A new law designed to develop the automotive components industry is making its way through Egypt’s parliament. It is an unwise thing that seems designed to benefit a tiny group of businessmen at the expense of consumers and the country as a whole.
The law, called the passenger car and feed-in industries development law, aims to boost local companies making components for automobile manufacturers. It would do this by penalising manufacturers.
It first would impose a hefty new tax on all passenger cars sold, whether they were imported or made locally, then redistribute the tax proceeds to car makers who met certain government targets for the use of local components.
Cars with engines under 1600cc would be taxed at 30 per cent, those from 1600cc to 2000cc at 100 per cent and those over 2000cc at 135 per cent, according to an outline of the law published by Al Watan newspaper.
The tax’s proceeds would be placed in a fund, then redistributed to Egypt’s car makers as an incentive to reach the government target, which would rise gradually over several years until it eventually reached 60 per cent of all the components in locally made passenger cars.
The incentive paid would be equal to 23.05 per cent of the sales price to producers of cars under 1600cc, 50 per cent for cars from 1600cc to 2000cc and 57.45 per cent for cars 2000cc and above. Buses and transport vehicles would also fall under the new programme but under a separate tax schedule.
The programme thus created would be overseen by the trade and industry ministry, while the fund itself would be controlled by the government’s Industrial Development Authority.
According to the wording of the law, the programme would be designed “to increase the competitiveness of these industries”. In reality, it would do anything but.
It’s clear that the brunt of the cost would be borne by consumers.
Local components will almost certainly be more expensive than those made abroad because if they weren’t, the local component makers would not need a special law in the first place.
This will make the final product more expensive, making it hard to see how domestic vehicle producers would be able to compete outside Egypt.
This is classic infant industry theory, a concept that has long been discredited, no less than in Egypt’s very own automobile industry.
The country in the 1990s gave its car makers huge tariff protection, spurring manufacturers to rush in from around the world and set up wonderfully profitable assembly plants with local partners and slip under the tariff barrier.
The government of Ahmed Nazif, when it came to power in June 2004, immediately slashed tariffs across the board but left the automobile industry’s protection intact.
Tariffs in 2004 were kept at 40 to 135 per cent on completely built-up vehicles, while those on components were left at 20 to 40 per cent.
According to Oxford Business Group, Egypt as of 2014 had 15 car assembly plants and 75 supporting facilities that produced a paltry 145,000 cars.
The country’s consumers that year bought 300,000 cars and buses, with the remainder imported.
What was the result of nearly two decades of protection? Today almost none of the car makers are able to export their locally made automobiles.
This brings us to the tariff portion of the law.
In 2001, Egypt signed a partnership agreement with the European Union under which it pledged to gradually reduce its tariffs on EU automobiles, until they reached zero in 2019.
Tariffs on cars from Japan and China are still as high as 135 per cent. But the EU tariff has fallen to 16 per cent. This means that Egypt’s car makers, especially those whose cars have bigger engines, are now feeling the brunt of real competition. Mercedes- Benz closed down its Egypt assembly plant last year.
It seems that rather than encourage competition, tariff protections do little but make local producers lazy.
Curiously, the proposed new law sets a new automobile import tariff at 10 per cent. Does this mean Egypt is reneging on its agreement with the EU to reduce its tariff to nothing? Both the import tax and the new components industry development tax would be levied on imported cars, whereas locally produced cars would only pay the new components industry development tax.
And consider the new bureaucracy that will have to be created to enforce this programme.
Wouldn’t it be much better if the government cut through the tangle of rules that is now Egypt? Why doesn’t it stand aside and let the country’s clever businessmen figure out in which areas they have an advantage, rather than trying to create its own champions?
Patrick Werr has worked as a financial writer in Egypt for 26 years.
business@thenational.ae
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