EU to challenge cut-price car import duties

Date: 25/09/1997

THE European Union is poised to launch World Trade Organisation action against Brazil and Indonesia to stop them offering lower import duties to car companies which invest in plants in their countries.

EU trade sources claim that such investment incentives discriminate against companies which do not set up factories and that they breach WTO rules agreed during the Uruguay round of the General Agreement on Tariffs and Trade (GATT).

Officials say that formal consultations with Brazil are ongoing as a “first necessary stage” before a decision is taken on whether to ask for a WTO panel, and add that the situation in Indonesia “is more or less the same”.

Typical incentives include a 50&percent; reduction in the levies companies would normally face when importing cars into Brazil or Indonesia.

“This means a 50&percent; reduction in import duties [in Brazil] of 62&percent;. The significance of this is even greater when you also take into account 50&percent; discounts on local and federal duties,” said one official.

If consultations do not lead to the abolition of these tariff reduction schemes, officials expect member states to back calls for a formal WTO panel to investigate the cases.

They say European companies taking part in the Brazilian scheme include “virtually all of the EU's volume manufacturers”, while Mercedes, Volvo and Peugeot have investments in Indonesia.

Although a large slice of the EU industry is winning reduced import tariffs from the concessions, the Union is unlikely to drop its calls for Brazil and Indonesia to overturn them.

“It is matter of principle. If we settle for the trade benefits that some of our companies are enjoying, it would be as though we had been bribed. We cannot be seen by other members of the WTO to ignore rules when it suits us,” said the official, who claimed European industry would accept the end of special tariff rates as part of the process of opening up world markets.

“Industry will not be angry. They know what we are trying to do and why. They know it is unlikely that they will suffer in the long run. These schemes add uncertainty to the market and multinationals hate uncertainty,” he said.

But a lobbyist for the major EU car group PSA Peugeot-Citroen admitted that companies were more concerned about protecting lucrative trade privileges than about the upholding of WTO trade rules.

“Normally, it is clear that you should fight against WTO rules being broken. But it depends on the position of your company in a country. I suppose it is cynical, but we are businessmen. It is the same for other companies, not just Peugeot,” he said.

The tariff-cutting schemes introduced by Brazil and Indonesia are just part of a wider problem which is occupying the minds of EU trade officials in the car sector.

The Commission last week warned Ukraine to amend or abolish draft rules giving tax breaks to a venture involving Ukrainian company Avtozaz, US car giant General Motors and South Korea's Daewoo.

The venture, which aims to produce 255,000 cars a year, includes investment of 1.2 billion ecu in a local car plant and the setting up of a nationwide dealer and service network.

But the Commission sees problems with granting the GM and Daewoo venture reduced import duties and corporation taxes while at the same time increasing import duties for other car manufacturers.

Some other countries, such as Mexico, have offered similar tariff discounts designed to attract badly needed inward investment and improve long-run export potential once a car industry is built up. But since Mexico put its scheme in place before the Uruguay round of GATT outlawed the practice, it was granted a 'phase-out' period until the turn of the century.