The four-wheeled dilemma

For any developing country that wishes to expand its industrial base, a trade policy is meant to support interest of local industries and smoothen supplies of imported material and goods necessary to strengthen local manufacturing base, as well as protect the interest of consumers. Policymakers in Pakistan are also striving hard to move in the said direction. But, when it comes to the auto sector, there exists a divergence of opinion between manufacturers and policymakers. After a series of steps taken to facilitate imports of used cars in the last fiscal year, industry sources suggest that the government is mulling over removal of restriction on commercial import of used cars. Currently, the import of used cars up to five years are only allowed under personal baggage, gift and transfer of residence scheme. The bone of contention between the two is higher car prices that has mainly stemmed from rising steel prices, higher inflation and depreciation of the rupee against the dollar and the yen during the past three years. In some measure, the auto manufacturers also blame higher cost of production to low scale as the industry (car and LCVs) capacity utilisation stood at around 45 percent in FY11. The capacity level of local assemblers is already far lower than regional economies. Therefore, to haul down prices of locally manufactured and assembled cars, the government is using used car imports as an antidote. Data gathered from industry sources suggest that imports of used cars almost doubled to 6,141 units in FY11, as compared to the previous year, out of which, nearly one-third used cars are above 1800 cc. Here, the point is how effective is the existing strategy to curb the prices of locally manufactured cars in Pakistan? Relaxation in import policy will definitely increase the availability of low priced used cars, and consequently exert pressure on local manufacturers in Pakistan. But, given that the local industry is growing at an anaemic pace amid weaker margin, it seems highly implausible that the local industry will reduce car prices. Moreover, this raw deal might also discourage local manufacturers to invest in expansion and technology up-gradation. Given this scenario, this strategy might fail to address a long-term agenda: to help fortify the local manufacturing base, without yielding to the rent seeking tendencies of the manufacturers at the cost of consumers. Therefore, to resolve this classic case of business dilemma and to help the local industry grow to the point where the industry can sustain foreign competition, policymakers need to find a common cause with local manufacturers.