme and procures inputs such as broiler DOC on behalf of farmers; and Sable Park Estates (Pvt) Ltd, which packages and distributes chicken products to retailers across Zimbabwe. The target company – Charles Stewart, is engaged in farming broiler and layer DOC, representing an earlier stage in the value chain.

Analysis by the Commission revealed that Charles Stewart is a dominant firm and market leader in the layer DOC market. It also showed that if the merged entity ventures into the business of rearing layer chickens to produce tables eggs post-merger, the merged entity will have access to layer DOCs that other players in the downstream market will not have. This will give an unfair competitive advantage to the merged entity thereby adversely affecting effective competition in the production of layer DOCs.  Further, the proposed merger would limit access to layer DOCs by customers and may lead to price enhancement, and this may prejudice consumer interests.

In light of competition concerns that arose from that transaction, the Commission approved the transaction on the condition that Charles Stewart and its subsidiaries, shall continue to supply layer DOC to its customers on non-discriminatory terms and conditions that include inter-alia prices, quality and delivery terms. This ensured that foreclosure concerns raised in the examination are remedied. While vertical mergers generally pose less anticompetitive risk than horizontal mergers, they can still raise competition concerns, particularly input and customer foreclosure. The example of the Charles Stewart Day Old Chicks (Pvt) Ltd and Shanksville Farming (Pvt) Ltd merger has shown that the Commission applied conditions to remedy anticompetitive effects identified during the analysis.

UNDERSTANDING TRADE REMEDIES: SAFEGUARDING DOMESTIC INDUSTRIES

UNDERSTANDING TRADE REMEDIES: SAFEGUARDING DOMESTIC INDUSTRIES

1. INTRODUCTION

International trade can be a double-edged sword for countries seeking to balance the benefits of open markets with the protection of domestic industries. While international trade opens doors to new markets, products and competition, it also brings risks, especially when foreign competitors engage in unfair trade practices. To protect local industries from these threats, governments implement trade remedies such as anti-dumping, countervailing and safeguard measures. These instruments ensure fair competition and maintain a level playing field for domestic producers.

• TRADE REMEDIES DEFINED

Trade remedies are actions that governments can take to counteract unfair trade practices preventing serious harm to their domestic industries. They come in three main forms namely i)anti-dumping duties, ii)countervailing duties and iii)safeguard measures. These tools are governed by both domestic legislation and international rules, particularly those established by the World Trade Organisation (WTO).

• Anti-Dumping Duties: Tackling Unfair Price Discrimination

Dumping occurs when a company exports a product to another country at a price lower than it sells in its domestic market. This practice is a form of international price discrimination and distorts competition by undercutting local producers. When this action causes or threatens to cause material injury to a domestic industry, it becomes actionable under WTO rules and domestic laws. Material injury is assessed through reviewing factors such as a declining local producers’ market share, sales, profits, employment and production output. E.g., if a foreign manufacturer floods the Zimbabwean market with a product at a price below its normal value, domestic industry may suffer. If the injury is linked to the dumped imports, anti-dumping duties may be imposed to bring prices back to fair levels, thereby shielding local industry.

Anti-dumping duties are a targeted response, affecting only specific products from particular exporters or countries. While the WTO typically promotes free trade and non-discrimination between trading partners, anti-dumping measures are allowed as exceptions, as outlined in the General Agreement on Tariffs and Trade (GATT 1994) and the WTO Anti-Dumping Agreement.

• Countervailing Duties: Addressing Subsidized Imports

Countervailing duties are imposed to neutralize the impact of imports benefitting from government subsidies in their home country. These subsidies give foreign companies an unfair advantage by artificially lowering their costs and prices, making it difficult for unsubsidized local producers to compete. For example, if a foreign government provides financial support to its steel manufacturers, allowing them to export steel at lower prices, Zimbabwe’s domestic steel industry may suffer. In such cases, countervailing duties are imposed to offset the advantage gained from these subsidies, ensuring fair competition for local producers. The process for countervailing investigations is similar to that for anti-dumping, with the aim of restoring balance in the affected industry.

• Safeguards: Protecting Against Import Surges

Safeguard measures are temporary actions taken to protect a domestic industry from serious injury caused by an unexpected and significant surge in imports. Unlike anti-dumping and countervailing duties, safeguard measures do not require proof of unfair trade practices like dumping or subsidies. Instead, they are used when a sudden increase in imports overwhelms a local industry, potentially causing widespread harm. Safeguards take the form of increased tariffs or quotas and are intended to provide temporary relief, giving domestic industries time to adjust to the new competitive landscape. For instance, if Zimbabwe experiences a sudden influx of cheap textile imports that threaten to decimate local textile industry, safeguard measures may be imposed to limit the volume of imports or raise duties temporarily.

• THE ROLE OF THE COMPETITION AND TARIFF COMMISSION

In Zimbabwe, the Competition and Tariff Commission (CTC), through its Trade Remedies Unit, administers trade remedy instruments. The Unit investigates allegations of dumping, subsidized imports and import surges, ensuring that the measures comply with domestic laws and WTO rules. The Unit maintains a Public File system for transparency, allowing access to non-confidential information regarding investigations. While confidentiality is maintained for sensitive information, summaries or sworn statements may be provided when necessary.

D.  APPLYING FOR TRADE REMEDIES

Domestic industries can apply to the Commission for an investigation into anti-dumping, countervailing, or safeguard measures. After a thorough investigation, the Commission makes recommendations, and the final decision on whether to impose duties or other measures rests with the Minister of Finance, based on advice from the Minister of Industry.

E.    CONCLUSION: SAFEGUARDING LOCAL INDUSTRIES IN A GLOBALIZED WORLD

As Zimbabwe continues to engage in global trade, protecting domestic industries from unfair competition becomes paramount. Trade remedies like anti-dumping duties, countervailing duties, and safeguard measures are essential tools in ensuring fair competition. These measures provide a lifeline to local industries, allowing them to compete on equal footing while remaining compliant with international trade rules. By carefully administering these remedies, Zimbabwe can foster a vibrant domestic market while reaping the benefits of international trade.

For any further clarification please contact the undersigned.

The Director

Competition and Tariff Commission

23 Broadlands Road

Emerald Hill

Harare

Tel: +263-242-853127-31

E-mail: director@competition.co.zw

Twitter: @CTCZimbabwe

WhatsApp: +263715905651

www.facebook.com/ctczimbabwe

Website: www.competition.co.zw