The EU-Egypt Association Agreement will gradually reduce tariffs on vehicles to reach zero per cent by the year 2019. Angy Essam explains the impact of this agreement on the car industry in Egypt and on the Egyptian economy as a whole
The EU-Egypt Association Agreement (EUEAA), a trade pact signed in 2001 and formulated to establish a free trade area between the EU and Egypt, implies reciprocal tariff liberalisation on industrial and agricultural goods exchanged between the signatories, as well as provisions concerning other areas. Customs have since been subject to an annual reduction of 5 to 25 per cent according to the nature of the product. As far as cars of EU origin are concerned, they should be selling free of duty on the Egyptian market by 2019.
The EUEAA came into force on 1 June 2004 after ratification by the Egyptian People’s Assembly and the member states of the EU. The agreement reflects the approach of the Barcelona Process and contains provisions with respect to the three pillars of the Euro-Mediterranean partnership, namely political dialogue; trade and economic integration; and social and cultural cooperation. Set to last for an unlimited period, its overall objective is to establish the appropriate framework for cooperation and partnership within the larger regional context and to build on the significant development of assistance and cooperation between Egypt and the EU. An essential element of the agreement is that relations between the parties will be based on a respect for democratic principles and fundamental human rights.
Other principles are a complete dismantling of customs duties and other charges having equivalent effect for Egyptian industrial products; no quantitative restrictions will apply; and there will be a gradual abolition of customs duties for European industrial products, according to a schedule of up to 10 years for the total elimination of customs duties for some European products. In addition there will be a reduction of 25 per cent each year for raw materials and industrial equipment starting from January 2004 to January 2007, and a reduction of 10 per cent for the first year and 15 per cent for each successive year for industrial supplies, semi-manufactured goods and construction materials starting from January 2007 to January 2013. There will also be a 5 per cent reduction for the first and second years and 15 per cent for each successive year on clothes, electrical domestic appliances, cosmetics, furniture and motor vehicles for the transport of goods, starting from January 2009 to January 2016.
As for vehicles, there will be a 10 per cent reduction each year for motor vehicles designed for the transport of people starting from January 2010 to January 2019, an issue that has pushed the German luxury car company Mercedes-Benz to declare that it will close its car assembly lines in Egypt while maintaining its after sales services. Mercedes also announced that it would produce components for other car companies while producing and exporting brake discs for brands produced by Daimler AG, the Mercedes mother company. This decision was taken on the Mercedes side because the gradual application of tariff reductions on European imported cars would make locally assembled Mercedes cars non-competitively priced.
Effat Abdel-Atti, head of the vehicle agents and distributions division at the Cairo Chamber of Commerce, says the gradual tariff reductions will harm not only Mercedes but will negatively impact other car companies such as BMW and Opel. He says Egypt has signed two other agreements besides the one with the EU, namely the global trade and Agadir agreements. These three agreements will lead to the same result, that is reaching zero tariff on imported European cars.
“The current imported vehicle tariff in Egypt is 40 per cent of the sale price on a vehicle less than 1600 cc and 135 per cent on vehicles of 1600 cc or more,” Abdel-Atti said. Every year this tariff will be reduced by 10 per cent until it reaches zero per cent, and Egypt will also apply this system to all the other countries in the agreement. Abdel-Atti added that owing to the economic instability that occurred after the 25 January Revolution, the Egyptian government was able to persuade the EU to delay the 10 per cent reduction in tariffs on vehicles due in January 2014. Abdel-Atti said this gradual tariff reduction would make imported high-quality European cars cheaper than vehicles assembled in Egypt, a fact that would negatively affect car assembly plants in Egypt and would in return have a bad effect on the Egyptian economy.
“We have 17 car assembly plants in Egypt. These plants employ other plants, so imagine how many workers, employees and engineers will lose their jobs and how many industries that are dependant on car assembly plants will stop. All of these will definitely harm the Egyptian economy,” Abdel-Atti said.
Abdel-Atti explained that in this way “we are committing the same fault we committed when we decided to apply the privatisation.” The solution, according to Abdel-Atti, lies in the hands of the Minister of Trade and Industry Mounir Fakhri Abdel-Nour, who should declare how the Egyptian government will handle the repercussions from large Egyptian car assembly investors. “The minister should explain to us how the Egyptian car industry especially, and the economy generally, will comply with this agreement without any kind of harm,’’ he said. He added that the minister should assure all the workers in car assembly plants that their factories would not be closed and that there would be an effective solution to the problem. “There should be a substitution because the ministry’s role is to encourage Egyptian industry and eliminate all the obstacles it faces instead of allowing 17 plants to shut down.”
The 17 car assembly plants provide work for 60 or 70 other factories, so many workers stand to lose their jobs if the car assembly plants shut down. “It is simply a disaster,” Abdel-Atti says. “The minister of trade and industry should meet automotive sector representatives to work out a plan for the coming period.”
He adds that the Egyptian government will also lose one of its main sources of income by cutting off vehicle tariffs. “I think the government will solve this problem to some extent by imposing other charges, for example development charges, to replace the income generated from car tariffs.”
Economics expert Hamed Morsy says abolishing vehicle tariffs will decrease the revenue from tariffs in general, and this in turn will negatively affect the state budget.
“The EUEAA gives participating countries the right to impose sales taxes to substitute tariff income,” Morsy says. He adds that Egypt does not have a vehicle manufacturing industry and is not capable of starting any such industry in the current economic climate. “All we have now is a car assembly industry that is threatened with closure as a result of the agreement. If the car assembly factories close then unemployment, which is already high, will increase significantly,” he points out. “Instead of finding solutions to the unemployment problem we will find the rate increasing.”
Morsy explained that the main advantage of the agreement would be that the Egyptian citizen would be able to buy a high quality Mercedes or BMW car at a reasonable price. “Without any doubt, the quality of the imported European Mercedes car will be remarkably higher than the locally assembled Mercedes car,” Morsy added, pointing out that locally assembled vehicles had recently been found to contain some defects.
According to Morsy, one of the main causes pushing Mercedes to withdraw from the market is that it fears losing one of its main characteristics, which is that people consider it an elite car. “After vehicle tariffs are cut Mercedes cars will be affordable to middle class people, and the company always says it is a luxury brand tailored for the rich, who will no longer feel unique when they find the brand owned by lower class people. This will drive them to shift to more luxurious brands like Jaguar, for example,” Morsy says. He predicts that once their price decreases Mercedes, BMW and the rest of the automotive companies serving the luxury market will increase their vehicle prices to keep them high even after tariffs are abolished. “Despite all of this, Egypt should comply with the terms of the agreement. But at the same time the government should take defensive action to benefit from this agreement, otherwise it will harm our economy,” Morsy added.
Ibrahim Adham, professor of economics at the Suez Canal University, said that despite the fact that the government would abolish vehicles tariffs it would most probably increase sales taxes.
“If the Egyptian government increase sales taxes this will compensate for the abolition of vehicle tariffs, and a lot of countries participating in the agreement have already done this,” Adham says. He believes that increasing sales taxes is the most suitable action for two reasons: first because vehicle tariffs are an important source of income for the government, who will have to find a substitute for it and the most suitable one is increasing the sales tax; and second, the government should find a source of funding for its petrol subsidy.
“The direct cost of vehicles in Egypt after calculating governmental subsidies for petrol and oil is extremely high, and this is in addition to the hard currency used in buying car parts. So increasing sales taxes to cover all these costs is a must,” he says.
Adham recommends that the government should enhance general transport infrastructure so as to lessen the number of cars on the roads. “In my view, the government should also decrease the taxes imposed on cars of less than 2,000 cc and increase it on cars above 2,000 cc to increase its fund sources,” he says.
