“… The objective of the system is to ensure that industry is not taxed by the tariff where it is serving no protective function. …” Minister Beddall 1992.
TAXES can have different purposes. Income and corporate taxes are revenue raising. A carbon tax has the purpose of reducing greenhouse gas omission. Customs tariffs have the purpose of protecting domestic industries. It would seem obvious then that if there is no domestic industry to protect, there should be no customs tariff.
It is this line of thinking that is behind calls by various industry bodies to remove the Australian 5% customs tariff on imported motor vehicles. Australian production of passenger motor vehicles ceased in 2017. While there is still a domestic components industry, there is no Australian manufacture competing with new imported passenger motor vehicles.
There is no policy justification of the retention of the 5% customs tariff. In fact, it goes against existing policy. Australia has a system of allowing importers to obtain an exemption from paying customs tariffs on imports when it can demonstrate that there are no Australian manufacturers producing substitutable goods. These exemptions are called tariff concession orders. However, regulation is in place prohibiting the making of tariff concession orders for passenger motor vehicles. This prohibition is left over from time when there was an established Australian passenger motor vehicle industry.
The cost of the customs tariff on passenger motor vehicles is significant. The 2017-18 budget estimated the tax would raise $470 million in 2017-18, rising to $560 million in 2020-21.
As a revenue raising tax, it operates unfairly. Australia has free trade agreements with major car manufacturers such as Japan, Korea, Thailand and the US. Vehicles from these countries are not taxed. This makes sense if the tax is protectionist – the tradeoff is that Australian industry is granted improved access to the domestic market of the FTA partner. However, it is inequitable when the tax is no longer protectionist, but rather revenue raising.
Politically, it may make sense to retain the tariff while Australia begins negotiating a FTA with the EU. As a low tariff country, Australia’s negotiating position is stronger if it can dangle in front of the EU the removal of a $500 million tax on European vehicles.
If this is the end game, it will produce an inefficient result. Using FTAs as a way to reduce tariffs does not come without a cost. The exporter must ensure the exported product complies with complicated rules of origin. Given the complex global supply chains involved with vehicles, complying with FTA requirements can be costly. Further, using FTAs to reduce duty distorts future decision making regarding vehicle production. Production does not flow to the most efficient countries, it flows to the country that produces the best Australian landed cost outcome.
New vehicles are safer and have a reduced impact on the environment. These benefits should not be made more costly by reason of a tax that no longer has a purpose.
This article was originally published by the Freight and Trade Alliance (FTA).
* Russell Wiese is a customs and global trade partner at Hunt & Hunt Lawyers