Economic Policy and Infrastructure

Trade

Access to foreign markets is essential for companies in the automotive industry. Apart from the US market, growth mostly took place in the markets outside the triad countries in Eastern Europe, Asia, Latin America and other threshold countries with rising levels of motorization.

Importance of trade policy for industry and for Germany as an industrial location

Access to foreign markets is essential for companies in the automotive industry. Apart from the US market, growth mostly took place in the markets outside the triad countries in Eastern Europe, Asia, Latin America and other threshold countries with rising levels of motorization. Manufacturing in Germany also benefited from the growth in other countries. The export level for cars reached a level of 77 percent last year, a new record high. However, growth in production is also increasingly happening in other countries. Lots of countries expect a local manufacturing site. In addition, many countries continually issue regulations to support or even force companies into creating local production plants. These include high import duties, nontariff trade barriers and an officially imposed demand for local content. All this means that exports from Germany are becoming increasingly difficult.

In some cases India imposes more than 100 percent import duty on German cars. As a result, manufacturers are forced to produce even small quantities locally so as to gain any sort of access to the market. In Brazil, import taxes are imposed that can only be avoided by local production. This is an important part of Brazil’s automotive policy and presents a challenge to exports from Europe. The country’s “Inovar” program means that it has clearly gone down the local content route and the EU Commission has already applied for consultations involving the WTO since local content policies contravene the rules of the World Trade Organization.

Russia has also set itself the goal of achieving as much production within its own borders as possible and is making imports correspondingly more difficult. WTO obligations are only implemented slowly. For example, the recycling duty has been extended to local manufacturers and almost simultaneously local manufacturers in Russia were granted subsidies. It therefore comes as no surprise that exports from Germany to Russia have dropped sharply in recent times. Argentina has almost returned to a form of bartering and demands export verifications if companies import goods. The Ukraine has increased its duties to create an incentive for local production. Other countries with which the EU already has free trade agreements, such as South Korea, are also attempting to make imports more difficult, for example by imposing technical regulations.

All these measures have a single result – namely that they restrict exports from Germany, thus affecting German manufacturing. It should be noted in this respect that for several years overseas production has been rising much more quickly than domestic production. This naturally has a good deal to do with the dynamic growth in these markets. But protectionist measures are also contributing to this trend.

Economists agree that the cost-intensive establishment of new production sites should be based on potential market demand and should not be enforced by “artificial factors” that make exports to these countries more difficult or even impossible.

It may initially appear tempting for less-developed economies to impose import restrictions to support and protect the “growth” of domestic industry. In the long term, however, it has been shown many times that these artificial barriers to protect domestic sites result in outdated structures, completely overextended capacities and thus to massive cost disadvantages in global competition. This is why the VDA is campaigning globally for fair market access and a level playing field – which at the end of the day is a win-win situation for the global division of labor within the automotive industry.

Multilateralism and free trade agreements

The German automotive industry supports the conclusion of free trade agreements but has always spoken out in favor of the multilateral removal of trade barriers. Unfortunately the Doha Round has not yet resulted in the removal of duties and nontariff barriers, although progress was made recently at the 9th WTO ministerial conference in Bali. On December 7, 2013, the members of the WTO agreed a treaty to make trade easier, among other things. The agenda at the meeting also included the topics of development and agriculture. The main results of the 9th WTO ministerial conference are:

  • The trade facilitation treaty
  • To support measures for the remaining undeveloped countries including market access and origin rules
  • Flexible structure of national programs for food security
  • Exports should not be subsidized and therefore artificially reduced in price
  • Trade barriers on imports of agricultural products should be removed

According to a study by the “Peterson Institute for International Economics,” decisions to facilitate trade may result in an increase in global economic capacity of up to one billion US dollars. The study also states that they could secure 20.6 million jobs. These results can only be achieved, however, if the trade facilitations are also implemented effectively. It is therefore important that the “post-Bali agenda” is driven forwards. The WTO must be given more power as an institution and in its role of defending free trade. The aim of extensive, widespread duty reductions must also not be ignored. However, trade policy should not be mixed with other policies, such as environmental targets, as the latter can be achieved better by other means.

Until such time as a breakthrough can be reached in the WTO customs duty reduction negotiations, bilateral free trade agreements will remain an important method of improving market access. Furthermore, agreements with attractive partners also have a certain attraction, which means that they may have an extensive integration effect.

Dr. Martin Koers
Dr. Martin Koers Head of Department Economic and climate protection policy

Tel: +49 30 897842-350 Fax: +49 30 897842-600
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