Afta: It’s Effect On Car Prices Before And After

Afta: It’s Effect On Car Prices Before And After

It is impossible for anyone to foretell future events. But when seven countries make a joint agreement to act in concert at a future date that is specified, it is possible to anticipate the consequences which would naturally follow from that agreement. It is also possible to avoid adverse consequences by using a little foresight. The Asean Free Trade Agreement (AFTA) calls for the removal of all or almost all customs duties that the countries now erect against imports as a barrier to foreign competition. These duties are put in place in order to assist the local industry. The consumer of the country is forced to pay a higher price than necessary for the protected goods. The extra money goes to the government as a form of revenue. It is in its effect, a sales tax on the buyer. This tax is an especially high burden for buyers of automobiles and motorbikes. It may be as low as 60% or as high as 300%. For automobiles, it is generally either 100% or 200%, with the 300% duty applying only to the automobiles with larger engines. Although the Malaysian government has extended the effective date by two years, the effects of the AFTA agreement are taking place in the car and motorbike market now. It is not necessary to wait until the day the tariff is actually removed to estimate the unseen forces which are occurring at the present time. It is not so easy to anticipate them fully so that prudent measures can be taken to offset them. However, a few basic facts are a dependable form of prescience.

An example of the way the new tariff structure will affect the Malaysian car and motorbike market can be given. In Singapore, there is a road tax of S$50,000 which applies equally to all cars, new or old. The payment of the tax must be made before the car can be operated on the roads of Singapore. It is dated from the day of first operation and is equally good for the full 120 months. With the passage of each month, a portion of the road tax becomes useless by an amount equal to 1/120 of the S$50,000, or S$417.

When the car is new, the payment of the road tax must be added to the price of the car. The car has an import value, which includes the customs tariff, to which must be added the road tax. This is the base price to the buyer, whether the car is a Proton Wira or a Rolls Royce. All cars lose the S$417 for each month of ownership. It is a form of legislated depreciation, which may be calculated exactly. Since automobiles are a declining asset, there is additional depreciation which occurs from the date of manufacture, and this depreciation is a certainty whether the car is used or not. To this must be added the depreciation associated with the wear from driving the car. In Singapore, then, there are three fundamental depreciation factors, which are aspects of car value and ownership. Over the ten years of the road tax, its depreciation may be graphed in a linear manner, which is just a way of saying the value declines in a straight line from the first day to the last. On the last day the car cannot be moved on the roads of Singapore. Effectively the car is worthless. It has only junk value for its usable parts. Only a payment of another S$50,000 will allow operation on the roads of Singapore, even if it is only to move the car to the dock under its own power. To avoid this prospect the car must be either towed or trailered to the export dock. The car must then be shipped to another country, which will allow entry on economical terms. In the last year the total monthly depreciation has a much steeper decline than it otherwise would have due to the loss of its use value at the end of the 120th month. In Malaysia the effect of the coming AFTA may be anticipated in much the same manner. A car that has a duty of RM100,000 today must be seen as depreciating towards the day the tariff is removed, though it is yet 60 months away. If the RM100,000 is seen as a linear depreciation over 60 months, then the monthly cost of owning this car between now and then is RM1,667 per month. If the effective date of the agreement for cars had not been delayed two years it would be almost double. The depreciation of a car between now and the date of the tariff removal is a factor which must be considered by anyone thinking of buying a new car today. It may well have the effect of forestalling new car purchases, whether locally produced or imported. AFTA has a negative effect on the car business generally. It affects banks, which derive profit from financing cars. Because this has been factored into the stock market, it explains why the share prices of firms in the business of automobile manufacturing, sales and financing are declining. These pressures are known as "dislocations".

Presently, if one owns an automobile that is registered in Malaysia, he would be affected by this dislocation. This is true whether the person owns a new car or an old one, and it doesn't matter whether the car was made in Malaysia or imported. It also applies to all new and used motorbikes and motor scooters. The value of all forms of transportation is now being reduced whether one is aware of it or not. It may be adversely affecting the person’s financial condition. It is impossible to calculate exactly the total amount of the monthly depreciation for a given car or motorbike between now and the date the tariff is fully removed. These are subject to various and variable market factors, but an estimate can be made by dividing the amount of the tariff paid on the vehicle by the number of months left until the tariff is removed, which is about fifty (year 2000) if the tariffs are removed on January 1, 2005. Therefore, if one buys a new imported car today, it will depreciate by 1/50th of the duty each month that the person owns it from now until then. This depreciation is in addition to the depreciation every declining asset suffers. For a car with RM50,000 in tariff the monthly depreciation due to AFTA will be about RM1,000. Since a car tends to also lose about half its purchase value in the same time, the total monthly depreciation would be in the neighborhood of RM1,500. This loss is not avoidable. It is an economic consequence of having the tariff barriers. Removal of  barriers which protect the local industry causes dislocations when they are removed. That the tariffs are removed in one lump sum tends to make the effect more pronounced than if they were removed gradually over a long period of time. The loss may be reduced, however. The owners of older cars (over ten years old) will not be affected as much as owners of newer cars. If the car is paid for, and one does not plan to change cars for the next ten years, the person may not notice anything. But car owners who have monthly payments will find that the car is depreciating faster than the principal balance owing. Cars which are returned to the lending institution for non-payment of the loan will not have re-sale value to recover the full amount of the outstanding loan. There will be widespread losses. A used car dealer with a yard full of vehicles has a big problem these days. To avoid a personal loss altogether, a person can sell his car before anyone notices what is happening. The prices of cars are still strong enough to avoid most of the consequences. If one buys a motorbike for RM5,000 instead, the loss would be minimal.

If the person then takes a taxi instead of opting for continued car ownership, the savings would more than pay for the expense. If one used public transportation you would not notice anything at all, and you would avoid the loss altogether. With the money saved, a person can buy a nice car after the agreement goes into effect. Or the person can use it to buy an older car now, thus avoiding most of the depreciation that owners of newer cars are suffering with.

Whether one chooses to take action or not, it is well to be aware of what is happening around us. If a person chooses to do nothing, and just wait, then at least he will have the satisfaction of knowing that he is aware and has consciously accepted the consequences.