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Fair competition, protectionism

December 09, 2012

A decision made in haste to reduce the age limit for imported cars from five to three years by the Economic Coordination Committee of the cabinet has created quite a commotion among stakeholders.

The summary moved on the recommendations of a committee led by Deputy Prime Minister Chaudhry Pervez Elahi of PML-Q to reduce the age limit  for imported cars for protecting domestic assemblers was approved by the ECC without circulating it to all relevant stakeholders.

“The measure will provide relief to the local auto vendors industry which is being hurt badly by the import of used cars”, according to an official statement.

While parliamentarians from the PPP and MQM have described the decision as non-transparent, the federal board of revenue has complained against possible loss of over Rs17 billion per annum. The Engineering Development Board has struggled to defend the decision to extend crutches to a sector that was required to achieve 100 per cent localisation by 1999 despite an absolute monopoly in the domestic market until a couple of years ago.

As part of international agreements under the World Trade Organisation signed in 1995, developing countries were to phase out protections to local industries by 1999. Pakistan was allowed about 195 deletion programmes in various sectors of economy and successfully achieved the targets in all other sectors like electronics, electric machinery and so on, leading to tremendous growth in these sectors. About 15 deletion programmes in the automobile sector ended in failure.

A subsequent partial opening of the motorbike industry also resulted in phenomenal growth in motorbike production and substantial reduction in prices as a result of competition to the benefit of consumers. That was not the case with four-wheeler sector.

In November 2001, Pakistan requested the WTO Council of Trade and Goods (CTG) for a five-year extension for the implementation of the deletion programme, but the council provided extension only for two years. In 2005, Pakistan was the only nation that sought further extension for auto sector until 2007 but was denied. Originally, the target of implementing deletion programme by Pakistan was to be achieved in five years, starting from January 1, 1995.

The automobile sector remained a highly-protected industry. To protect this sector the federal government has not only imposed 150-200 per cent customs duty on the import of completely built units (CBU) but also allowed import of certain parts and equipments for ‘assembling’ at cheaper rates.

Though the local assemblers were to face more competition from new auto assemblers because the fresh entrants were not required to meet the condition of using a certain percentage of locally produced auto parts, they could not enter the market because bureaucratic hurdles created by adverse duty structure, restrictive fresh foreign investment policy.

Under import policy 2009-10, the government allowed import of used cars under personal baggage, gift and transfer of residence schemes and the age limit was kept changing between three to five years. The depreciation is allowed at a rate of one per cent per month subject to a maximum of 60 per cent.

On the recommendation of industries ministry, the federal cabinet decided in February 2011 to increase the age limit from three to five years for used cars as a measure “to rationalise the prices of locally manufactured cars and create healthy competition”. The domestic prices, however, went on increasing because of marginal lower prices of imported cars of better standards and quality.

The situation started to improve in 2011-12 when a total of 56,973 used cars were imported, shooting up to 37 per cent of total local production as against five per cent in 2009-10. The industries ministry now contended that despite diversion of demand to the imported cars, the prices did not drop locally as local production was affected.

Interestingly, the ministry of commerce has not supported the industries ministry’s recommendation and ECC decision, saying the rules of business required that the commerce ministry suggest any change in import-export rules.

In fact the commerce ministry had engaged the two professional organisations — National Tariff Commission and Competition Commisison of Pakistan — to study market conditions, conduct indepth analysis and impact of earlier policy changes, and the cost of production before suggesting fresh policy changes. While the studies were in progress, the ECC on the recommendations of a committee led by the deputy prime minister reduced the age limit from five to three years for imported cars.

The summary moved by Chaudhry Pervez Elahi to the ECC argued that annual estimated demand for cars was around 200,000 against the current production capacity of 250,000 cars and hence the local assemblers should be allowed to achieve better capacity utilisation and meet local demand. Suzuki, Honda and Toyata — the three local assemblers — were  currently operating at 61 per cent, 25 per cent and 80 per cent capacity respectively at present.

It recommended discouraging imported cars, arguing that over 200,000 persons were associated with domestic car and vendor industry, and hence the age limit for imported cars was reduced again to three years. Finance Minister Abdul Hafeez Shaikh said the government has also to keep on mind whether it was prudent to adopt policy that leads to workforce layoffs instead of creating new job opportunities when economic conditions were not so favourable.

The National Assembly’s standing committee on finance has directed non implementation of the decision till market studies were completed while the Public Accounts Committee of the National Assembly has also sought full record of the entire issue.

Most of the economists, including former Governor State Bank of Pakistan Shahid Kardar, argue that an industry that enjoyed over 20 years of virtual unblemished monopoly and was still unable to compete with five- year-old imported cars has no right to be given further protection at the cost of domestic consumers, and more so, because they have not been able to make even a negligible footprint in exports.