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May 11, 2012

Competition vs protection

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We have been involved in a number of recent International Trade Administration Commission of South Africa (Itac) investigations which have had a significant impact on the competitive position in South Africa and, very recently, in a Competition Commission matter which had a direct bearing on Itac’s function.

The interesting part of both of these investigations is that there is no longer any logical and structural platform to ensure that the concerns of both of these parties are considered in these investigations. The Competition Act has a specific advocacy clause which allows it to talk to other departments if it is felt that their decisions will have a detrimental effect on the competitive position in the country, but it seems someone else – external interested party – has to trigger this clause for any action to be taken.

This is very interesting because there also appears to be a fairly consistent profile for the company or consortium that applies for protection from Itac. There are certainly exceptions, but many of the industries seeking protection are highly concentrated, which has the very real potential to create a problem where this dominant position is abused (which is an offence in terms of the Competition Act).

There are some fairly obvious reasons why concentrated industries apply for protection, the most obvious being that it is much easier for one or two companies to cooperate than it is for eight or ten companies to do the same thing.

However, there may be some deeper reasons that talk to the fundamental lack of competitiveness in these highly concentrated (and usually primary) industries. The problem arises when a highly concentrated industry or even a monopoly requests duty protection. Very often, the import competition is the only counterbalance to the dominant player and shutting off this source of supply creates the very real risk that the dominant player will suddenly have no competition and be given the opportunity to simply push prices up to whichever level it chooses (or at least to just below the new duty-inflated import price).

This very significant risk exists, but what can be done about it? Clearly Itac and the Competition Commission require very different skills sets, but, perhaps, there should be some sort of process to ensure that information is shared between these two organisations.

The existing lack of formal structure that allows such information to flow places the burden of complaint on the offended party and in many cases that party will not even be aware of the option to take its matter to the other body. The existing enthusiasm for protection increases this risk as companies now apply for duty protection simply because they are receiving a very friendly reception.

This is not to say companies do not or should not be applying for protection, but, rather, that the competitive implications of that protection need to be considered before the protection is provided. The lack of such consideration creates the very real risk that the duty imposed may actually cause significantly more harm (and potentially cost more jobs) than it prevents. I have no idea if other countries treat this see-saw relationship between the competition watchdog and the trade policy body in a different way to South Africa, but I believe that the lack of interface between these two bodies creates an economic risk which currently is simply not managed and which has the potential to do some very serious damage to what is already a very fragile economy.

Edited by: Martin Zhuwakinyu
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