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Wednesday, 23 May 2018

Lowering tariffs on imported EU cars: No benefits for Egyptian market

Why has neither the Egyptian car industry nor the consumer benefited from the reduction in tariffs on European car imports since 2010

Mohamed Abdel-Razek , Saturday 13 Jan 2018
Car
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Trade agreements are made among nations to benefit the economy and consumers by eliminating trade barriers such as tariffs and quotas.

So when the Egypt-EU Association Agreement was signed in 2004 a main goal was to encourage manufacturers targeting the European market to make Egypt their manufacturing hub and benefit from the low cost of labour and cheaper currency. They could then ship their finished products into Europe free of tariffs and quotas.

 Egyptian consumers should have benefited from higher-quality European products including cars on the Egyptian market at affordable prices since they would be tariff-free.

“Tariffs on European cars shall be reduced by 10 per cent annually starting six years after the entry into force of the agreement, or January 2010, with duties completely eliminated within 16 years after entry into force of this agreement,” says the text of the agreement on the EU website.

However, this schedule was interrupted for some time due to political instability in Egypt after 2011. An unpredictable economic situation in Egypt also allowed the government to postpone the process for a year. But many car-buyers in Egypt have also asked why the agreement has not helped bring down the price of European cars over recent years before the impact of the current inflation.

“Before the current round of inflation, dealerships and car distributors in Egypt benefited the most from the reduction in tariffs by increasing their profits,” said Effat Abdel-Atti, head of the Cars Division at the Cairo Chamber of Commerce.

Abdel-Atti said that with the changes in the law, tax rates and the value of the Egyptian pound over the last few years, dealerships and car distributors wanted to make the biggest profits possible to make up for any losses they might face in the future.

“The lack of monitoring by the government made it easy for car dealerships and distributors to control car prices in their favour,” Moetaz Atef, a media commentator on the automobile industry, said.

Atef said that as distributors get most of their stock of cars from dealers, they can easily control prices by withholding or flooding the market with cars, eating up any consumer benefit from reductions in customs.

Atef also blamed consumers for accepting the dramatic increases in car prices that had made distributors push them up above inflation. Consumers were accepting overpriced cars because they thought prices would go up even further in future or cars would become unavailable, especially German imported cars, he said.

From the car-manufacturing perspective, the benefits of the agreement have also been dubious. Egypt is not assembling or exporting cars to Europe, so neither the local car industry nor the wider economy benefits from the EU Association Agreement.

Morocco, on the other hand, has been able to take advantage of its Agadir Agreement, also involving Egypt since 2007, to export Renault cars assembled in the country to Egypt free of tariffs.

Last year, Mohab Mamish, head of the Suez Canal Authority and chairman of the Suez Canal Economic Zone (SCZone), agreed with the German company Mercedes-Benz that it would assemble cars in Egypt for export to the region, helping to kick-start the economy.

However, this is the only good news the sector has received in recent years. For the time being, consumer car prices rely on demand and supply and the willingness of consumers to accept the prices offered by dealerships and distributors because there is no regulator that can regulate car sales in Egypt.

“If there was regulation obliging dealers to sell a percentage of their stock directly to consumers rather than to distributors, prices would go down,” Atef said.

The government has given the banks the right to buy and sell foreign currency in order to help stabilise the economy, and the same principle could be applied to the car market in order to fight inflation created by distributors that has added pressure to already inflated prices due to the decrease in the value of the Egyptian pound.

In the wake of criticisms by both consumers and manufacturers, many are asking why Egypt is signatory to the EU Association Agreement as well as the Agadir Agreement, when no serious plans have been made to build up a well-established car-manufacturing platform in the country and make sure manufacturers are attracted to it.

*This article was first published in Al-Ahram Weekly

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