Tariff rationalisation seen in isolation

Tariffs, quotas, and VERs (voluntary export restraints) are protective measures taken by governments to support local industry. These measures work in different ways; some increase the prices of imported products in the local market while others set a limit to the quantity of imports allowed, thus protecting demand for local products. But such protectionism is always a mixed blessing which also entails indirect costs for consumers and the economy as a whole. A somewhat similar case can be seen in Pakistan where auto manufacturers are lobbying the government to revise concessions, recently extended to new entrants. Local auto manufacturers and vendors have serious reservations against the changes made by the ministry of industries to the auto industry investment policy of the auto industry development program. Pakistan association of auto parts and accessories manufacturers (PAAPAM) has rejected the notification saying that riefcase manufacturers would not give a fair competition to the industry. Among the most contentious amendments to the policy is the revision of the definition of "global presence". Originally, this caveat mandated that any car manufacturer with a worldwide annual production of at least 500,000 cars would be considered to have a global presence. This requirement has now been scaled down to a requirement of just 100,000 cars. Industry sources say that this downward revision has opened up the local market to Chinese auto manufacturers that can produce cars priced at least Rs200,000 to 400,000 lower than cars made by existing manufacturers in the country, since new entrants would have to pay a 32.5 percent duty on the import of CKD (completely knocked down) vehicles as compared to 50 percent for the existing manufacturers. This price differential would enable new entrants to capture a large chunk of the existing demand which would in turn take a bite out of the sales of local manufacturers, vendors as well as OEMs (original equipment manufacturers) who are making parts for existing car manufacturers. However, on the flip side, it appears that vendors are only focusing on the short-term effects of this policy change. The revised policy has allowed this and other concessions for new entrants only for 3 years after which they would be subjected to the same duty structure as the existing manufacturers. In addition to this, to be eligible for concessions, new entrants would have to demonstrate intentions to manufacture parts locally along with a detailed business plan, which shall verify complete in-house assembly or manufacturing facility, submitted to the Engineering Development Board (EDB). In other words, local vendors will be making parts for new entrants after 3 years. Any increased competition will also pressurize the present manufacturers to reduce transfer pricing of the parts imported from their main manufacturing facilities in Japan. These changes would also force manufacturers to increase investment in localisation programmes to compete with new manufacturers, since at present the vehicles being manufactured in Pakistan tend to have low localization levels. The government appears to be equating apples with oranges, when it comes to making policies that affect local trade and industry. Local manufacturers of tractors are also up in arms over the recent decision to lower duties for new tractor manufacturers. Considering the fact that local tractor companies have significantly high levels of localization (about 90 percent), the case for industry-specific policy making gathers strength. Across the world, government policies attempt to create a balance between protecting local industry and encouraging competition. When devising policies, the government should also be mindful of the ramifications for the industry, consumers and the government itself.