Deductions Of Tariff Rates On Imported Cars example essay topic

The car sector within China automobile industry is taken as an infant sector and, as such, it has always been subject to protection against imports by means of the highest import tariff rate. On several occasions in recent years, China has made readjustments to tariff rates. The import duty has been reduced to 80% for complete cars with a displacement of three liters or less and 100% for those with a displacement of three liters or more. This is higher than for all other imported industrial goods.

The tariff rates for car parts and accessories, however, are lower than for complete cars 40-50% for engines, gear boxes, driving axles, vibration reducers, clutches and breaks, 22% for tires, and 12-25% for electronic devices used in cars. To encourage domestication of car building, the state is practicing a string of preferential tariffs. Entitled to these preferential tariffs are imported parts and accessories by enterprises producing complete cars provided they meet the domestication standards prescribed by the state. Going hand-in-hand with protection by high tariff rates are non-tariff restrictions on import of automobile products under the import quota and licensing system. It is true that import quotas are playing a less important role in restricting automobile import as domestically built vehicles have become increasingly cheap and their prices on the domestic market are now closer to international prices.

Despite that, a comparison between the marketing prices of imported goods and their normal tax-included prices (prices that include the custom duty, VAT and consumption tax on them) brings to light that the non-barrier duty equivalents practiced under the quota systems will still be as high as 10%-30%. Restrictions by the quota system will be even more significant on the import of medium- and high-class cars with a displacement of 2 liters or more. Since the beginning of the 1990's, the annual national automobile sales has grown at an average rate of 14.5%, and corresponding rate of increase is as high as 31% for sales of cars. In other countries and regions, the number of automobiles in the population possession will increase rapidly when the annual GDP of a country or region reaches US$4,000 per capita (at purchasing power parity). By then, the elasticity index of per capita possession of cars relative to economic growth up will have risen from 1.7-1.8 to 2.6-2.7. According to recent studies (e.g. Maddison, 1998; Ren, 1997), China GDP, calculated at purchasing power parity, is close to US$3,000, suggesting that beginning 2004, the domestic demand for car will grow even more rapidly than now.

Our own computation indicates that by 2010, cars owned by the Chinese population will average 47 per 1,000 people, and corresponding figure for automobiles will be 17 per 1,000 people. Both figures will match those for Japan in the mid-1960's and those for the Republic of Korea and Taiwan in the 1980's. Basing ourselves on this computation, we are expecting a potential national demand for 5.8 million automobiles and 2 million cars in 2005, and 10 million automobiles and no less than 4 million cars by 2010. In the first place, the domestic automobile market is isolated from the international automobile market because of the high tariff rates imposed by the state.

And as a result, Chinese automobile enterprises are almost free from the pressure of international competition. At present, the domestic selling prices for imported cars that include import custom duties, import-linked VAT and consumption tax are 2.2-2.5 times their CIF (cost, insurance and freight). Besides, automobile imports are subject to restrictions of import quotas, import licensing and other non-tariff measures. As a result of so great a protection against imports, cars imported through normal channels are bound to suffer from limited competition capability in light of the cost of production and selling prices for domestically built cars.

As a matter of fact, automobile imports have continuously declined in recent years, to less than 40,000 vehicles in 1998, and imports of cars, to less than 20,000. The share of the Chinese market was imported automobiles was 18.5% in 1992 and, by 1998, it had dropped to 3.5%; and the share for imported cars, from 61.1% to 3.5%. Moreover, deductions in tariff rates in recent years have failed to push up imports. It is therefore clear that as long as China continues to practice the current tariff rates and import quota system, cars imported through normal channels will be no challenge to domestically built cars.

What also merits attention are the various protection measures taken by local governments, which lead to partition of the domestic market and inadequate competition between domestic producers. The automobile industry does have certain barriers against entry because of its scale economic feature. The state, on its part, has, through policy measures, imposed restrictions on the number of automobile projects to be started. All the factors cited above invariably result in a market structure with a certain degree of monopoly as a most striking feature. And finally, competition on the domestic automobile market is also subject to state restrictions, e. g., by vaporizing automobiles to restrict price competition. The 13 car manufacturers operating in 1998 produced 510,000 vehicles altogether averaging less than 40,000 by each.

For the largest, the Shanghai Volkswagen Automotive Company Ltd., the output was a mere 230,000. About 20 car manufacturers are operating in China, but factories producing cars may number about 20, including some that are not licensed for car manufacture. Again the car sector. The sector has a total production capacity of more than 1 million vehicles but the effective market demand is computed at no more than 500,000.

The volume of car sales, which is limited, has become a serious handicap to car production, as it leads to idle production capacity and excessively high fixed cost of production apportioned to cars produced. Further deductions of tariff rates on imported cars may cause prices to drop on the domestic market. This, in turn, helps boost the market demand for cars. The end result will be lower cost for domestic manufacture of car and greater competitiveness of the domestic automobile industry. The domestic automobile industry falls far below the best international standards for batch quantity of production, prices of products and technological level, hence its inability to take part in international competition in an all-round way.

The current protection, however, can in no way help the industry achieve scale production, enhance its efficiency, improve its technological level and reduce the cost of its production and operation. Weak market demand and imperfect competition are the main reason for problems the domestic automobile industry faces low level of production concentration, limited size of individual enterprises, low efficiency, inadequate competitive power, etc. Because of this, a constantly expanding demand and increasing competition are what the domestic automobile industry inevitably requires in seeking development. China WTO entry will be conducive to effort to expand the domestic automobile market and enhance the domestic automobile industry competitive power. In view of this, the government, while striving for entry of the global trade organization, should make positive efforts to foster the market. That means establishing a kind of highly efficient, pro-competition market mechanisms, and using market means and competition to promote the merger and re-organization of the existing car manufacturers.

And in the process, those technologically backward and poor in efficiency will be eliminated and manufacturers in general will be forced to improve their management and efficiency. In short, within the short protection period allowed to China in the wake of its WTO entry, the Government should see to it that the domestic automobile industry will rapidly enhance its competitive power.