Enabling Automotive Trade:
3. Key Findings
Six key supply chain barriers were identified from the panellists’ input:4
Excessive border-crossing times and processes
Border delays and burdensome requirements can extend beyond a customs administration to include lack of coordination between border agencies and lack of compliance with import-export standards.
Re-export barriers: Non-deductibility of import tariffs on re-exported parts and pooled equipment
Duty drawbacks allow exporters to obtain a refund of the customs duties, taxes and fees paid on the merchandise they import, if that merchandise is subsequently exported. The main objective is to lower the cost of imported inputs and, consequently, to increase the exporting firms’ competitiveness, eventually returning benefits to end customers by providing vehicles at lower cost. However, some countries do not permit or easily facilitate the duty drawback system. For example, governments sometimes restrict or create disincentives (e.g. tariffs and conditions such as bonding) to pooling and reusing containers and pallets, resulting in inefficient, less sustainable and more costly supply chains.
Unnecessary differences in regulatory standards between countries
Despite having broadly similar intentions, nations mandate widely differing motor vehicle safety standards, and environmental and technical norms. This imposes costly and lengthy technical adaptations on carmakers, and prevents them from selling standardized vehicles around the world.
Lengthy dispute settlements encouraging short-term violations
The lengthy WTO dispute settlement process results in some countries purposely violating the organization’s rules to temporarily take advantage of financial gains during the settlement process.
Lack of visibility and transparency on trade and investment
Identifying local regulations on non-tariff barriers is a lengthy and manual process; it highlights the lack of a single, global automated tool, available to importers and exporters that could help them identify the most up-to-date non-tariff barriers at country level. Similar frustrations exist on the investment side, as importers and exporters struggle to deal with a confusing variety of government agencies involved in the trade- and investment-facilitation process.
Tax obstacles to free trade
Even within large free trade areas such as the European Union (EU), local tax obstacles to trade persist. In some cases, physical goods are transferred between nations simply for tax purposes.
Figure 1 visualizes and ranks the panellists’ assessment of the financial impact and ease of implementation of these six barriers.
Figure 1: Assessment Results of Six Barriers in the Prioritization Matrix5
Source: World Economic Forum; Bain & Company
The analysis of this ranking highlights two main clusters of barriers:
I. Top near-term priorities
The authors propose that the WTO spend initial energies on addressing the two most important near-term priorities, given their relatively high value-at-stake and potential ease of implementation:
- Excessive border-crossing times and processes
- Re-export barriers: non-deductibility of import tariffs on re-exported parts and pooled equipment
The recent agreement reached at the WTO Ministerial Conference in Bali, Indonesia is an important first step in improving border management. This issue is particularly important in emerging economies, a major focus of growth and investment for automotive manufacturers. Ensuring fast implementation of the agreement, while drawing on promised support and private-sector expertise, will be crucial.
Duty drawbacks still remain an issue in many recently completed Free Trade Agreements (FTAs). For example, the FTA between the EU and the Republic of Korea (Korea) became effective July 2011, and helped both sides to mutually agree on eliminating or reducing import tariffs. However, duty drawbacks in the automotive industry were not included in the deal. If a Korean carmaker wants to export its vehicles to the EU – vehicles assembled in Korea with imported parts from China – it is still required to pay import duties levied on those Chinese automotive parts. Likewise, local auto associations and manufacturers which aim to protect the market from foreign players will continue to lobby the government to keep the current restrictions valid.
II. Longer-term priorities
According to panellists, the next cluster of barriers present either lower value-at-stake or greater difficulty of implementation:
- Unnecessary differences in regulatory standards between countries
- Lengthy dispute settlements encouraging short-term violations
- Lack of visibility and transparency on trade and investment
- Tax obstacles to free trade
The regulatory-standards issue stands out among this cluster due to its higher value-at-stake. It is indeed one of the key points on the agenda of the EU/US FTA negotiations. For the past few years, many of the major automotive-industry players have been calling for a mutual recognition of safety standards to reduce cost burdens from development of customized models for each market. However, because the regulatory institutions in Europe and the US are different, achieving alignment may be even more complicated than negotiating solely on tariffs.