Cheaper Cars Makes Economic Sense; Cheaper Gas Doesn’t
An acquaintance asked me the other week when I was going to bash Pakatan Rakyat’s Manifesto. I don’t know that bashing would be the right word – I’d prefer “constructive criticism” – but I suppose this post will come close.
One of the hotter topics to arise in the last six months has been the price of cars. In Malaysia, of course, the national car industry has been protected by an excise duty on imports and non-“national” cars, even those assembled locally.
Wherever you stand on the desirability of industrial policy, this has had the obvious effect on car prices – cars in Malaysia retail for more than in other countries. For example, the Honda Civic in Malaysia ranges from about MYR120k to over MYR130k, but goes for between USD18k to USD28k in the United States.
At today’s exchange rates, that amounts to a difference of between about 50% to 110% higher. Even allowing for differences in on-the-road pricing (engine variations, insurance, accessories, trim level etc), the difference still amounts to a hefty chunk of change. In this region, only Singapore has higher prices.
The duties would be more defensible in economic terms if they were applied evenly, but they are not. Duties on national car makes are lower than on non-national car makes; CKD duties are lower than CBU. This severely distorts the market for autos, and constrains consumer choice. By skewing the market to local brands and locally assembled imports, competition is reduced and we get a loss of consumer welfare.
The flip side of the argument is that differential tax treatment allows for the development of local heavy industry. But our experience over the last thirty years is that the spill-over effects from a national car industry have been disappointing, and any cost-benefit analysis would suggest that the game isn’t worth the candle.
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