Automobile Industry Art 2

ARTICLE PRESENTATION SUBMITTED TO: SIR. AFAQ ALI KHAN

BY:

Naveed Muhammad SP07-BB-0122

Topic:

Automobile Industry

WTO and the automobile industry By Abbas Raza THE World Trade Organization (WTO) has rejected Pakistan’s request for the extension of the deletion programme which enabled it to lay down the condition of the local content requirement (LCR). Under LCR, the automobile and other engineering industry was required to use locally manufactured parts and accessories in terms of government’s deletion policy. The condition of the LCR was an aberration to the Clause 5.2 of the WTO Agreement on Trade Related Investment Measures (TRIMs) read with clause Article III–-National Treatment under the GATT, 1994. Pakistan being a developing country was in principle, required to phase out and withdraw all the trade-related investment measures, inconsistent with the agreement on TRIMs, by the year 2000. However, it kept on seeking extensions of the LCR condition and was granted two consecutive extensions. The request for third extension was turned down by the WTO on the serious objections raised by the United States. Apparently the US holds no direct interest in Pakistan’s automobile industry, but its future plans of investing in the sector in Pakistan can not be ruled out. WTO’s decision for not extending its deletion programme / LCR condition has varied impact on Pakistan’s vendor industry, automobile assemblers, car users and the government. The implications of the decision on the vendor industry, engaged in the production of parts and accessories for automobile and other engineering goods, if not adequately protected will render the industry below the peril point and at the mercy of importers and automobile assemblers. The domestic vendor industry, which is still in its infancy, has only been catering to domestic assemblers requirements. Considering its weakness, it will not be possible for it to come up to the international competition, thus putting the entire investment and resources at stake. WTO’s decision on the rejection of the extension of Pakistan’s deletion programme did not come as a surprise. However, a big question arises that as to whether the concerned departments had anticipated the situation and prepared a fall back plan to avoid adverse affects on vendor industry, which requires structural changes to cope up with the situation. In fact, strategic planning for which should have been undertaken much earlier.

Adequate protection to the development of vendor industry producing parts and accessories of any country is necessary to convert the assembly lines into higher valueadded production activities. Automobile assemblers will, however, not as such be affected by this decision as they will have the option of importing the deleted auto parts from international sources including China, Korea and Taiwan or to procure them from the indigenous vendor industry. In any case prices of the automobile industry will not be reduced. On the contrary, if the CKD automobile suppliers insist Pakistani automobile assemblers to procure 100 per cent CKD automobiles from them, there is a possibility of increase in prices for a number of reasons including quality and increase in their own sales which were currently being met through LCR at lower prices. The consumers are not likely to benefit from the decision in terms of prices. However, there could be some marginal improvement in qualitative terms in parts and accessories. The consumer interest can only be protected by reducing the level of protection available to domestic assemblers which is currently operating at low- value addition. The government is also not likely to benefit from the decision as there could be a revenue loss on account of sales tax being charged from the local vendor industry. There is a tendency of under-invoicing and miss-declaration in the import of automobile parts, which is not likely to raise enough collection of customs duty to compensate the sales tax being collected from the domestic vendor industry. The situation demands that the government should review the automobile and engineering sectors affected by the decision and prescribe adequate and timely protection levels and undertake tariffication of deletion programmes. The Article XVIIIC on governmental assistance to economic development under GATT, 1994 allows developing WTO member countries to grant additional protection to its domestic infant industries. The GATT Article XVIIIC allows the developing countries to deviate from the provisions of GATT / WTO for (I) the achievement of the objectives of the WTO, (ii) attainment of the policies of economic development, (iii) protection to new/infant industry and (iv) development of the existing industries. Protection under Article XVIIIC can take the form of measures like additional tariff and restricting imports for temporary periods up to eight years. However, only that developing country can take action under the Article which has a weak economy, support low standards of income and is in the early stages of development. Pakistan’s economy has all the three features which the Article lays down for taking action under it.