Europeans demand Australia dumps car taxes

European Union trade negotiator, Cornelis Keijzer, insists the abolishment of Australia’s 5% import tariff on European cars and the 33%tax on luxury cars will be a key condition of any free trade agreement (FTA) with the EU. Trade Minister Simon Birmingham says the federal government will be open to requests from the EU with regard to tariffs on specific products, but any decisions will be made in the context of the broader deal:

Senior EU trade negotiator Cornelis Keijzer told The Age and The Sydney Morning Herald on Wednesday that Australia had agreed to discuss the removal of the automotive taxes which he argued would give local consumers cheaper cars and more choice.

During a visit to Melbourne on Wednesday Mr Keijzer described the EU push for the removal of the car tariff and luxury car tax as “one of the key demands on our side”…

Asked about the likelihood of Australia removing the tariff on European cars, Mr Keijzer said it was generally assumed that the tariff would “go to zero. The luxury car tax is something that they’ve said is on the table, but they’ve not made any concession on this so far.”

FTA aside, there is little justification in maintaining automotive protection now the domestic car industry is gone.

Specifically, Australia should:

  1. Remove automotive tariffs;
  2. Allow the importation of high quality used cars (so-called ‘grey imports’), such as occurs in New Zealand;
  3. Scrap the luxury car tax, which is set at 33% on the marginal cost of vehicles above $60,316, and serves as a defacto tariff initially designed to raise the cost of more expensive imports and make now defunct local models, such as the Fairmont Ghia, more attractive; and
  4. Scrap Australia’s unique technical standards in favour of global rules, thereby opening the market to a wider array of foreign cars and reducing overall import costs. Indeed, the PC report also recommended accelerating “the harmonisation of Australian Design Rules with the United Nations Economic Commission for Europe (UNECE) Regulations and the mutual recognition of other appropriate vehicle standards”.

Australia has already lowered or eliminated automotive tariffs with other various FTA partners, which has created efficiency distortions via trade diversion (i.e. when trade is diverted from a more efficient exporter towards a less efficient one). Removing tariffs on automotives for all trade partners would eliminate these distortions.

While there would obviously be negative revenue impacts from the above reforms, namely the abolition of tariffs and the luxury car tax, such concerns could be overcome by broadening the tax base through genuine tax reform. This way, the tax burden would be spread more evenly across the economy rather than concentrated on the car industry – a far more efficient and competitively neutral outcome.

Again, given the domestic car assembly industry has closed, the least the government can do is soften the blow on consumers and increase their spending power, while also encouraging greater vehicle safety by reducing the average age of Australia’s automotive fleet.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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