Enabling Automotive Trade:
6. Case Studies
I. Excessive border-crossing times and processes
Time is money. Import and export delays represent significant costs for export-intensive industries such as automobile production and automotive equipment manufacturing. According to the chief financial officer of a European original equipment manufacturer (OEM), “time is the enemy in automotive. The value of one day of working capital in the automotive industry is very large.”
Customs clearance and border-crossing times vary widely across countries and, indeed, within them. Document checking, physical inspection, poor infrastructure, obsolete equipment and poorly trained staff are among the common causes of delay.
According to the analysis conducted by the World Economic Forum and Bain & Company, based on World Bank data on time required to import and export6, roughly US$ 6 billion7 is spent by the automotive industry on inventory-carrying costs for border crossing. By bringing all countries halfway to best practice, around US$ 2 billion could be cut from those costs.
Automotive Co., a global automotive manufacturer, provides an illustration of losses due to customs clearance and border-crossing delays in Russia. Reasons for delays include:
- Almost every truck is reweighed at the customs terminal and even minor deviations from declared weights lead to delays. For example, pallets shipped wet from Western Europe require reweighing when dry at the Russian border.
- Imports require a contract with the internal or external supplier in three languages, along with mandatory translation of technical documents into Russian.
- The trade description of goods for customs clearance are much more detailed than in other major markets, and product codes do not entirely match international standards.
The “Enabling Trade: Enabling Smart Borders” section of the Enabling Trade: From Valuation to Action report offers best practices for implementing solutions to improve border-crossing tools and processes.
II. Re-export barriers: Non-deductibility of import tariffs on re-exported parts and equipment pooling
Duty drawback regimes are a generally accepted means of lowering input costs; the regimes allow exporters to obtain a refund of customs fees paid on imported components that are subsequently exported.
The manufacturing process of the Renault Logan,8 for example, is carefully designed to minimize costs at each stage, allowing the production of an affordable car for various emerging markets. Renault uses a global hub in Romania to source parts, while assembly occurs in plants in Romania, Morocco, Russia and other countries, reducing exposure to high finished-vehicle import tariffs. Duty drawbacks are an essential component of this approach.
However, even where an entire vehicle platform is carefully designed to fit country-specific drawback regulations and processes, the administration is often problematic. OEMs are hindered from taking advantage of duty drawback due to costly application procedures, long delays, a lack of transparency and significant uncertainty about eventual refunds.
Equipment pooling presents unique challenges in the duty drawback process. The use of pooled equipment, notably pallets, crating and packaging, is widespread in the automotive industry. As components move along tiers of suppliers, manufacturers rent pooled equipment rather than disposing of containers or sending them empty back up the chain. Typically, the lessor ensures that equipment is well-maintained and available where needed. The flow of pooled assets is thus efficiently managed among many companies with similar needs.
Equipment pooling systems can have economic and environmental advantages as material is circulated and reused efficiently. However, border agencies do not always offer workable means for such equipment loops to cross international borders.
A typical solution, such as that proposed by US Customs and Border Protection, is to designate these materials as instruments of international traffic, effectively exempt from import duties. Similarly, aircraft, trucks and other vehicles are not repeatedly subjected to import charges on each leg of a regular route.
However, the Customs Convention on Containers and the Istanbul Convention both restrict their definitions of containers to units larger than one cubic metre. As many automotive components are shipped in smaller containers, it would be valuable to expand trade facilitation benefits to this equipment.
More generally, requirements to post bonds on temporarily imported containers are probably unnecessary for today’s supply chains. To ensure pooled equipment is indeed re-exported, border agencies generally require that it is registered, and either duties or a bond are paid, with reimbursement upon re-export. Two difficulties result:
- Uncertainty arises as to how the dutiable value of reusable packaging should be assessed (e.g. rental fees over the duration of a contract, depreciated book value).
- Packaging materials are sometimes only eligible for duty refunds when re-exported by the importing entity. Rather than repeatedly paying cumulated import duties, manufacturers bear the expense of recollecting and shipping out empty containers.
Through quantification work conducted by the authors, the cost of this wasteful returns process alone (for a fairly small and peripheral part of the automotive value chain) is estimated at about US$ 40 million in India alone.9
III. Unnecessary differences in regulatory standards between countries
Differences in regulatory standards have long hampered efforts to develop models for sale worldwide. Harmonization efforts have existed for decades, yet homologation for different markets remains a costly process, deterring trade in automotive parts and in new and used vehicles.
Substantial differences in standards between economies at very different levels of development are perhaps to be expected. However, small variations in standards between similar economies become barriers to trade out of proportion to their stated purpose.
The European Commission estimates that unnecessary standards barriers equate to a tariff of 10-20%,10 even for large markets. Based on analysis conducted by the authors of this report, this implies an additional annual cost of US$ 3 billion-6 billion11 on EU car exports to the US.
The Fiat 500 model12 illustrates the magnitude of inconsistencies in safety and regulatory standards. The Italian manufacturer decided to market this Fiat model in the US after commercial success in Europe. In a process overseen by Fiat engineers, despite a very similar appearance to the European model, the US-market Fiat was significantly retrofitted and re-engineered. Among other almost imperceptible modifications was the need to re-engineer the front and rear fascias, as European number plates are wider and shorter than the US standard. Engineers had to increase the size of the windshield wipers to meet US guidelines. Side lights are compulsory in the US, and additional protections are needed for passengers who may not be wearing seat belts. The overall homologation process can take up to 18 months.13
It is advised to first strive for mutual recognition of automotive-safety norms between the EU and the US, and then for harmonized environmental standards. The ideal scenario is a global safety standard. Regulatory compatibility is a key component of the Transatlantic Trade & Investment Partnership negotiations, yet there is considerable scepticism about the likelihood of coming to agreement across a wide set of complex issues. The approach of mutual recognition – recognizing that regulators have similar safety concerns – is perhaps more promising. This has been applied successfully across a broad range of issues within the EU.
After reaching agreement on the mutual recognition of safety standards, regulators should start working towards harmonized environmental regulations. This would imply both reconciling regulations around existing topics (e.g. carbon dioxide and particulates output) and getting “ahead of the curve” to create shared, future environmental legislation for the automotive industry (e.g. electric-vehicle battery recyclability).
IV. Lengthy dispute settlements encouraging short-term violations
The WTO’s Dispute Settlement Body allows a member country to protest a policy measure adopted by another member that is considered to be a breach of WTO agreements.
The procedure for settling disputes follows a detailed and structured set of milestones. The duration of the process varies, but according to the WTO, if a case runs its full course to a first ruling, it should normally not take more than 12-15 months even if the case is appealed. However, the agreed time limits are flexible and disputes can, in fact, take longer to be settled.
The perception within the automotive industry is that dispute settlement has become excessively lengthy, given the large economic and commercial impact of disputed measures. Multiple industry players assert that this provides an incentive to manipulate the system by temporarily breaching WTO agreements.
A current dispute (DS 462), filed in July 2013, has a number of nations opposing the Russian Federation on whether its newly introduced recycling fee discriminates against imported vehicles. The fee varies from US$ 700 to 7,00014, and is estimated to have created up to US$ 1.3 billion15 in cost, according to the authors’ analysis. At issue is whether importers are disadvantaged by the provision for local producers to collect and dismantle vehicles themselves rather than face the levy.
V. Lack of visibility and transparency on trade and investment
In the area of trade, many OEMs and parts suppliers are hampered by a lack of visibility on non-tariff barriers, and feel that the investment side of the trade equation suffers from a lack of transparency. The automotive sector has been an important provider of FDI, with countries and regions having competed fiercely to host this investment. This competitiveness has undoubtedly resulted in improvements in the business environment, with benefits seen in employment, fiscal revenue and skills transfer.
However, companies still report significant complexity in setting up and managing investments. Typically, a multiplicity of government agencies makes it difficult to find the relevant interlocutors. A single point of contact can significantly help to coordinate the issuing of licences and removal of bottlenecks when establishing new business.
Competition for FDI can drive states or regional governments to offer substantial financial incentives. While of course welcomed by investors, it is important to establish agreed national and international frameworks for these incentives. Subsequent reassessment of their legitimacy is clearly harmful to current investors, while instability deters future investment.
A frequently cited example is the fiscal war16 that broke out among Brazilian states vying to host production plants of European car manufacturers, as the constitutionality of agreed incentives was subsequently questioned. As the head of strategy of one of the European OEMs notes, “I’m not sure that the manufacturers were any better served by this sort of disjointed competition between regions within a nation for manufacturing plants. I feel like each OEM received vastly different information and commitments depending on [the] national or regional authority with which they were consulting.”
Both importers and exporters fear finding themselves confronted by a jungle of unforeseen hidden costs. According to the head of one national automotive trade association, “availability of information on non-tariff barriers is very limited and not centrally available.” The issue is all the more acute for smaller exporters or those from low-income nations, who suffer from a lack of resources to keep up to date with their evolution.
Various public sources have undertaken efforts to track and publicize these barriers. However, automotive-industry players, confronted by a growing number of overlapping and sometimes inaccurate databases, are confused. While multiple private agencies also work to compile the latest information for importers and exporters, the industry clearly feels that obtaining a reliable picture remains a significant challenge.
VI. Tax obstacles to free trade
Even within apparent free trade zones such as the EU, tax policies can create significant barriers to the efficient movement of goods along supply chains. Variations in value added tax (VAT) provide a prominent example (Figure 2).
Figure 2: Example of Tax Obstacles for Free Trade
CarCo is a global car manufacturer with a strong foothold in Europe, operating several plants in Country A within the EU and supplying other EU countries from these plants. The exported vehicles are transported by train and/or truck. To reduce inventory, handling and transport costs, manufacturers would prefer to store finished vehicles at the plant before distributing directly to dealerships.
However, VAT structures require that vehicles are first sent to storage facilities within each country, then invoiced prior to dispatch to dealerships. According to quantification work conducted by the World Economic Forum and Bain & Company, the additional costs created by this otherwise unnecessary stage are estimated to add around US$ 50 to a vehicle’s price, or a total of about US$ 600 million17 across the EU. As CarCo’s chief financial officer points out, “The physical distance from the factory to a dealer in the domestic country may be longer, in fact, than the distance to a dealer in country B, yet I’m not able to have the car funded and in my balance sheet until it clears the other side of the border, a border within the EU nation. This is just wasteful.”