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Sunday, 12 July 2020

Egyptian automotive industry bears the brunt of trade treaties

The prices of cars imported from customs-exempt countries rival those of cars assembled locally

Khaled Al-ghamry, Tamer Alshazly, Wednesday 26 Feb 2020
(Al-Ahram)
(Al-Ahram)
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Egypt has signed a number of international economic agreements which have created free trade opportunities, with the aim of increasing exports; yet these agreements have had a number of negative effects on the country’s car manufacturing industry.

Local business experts say that the prices of cars imported from customs-exempt countries rival those of cars assembled locally, creating problems for the country's car manufacturers.

Egypt signed the Greater Arab Free Trade Area (GAFTA) in 1997, which was approved by the United Nations Economic and Social Council (ECOSOC) to establish a free trade area among Arab countries.

The Common Market for Eastern and Southern Africa (COMESA) agreement was signed in 1998 by Egypt, Kenya, Sudan, Mauritius, Zambia, Djibouti, Malawi, Madagascar, Rwanda and Burundi.

In 2001, Egypt signed the EU-Egypt Association Agreement, which includes 15 European countries.

In 2005, a free trade agreement between Egypt and Turkey was signed, and the following year, the European Union-Mercosur free trade agreement was signed, including Egypt and Brazil, Paraguay and Uruguay.

The main purpose of all the aforementioned agreements was to help Egypt improve its national economy by increasing the export volume of Egyptian products compared to imports, and strengthening diplomatic ties with these countries.

Some of those agreements have been put into action, including the Agadir Agreement, the EU-Egypt Association Agreement, and the Egypt-Turkey free trade agreement, resulting in the lifting of customs tariffs on some of the goods imported from these countries, including cars.

But those customs tax exemptions have had an effect on the automotive industry and trade in Egypt, considering that the country is encouraging automotive agents and dealers to manufacture locally using local components, which in return could enable them to export to these countries.

Khaled Saad, secretary-general of the Egyptian car manufacturers’ chamber, confirms that these agreements have a negative effect on locally produced cars, as the prices of the cars imported from customs-exempt countries have become very similar to those which are assembled locally, and this is due to customs on imported components which are used in assembling and manufacturing processes of up to 6 percent on passenger cars and 8 percent on commercial cars.

There are also taxes imposed on locally assembled cars. They are deducted, but only after the car is sold, leading them to be considered an extra cost and ultimately raising the price of locally assembled cars.

Over time, this has led to an increase in the sales volume of imported cars which benefit from customs exemption; for example, the sales volume of European-origin cars increased from 11 percent in 2018 to almost 20 percent in 2019.

Other countries which Egypt hasn’t signed international agreements with have been affected negatively due to its deprivation of the tax exemption advantage, like cars of Korean, Chinese, and Japanese origin.

The agents and dealers in Egypt have addressed this issue by urging the mother companies to lower their prices, decrease their profit margins, or minimise the accessories and extra options so that they can decrease the prices and face this pricing gap.

Saad also added that the government needs to abolish customs on the imported components used for local assembly and exempt them from taxes upon entry and not after sale of the finished car.

It should also hold specialised committees upon the signing of new agreements, which would be responsible for studying the effect of these agreements on different goods available in the local market.

Tarek Mostafa, an automotive expert, said that the customs exemptions seriously affect the sales of locally assembled cars, as well as those imported cars which do not benefit from these exemptions.

He noted that some brands which had gained the trust of consumers have exited the market recently, including both locally produced and fully imported.

Another category of cars which has been deeply affected are sedans, due to a consumer trend and preference for buying SUVs, the prices of have become close to the price of sedans, even those locally assembled.

Mostafa believes that Egypt needs to provide a bundle of customs and tax incentives linked to the production volume of local assembly, so that the agents can address pricing gaps, and to achieve the principle of price justice.

On the other hand, Amgad El Feky, deputy general manager of El Kasrawy Group, a Citroen agent in Egypt, said that, in recent years, Egyptian car manufacturers have not exploited these agreements for their main purpose, i.e. exporting, instead only taking advantage of them for commercial sales purposes inside Egypt.

He said that they didn’t make the necessary developments to provide higher quality levels of their products to enable them to compete and export, taking into consideration that the manufacturers of other locally produced products took great advantage of these agreements in terms of exporting abroad, especially as those agreements were not meant solely for the automotive industry.

He added that the government has to interfere during this critical stage to save the automotive industry by providing some solutions.

One solution would be working on marketing locally assembled cars abroad i.e. using the commercial offices in Egyptian embassies abroad to promote and market these products, and cooperating with manufacturers on that aspect through continuous communication.

Another solution would be providing training technical manpower to enhance the quality of locally assembled products.

Another would be addressing the development of car components industries, and working on raising their quality to increase the percentage and quality level of local components used in the car industry.

Another would be imposing strict quality control policies on products exported abroad.

Providing tax exemptions for manufacturers to give them a competitive pricing edge, which could help them export their products outside Egypt, is also suggested.

The government plays a vital role in supporting the car industry, and not only gaining from the financial revenue of taxes.

Hence, signing international agreements is very important for the economy and for raising the quality levels of locally assembled products, besides creating new job opportunities and providing trained and skilled manpower.

But prior to signing such agreements, the government needs to study their potential, prospects, capabilities, and resources in order not to be the losing party, and to ensure they establish a successful and balanced commercial exchange relationship between the parties included.  

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