The impact of import tariff on Vietnam’s automobile sector

The impact of import tariff on Vietnam’s automobile sector Automobile industry plays a vital role in the development process of any countries in the world. Automobile industry has a significant multiplier impact on the development of a country and a driver of economic growth because of its forward and backward linkages with some crucial sectors of the economy structure (Nag, Banerjee, Chatterjee, 2007). Specially, with Vietnam- a developing country, this industrys development helps Vietnam in achieving the goal Industrialization modernization and encouraging the countrys growth. By openness policies, Vietnamese auto industry is a leading industry to develop other industries such as the chemical industry, metal, and electronics. According to Mr. Nguyen Xuan Chuan, the minister of industry (2003) said that: If we develop and try to obtain localization rate of 30%, after 10 years, the automobile industry creates approximately $250 million with 10.000 workers, equally the value of export rice of many million farmers. It can be said that the automobile industry is one of the most vital sectors to upgrade the Vietnam position in the world. However, the Vietnamese automobile industry is still quite young. Before the period 1990s, the Vietnams automobile operated according to the governments plans, most of cars were imported, the domestic manufactures worked basically on simply repairing that imported cars ; The auto industry has existed since 1986, when Vietnam conducted openness policies- the DOI MOI restructuring process began. The Vietnams automobile industry has begun to dramatically growth; it resulted from benefits from the open policy and a range of incentive activities of the government. Beside, calling for foreign investment, the government had preferential policies to attract investment. It made Vietnamese auto market became more heated; many foreign investors came to Vietnam to research and plan investment projects. However, at that time Vietnam, due to the economic sanctions that the US placed on Vietnam, most of automobile manufactures of the US, Japan, and the Europe limited in having investment divisions. As the result, they used to indirectly invest through Asia companies. Although having many difficulties and obstacles, this period was a vital foundation to form Vietnamese auto assembler companies. The year 1991, when the US deployed the embargo against Vietnam, remarked an important step in relationship between Vietnam and the US. It was also a crucial incentive to develop Vietnams auto industry and following that a range of leading join venture manufactures set up such as Ford, Toyota, and Mercedes-Benz in Vietnam. So by the end of 1990s, there were up to 11 JVs in Vietnam. The existing of these famous brand names, it reflects clearly that Vietnam is a potential market. Besides, these beginning success are derived from suitable policies of policymakers. Consequently, the Vietnams auto market obtains an admirable growth speed. Since 2003 the Vietnamese automakers have developed dramatically when the government approved the strategy of Vietnamese automobile industry development to the year 2010, vision 2020 in which encouraged all economic sectors participating in the automobile industry and eagerly accelerated state-owned automakers. In 1990s the majority of market share appro ximately 90% belonged to the production of the join venture manufactures, whereas a tiny rate was those of the Vietnamese companies. However, there was a sharply change in terms of the domestic market share between them, the domestic manufactures increased significantly their sales volume and accounted for 43% of the total sales in 2007 (Report on investment in automobile, 2007). To help the domestic automobile industry having a sustainable position in the domestic market, from that to able to penetrate into foreign market, Vietnam conducted some protection measures. In the first period, tariff including non- tariff and tariff imposed on imported cars with high rate, so tariff barriers and non tariff protected effectively the infant auto industry. Actually, it created a huge difference between imported cars and assembled cars in the country in terms of price. However, the strict protectionism made the imported cars price in Vietnam is much higher than other countries. For example, a new car named Ford -Taurus was imported in the Vietnamese market higher approximately 300% than in the US (Baston, 1998). Evenly, a car assembled in Vietnam is more expensive than the same one in the US due to only there is a small number domestic manufactures investing seriously in production to improve their competitive abilities, while the most ones operate at simple assembling level (Nguyen, 2007). It creates an unfair situation for the Vietnamese consumers as they have to pay a much higher price. Applying strict barriers is essential way to protect and force the development of this leading industry, but do its impacts really positive and effective? The answer is current situation in Vietnam, many domestic assembled companies and joint venture companies do not many exchanges to improve localization rate and competitive abilities with imported cars. Due to these companies depend too much on these protection tools from the government and take them becoming a comparative advantage. Actually, it is a worry issue with the Vietnams auto industry when integrating into the globalization market, all barriers will be eliminated. I.2-Research focus The price of a imported car in Vietnam is contributed by many restrictions from government rules such as value added tax, special consumption tax and import tax, which causes the amount of money for a car in Vietnam that is much higher than other countries. Imposing high tariff rate not only brings huge revenue for State budget, consumption orientation for social but also affect strongly domestic market. Specially imposing high import tax makes the price of an imported car increase, which is disadvantage for foreign companies in competition with local ones. Clearly, most local manufactures want the high import rate to gain more profit and market share. This is an unfair treatment and it is also eliminated in the short time, because one of the most important regulations in free trade wherein all barriers are removed on trade among members. (Dominick Salvatore, 2007, p340). However, clearly it may be a useful way to protect an infant industry as the Vietnams auto industry to have necessary time to prepare it to be able to overcome difficulties and challenges in the beginning period from the other developed competitors. A major focus of this research will concentrate on impact of import tariff imposing on completed car up until recently; including challenges to the Vietnamese car as tariff come down to 0% in 2018. What motives to change tariff before 2007, which is the period Vietnam was not a member of the World Organization Trade (WTO)? What positive and negative impacts is the auto gained from imposing import tariff? To gain a deeper understanding of these issues prevailing in the industry, two main activities need to be considered: a review of relevant literature to ascertain current research findings to exam the forces that are driving to impose tariff and including potential challenges the industry faced in the short next time; and empirical data collection on changes in the volume and value of imported and domestic completed car and the overall views of some economics on the industry in imposing import tariff, also difficulties as the tariff is coming down to 0% in 2018. I.3-Significance of the study Automobile industry plays a vital role in the development of Vietnamese economy. An opening economy and special integrating The World Trade Organization (WTO) is a great chance for quick penetrating with the world economy for Vietnam. Also, it creates plentiful of opportunities for Vietnams auto industry such as attracting foreign investment and technology to improve comparative abilities not only in Vietnam but also in other markets. However, beside a range of these benefits, by opening the market, it causes increasing imported commodities which are difficulties for domestic economy. Therefore, imposing and applying imported rules that accord to commitments are necessary. A study The impact of import tariff on Vietnams car sector is significant to provide basic information in terms of the relationship between import tariff and its impacts through a specific case. Moreover, it is helpful for making strategy plans for the automatic sector in the future. Specially, being a member of WTO creates not only opportunities but also challenges. Firstly, Vietnam has to implement a range of commitments with the role of a member; that is eliminating restriction barriers. Car sector is not an exception. According to commitments with WTO, CEPT, AFTA and ACFTA, Vietnam has to reduce import tariff with imported cars and the time to apply the rules shorten. For example, in terms of completed import car, from now to 2013, Vietnam has to reduce the rate of tax from 83% to 60% and it is 0% in the year 2018 and at that time the domestic industry will have to compete for market share by itself ability without any support. Currently, it can be that the mainly advantage of bo th car produced and assembled in Vietnam is price which is affected mostly by tax. Therefore, as the tariff is coming down, the price of imported car will really much cheaper than domestic car. It will be a huge challenge for Vietnamese car that does not create comparative advantage in terms of neither quality nor price. This raises the question of whether the Vietnamese car industry can survive. A significant decrease in the short time may be a disadvantage for domestic companies. Therefore, to improve competitive ability, all of local companies need to have specific development plan to win in the home market. I.4-Overall research aim and individual research objectives The overall aim of this study is to have a deeper understanding of the impact of import tariffs on Vietnams auto industry in particular. However, in order to understand the role of import tariffs in the industry, it is necessary to gain an insight into the forces driving the imposition import tariffs. Therefore two main research vehicles that needed to clarify the issues of this research: a in-depth review of relevant literature and the collection and analysis of empirical figure. The details of the research strategy and the data collection techniques to be required to gain the empirical data are presented in the Research Methods section. Specifically, the objectives of this research are to: 1, Identify the meaning, motives for applying import tariff and the forces driving chances to the import tariff. 2, Examine the effects of applying import tariff on completed imported cars and domestic car volume in Vietnams automobile industry. 3, Evaluate the challenges faced as the tariff come down to 0% in 2018. 4, Compare the recommendations and views of some economics. The first objective- on import tariff drivers will attempt to answer the questions: What is import tariff? Why have to impose import tariff? What is the role of import tariff in the development process of each industry? Next, objective 2 the role of import tariff in the Vietnams auto industry- provides opportunity to gain meaning insight the effects of import tariff in specific context. The objective 3 on difficulties may be faced in the future of the Vietnamese auto- will give some indication of how much the industry will be challenged, as the tariff comes down to 0% in 2018 according to the signed commitments. Finally, the objective 4 formulating recommendations in the impact of import tariff in the industry as a result from review of literature and analyzing empirical data. The next chapter the literature review- examines literature pertinent to the objectives of this study, beginning with an investigation of what is meant by the term import tariff. II Literature review II.1 Introduction 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 Vietnams 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 Vietnams 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 and infant industry, from that to explore main issues of this research. II.2 Defining tariff and infant industry A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. (Dominick Salvatore, 2007, p.248). Tax is one of the restrictions that are imposed on trade among countries in the world. The rate of tariff may be an obstacle or incentive way for coping with the nations trade. Tax policy plays an important position in car section, clearly it influents both internal and external car firms. For example a change in import tariff affects not only directly on the imported cars but also indirectly on the domestic cars. Due to a crucial role of tax, so Viet Nam also has suitable changes to contribute in the development of this section. Infant industry argument the argument that temporary 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. (Dominick Salvatore, 2007,p) The use of tariff policy as a potential retaliatory weapon against foreign countries has been observed both historically (Perry, 1955) In small open economy, the imposition of an import tariff has little effect on the world price of the commodity. In general, a tariff attracts resources to the protected sector and shifts demand away from foreign goods. The tariff, however, not only drivers up the relative price of the commodity in question, it also raises revenue (Caves and Jonkes, 1985) The persistence of tariff is very important issue mainly for political economy reason (Baldwin, 1985; Dales, 1966) Critics of protection maintain that temporary protection designed as a relief for ailing industries or an incubator for infant industry will quickly become a permanent fixture in the economy. Automobile policy in some countries Mexico As other countries, the automobile industry plays a crucial role in Mexicos industrialization strategy and is one of the key sectors to contribute the development process. To compete with foreign manufactures and have enough time to mature its domestic companies, the Mexican government also has some particular policies to protect this important sector. Initial, the government declared an Automobile Decree 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 development of Mexicos automobile industry divided into four phases. Firstly, the period of time before 1962 as the Automobile Decree issued, the main activities of Mexicos auto industry was assemble auto parts with less than 20 percent of domestic factors and most vehicles being imported into Mexico. Secondly, the period of time from 1962-1976: import substitution, at that time the Automobile Decree was stipulated. 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 require 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. 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 open up the automobile parts markets 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 decree opened up the automobile market only brought new opportunities for the Mexican companies to broaden distribution network. Specially, when 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, 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). Thailand With flexibility 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 and become the leading automaker in ASEAN. The Thai automobile industry dated in the early 1960s. At that time, in order to attract foreign investors to set up their operations in Thailand, the government had some incentive policies that remarked many manufacture from the US, Japan and Europe located their factories in the country. However, from incentive rules to establishment plants, 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 201 percent for commercial cars by 1975. 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. Consequence, an import ban on the CBU passenger cars, an increasing import tariff on CKD kit from 50 percent to 80 percent were imposed to reduce these pressures. In terms of the local contents requirement, the government decided for raise from 25 percent in 1978 to 50 percent 1983, but due to the economic recession in 1980s, the government banned setting up new enterprises and reduced the localization ratio to 45 percent in stead of 50 percent according to the requirement in 1978. Continuously, the first oil crisis and political instability 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 Gene ral Motor. However, the Thai economy significant recovered in the early 1990s with a range of positive changes in the general economy, also with liberalization policies in the auto industry in particular. In order to strengthen the international competitiveness 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 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 Thailands 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 and new 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. 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 worlds 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 Brazils auto industry can not mention to the role of state policies. The modern Brazilian auto sector 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 to choose between a banding the Brazilian market or producing vehicles with 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 measures of Brazil to protect the domestic market. The industry, however, gained many positive improvements; transnational corporations had to upgrade their operations from simply assembling to full manufactu re. 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, in the auto sector with the 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 imported machinery, equipment and other parts, and waived 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 Brazils 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. 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. However, the Brazilian automobile industry was really close for imported manufacture that went back with the trend of global integration. Therefore, in the 1990s, Brazils President decided to open the market to imported cars for the first time since the 1950s. This 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. II.3 Conclusion These are three typical examples for success developments. Even though, each the industries have different in terms of time and conditions in each countries. Clearly, all of them had to experience a difficult period in the early time. The countries had different measures at that time to protect infant industry. One of the useful tool is import duties beside other regulations. III- The effects of applying import tariff on completed imported cars in Vietnams automobile industry. According to Vietnam autos Report Q4-2010 New Market Report Published by Press Office stated that: Fluctuating tariffs are still a factor in Vietnams 12th position out of 14 markets in BMIs Business Environment Ratings for the autos sector in Asia Pacific. The highest score is for market risk, which stands at 85.0. Its country risk score has also risen from 49.8 to 51.5, taking its total score for risks to realization of returns up to 68.2. Vietnam is still a country we would expect to see climb the ratings in the future, particularly if its vehicle tariff policy becomes more consistent. Currently, a new imported car to Vietnam has to subject to three taxes that are import duty, excise tax, and value added tax. For example a new 5 seats car imported to Vietnam, the price itself has to added to three taxes import duty, excise duty and value added tax with the rate are 83 %, 50% and 10% respectively. Clearly, these taxes are important factors decided to how high in terms of price of a car is sold in Vietnam. Among three kinds of duties on cars, import tariffs have the highest rate. Moreover, it is an exclusive difference between domestic assembled or produced cars and imported cars. Thus, in order to find out reasons influent on imported cars that have indirectly impact on local cars, it is crucial to investigate the trend of import duties in Vietnam. III.1-The current condition of the Vietnams automobile industry The Vietnams automobile industry had more than two decades of prevailing and developing, it is so far in the early stage of an infant industry and just limits at simple automobile assembling (Nguyen, 2007). Source: VAMA Figure 1: The sales of local enterprises and the volume imported new car Advantage Vietnam is a new emerging and potential market and production base on for automobile products due to its dramatic economic growth and bid population of more than 84 million with low car ownership rate and possibility to grow as manufacture with good and bid labor forces. (Nguyen.2007) Joining in and taking advantages from liberalization brings about benefits of market expansion, technology transfer, labor division. Disadvantage -The size of market: The automobile industry needs to have very big initial investment capital for Equipment, factories, technology, RD and so on. Thus, it is difficult for them to reduce production cost, make profit and reinvest in productions if sales volume exceeds 300.000 units a year (Takayasu, 1998, p22) According to Vietnams Business environment Survey belonging activities of the Consulate General in December 2010, one of the problems is Vietnamese infrastructure including soft and hard. soft infrastructure: labor and legal basis_ Director of international financial corporation( IFC) Simon Andrew state that 50% enterprises do not want broaden their operations and one of the reasons is that the level of labor. Accor him, Vietnam can not win in global game if only based on cheap labor resources hard infrastructure : physical infrastructure- lack and slowness accor to America Chamber III.2 Vietnamese government policy toward the automobile industry Taxation policy is the main tool of policy makers in management of the automobile industry. It has direct effect on decision of business and production of the automobile makers. III.3- The effects of import tariff on Vietnamese automobile industry Source: The general department tax Figure 2: Timeline for Vietnamese new imported car duty Taxation policy is the main tool of policy makers in management of the aut