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FTA WORRIES LOCAL AUTO INDUSTRY
BY GEOFFREY CRAIG
After a long wait, a small sign emerged recently suggesting greater regional trade. In early September, the Customs Authority eliminated tariffs on cars entering from Morocco under the Agadir Agreement, the four-year-old free trade deal signed by Egypt, Morocco, Tunisia and Jordan. But while car shoppers may soon enjoy a new selection of cheaper imports, the local automobile industry is voicing concern.
Removing custom duties on imported cars means stiffer competition at home, without clear benefits abroad, they say. Egypt’s sizeable consumer market is a potential bonanza to other producers, while other member countries are too small to offer much in return.
Trade should be a “two-way street, from Morocco to Egypt, and from Egypt to Morocco. The problem is that, of course, the Egyptian market is maybe triple the Moroccan market,” says Salah El Hadary, secretary-general of the Egyptian Automobile Manufacturers Association (EAMA). Indeed, Egypt’s population of nearly 82 million dwarfs other Agadir members, whose combined population stands at 60 million.
Moreover, local Egyptian car companies might not even have the option to export because they must first get permission from their parent company. The same condition applies all over the world. Renault, for instance, has allowed its Moroccan subsidiary to export a low-cost family sedan called the Logan. Tunisia and Jordan are without an auto industry.
Egyptian automobile makers haven’t ruled out the possibility of exporting. There are 17 automotive manufacturers with assembly lines in Egypt. At least two European car companies with local assembly plants have expressed interest in exporting to other Agadir members, Minister of Trade and Industry Rachid Mohamed Rachid recently told Business Monthly. “If [the automobile companies] are fulfilling the EU and Agadir requirements, they will be able to export,” he said.
In addition to receiving the go-ahead from the parent company, the subsidiary must also show that at least 40 percent of the components are of local origin, as per the agreement’s rules. Last July, representatives from the Ministry of Trade & Industry inspected the Renault plant in Morocco and confirmed that the 40-percent threshold was met.
The minimum “local” content requirement can come from more than one Agadir or EU member state. This may seem like a strange caveat, though its existence illustrates the purpose behind the agreement in the first place.
Agadir was envisioned as a step towards creating a free trade area spanning Europe and the southern Mediterranean states by 2010. To reach this goal, the Barcelona Process was launched in 1996 to phase in political, cultural and economic integration between the two sides. The Agadir Agreement, signed in 2004 and ratified two years later, aimed at further unifying customs rules by adopting EU rules of origin, an important precursor to a free trade area.
In return, the EU allowed for goods produced jointly among Agadir states to enter Europe duty-free. For instance, Morocco could produce a raw material or intermediate good, which Egypt uses to create a finished good, which is then exported to Europe without any customs tax.
In short, the agreement was meant to be “a locomotive for south-south cooperation,” recalls Gamal Bayoumi, a former Egyptian diplomat who helped to negotiate the Egypt-EU Association Agreement during the 1990s.
The potential for inter-Arab trade exists strongly for some intermediate goods, such as textiles, but seems unlikely for automobiles. That is because most car parts used for assembly aren’t even manufactured in the region, but are imported from Europe or Asia.
Instead, the Agadir Agreement will likely result in the shipment of finished goods, or assembled automobiles. And that has caused some people in the local car industry to view the trade deal more as a threat than an opportunity.
The Renault Logan, in particular, may fare well in Egypt because it falls in the budget price category, but has a superior reputation compared to its peers that have flooded the market over the last few years, according to Ayman Kamel, president of Symex International, a local company that imports Chinese-made automobiles. “People trust a French car. They know the name from a long time ago,” he notes.
Local car dealers could respond to the competition by slashing prices on budget cars, but “it will be very difficult to reduce prices because the profit margin is [already] very small,” says El Hadary, who figures that the margin is about 5 to 6 percent for mid-sized sedans.
There may be little wiggle room for cutting sticker prices, though there is a flipside to this debate. And that is a positive outlook for car demand. The EAMA expects passenger car sales for this year to be 25-percent higher, and forecast next year’s growth rate at 7 to 10 percent.
The last three years have witnessed an explosion of car sales. Last year, 228,000 passenger cars were sold, compared to 72,000 in 2004, according to EAMA figures, spurred on by the reduction in customs duties on imported parts and cars in late 2004.
Today, the split between cars assembled locally versus those imported is 40/60, El Hadary says, which is the exact reverse of the breakdown three years ago. He explains that a surge in imports of mid-sized passenger vehicles, mostly from East Asia, accounts for this change.
Kamel recalls customers’ keen interest when he first began importing cars from China in 2004. They proved so popular, in fact, that other dealers also began importing Chinese-made cars, and assembly lines even opened in Egypt producing the same cars. “A lot of people started to import Chinese cars, so I changed from sedans to commercial vehicles,” he says.
The trend of greater competition will only intensify, industry insiders point out, as Egypt’s market continues down the path of liberalization. Beginning in 2010, for example, customs duties on cars from Europe will decrease 10 percent per annum, until 2020, when they reach zero, according to the Egypt-EU Association Agreement.
In the meantime, the car industry argues that opening up the local market to competitors with duty-free access isn’t fair under the present circumstances. Moroccan automobile makers, for example, can import parts at a lower customs rate compared to their Egyptian counterparts, and then export the assembled cars duty-free to Agadir and EU member states, according to El Hadary.
He adds, “If the [Egyptian] government agrees to take off all duties on imported components and raw materials for localized components, then there isn’t a problem for local producers or assemblers here to compete with anyone else.”
Bayoumi, for one, acknowledges this dilemma, arguing that a way to remedy the situation would be the creation of a customs union, whereby all member states are subject to the same customs duties with respect to third parties. “If we don’t enter into a customs union, then we as producers in Egypt will be in a less competitive position than Morocco if they are paying less for spare parts. The solution is to unify the customs duties among the member countries.”
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