Sunday, October 09, 2005

A.P. Tariff and Wealth Transfer

A couple of month ago, a friend bought a used Mercedes at a dealer. The car was imported from Japan and he has applied AP through MITI and got the necessary approval. So by the end of the year, he will be packing his Merc into a shipping container and wait for his car at a Malaysian port, pay the necessary custom duties before being able to drive it again on Malaysian road. The car cost him NZD13000 (about RM32500) and he estimated to pay about RM35000 in customs duties at port, making total cost about RM75000 after shipping. The estimated value of the same model car in Malaysia is about RM250000.
So his net worth will increase by RM175000 just like that!
Wealth creation? I doubt it.
Value and worth may go high or low depending on the scarcity and perceived value of the commodity, er, in this case a car.
A Mercedes brings along its prestige, history of reliability and perceived beauty, enhanced by the company’s investment in branding. If public perception changed, it is no longer viewed as desirable or ugly, and no one wants it, then the value might be worthless.
If we can import any car from any country we like, without having to pay any form of duties, would the value or price of car be as high? As an example, New Zealand has no tariff regime for imported cars, anyone can log on to internet, order and pay for a car in Japan, L.A or Bangkok, arrange for shipping to the nearest port. But to be able to drive it on NZ roads, the car must pass certain rules. As a result, car prices in NZ are relatively cheap. I bought a Mitsubishi Chariot 98 at an auction for NZD4000, about RM10000.
Any form of trade barrier; tariff, licensing, permit etc will only benefit those lucky few who has license or permit to import, or local producers protected by the trade barrier. The rest of the population - the have not, will have to pay higher prices and derive less benefit. To put it bluntly, this is a transfer of wealth from the unprivileged masses to the privileged few.
Why do I say so?
Lets take example from high car prices, as a result of these trade barriers. For a start, because the prices are higher (irrespective of the make, locally or imported), less number of people can afford to buy car – less economic benefit to the country. A deadweight loss. If the car were used as a taxi, the taxi charge would have to be higher, because the taxi driver has to pay for expensive car, as well as expensive taxi licence. This will go on for the rest of the economy, big companies, traders, farmers and producers, the small portion of expensive car and transportation cost will be passed on to the consumers. In the end, you and I, the ordinary blokes are paying to enrich the privileged few.
Much benefit will be accrued to the economy by removing trade barriers. For a start, car prices and other protected goods prices would start to fall. Our purchasing power would increase.
An analogy; if yesterday RM1 buy one bungkus of nasi lemak, and today the price of nasi lemak falls to RM0.90, then our purchasing power just increased 11%.
With lower prices of commodity and consumer goods, labour cost would also be relatively lower (workers wouldn’t have to demand higher wages) and we would become more efficient to be able to compete globally. There will be more wealth to be shared in the country, and creating wealth in the future. When people feel wealthy, they consume more and invest more. Keynesian cross shifts upwards, higher income and higher employment.
What about Proton, Perodua and other related car manufacturer and their suppliers? They will have to work harder for their profits, or shall I say they will have to earn their profits. When Malaysians become wealthier, they will demand better higher valued cars as well as expanding the market for cars. Instead of their share of car market shrinking, more Malaysians would be able to afford more cars, and buy new instead of second hand, expanding the market for car manufacturers. In the long term, if Proton and Perodua able to be competitive and efficient, they might be able to take on other global manufacturers.
When we are pressured to perform, we will improvise and perform. Look at those kids sitting PMR and any other exams, how could they study all night and all day?

1 comment:

Anonymous said...

Your views on the net results of tariffs and quantitative restrictions on
imports are sensible.Tariff and import restrictions will appear to "create
wealth" in the sense that the person successfully importing the car or stuff
will derive instant "wealth" represented by the market "value" of the
imported car or stuff less what the importer paid for the import. But then
the value thus derived is not real, but illusory in the sense that it is
only there courtesy of the tariffs and import restriction.

You remove the tariff and restrictions on import, the so called "value"
would not be there at all. So you can say that our AP issue is a means of
false wealth creation. But then again, the AP is meant to plug total leakage
in the economy should there be no AP and there is in fact free-for-all

We need not waste time debating on the merits or demerits of the AP matter
if we use the AP like the Singapore Government uses their COE, certificate
of entitlement to purchase imported cars. The difference is that here in
Malaysia, the AP is arbitrarily given to a privileged few. Whereas in
Singapore the COE is sold to the highest bidder. The net effect of the
Singapore model is that only the successful bidder get to purchase his car
for which he pays quite a sum. There is no "surplus" i.e. difference
between market price of the imported car and what the purchaser paid for the
vehicle. No artificial "instant wealth" as the case seem to be with our much
talked-about AP.

Let us say we place a starting price of an AP at RM1,000,000 each for the
privilege to import of say Mercedes 200 Kompressor (full specs.) model. If
the net price (AP +Taxes+Transport charges, road tax and insurance not
included) of that car is RM 1,150,000 paid for by the importer, that would
be the "value" of the car in the market.

He cannot make a quick buck, which seems fair and the government gets plenty
of revenue both from sale of APs as well as from tariff on the imported
Imagine if the total number of AP sold is 100,000 in one year, the proceeds
from the annual sale of AP alone to the government is RM100.billion -
sufficient to subsidise every national car produced in the country.

You will truly exhibit your conspicuous consumption, and proudly announce
to the public that you do have money when you drive around in your imported
Mercedes Benz.!

In that way, you are happy, the government makes the money and those Proton
and Produa owners would be equally happy too, presumably.