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Motives For Applying Import Tariff In Vietnam Economics Essay

This Literature Review will examine the main issues the motives for applying import tariff in all commodities in general and in the auto industry in Vietnam in particular. The literature review of this research concentrates on objective 1 (the second and third objectives will be analyzed though the empirical data collection, while the final objective is derived as a result of the outcomes of the other objectives.)

1, Identify the meaning, motives for applying import tariff and the forces driving changing of import tariff.

2, Examine the effects of applying import tariff on new imported car and domestic car volume in Vietnam’s automobile industry.

3, Evaluate the challenges faced as the tariff come down to 0% in 2018.

4, Formulate the recommendations and views of some economics.

By investigating the above literature, a deeper insight will be stimulated in the study. The strategic forces pushing impose import tax in general and in the Vietnam’s auto sector in specific. Though this part, a critical comprehension of key issues will be clarified. In the first instance, a worth starting point is to define the terms of import tariff from that to explore main issues of this research.

II.2 The role of Import tariff

“A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary.” (Dominick Salvatore, 2007, p.248). Tariff restrictions that are imposed on trade among countries in the world are of the “principal methods” to pursue the trade goals (Conybeare, 1983).

There are three main functions of imposing tariffs. First of all tariffs are main tools of government in order to concentrate part revenue of social on State budget. It is also the main revenue for State budget. In Vietnam, it accounts for 60 percent among all revenue resources of State. Secondly, tariffs are a tool which are used to controls macroeconomics issues of government. By imposing tariffs, government distributes income and consumer of social. In addition they also affect to the demand and supply of goods from production stage to distribution stage and the consumption stage. The use of tariff helps to achieve non economic objectives such as protecting domestic sectors. Lastly, tariffs are useful techniques that able to ensure equality in social through distribution of income and wealth. Also, F.W Taussig argued that the exclusive aim of tariff is just to “equalize opportunities”, “equalize position”.

With many benefits from applying these restrictions, they become important tools for both developed countries and developing countries (Conybeare, 1983). Tariffs have a crucial role in development process of certain industries. According to almost of economists, it is useful way to protect local industry, especially in the beginning period of development. Thus, there is an argument named that “infant industry argument”, the content of this phase is “trade protection is needed to set up an industry and to protect it during its infancy against competition from more established and efficient foreign firms.” (Salvatore, 2007). Moreover, it is a “potential retaliatory weapon” to help domestic manufactures competing against foreign competitors (Perry, 1955). Though in small economy, the imposition of an import tariff on certain products dose not affect too much on world price of these products in the market, in domestic market, it is effective tool for the protected sector to have changes to win foreign competitors. It allows the local companies occupy demand from foreign commodity, but it also causes the distortion of relative price of goods and it also raises revenue for government (Caves and Jonkes, 1985).

Automobile policy in some countries

Actually, trade policies prove themselves role in the development process in industries and automobile industry is not exception. With typical characteristics requiring both high capital intensive and skills labor, these elements made automobile sector become a tough challenge for newcomers, especially developing countries. If they do not strategic planning for each stage, it is failure in itself market because of replacing of foreign companies. Thus in order to assess role and impact of import tariff on this industry, it is necessary considering empirical cases. This study investigates effects of import tariffs on automobile industry through four developing countries namely Mexico, Thailand, Brazil and Malaysia.

Mexico

As other countries, the automobile industry plays a crucial role in Mexico’s industrialization strategy and is one of the key sectors to contribute the development process. In the beginning of the process, in order to compete with strong foreign manufactures and have enough time to mature its domestic companies, the Mexican government also has some particular policies for each stage to protect and stimulus the important sector.

The development of Mexico’s automobile industry divided into four phases.

Firstly, the period of time before 1962 as the Automobile Decree issued, the main activities of Mexico’s auto industry was assemble auto parts with less than 20 percent of domestic factors and most vehicles being imported into Mexico. At this time, there almost did not any trade policies to protect the domestic producers.

Secondly, the period of time from 1962-1976: import substitution, at that time the Automobile Decree was stipulated. That is the formal implementation of these programs to regulate production, sales and imports of vehicles and auto parts. The aims of these activities were to encourage local automobile manufactures operations. The content of this Decree banned “importation of vehicles of completely knocked – down kits (CKDs), of engines, and of many major automobile parts”. Beside, another important point of this Decree was requirements such as about the ratio of localization on vehicle assembled in Mexico, in specific, it must reach 60 percent local valued added, and a 40 percent limit on foreign ownership of auto parts plants. With a range of strict regulations, they created a tightly protected domestic market. However, it caused international competitive that was not exist in the Mexican market. This leaded to negative results such as poorer quality vehicles and higher production cost than foreign competitors.

Thirdly, the period of time from 1977 to 1989: Toward international competitive through trade protection and export promotion. The main aim of this phase was to support export. It required at least 50 percent of the foreign exchange requirement of terminal firms to protect automobile parts manufactures, value- added requirement were tightened and foreign firm remained excluded from majority ownership. Due to strict rules, automobile companies had to modernize their Mexican plants to apply these conditions. They had to have decisions to restructure for up – to - date technology, new building plants. Moreover, the workers had chances to improve their skills, qualified to control modern plants. With clear objectives, Mexico became one of the big competitive exporters at this time.

Lastly, the beginning of trade liberalization period, in December 1989, “the Decree for the Modernization and Promotion of the Auto Industry” authorized imports of new vehicles for the first time since 1962. The automobile parts market was opened up in many significant ways. However, at that time it can be said that the Mexican automobile industry had certain position not only in the domestic market but also in the outside markets. Thus, the degree of opening up the automobile market brought new opportunities for the Mexican companies to broaden distribution network in the world market. Specially, Mexico integrated into the North American Free Trade Agreement (NAFTA) including three countries Mexico, Canada and the United State. Even though most protected barriers on imports of new cars to Mexico were removed or reduced significantly, the regional trade expanded enormously, a range of giant manufactures such as Honda, Mercedes – Benz, BMW, and Toyota located in Mexico to supply its plants in the US.

From the development of the Mexican automobile industry, one of the most outstanding points in the policies of Mexico is requirement domestic content and value added in each production, also the ratio of localization of all enterprises. Essentially, the value added requirement became a function of domestic sales and imports of finished vehicles (Fernandez, 1994).

Brazil

The vehicle sales in Brazil were about US 3.1 million in 2009 and it expects raise to US 3.4 million in 2010 in prediction. With the drastic growing, “the emerging market, age of coming” forecasted may pass Germany to become the world’s fourth largest market. Brazil is a typical example for a huge development from an infant industry. Among factors contributing to create a high position of Brazil’s auto industry can not mention to the role of state policies.

The modern Brazilian auto sector was traced back to 1956 (Sharpiro, 1996). The government establishes “a five-year plan” to protect local parts companies. Beside, attracting foreign investment, technology and creating connections to complementary sector, the auto industry was identified as a “leading sector in a broad import-substituting industrialization push”. The approaches applied were restrict imports and force transportation automobile companies through choosing between a banding in the market or producing cars containing 90-95 percent Brazilian made content within five years. Evenly, the timing will be set by increasing barriers to entry if the entrant wants to delay its investment; in addition to the cost for exit market will be quite high as well. Actually, this was the strictest approach of Brazil to protect the domestic auto producers. The industry, however, gained many positive improvements; “transnational corporations” had to upgrade their operations from simply assembling to full manufacture. This led to develop of other supportive productions in Brazil. Not only offering strict regulations but the Brazilian also had financial incentive measure to stimulate all enterprises such as “extensive subsidies to reduce the cost capital investment and guaranteed a return even if profit did not materialize”.

The 1960s marked a period of an instability economy and labor unrest in Brazil. The industry was affected heavily, with original eleven firms reduce to eight in 1968, many weak companies that did not have enough financial capability had to close. However, in the late 1960s also remarked recovery strongly of the Brazilian economy, specially, the auto sector with its GDP up to 20% compared to 10% of the economy. Evenly, the production capacity could not keep track with rising demand, so many local enterprises started have plans to broaden investment.

Once again, because of outside factors influent to development orientation of the industry, particularly changing international conditions. To balance foreign exchange, the auto industry was expected towards export as a solution for this context.

Exporting, it means that the Brazilian had both opportunities and challenges from expanding the market. Clearly, there had to face strong foreign competitors such as Japan companies famous with low cost and high quality productions. In order to survive, the Brazilian automakers decided “world car strategies”, that allowed them can increase the volume and reduce the cost by economies of scale. When overcame these obstacles, global market would become to a benefits due to opening to new doors. Beside, the government also had particular activities to promote exporting progress though the Special Fiscal Benefits in 1972 including tax exemption on importation of machinery, equipment and other components involving the industry, and supported from federal and state value- added taxes on exports. In exchange, firms had to commit to long term export contracts and comply with minimum domestic content requirement (85 percent). Beside, the firms were also allowed to import a certain number of parts and component that had banned before.

One of the most outstanding of the policies imposed in Brazil’s auto sector that was obligation the auto transnational automakers to produce cars and component for export in Brazil. For example, Fiat which until then had no presence in Brazil was allowed to enter the domestic car market only in exchange for exporting 155.000 engines (Shapiro 1996). Actually with strict disciplines, they helped local enterprises including auto parts and supportive ones have more chances to develop not only in the domestic market but also the world market.

Although the Brazilian automobile manufactures had export operation in the early 1970s, and they gained a high position in global market, there was no existing of imported cars in the domestic market. In 1990s with pressure on meeting the international standards in terms of cost, quality, and delivery time increased that resulted from globalization trend. Therefore, Brazil’s President decided to open the market for imported cars in the first time since the 1950s. At that time, the effective protection rate that converts into nominal tariff was naught (Fiuza 2002). This decision led to some chances in previous policies to harmonies with current context. For example, the ratio of local content decreased from 90 percent to 70 percent and the time to introduce new model to loosen protection measure also to offer flexible condition for domestic companies to compete with foreign competitors. Beside, the stimulating from the government, the companies themselves had specific activities to improve their comparative abilities such as modernizing plants in terms of technology, management to cut cost.

Table 1: Import tariffs for each categories of firms

Date

Incumbents and newcomers

Independent importers

Cars

Light Commercials

Mass transportation Vehicle

Cars

Light Commercials

Mass transportation Vehicle

Jan/1991

85

85

85

85

85

85

Feb/1991

60

60

60

60

60

60

Jan/1992

50

50

50

50

50

50

Oct/1992

40

40

40

40

40

40

Jun/1993

35

35

35

35

35

35

Sep/1994

20

20

20

20

20

20

Feb/1995

32

32

32

32

32

32

Apr/1995

70

32

32

70

32

32

May/1995

70

70

32

70

70

32

Mar/1996

35

32.5

32.5

70

70

32

Sep/1996

35

32.5

32.5

35

35

35

Jan/1997

31.5

27.5

27.5

35

35

35

Sep/1997

31.5

27.5

27.5

31.5

27.5

27.5

Jan/1998

24.5

23

23

24.5

23

23

Jan/1999

23

23

23

23

23

23

Source: Abeiva, DeNegri (1998), Quatro Rodas (May, 1995)

Allowing import cars brought positive impacts on both domestic producers and consumers. In order to compete against imported cars, the local manufactures modernized their plants to improve quality and productivity. This adaptation made most of cars produced in the country decreasing the cost and the price decreased slightly which benefits for consumers. Beside, high tariffs forced the domestic auto firms to supply local cars rather than imported cars.

Thailand

With pragmatic and suitable internal and external policies in each period of the development progress, the Thai automobile industry overcame many challenges and difficulties in the early time to achieve many successes. Now, Thailand is the second largest producer in the world after the US and the largest exporter of one ton pick up trucks and the “Detroit of the East” (Economists Intelligence Unit 2008, p21).

Import-substitution

The Thai automobile industry dated in the early 1960s and as many nations, one of the first goals of industrial development was import- substitution. In order to encourage local assemble of automobile, the Thai authorities imposed high rate for imported end productions and lower tariff for imported inputs. Tariffs on import of CBUs of passenger cars, vans and pick up trucks are 60%, 40% and 20% respectively, while tariffs on CKD kits and parts of three categories were a half compared to the CBUs rate.

From 1962 in order to approve foreign investments to complement the domestic assembler, a range of investment promotion policies introduced to attract manufactures from the US, Japan and Europe located their factories in the country such as income tax. Specially, unlike other nations, Thailand had an equal treatment between domestic and foreign investors. However, the number of entrants and “inefficient import – depended assembly operation soared which caused trade deficit and difficulties to gain economies of scale (Fujita, 2000). In response, the government accepted a new policy “aimed at progressive localization of auto production”. In 1971, the automobile Development Committee announced a policy requiring progressive increases in localization ratio to 25 percent for passenger cars and 15 percent for commercial cars and pick up truck by 1975. Beside requirement of local content rate, an upward import tariff rates of passenger cars, vans and pick-up truck on CBUs to 80%, 60% and 40% and on CKD kits to 50%, 40% and 30%, respectively in 1978.

These regulations had positive replies in the early period for example many join venture companies started to invest in Thailand and Thai firms also became actively improvement their operations. However, the strict localization ratios created competition between locally assemble cars and imported CBU automobiles. Beside the size of the market seem to be small compared to the number of the existence plants in Thailand. Thus, the Thai government decided to declare an import ban on the CBU passenger cars, and an increasing import tariff on CKD kits from 50 percent to 80 percent. The import tariffs on CBUs and CKD kits of vans and pick-up were rose up to 80% and 60%, respectively to reduce these pressures. Regarding to the local contents requirement rate, the government decided for raise from 25 percent in 1978 to 50 percent 1983, and due to the economic recession in 1980s, the government banned setting up new enterprises combined with reducing the localization ratio to 45 percent in stead of 50 percent according to the requirement in 1978. Continuously, Thailand experienced the first oil crisis and political instability which caused the automobile industry in Thailand faced difficulties during the period from the late 1970s to the mid 1980s. Many foreign manufactures had to withdraw from the Thai market such as Ford, Fiat, and General Motor. At that time, the Board of Investment had special policy for firms exporting more than 30 per cent that was exemption of imported inputs duties to promote export orientation.

In the first phase of development process of Thailand automotive industry, there was a wild fluctuation in import tariffs on all categories. It was used pragmatically according to requirements of each period of time. Through controlling the volume of imported cars by import tariffs, the Thai government guided the best way for domestic producers. Although the end of import-substitution phase was not optimism, the Thai automotive industry achieved some first good signs such as high local content rate in car production, a clear developing strategy as listing for compulsory and non-compulsory, one-ton pick-up truck as a strategic production.

Integrating global market

Beginning the second phase is the early 1990s; the Thai economy significant recovered with a range of positive changes in the general economy combined with liberalization policies in the auto industry, the Thai automobile industry returned from domestic orientation toward integration into global market. Adisak Rohitasune, vice chairman of the Federation of Thai Industries and vice president of Asian Honda Motor, stated that the auto and parts trade not only stimulus ASEAN manufacturers, but also bring investment into the region through liberalization. In order to improve the competitiveness in the world of the industry by increasing competitions between local enterprises and decrease domestic car prices, in 1991, the government removed the ban on import of CBU passenger cars, simultaneously, drastic reducing duties in most imported car categories. This led to the prices gap between imported and domestically assembled and produced cars getting narrow.

When the Thai automobile industry had particular comparative abilities, the Thai policymakers started to strongly promote export orientation for the automobile industry in the year 1993. It can be said that this is important strategy remarked a new development phase of Thailand’s automobile industry, replaced previous policies which always targeted at the domestic market. Thus, the Thai government had an exclusive program called “The Automobile Industry Export Promotion Project” to achieve the given goals. A range of activities were implemented to attract more foreign investors also improve the ability of local enterprises through incentive policies such as exemption from import for auto parts and corporate income tax.

In 1995, Thailand signed the ASEAN Brand to Brand Complementation programs to stimulus trade operation in parts and components among ASEAN automakers. It provided a half reduction in prevailing import tariff. Moreover, according to the ASEAN Free Trade Agreement (AFTA) the 0-5 percent import rate for CBUs were imposed among ASEAN nations. All protection measures removed were not challenges for the Thai auto industry. Actually, they were huge opportunities for the sector in Thailand case. Thailand gained enormous benefits from elimination of tariffs which help the industry expanding distribution market. The CEO of Nissan Motor Corporate declared that “Thailand offers a great opportunity for Nissan. There is potential for growth and it is an excellent base for us to expand our present in the region”. The General Manager of a Japanese auto company stipulated that “Thailand has the most to gain from AFTA implementation as it dominates the automotive industry in the ASEAN region”. That is one of reasons why many the Japanese auto makers choosing Thailand to locate their factories here. In 2008 the production measured in units of Japan’s auto manufactures accounted for 81.4 percent the car makers in Thailand, of which Toyota dominated with 41.1 percent.

Being a member of WTO in 1995, Thailand also signed some bilateral free trade agreements such as the Thai-Australia FTA, the Thai- New Zealand FTA in 2005 and the Thai- Japan FTA in 2007. Beside preferential tariff reductions, general tariffs on CBUs and CDK kits have also decrease according to the Most Favored Nations (MFN) principle. However, Thailand applied a “cascading” tariff structure with low import tariffs on parts and components from 10% to 30% and higher tariff rate for CBUs with a range from 20% to 80%. This “tariff escalation” made the rate of effective protection estimated at 64.8% in 2005 (Jongwanich and Kohpaiboon 2007).

Table 2: Import tariffs impact on the Thai Automotive Industry

1962

Industrial Investment Promotion Act provided incentive for the domestic producers: tariff for passenger cars, vans, trucks on CBUs were 60%, 40%, 20% and on CDK kits are 30%, 20%, 10%

1969

Increase 20% in tariffs on CBU vehicles and CKD kits of all categories

1978

Tariffs on CBU passenger cars and CKD passenger cars were increase to 150% and 80%, respectively.

1991

Tariffs reduction on both CBUs and CDK kits:

CBUs over 2.3 liters from 300% to 100%

CBUs under 2.3 liters from 180% to 60%.

CKD kits from 112% to 20%

1995

Tariffs on CKD kits reduced from 20% to 2%

1999

Increase tariffs on CKD vehicles from 20% to 30-35%

2003

Tariffs preferences under AFTA come to 0-5% for ASEAN nations.

Source: “Thailand in Global automobile network” - The International Trade Centre table1.

Since the late 1980s up till now, the Thai automotive has recorded an impressive growth. Production capacity increased rapidly from 160 thousand to 1.6 million between 1989 and 2006, a ten fold increase. The value of auto export recorded a significant rise from 1275 $million to 8227 $million, approximately 8 times increase in comparison with nearly twice times increase in the value of auto import in the same period (table 2). Choosing one- ton pick up trucks as strategic products combined with export orientation, the production volume of this category increased from 47.000 units to 410.000 units between 1985 and 1995 and over 950.000 in 2008 and dominated share among exported vehicles. However, in total export value, the share of this vehicle decreased sharply from 74.6% in 1999 to 42.6% in 2007 though Thailand is the largest one ton truck exporter in the world. Instead of, the share of passenger cars increased dramatically over time, this category contributed approximately 31 percent in total export value in 2007.

Figure 1: Production Capacity of Thai car Assemblers 1989-2006 (units)

Source: Thai Automotive Industry Association

Table 3: Automobile Exports and Imports Classified by Vehicle Type, 1999-2007

 

1999

2000

2001

2002

2003

2004

2005

2006

2007

Export ($million)

1275

1627

1924

1968

2649

3858

5198

6648

8227

Percentage share

 

 

 

 

 

 

 

 

 

Passenger car 1000-1499 cc.

1.1

1.4

1.2

2.5

14.1

16.1

9.4

8.8

7.9

passenger car 1500-3000 cc.

7.1

8.8

21.9

14.9

14

10.4

18.9

22.7

23.3

one-ton pickups

74.6

70.7

54.9

61.1

55.5

54.9

44.1

47.1

42.6

Import ($million)

558

526

382

417

618

608

795

772

1013

Percentage share

 

 

 

 

 

 

 

 

 

passenger car 1500-3000 cc.

60.9

33.4

39.8

27.1

50.3

34.5

33.0

23.8

18.6

passenger car larger than 3000 cc.

5.4

8.8

8.5

12.9

9.9

8.8

5.6

5.8

4.2

Bus

7.9

18.6

13.2

18.4

11.8

17.1

28.9

28.9

32.7

Truck

5.3

11.8

15.3

14.7

6.8

7.1

5.4

5.4

7.3

Source: Compiled from UN Comtrade Database

4. Malaysia

Like the Thai automobile industry, the automotive industry of Malaysia began in the 1960s. Before this period, most cars in Malaysia were imported from the European in the CBU form. The industry was really existed since 1963 when the government had specific policies to encourage the establishment. The development of the Malaysian automobile industry may divide into two phases (Jomo, 2007). The first phase encouraged local assembly from 1967 to 1982, while the second phase was the establishment of national cars from 1983 up till now.

Local assembly

In September 1963, the Malaysian government announced a plan to stimulus the automotive industry, starting with assembled cars. The government declared the “Local Content Policy” to promote the development of local parts and component industries, decrease the importation of CBUs, create employment, and stabilize balance of payments (Malidin, 2004). Thus high protective tariffs were imposed. Immediately, the volume of CBU decreased dramatically because of high tariffs and quantitative restrictions. Whereas the volume of the CKD increased significantly due to a range of auto assemblers and auto supporting manufactures were set up. By 1980, there were 11 assembly manufactures operating in Malaysia and most of them were foreign companies, in which Japanese enterprises were dominants (Doner 1991). As a result, there were a big number of makers established with 122 car models existing, but they were too much compared to the size and demand of the market at that time, which leaded to the difficulty for them to reach the economies of scale.

As Thailand, the local content of assemble cars was quite low in the initial time. Thus to improve the domestic content, promote localization, the government introduced an import approval component list depending on their localization rate. In the early 1980s, the locally assembled cars reached approximately 20 per cent with around 200 parts and components produced in Malaysia (Jomo 1993, p265).

National cars

Opening the second phase is the implementing of the project called “the national car” which was considered as “the historical moment” for the Malaysian automobile industry. The first Malaysian brand name is Proton (1984), next is Perodua (1992) and Kia (2003). Malaysia became the first country in the region having own brand name cars. The national cars were aimed for promoting supporting industries and increasing the involvement of native Malaysian in the industry. The penetration of national cars into the local market has restructured the industry from a simply assembling to manufacturing.

Table 4: Import and excise duties on automotive vehicles before 2005

Type

ASEAN

NON ASEAN

CKD vehicle

CBU

CKD vehicle

CBU

Import duties

(%)

Excise duties

(%)

Import duties (%)

Excise duties

(%)

Import duties

(%)

Excise duties

(%)

Import duties

(%)

Excise duties

(%)

Passenger cars <1800

42

55

140

0

42

55

140

0

1800-2000

42

55

170

0

42

55

170

0

2000-2500

60

55

200

0

60

55

200

0

2500-3000

70

55

250

0

70

55

250

0

>3000

80

55

300

0

80

55

300

0

Source: The Malaysian Industrial Development Authority (MIDA)

Figure 2: Sales of passenger cars (1995-2003)

Source: Malaysia Automotive Association (MAA)

With high and strict import tariff rate on the CBU and the CKD, especially on the CBU, the Malaysian automobile industry was almost close to foreign manufactures. The effect of high taxes made the volume of imported cars was quite small in comparison with the volume of sales of local cars and the size of the market. According to statistic of International Trade Commission (ITC), the value of vehicle importation from the US decreased from $6 million to $1.6 million in 1997. The high rate from 140 percent to 300 percent caused the imported cars prices skyrocketed to almost 300 percent. Evenly, to promote the national cars, the government gave several of preferential treatments. For example, the import rate of CKD for national cars was lower than for other kinds and it made the price of national car was 20 per cent to 30 per cent cheaper than similar one. In 1987, the 1300cc Proton Saga was priced at RM 21000, meanwhile, with a same one of different auto makers, the prices was RM 28000-29000. Actually, the price became a crucial factor deciding the winning of national cars in the local market. In 1995, the biggest brand names of Malaysia were Proton and Perodua accounted for 62.5% and 17.7% respectively of the total passenger cars in the market.

Table 5: Domestic Car Sales and the Market Share of National Carmakers, 1985-2008

Total

Share of national cars

(units)

Total

Proton

Perodua

1985

63857

12

12

1990

80420

64.2

64.2

1995

224991

80.2

62.5

17.7

2000

282103

92.7

63.4

29.2

2005

416692

81.9

40.3

34.9

2006

366738

73.8

32.2

41.6

2007

442885

74.7

30.3

42.4

2008

497459

72.3

29.2

43.1

Source: 1985-2000: Tham (2003); 2001-09: Malaysian Motor Traders Association,

http://www.maa.org.my/info_summary

Not only having a successful domination in the local market, the Malaysian cars exceeded the border to penetrate into foreign markets, more than 20 countries have presenting of Malaysian cars. No surprisingly, Malaysia became the biggest manufactures of passenger cars in ASEAN at 24.4% in 2004. Furthermore, this industry create more jobs for local labor, approximately 40.000 employees working in automobile industry including manufacture of parts and accessories industry in 2003. It can not deny that, these achievements at this time contribute the current position of Malaysia automobile industry in ASEAN now.

Obviously, all restrictions imposed had specific positive effects to development progress of the industry, but there were some negative effects. The first loss belonged to the Malaysian consumers. Imposing high tariff rate on CBUs and CKD units lead to the price of cars is much higher and that is transferred to Malaysian consumers in the form of much higher prices. Consequence, it is difficulty to the users to own an imported car. Additionally, all the automobile policies created an invisible obstacle to foreign brand names integrating into the Malaysian market. As a result, it causes welfare losses to consumers. Protection national cars and restraining imported cars force them to accept poorer quality local cars and less choice (Jomo, 2003).

In 2005, import tariffs on CKD kits and CBUs ranged from 42% to 80% and from 140% to 300%, respectively. According to estimates based on figures in 2005, the effective protection rate for passenger cars was 57.1% in comparison with less than 10% of overall manufacture (Athukorala 2005). With preferential treatments, the government kept the price of national cars much cheaper than others.

Trade liberalization

National cars under high protection domestic products in long time really has come threat from Malaysia’s liberalization commitments with the WTO, the AFTA and some free trade agreements signed with some other partners. Malaysia had to reduce dramatically both tariffs and non- tariffs barriers over two part decades from the late 1980s as a market oriented reform.

Like Thailand, Malaysia is one of founding members of the ASEAN and the AFTA. According to the Common Effective Preferential Tariff (CEPT) provisions of AFTA, Malaysia had to reduce tariffs for auto importation from ASEAN members to 0%- 5% in particular tariff lines. Obviously, the national cars had to competition with international automakers located in AFTA member nations not only in the domestic market but also in the region. In particular, the sales of Proton cars dropped to 35% from 166.118 in 2005 to 115.538 in 2006 in Thailand market. In 2007, the top of selling carmaker of Proton since 1985 was replaced by Perodua. Moreover, the total of the two national cars recorded a reduction from 92.7% to 72.3% between 2000 and 2008. Simultaneously, the sale of foreign auto manufactures begun to increase in Malaysia.

II.3 Conclusion

These are four examples Mexico, Brazil, Thailand and Malaysia which are developing countries achieving particular successes in their automobile industries. There were many differences in terms of time and conditions in each country. However, all of them had to experience a difficult period in the early time when in the auto market presented strongly developed automobile industries such as from the Europe, Japan and the US.

In order to establish domestic industry actually manufacturing not just import from foreign countries, the developing countries had different policies at that time to protect their infant industry and encourage the domestic industry. Thus the first target of the four countries was import- substitution. A useful instrument to achieve this goal is high import tariff duty. Imposing high import tax rate to protect the local manufactures and restrain imported production. Mexico, Thailand and Malaysia imposed high import tariffs on CBUs and lower import tariff rate on CKD kits. The reason for this difference is desire reducing importation of completed cars replacing importation of parts and components to stimulus assembled cars in the country. This import duty structure was applied in the automobile industry in Vietnam in the early phase.

Addition to local content requirement and several preferential treatments, the high import tariff helped the countries establishing their own industry. Import duty affects directly on volume and price of importation of production and then indirectly the domestic production. Thus import policy was always the first instrument to reach other targets in the countries. For example, in1978, in order to promote local content in auto product, the government use a ban in import CBUs passenger cars on the rate of 80% on CKD kits. Actually, the import duty affected the Thai auto makers. In 1986 the local content rate in passenger cars in Thailand lifted to 54%. Simultaneously, a range of companies producing auto parts and components were set up and stimulated by this requirement. As a result, the supporting industry in Thailand developed strongly. Developed supporting industries are really important due to they are decisive factors for cost of the final products. Thus the four countries have required strictly the rate of local content for produced and assemble auto manufactures. Understanding the importance of the level of domestic content, Vietnam had requirement like that for foreign enterprises to help the automobile industry has a right direction of development.

Beside, there is one factor contributed on the success of the four developing countries that is export orientation for the industries. Export into the global market is a great opportunity for the domestic manufactures expanding the market. Beside it helps companies reaching economies of scale to reduce the cost and improve their competitive abilities. It is a good way for orienting the development of the industry for Vietnam. However, after 20 years prevailing and developing, the Vietnamese automobile industry still is frozen in the simple assembly stage. It hampers the industry when Vietnam is joining quickly in the global economy.

Thailand and Malaysia are ASEAN members who have successful automotive industries with export orientation to other countries. They are good potential role models for Vietnam in developing the automotive industry. However, as members of ASEAN, Vietnam will be facing to Thailand and Malaysia as competitors.

The difference in terms of price creates an advantage comparative for local enterprises to compete with developed ones from oversea. Thus it affects strongly to ratio between local cars and imported ones. Beside, these restrictions are sources contributing huge revenue in Budget Sate, and employment creation. Although the effects of the restriction trade to social and auto producers are quite positive, the cost of these measures is not small and it is welfare losses to consumers. Therefore applying these tools in general and import tariff in particular need to have flexibility in specific context. However, it is can not deny that the role of import tariffs contributing to the growth progress of the four nations.

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