G/C/W/487 16 April 2004 ORGANIZATION (04-1728) Council for Trade in Goods Original: English
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WORLD TRADE G/C/W/487 16 April 2004 ORGANIZATION (04-1728) Council for Trade in Goods Original: English REPLIES FROM PAKISTAN TO QUESTIONS FROM THE UNITED STATES1 ON PAKISTAN'S REQUEST (G/C/W/478) FOR EXTENSION OF THE TRANSITION PERIOD UNDER THE AGREEMENT ON TRADE-RELATED INVESTMENT MEASURES The following communication, dated 15 April 2004, is being circulated at the request of the delegation of Pakistan. _______________ 1. Pakistan's request appears to suggest that measures inconsistent with the TRIMs Agreement have been eliminated in all but 16 areas or programmes in the automobile sector. 1.a Is this reading of the request correct? Reply: It is correct that Pakistan has phased out all the deletion programmes of the engineering sector except the automobile sector. 2. We would like to understand better the character and effect of the measures covered by this request: 2.a What are the programmes to which the request refers: Are they specific measures, or are they specific measures or sets of measures that apply to a particular industrial component, facility, or sector? Reply: The request refers to the Deletion Programmes of the GOP available for the Automobile Sector. The Deletion Programmes are voluntary measures. The investor may opt for adoption of such measures and avail certain incentives. The programs only specify percentages of the components and parts to be deleted (Annex A) and do not specify or name the components/parts to be deleted. This option is also left to the Assembler or the Vendor to choose parts/components from the total basket for meeting the annual target. These components are supplied by the automobile Vendor Industry comprising of more than 400 units. Till recently these units were operating at below par capacities. Only the recent growth in the automobile sector has enabled these units to not only achieve full capacities but in most of the cases the capacities have been almost doubled. The new entrant as an assembler, however, has the 1 G/C/W/480. G/C/W/487 Page 2 incentive to begin the assembly at the deletion level already achieved two years earlier by the industry and catch up to the industry level within two years from the date of participation in the programme. 2.b How do these programmes work, and in what respects are they not consistent with the TRIMs Agreement? Reply: Under the programme, Industry Specific Deletion Program (ISDP) has been formulated with active participation of all the stakeholders and the individual units draw their Unit Specific Deletion Programs (USDP) as per their convenience with adherence to the specified targets. It entails a basket concept which allows the Original Equipment Manufacturers (OEM)s to select the parts for indigenization keeping in view the available technologies and vendor facilities. The programme is regulated by the Engineering Development Board (EDB), which oversees the implementation of the Deletion Programs. Beyond this, each participating unit has the freedom to chalk out its future USDP. It is the ‘mandated deletion’, i.e. the local content requirements, which perhaps may appear to be in-consistent with the TRIMs Agreement. As explained above the deletion policy has built in phase out mechanism. 2.c Which domestic and foreign producers are affected by these measures, and in what ways? Reply: Besides the whole of the vendor industry, the OEMs that will be affected for the measures are enlisted at (Annex B). The level of localization of parts is confined to production of minor low tech parts while the high tech and major engineering parts have not been developed much. A few joint ventures (Annex C) have however brought in some technologies which were made possible only though the implementation of these deletion programs. The OEMs are paying huge amounts to the local vendors for the development of parts. The contribution of vending industry in this regard is indeed substantial. So far, among the four major players, Indus Motors is producing about 740 parts, Pak Suzuki is producing approximately 1794, Honda Atlas Cars has localized about 699 parts and Dewan Farooq Motors Ltd. has commenced the assembly of Kia/ Hyundi vehicles at the same deletion threshold as others. Similar is the case of Motorcycles and other commercial vehicles. Auto Assembly units and Vendors assembling/manufacturing the five categories of vehicles namely Cars, Tractors, Motorcycles, Commercial Vehicles and Buses and Trucks are affected by these measures as explained above. This industry provides direct jobs to no less than 171,000 persons. The elimination of the local content requirement at this stage may not only mean loss of jobs to 171,000 families but also putting at risk investments to the tune of Rs. 98.00 Billion. The Units not participating in these two programs can not avail the concessionary tariffs on their imports of components and parts. G/C/W/487 Page 3 2.d What percentage of local content is currently required for each of the producers or industries or product categories affected by these measures? Reply: The average percentage of local content currently achieved by each of the five categories of producers is as follows: Product Cars 31– 60 % Tractors 47– 78 % Motorcycles 79– 83 % LCVs 36 – 59 % Buses/Trucks 39 – 41 % 2.e What kinds of local goods qualify to meet the local content requirements? Reply: All parts and components (critical & non-critical) manufactured out of local/imported inputs selected by OEMs/vendors depending on their indigenization priorities qualify to meet the local content requirements. 2.f Have any firms or business-people in the relevant sectors or importing products into Pakistan chosen not to participate in the TRIMs programme? Reply: The Deletion Programmes are voluntary in nature and are available to both domestic and foreign investors in the automobile sector engaged in the manufacture and supply of auto components and parts. Importers or any non-auto businesses are not involved in this programme and are free to import the goods of their choice at normal Customs Tariff. No automobile manufacturer/assembler has chosen to opt out from the TRIMs programme, as they are the principal user and beneficiaries. Some of the vendors are not participating in the Deletion Programmes because their inputs are either locally available or can be imported commercially at low tariff rates. 3. Have the measures covered by this extension request changed since they were notified in 1995? If so, please describe the changes. Reply: No principle changes have been made in the Deletion Policy since 1995. 4. Article 5.3 of the TRIMs Agreement gives the CTG authority to extend the TRIMs transition period for a Member that has “demonstrated particular difficulties in implementing” the Agreement’s provisions. In 2001, Pakistan identified several difficulties it had encountered in implementing the TRIMs Agreement. These included International sanctions, reduced foreign investment inflows and a general economic slowdown. Since that time, the sanctions have been removed, foreign investment inflows have increased; Pakistan’s economy has recorded excellent growth, and, according to Pakistan’s request, the auto sector has grown 49.8 percent during the 2002-2003 periods. G/C/W/487 Page 4 Reply: The above position is largely factual. Pakistan’s GDP has recorded a modest growth rate of 4.9% during 2002-2003. However the automobile sector has registered a higher growth rate of 49.8%, which is one-off phenomenon. This sudden increase in output was just as much externally induced in form of large foreign remittances, foreign aided economic relief and special debt relief in form of rescheduling directly improved the macroeconomic indicators, currency stabilization being one of them. This growth/ output will be very difficult to maintain if the programme is terminated immediately which for the present has given a boost to the Vendors production capacity utilization and reduced their unit costs. Based on this increased demand, the OEMs and Vendors have increased their capacities and provided employment to more people. At this crucial juncture, when some of the investment plans are still under implementation, if the local content condition is withdrawn, the assured volumes will fade away and newly made investments and newly provided employment will be in jeopardy. 4.a Please describe the "particular difficulties" that currently prevent the government of Pakistan from eliminating the remaining TRIMs measures. Reply: A survey report on "Pakistan – DEMAND SURVEY ON AUTOMOTIVE COMPONENTS" by the ITC/UNIDO/WTO (August 2002) had opined: "Like other industries, the development of automobile industry too depends on consistent government policies. Any sudden change in the official priorities certainly affects the long- term investment patterns. Inconsistent government policies and uncertain decisions not only discourage the foreign investment but also create insecurity among local manufacturers. The uncertain policies also affect the development of local industry in many ways. In last 10 years the auto industry has experienced 26 policy changes and imposition of duty tariffs, although the industry got due support from the Establishment of Engineering Development Board. However, the volume of production remains very low due to the adverse political and economic situation of the country. A consistent policy should be declared by the Government for at least 7-10 years in order to make the local auto parts manufacturers more focused and more certain." Duty free imports of vehicles under various schemes such as Yellow Cab Scheme, the Green Tractor Scheme etc. and import of old automobile and used parts and variation in import duties previously are some examples of inconsistencies. It is over the past three to four years that stable policies are being followed and the industry has experienced some respite through increased volumes. The particular difficulties and some adverse consequences are enumerated below; (i) Closure or substantial reduction in actual production capacity of over 400 vendor units manufacturing and supplying the automobile components and parts to the auto industry and operating under different technology transfer agreements.