Professional Documents
Culture Documents
UNCTAD 2007-Elimination of TRIMS
UNCTAD 2007-Elimination of TRIMS
UNCTAD 2007-Elimination of TRIMS
ELIMINATION OF TRIMS:
THE EXPERIENCE OF SELECTED
DEVELOPING COUNTRIES
UNITED NATIONS
New York and Geneva, 2007
ii Elimination of TRIMs: The experience of selected developing countries
Note
UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to
foreign direct investment (FDI) and transnational corporations (TNCs). In the past, the Programme on
Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations
(1975–1992) and the Transnational Corporations and Management Division of the United Nations
Department of Economic and Social Development (1992–1993). In 1993, the programme was transferred
to UNCTAD, which seeks to further the understanding of the nature of TNCs and their contribution to
development, and create an enabling environment for international investment and enterprise
development. UNCTAD’s work is carried out through intergovernmental deliberations, research and
analysis, technical assistance activities, seminars, workshops and conferences.
The term “country” as used in this study also refers, as appropriate, to territories or areas; the
designations employed and the presentation of the material do not imply the expression of any opinion
whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country,
territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. In
addition, the designations of country groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgement about the stage of development reached by a particular country
or area in the development process.
The material contained in this study may be freely quoted with appropriate acknowledgement.
UNCTAD/ITE/IIA/2007/6
UNITED NATIONS PUBLICATION
Sales No. E.07.II.D.18
ISBN 978-92-1-112729-4
ISSN 1818-1465
Preface
After the stipulated transition periods had expired, 10 developing countries under article 5
of the agreement requested extensions of the transition period. By early 2007, virtually all
notified TRIMs had been abolished by the countries concerned. Before that, few studies had been
conducted to examine the implications of the elimination of TRIMs.
Against this background, the purpose of the present study is to shed new light on this
important area. It considers the experience of four countries that notified TRIMs in 1995:
Argentina, Mexico, Pakistan and the Philippines. In addition, it covers two countries that, when
the project was started, were seeking to accede to WTO: Ethiopia and Viet Nam, the latter of
which has now already become a WTO member. The idea of including these two countries was to
examine the likely impact of WTO accession on their use of selected TRIMs.
The study constitutes an extension of previous analytical work by UNCTAD in the area of
performance requirements, as reported in the World Investment Report 2003: FDI Policies for
Development: National and International Perspectives. It responds to the decision at the eighth
session of the Commission on Investment, Technology and Related Financial Issues (paragraph 5
of the report from that session) that: “The secretariat should also follow up on the work it has
undertaken in the World Investment Report 2003, especially on issues of special interest to
developing countries.”
Furthermore the São Paulo Consensus specified (paragraph 50): “UNCTAD should
continue its work on investment, as well as technology and enterprise development, and –
through policy analysis, technical assistance and capacity- and consensus-building – assist
developing countries in policy formation and implementation in this regard, taking into account
developments in the international economic environment. UNCTAD should pay particular
attention to the international dimension in order to identify the opportunities for and obstacles to
progress in economic development.”
The research has benefited from the financial support from the Development Account and
offers important findings for Governments and their agencies involved in investment-related
policymaking. For example, in the context of promoting linkages, many developing countries
have traditionally made use of TRIMs. The six country studies illustrate how the countries
concerned have been affected by the elimination of such TRIMs. They also consider possible
alternative ways to encourage linkage development.
In the context of this project, a panel discussion was organized in March 2006 during the
tenth session of the UNCTAD Commission on Investment, Technology and Related Issues and
back to back with the Annual Conference of the World Association of Investment Promotion
Agencies. During the same week, a workshop was organized to discuss the preliminary findings
of the case studies.
From a normative perspective, the notion that TRIMs should be disallowed, when
individual countries may consider them as useful tools of industrial development and
diversification, remains controversial. It has become even more so as developed economies have
resorted extensively to such schemes in order to, among other things, build domestic
manufacturing capabilities and stimulate production linkages.
The study suggests that the extent to which TRIMs have helped advance the objectives set
out has varied considerably, reflecting the specific economic conditions and policy environment
of the country using them. In some cases, they have played a role in spurring foreign companies
to source more locally in, or enhance their exports from, the host economy. In other instances, the
impact appears to have been small or even negative. The effectiveness of various TRIMs has
been influenced by a range of factors, including government capabilities, local absorptive
capacity of the workforce and domestic enterprises, and the extent to which measures used have
been compatible with other industrial and trade policies.
Acknowledgements
This publication was edited by Americo Beviglia Zampetti and Torbjörn Fredriksson
under the guidance of Anne Miroux. It is based primarily on background papers prepared for the
different chapters by Le Thuc Duc and Tran Hao Hung, Mamo E. Mihretu, David Romo Murillo,
Zafar Mueen Nasir, Rene E. Ofreneo, and Diana Tussie and Ignacio Labaqui.
The final version reflects comments received by Joachim Karl, Martha Lara, Dong Jae Lee,
Mina Mashayekhi, Theodore H. Moran, Thomas Pollan and Yunsung Tark.
Teresita Ventura did the desktop publishing for the paper. It was edited by Michael Gibson.
Contents
Page
Preface...............................................................................................................................................iii
Acknowledgements...........................................................................................................................iv
I. Implications of the elimination of TRIMs: A summary....................................................... 1
A. The TRIMs Agreement................................................................................................... 1
B. Case study findings ......................................................................................................... 5
C. Conclusions ...................................................................................................................... 9
II. Argentina ................................................................................................................................ 13
A. Introduction .................................................................................................................. 13
B. Regulatory framework and recent trends in FDI ..................................................... 13
1. Legal framework ................................................................................................... 13
2. Recent trends in FDI inflows ................................................................................ 14
C. Argentina’s TRIMs notifications ................................................................................ 16
D. The automotive regime and the MERCOSUR automotive policy........................... 18
1. The automotive regime ......................................................................................... 18
2. The MERCOSUR automotive policy.................................................................... 21
E. The automotive industry in Argentina....................................................................... 25
1. Phase 1: Domestic demand-driven boom (1991-1994)......................................... 27
2. Phase 2: Outward led-growth (1995-1998)........................................................... 27
3. Phase 3: Recession and adjustment (1999-2002).................................................. 29
4. After the crisis ....................................................................................................... 30
F. Assessing the impact of the TRIMs phase-out........................................................... 30
G. Conclusions .................................................................................................................. 35
III. Mexico..................................................................................................................................... 39
A. Introduction ................................................................................................................... 39
B. The Mexican regulatory framework ........................................................................... 39
1. Impacts of the use of TRIMs in industrial policies in Mexico............................... 39
2. Policies towards foreign investment and FDI inflows ........................................... 41
C. TRIMs notifications made by Mexico ......................................................................... 45
D. TRIMs impact assessment: the case of the automotive industry.............................. 49
1. Historical perspective............................................................................................. 49
2. Trade implications.................................................................................................. 52
3. Foreign investment implications ............................................................................ 54
4. TRIMs and their elimination.................................................................................. 57
5. Substitute policy measures for TRIMs................................................................... 59
E. Conclusions .................................................................................................................... 61
Annex to chapter III. TRIMs in the pharmaceutical and electronics industries ............. 63
IV. Pakistan .................................................................................................................................. 69
A. Introduction .................................................................................................................. 69
B. Investment policies and the regulatory framework .................................................. 70
C. FDI trends and sectoral distribution ......................................................................... 71
D. Trade-related investment measures in Pakistan ....................................................... 72
1. Pakistan’s commitments under the TRIMs Agreement ........................................ 74
Boxes
Figures
Tables
Many countries have used these Eventually, the issue of TRIMs was
performance requirements as a tool to included in the Uruguay Round of trade
maximize the benefits from foreign direct negotiations. However, as a result of the
investment (FDI). For instance, local content stark opposition, the TRIMs negotiations
requirements, which force foreign investors turned out as what some observers qualified
to purchase a proportion of their production as the “most frustrating and least productive
inputs from domestic sources, are generally of the Uruguay Round” because developing
designed to create local jobs and training, countries resented negotiations on the
promote the transfer of technology and matter, while developed countries had “little
ameliorate trade imbalances. leverage to force progress” in this area
(Croome, 1995: 138). Not surprisingly, the
Throughout the 1970s, Governments final agreement did not break any new
of developing and developed countries ground and essentially restated existing
resorted to performance requirements as a GATT obligations. However, even that can
means to counteract the trade distorting be considered an important result from the
practices of TNCs and to promote economic developed countries’ perspective, as it put
development and growth. These were the spotlight on TRIMs, which previously
particularly common in the automotive, did not appear to fall within the jurisdiction
chemical and petrochemical, and computer of GATT, and effectively pushed their
and informatics sectors (UNCTC, 1991). elimination – eventually – by means of
actual or threatened dispute settlement
Foreign investors often objected to action. Furthermore, through its illustrative
the use of performance requirements, which list of prohibited measures, the TRIMs
they perceived as unwelcome interference Agreement contributed significantly to more
with their investments. Pressure from them legal clarity.
led the United States Government to put the
issue of performance requirements on the The Agreement on Trade-Related
agenda of the 1982 General Agreement on Investment Measures (the TRIMs
Tariffs and Trade (GATT) ministerial Agreement) stipulates that certain measures
meeting. However, within the GATT there adopted by Governments to regulate FDI can
was a deep division between the countries cause trade-restrictive and distorting effects.1
which supported the United States in their The agreement is only concerned with the
quest to have TRIMs placed on the agenda trade effects of investment measures. It is
2 Elimination of TRIMs: The experience of selected developing countries
not intended to deal with the regulation of concerning service industries are addressed
investment as such and does not impact by the General Agreement on Trade and
directly on WTO members’ ability to Services GATS, which does not contain
regulate and place conditions upon the entry explicit rules dealing with TRIMs, although
and establishment of foreign investment.2 these may be subject to specific negotiated
However, the TRIMs Agreement may have commitments.
an effect on limiting a country’s policy
options in regulating foreign investment, Table I.1. Prohibited TRIMs contained in the
once admitted, through the obligations to agreement’s annex (illustrative list)
eliminate prohibited TRIMs measures or Local The purchase or use Internal
Para.
through the threat of dispute settlement content by an enterprise of measure in
1(a)
action. requirements products of violation of
domestic origin or GATT art. III
from any domestic (national
The stated objectives of the TRIMs source treatment)
Agreement include not only the promotion Para. Trade An enterprise’s Internal
of the expansion and progressive 1(b)
balancing purchase or use of measure in
requirements imported products is violation of
liberalization of world trade, but also the limited to an GATT art. III
facilitation of investment across international amount related to (national
frontiers.3 The TRIMs Agreement prohibits the volume or value treatment)
of local products
the application of certain investment that it exports
measures related to trade in goods to Para. Import General import Border
enterprises operating within the territory of a restrictions restrictions related measure in
2(a)
member. It should be noted that the TRIMs generally; to product used in violation of
local production; GATT art. XI
Agreement is concerned with discriminatory (quantitative
treatment of internationally trade goods and Trade Import restrictions restrictions)
quantitative restrictions, and is not balancing related to the
requirements enterprise’s volume
specifically concerned with the treatment of or value of local
foreign legal or natural persons. Thus, the production that it
basic substantive provision in article 2 of the exports
TRIMs Agreement prohibits the application Para. Foreign Measures that Border
exchange restrict an measure in
of any trade-related investment measure that 2(b)
balancing enterprise’s access violation of
is inconsistent with the GATT’s provisions requirements to foreign exchange GATT art. XI
on national treatment or the elimination of for imports to an (quantitative
amount related to restrictions)
quantitative restrictions.4 In particular, an the foreign
illustrative list annexed to the agreement exchange inflows
identifies certain measures that are attributable to the
enterprise
inconsistent with article III.4 or article XI:1
Para. Domestic The exportation of Border
of GATT 1994.5 sales products is measure in
2(c)
requirements restricted in terms violation of
These cover essentially the following of particular GATT art. XI
products, volume or (quantitative
types of measures: local content value of products, restrictions)
requirements, trade-balancing requirements, or volume or value
foreign exchange-balancing requirements of local production
and restrictions on exportation (table I.1). Source: UNCTAD.
The agreement bans not only TRIMs that are
obligatory in nature, but also those whose
compliance is necessary in order to obtain an While the measures illustrated in the
advantage.6 It applies only to investment annex to the agreement frequently arise in
measures related to trade in goods. It does the context of foreign investment policies,
not cover trade in services. Measures there is nothing in the TRIMs Agreement to
suggest that these rules do not apply equally basically limited to the requirements
to measures imposed on domestic included in the TRIMs Illustrative List and
enterprises. For example, a local content does not extend to export performance
requirement imposed in a non-discriminatory requirements.9
manner on domestic and foreign enterprises
is inconsistent with the TRIMs Agreement Article 5 of the TRIMs Agreement
because it involves discriminatory treatment contains provisions for notification of and
of imported products in favour of domestic for transitional periods for the elimination of
products, regardless of whether there is any measures inconsistent with the agreement
discrimination between domestic and foreign existing at least 180 days prior to entry into
investors with regard to the imposition of the force of WTO. Under article 5.1, States that
requirement.7 were members of WTO on 1 January 1995
were required to notify to the Council for
Export performance requirements are Trade in Goods, within 90 days after the date
another type of performance requirement of entry into force of the WTO Agreement,
often imposed on foreign investors. For any TRIMs that were not in conformity with
various domestic economic policy reasons, the agreement.10 With regard to transition
these force foreign affiliates to export a periods, developed, developing and least
larger share of the local output than that developed countries were given,
motivated by purely profit considerations. respectively, two, five and seven years from
Export performance requirements were a the date of entry into force of the WTO
sticking point in the Uruguay Round of trade Agreement to eliminate notified TRIMs
negotiations which led to the TRIMs (article 5.2). Furthermore, upon request, the
Agreement, with many developed countries transition period could be extended for
insisting on their inclusion and many developing and least developed countries
developing countries resolutely rejecting it. that demonstrated particular difficulties in
In the end, neither the TRIMs Agreement implementing the provisions of the
nor any other WTO rules forbade the agreement (article 5.3).
imposition on foreign investors of
requirements to export a minimum amount Several developing countries
of domestic production. forcefully stressed the difficulties in meeting
the agreement’s obligations. As a result, the
An important dispute settlement WTO General Council meeting in May 2000
panel ruling had clarified the applicability of agreed to “direct the Council for Trade in
GATT to the issue in 1984 in a case pitting Goods to give positive consideration to
the United States against Canada.8 The panel individual requests presented in accordance
decision confirmed that existing obligations with article 5.3 by developing countries for
under GATT were applicable to performance extension of transition periods for
requirements imposed by Governments in an implementation of the TRIMs Agreement”.11
investment context insofar as such At the Doha Ministerial Conference, WTO
requirements involved trade-distorting members took note of the actions taken by
measures. At the same time, the panel’s the Council for Trade in Goods and urged
conclusion that export performance that council to give positive consideration to
requirements were not covered by GATT possible requests for extension by LDCs.
also underscored the limited scope of The relevant part of the Doha
existing GATT disciplines with respect to Implementation Decision reads: “[The
such trade-related performance Ministerial Conference] urges the Council
requirements. The subsequent Uruguay for Trade in Goods to consider positively
Round negotiations did not change the requests that may be made by least
situation. The coverage of WTO rules is developed countries under article 5.3 of the
TRIMs Agreement or Article IX.3 of the proved and views continuing to diverge.17
WTO Agreement, as well as to take into The critics stress that “domestic content
consideration the particular circumstances of requirements, and the implicit trade
least developed countries when setting the protection associated with imposing such
terms and conditions including time- requirements, do not create efficient local
frames.”12 After protracted negotiations, industries or promote host country growth.
extensions were granted to Argentina, … [R]eaffirming the TRIMS Agreement and
Colombia, Malaysia, Mexico, Pakistan, the adding multilateral prohibitions on joint
Philippines, Romania and Thailand until the venture and technology sharing requirements
end of 2003,13 subject to certain criteria, would serve the self interest of developing
such as the submission of a phase-out plan countries” (Moran et al., 2005).
for the TRIMs measure.
However, not all agree with this
Beyond the implementation view. It is also argued that “well-conceived
difficulties that prompted the requests for performance requirements with clear
extension of the transition period, the TRIMs objectives and effectively enforced are not
Agreement has remained controversial in only able to meet their objectives but may
several respects. Some developing countries also bring significant favourable externalities
have advanced proposals for the to the host countries” (Kumar 2003: 72).
modification of the agreement, most recently Furthermore, it is argued that the abolition of
in the context of the Work Programme on TRIMs may reduce the host country
Special and Differential Treatment14 and of Government’s bargaining power and hence
the Decision on Implementation-Related the potential gains derived from FDI. In
Issues and Concerns. Discussions in this area particular, the TRIMs Agreement is seen to
remain very difficult.15 However, at the 2005 impose “restrictions on government actions
Hong Kong (China) ministerial meeting, but no reciprocal restrictions on the actions
WTO members agreed that LDCs shall be of multinational enterprises” (Morrissey,
allowed to maintain, for seven years, 2001: 69). As a result, many developing
existing measures that deviate from their countries have resisted the obligation to
obligations under the TRIMs Agreement. eliminate TRIMs, since they are regarded as
For such measures, a notification period of policy instruments necessary to encourage
30 days was set. This transition period may industrialization (Hertel et al. 2002: 113–
be extended by the WTO Council for Trade 140). Moreover, as the aggregate trade
in Goods under the existing TRIMs impact of performance requirements has
Agreement procedures. Furthermore, LDCs been found to be limited, foregoing this
shall also be allowed to introduce new bargaining tool, which may be useful in
measures that deviate from their obligations specific circumstances, is perceived as
under the TRIMs Agreement. The duration detrimental in dealings with TNCs.
of these measures will not exceed five years,
renewable subject to review and decision by Hence, from a normative perspective,
the Goods Council subject to a general the notion that TRIMs should be disallowed,
phasing-out deadline by the year 2020.16 when individual countries may consider
them as useful tools of industrial
Debates and disagreements on the development and diversification, remains
relative economic merit of TRIMs, as well as controversial. This has become even more
the appropriateness of banning a particular so, as developed economies have resorted
subset of investment measures, do not show extensively to such schemes in order to,
any signs of abating. From an empirical among other things, build domestic
perspective, the argument inevitably results manufacturing capabilities and stimulate
in trade distortions not being conclusively production linkages.
life of TRIMs, albeit now only in the context prominent position to source, especially for
of regional trade, which is important the United States market.
particularly in the case of the Argentinean
automotive industry. Regionalization was However, during the past five years,
able to offset the full blow of the expected the Mexican auto industry has experienced a
phase-out. But substitution naturally led to a deteriorating position reflected in decreased
new scenario of regionally more active levels of production, exports and
negotiations. employment, combined with increased
imports. In the end, improving this crucial
The Mexican case provides industry in a post-TRIMs world will require,
interesting lessons regarding the application the study argues, deepening the local
of TRIMs. These were widely used in supplier base and targeting specific
several sectors during the import-substituting automotive TNCs for quality or for their
industrialization efforts that took place after willingness to build unique models in
World War II. Their application indeed Mexico, which can then be exported to other
contributed to the development of the markets.
country’s industrial base by incorporating
Mexican firms into the production chains of Pakistan has traditionally used some
TNCs. For most of the industrial sectors TRIMs to develop its manufacturing
where domestic content requirements were industry as well as protect it from
applied (e.g. the pharmaceutical and competition. The country maintained links
electronics industries), this result, however, between certain tariff exemptions and local
proved to be unsustainable. Once these content requirements in a number of
requirements were eliminated, most of the industries, including automobiles, electronic
contractual relationships disappeared and the goods, electrical goods and machinery. It
ambitious domestic-content levels set in notified to WTO the elimination of most of
government plans were never reached. those TRIMs in the year 2005. The reason
for continuing some of them – especially the
At the close of the Uruguay Round, deletion programme – was their deemed
the only remaining prohibited TRIMs were usefulness. The Government believed that
local content and trade-balancing the industries which opted for the
requirements affecting the auto industry. For programme had significantly benefited from
this industry, domestic content rules had it, while the country as a whole also
become irrelevant, since actual levels were benefited through job creation and support
well above those required by the regulation. for underdeveloped areas.
Hence, these were generally ineffective in
achieving long-term and sustained By 2005, most TRIMs notified had
improvements in the performance of been eliminated. Pakistan had removed all
companies that at some point benefited from programmes relating to machinery and
these measures. Trade-balancing domestic appliances. Difficulties were,
requirements, on the contrary, had earlier however, encountered in phasing out a
proven to be pivotal in influencing the number of programmes related to the
decision of major automotive TNCs to automotive industry. Slow movement on this
include Mexico as an export platform. In this front aimed to help local vendors prepare
case, they had a positive effect by leading to themselves to compete in domestic and
a change in corporate strategies. international markets. According to the
Furthermore, trade-balancing requirements Government, TRIMs in this industry have
had a role to play not only in reducing trade among other things contributed to
deficits, but in placing Mexico in a more employment creation, technology transfer,
foreign exchange savings, and increased
foreign and local investment. The Pakistani out, both the car assembly and car parts
automobile industry is now starting to move industries were hit by massive closures and
into the export market. It is expected that it layoffs.
has reached a level of competitiveness that
should enable it to stand on its own feet There have been only a few winners
without government support in terms of in the post-TRIMs era – the TNC-assisted
tariff and non-tariff measures. The overall producers of parts, e.g. wire harness and
effect of the phasing-out of the TRIMs may transmission, destined for the global market
then spur the industry to enhance its – and those involved in the assembly of
competitiveness even further. certain vehicle models selected by the TNCs
based on their own regional and global
The history of the car industry in the division of labour. Overall, the “progressive”
Philippines is also telling with regard to the development of the auto industry, the study
role played by TRIMs. The Philippines has contends, was doomed by the rapid
no car industry of its own. What exists is an liberalization/deregulation programme,
auto assembly industry utilizing mostly poorly-coordinated local content instruments
imported parts in completely-knocked-down and the general lack of a dynamic and
or semi-knocked-down packages. In 1973, coherent industrial policy to support market
the Government launched a programme for development, learning and innovations,
the “progressive” development of cars, which are all necessary to promote
trucks and motorcycles. It mandated technological deepening in the industry.
investors to observe two TRIMs: increased
local content usage and payment of The case study of Ethiopia, a country
completely-knocked-down imports, partly in negotiations to accede to the WTO,
through export earnings – auto-related or provides a different picture compared to the
not. The incentive to the original participants case of Viet Nam described later, as the
– three Japanese joint ventures and two country has hardly used any TRIMs.
American subsidiaries – was a ban on the Ethiopia has been implementing major
importation of completely-built-up (CBU) policy reforms since 1992. These reforms
units. These TRIMs were still in force at the include the liberalization of trade policy, the
end of the Uruguay Round and continued privatization of public enterprises, financial
until mid-2003. sector reforms, and deregulation of prices
and exchange rate controls. The regulatory
However, three decades of TRIMs regime governing investment in Ethiopia has
failed to produce a Filipino car. The also undergone significant changes as part of
programme ran into difficulties in the first the reform process. The present FDI regime
half of the 1980s due to the debt crisis and is based on a series of investment
the ensuing decline in domestic demand. proclamations issued between 1996 and
Subsequently, it was watered down as a 2003. These laws establish (a) which
result of a broad drive to liberalize the industries are open to FDI; (b) the financial
investment and trade regime. The limits and requirements for FDI; (c) the
completely-built-up ban was replaced by monitoring and reporting requirements; and
tariff protection, which was initially at (d) the available financial incentives. As part
100 per cent but rapidly went down to of the investment regime reform, the
40 per cent by 1993; however, tariffs on Ethiopian Government has limited the use of
completely-knocked-down imports fell performance requirements, including
faster, from 30 per cent in the 1980s to TRIMs, to better attract FDI inflow.
20 per cent in 1993–94 and subsequently, to
10 per cent in 1995 and 3 per cent in 1996– In a further attempt to anchor its
97. When the Asian financial crisis broke trade and investment policy reform process,
Ethiopia in 2003 applied for WTO FDI inflows or affect the quality of the
membership. As part of the accession investments.
package, Ethiopia will likely be required to
commit itself to implementing the TRIMs
Agreement. As Ethiopian FDI policy does Viet Nam is a country that over time
not explicitly require foreign firms to meet has applied a large number of TRIMs.
specific performance goals or guidelines, for Hence, this policy area assumed high
instance, in terms of export, foreign relevance in the country’s WTO accession.
exchange, or local content levels in The most important set of measures includes
manufactured goods, WTO commitments in the local content requirements, which were
this area should not pose a particular used as a condition for licensing foreign
challenge. Ethiopia should also enjoy the investment projects in manufacture or
flexibility provided for in the Hong Kong assembly of automobiles, motorcycles and
(China) declaration of December 2005 electronic products. For the investments in
mentioned above. cane sugar, milk and vegetable oils
processing, the requirement has instead been
The Ethiopian case also confirms the the development of local sources of raw
recent general decline in the incidence of materials. There have been schemes of
performance requirements and the use of preferential tariff rates dependent on the
TRIMs in Africa. According to trade policy ratio of local content that apply to both local
reviews of different African countries and foreign investment enterprises in
conducted by WTO, the majority of African automobile, motorcycle, mechanical, electric
countries do not maintain any TRIMs at and electronic products or spare parts. As
present, with a few possible exceptions. This supporting devices to the local content
trend, which also goes beyond Africa, can be requirements, non-tariff barriers and excise
explained by several factors: (a) the need to taxes have also been used. Many other
comply with WTO commitments; (b) the TRIMs in Viet Nam served to sustain
participation in regional integration and foreign exchange reserves and control the
bilateral agreements, which has led certain trade balance. For instance, according to the
countries to phase out performance “foreign exchange surrender requirement”,
requirements; and (c) the increased the foreign exchange earners had to sell to
competition countries face for FDI inflows. State banks a specified portion of their
earnings. Furthermore, foreign investment
enterprises, producing specified items, must
In the Ethiopian context, however, export at least 80 per cent of their outputs.
the limited use of TRIMs is not due to Most of the TRIMs have either been totally
Ethiopia’s international commitments. Nor is eliminated or reduced in their scope of
it a result of Ethiopia’s participation in application. Others are loosely implemented.
regional integration and bilateral agreements.
It is more the effect, the study argues, of the The case study found that TRIMs
policy shift in 1991 away from central mostly failed in the automobile industry.
planning. In the context of the new policy Local content ratios have not been achieved
direction, encouragement and promotion of and the automobile spare parts made in Viet
investment have become necessary to Nam are of low quality. In the motorcycle
accelerate the economic development of the industry, however, foreign enterprises
country. In Ethiopia, therefore, the reason for delivered on their local content
the limited and almost non-use of TRIMs is commitments. Particularly, Honda–
linked to the desire to avoid any measures Viet Nam has achieved a high local content
that would have a deterring effect on inward ratio. Moreover, it has developed strong
FDI. TRIMs are not applied for fear that linkages with local firms. At the same time,
performance requirements may discourage it successfully competes with Chinese-made
products and has become an important TRIMs were maintained in this industry long
exporter. Some other motorcycle makers in after they had been dismantled in other
Viet Nam are also strong competitors. On industries. In the two countries that were in
the other hand, the effect of TRIMs on the WTO accession negotiations at the time of
production of electronics items has been this study, the situation was somewhat
mixed at best. While electronics exports different. Ethiopia – like most African
might have become stronger than without the countries – generally had few TRIMs,
TRIMs, linkages are weak. Local content is whereas in Viet Nam TRIMs have been
very low in exported products and carries applied in a range of industries, including the
little value added. The obligation to develop automotive industry.
local raw materials for processing milk,
sugar and vegetable oils made foreign Firm conclusions are difficult to
enterprises in Viet Nam less competitive. draw from the studies. The extent to which
Failure of this regulation is most apparent the TRIMs have helped advance the
for sugar cane production. The high cost of objectives set out has varied considerably,
cane input invariably leads to significant reflecting the specific economic conditions
differences between world and domestic and policy environment of the country using
sugar prices. them. In some cases, TRIMs appear to have
played a role in spurring foreign companies
Furthermore, the study maintains, to source more locally in, or enhance their
TRIMs have not resulted in the expected exports from, the host economy. The auto
technology transfers to domestic firms. industry in Mexico and the motorcycle
Overall, they have had moderate positive industry in Viet Nam are cases in point. In
impacts, if any, on a small group of other instances, the impact appears to have
industries, and these are more temporary been small or negative. The effectiveness of
than permanent. The possible exception various TRIMs has been influenced by the
might be the motorcycle industry, which has clarity of set objectives, the capability of the
become quite competitive and for which Governments to implement a given policy,
TRIMs elimination should cause little the local absorptive capacity of the
disruption. The impact of the abolition of workforce and domestic enterprises, and the
TRIMs may also not be important on the extent to which measures used have been
local electronics industry, but will compatible with other industrial and trade
significantly affect Vietnamese enterprises in policies.
the automobile industry, which will likely
undergo a major restructuring. This is even For example, where the application
more so for cane sugar producers, where of local content requirements have not been
major changes of ownership seem accompanied by efforts to boost the
unavoidable. competitiveness of the local enterprise
sector, the removal of the requirements and
C. Conclusions associated trade protection is likely to force
local suppliers out of business. Thus, the
In most of the cases reviewed, findings of this research confirm those of
TRIMs notification concerned just a few many previous studies, as summarized in an
selected industries, most commonly the earlier UNCTAD publication (UNCTAD,
automotive industry. For many developing 2001: 169):
countries, the auto industry has been seen as
a strategic industry for the promotion of “Where [local content requirements are]
industrialization, employment generation used carefully, with offsetting measures
and technological upgrading. In Argentina, to ensure that suppliers face competitive
Mexico, Pakistan and the Philippines, pressures and have access to the
Notes
Canada - Administration of the Foreign
1
For a recent commentary on the Agreement, see Investment Review Act (“FIRA”) (BISD
Lara de Sterlini, 2005: 437–483. See also 30S/140, 1984).
9
Koulen, 2001. However, it is important to stress that a
2
This is in contrast to the General Agreement on requirement to export is inconsistent with article
Trade in Services (GATS), which covers some 3.1(a) of the WTO Agreement on Subsidies, if it
aspects of investment liberalization, although is combined with a subsidy within the meaning of
limited to the area of services. article 1 of that agreement.
3 10
See TRIMs Agreement Preamble. The WTO General Council in April 1995 decided
4
“The TRIMs Agreement essentially interprets that States that had not been members of WTO
and clarifies the provisions of article III (and also on 1 January 1995, but were entitled to become
article XI) where trade-related investment original members within a period of two years
measures are concerned. Thus, the TRIMs after 1 January 1995, should make notifications
Agreement does not add to or subtract from those under article 5.1 within 90 days after the date of
GATT obligations, although it clarifies that their acceptance of the WTO Agreement. All
article III:4 may cover investment-related notifications pertaining to the TRIMs Agreement
matters.” Report of the Panel, European are recorded in Report (2005) of the Committee
Communities – Regime for the Importation, Sale on Trade-Related Investment Measures, G/L/752,
and Distribution of Bananas, WT/DS27, 25 of 25 October 2005.
11
September 1997, para. 7.185. WT/GC/M/55, annex II, the third bullet point.
5 12
Other measures beyond those specifically listed Section 6 of the Decision of 14 November 2001
could be claimed to be TRIMs in violation of on Implementation-related issues and concerns
article 2.1 of the TRIMs Agreement. This would (WT/MIN(01)/17 of 20 November 2001).
13
entail showing that the measure at issue is a 30 June 2003 in the case of the Philippines and
TRIM inconsistent with the provisions of article 31 May 2003 in the case of Romania.
14
III or article XI of GATT 1994. Under Paragraph 44 of the Doha Ministerial
6
The Report of a WTO Panel, Indonesia - Certain Declaration.
15
Measures Affecting the Automobile Industry, Report (2005) of the Committee on Trade-
WT/DS54/R, WT/DS55/R, WT/DS59/R, Related Investment Measures, G/L/752, of 25
WT/DS64/R, 2 July 1998 made it clear that “A October 2005.
16
simple advantage conditional on the use of Doha Work Programme, Ministerial Declaration,
domestic goods is considered to be a violation of WTO doc. WT/MIN(05)/DEC, 22 December
article 2 of the TRIMs Agreement even if the 2005, annex F.
17
local content requirement is not binding as such” For a review of the evidence, see Trade-Related
(paragraphs 14.88–14.91). Investment Measures and other Performance
7
On this point see Panel Report on Indonesia – Requirements – Joint Study by the WTO and
Autos, paragraph 14.73. UNCTAD Secretariats, G/C/W/307, 1 October
8 2001 (Part I) and G/C/W/307/Add.1, 8 February
The panel considered a complaint by the United
States regarding certain types of undertakings 2002 (Part II). See also UNCTAD (2003).
which were required from foreign investors by
the Canadian authorities as conditions for the
approval of investment projects. These
undertakings pertained to the purchase of certain
products from domestic sources (local content
requirements) and to the export of a certain
amount or percentage of output (export
performance requirements). The panel concluded
that the local content requirements were
inconsistent with the national treatment
obligation of article III:4 of the GATT but that
the export performance requirements were not
inconsistent with GATT obligations. The Panel
emphasized that at issue in the dispute before it
was the consistency with the GATT of specific
trade-related measures taken by Canada under its
foreign investment legislation and not Canada’s
right to regulate foreign investment per se. See
By the time that the WTO TRIMs FDI in Argentina is regulated by the
Agreement provisions entered into force in Foreign Investment Act 21382 (1976) and
1995, Argentina had abandoned its import the Executive Decree 1853/1993. The former
substitution strategy and dismantled most guarantees foreign investors “the same rights
industrial policy measures.1 The automotive and obligations that the Constitution and
industry stood as an exception so laws accord to domestic investors, subject to
Argentina’s TRIMs commitments to WTO the terms of this law and the terms
were seen to have crucial implications for contemplated in special or promotional
the system of incentives in the sector. regimes” (article 1). Foreign investment is
defined as:
This chapter analyzes the impact of a) All capital contributions belonging to
TRIMs commitments in Argentina’s foreign investors and used in
automotive industry. Section B provides an economic activities in Argentina; and
overview of trends in FDI flows together b) Acquisition of all or part of an
with a brief description of the country’s legal existing domestic company’s capital
framework for foreign investment. by foreign investors (article 2).
Notifications of TRIMs to the Council of
Trade in Goods are analyzed in Section C. The law distinguishes between two
Sections D and E provide an account of the types of firms: domestic companies of
evolution of the automotive industry since foreign capital and domestic companies of
the early 1990s. Section F assesses the domestic capital. The former comprise all
consequences of the removal of TRIMs for those firms located in the country in which
the automotive industry, and section G physical or juridical persons domiciled
concludes. abroad own directly or indirectly more than
49 per cent of the capital, or directly or
B. Regulatory framework and recent indirectly control the number of votes
trends in FDI necessary to prevail in stockholder meetings
(article 3, paragraph 3). On the other hand,
During the 1990s, Argentina became domestic companies of domestic capital are
one of the main recipients of FDI among the those in which physical or juridical persons
emerging economies. The boom in FDI was domiciled within the country own at least
intimately linked with a major shift in 51 per cent of the capital and control the
development strategy. Reforms entailed the votes required to prevail in stockholder
liberalization of both trade and capital meetings. The 1976 law represented a
account, and a far-reaching privatization turning point, as it eliminated all general
programme, which privatized all the major restrictions on FDI. Not only did it grant
State-owned companies, including public equal rights to foreign investors, it also
utilities and even the oil-producing firm permitted the free remittance of profits.
YPF. This section analyzes the country’s According to one study (Bouzas and
regulatory framework for FDI and depicts Chudnovsky, 2004: 5), “the 1976 Foreign
recent trends in FDI inflows with a focus on Investment Act shifted the policy focus from
industries in which TRIMs have been FDI control to FDI promotion”.
applied.
Argentinean peso and meet its debt and devaluation in 2001 resulted in an 11 per
payments resulted in a drop of capital cent decline of GDP in 2002.
inflows in 2000–2002 (figure II.1). Default
23,986
25,000
20,000
15,000
10,418
9,161
10,000
6,951 7,292
5,610
4,432 4,274
5,000 3,637
2,793
2,149 2,047
2,166
,0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
FDI inflows had initially favoured gas and water were major recipients of FDI.
the utilities sector – notably electricity, gas Manufacturing received about one third of
and water – reflecting interest in the total inflows of FDI between 1994 and 1997.
privatization process. As shown in table II.1, However, after 1998, its share decreased.
during the first half of the 1990s, electricity,
Table II.2. FDI flows by sector within the manufacturing industry, 1992-2004
(Millions of dollars)
Year
Sector 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Foodstuff, beverages and tobacco 384 338 1 014 793 405 360 256 1 192 476 6 -133 268 419
Textiles and leather - 39 -18 80 15 36 -5 -49 -12 -37 36 16 -18
Paper -102 27 31 119 375 335 89 15 91 -195 78 41 91
Chemistry, rubber and plastics 217 350 325 792 937 770 232 762 695 395 171 538 -51
Cement and ceramics 33 47 26 33 20 51 306 0 -25 -35 12 55 2
Metal industry -120 26 245 -31 86 569 96 -18 74 -20 819 246 122
Machinery and equipment -152 -32 60 8 165 106 111 360 -64 -47 -75 -62 51
Automotive and transportation 373 64 116 392 774 1 082 65 -313 253 -17 80 42 606
Total 634 858 1 798 2 186 2 776 3 308 1 147 1 950 1 487 49 988 1 145 1 221
A general fall in interest rates and the (b) The increase in exports by capital
negotiated drop in prices gave way to a sales goods-producing firms with respect
boom (see below). The remarkable increase to 1993, which could be transferred
in demand was met not only by domestic to vehicle firms as exports of their
production, but also by imports. As a result, own; and
many producers were unable to comply with (c) The increase in local content in
the balanced trade requirements. In order to respect to the previous year. The
avoid penalties for violations of the import positive differential in domestic
cap, the Government in 1994 introduced added value would generate credit in
some amendments through Decree the firm’s trade balance.
683/1994, which provided firms a generous
scheme for the cancellation of penalties. In This last amendment was geared
addition, it raised the rate of investments towards providing incentives to the auto
computed as exports from 30 per cent to parts industry. However, it was also a
40 per cent, broadening the concept of response to the implementation in Brazil of a
“investments” to include offices and set of measures that resembled the
buildings (Vispo, 1999; Llach, et al., 1997). Argentinean regime, with even further
incentives to attract FDI. Both unilateral
The automotive regime was evidently initiatives, the Brazilian regime and the
biased in favour of the vehicle-producing amendment of the Argentinean Automotive
firms. 13 A further modification to the Regime, took place as preemptive measures
automotive regime in 1996 by Decree 33/96 amidst efforts to put together the
established the so-called “auto parts MERCOSUR Common Automotive Policy.
producers regime”. The regime introduced a
balanced trade scheme for auto parts with The Argentinean regime envisaged a
the goal of favouring the import of extra- $200 million trade surplus for automobile
MERCOSUR parts with a 2 per cent manufacturers for 1992–1994. However, by
preferential tariff and the possibility of the end of 1994 there was instead a deficit
meeting the local content requirement over a amounting to $2.1 billion. This imbalance
three-year period. As to the balanced trade was caused by the regime’s lack of adjusting
requirements, the decree established that: mechanisms to deal with infringements to
(a) Exports of auto parts would be the balanced trade targets set by automobile
multiplied by a factor of 1.2; producers. In addition, booming domestic
(b) Exports of auto parts ceded by other demand forced the Government to sacrifice
firms would be multiplied by 1.1; the trade balance objectives of the
and Automobile Regime in order to keep prices
(c) Investments in domestic capital down. Meanwhile, firms were easily able to
goods would be computed as exports meet the 60 per cent local content
at the rate of $1=$1.4, then requirement (Llach, et al., 1997; Vispo
decreasing gradually to $0.7 in 1999. 1999).
6,000
4,934
4,754
5,000
4,000
2,881 2,997
2,868
3,000 2,344
2,092 2,646
1,818
2,000 1,512
1,272 1,597
1,000
,0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
35 32.87
31.59
30
24.01 23.44
25 21.66 21.39 20.45
19.60 18.96
20 17.26 17.05
15
10
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Own elaboration on the basis of data from the Argentina Ministry of Economy.
Hereafter, the last issue would be the Argentina and Brazil to strike an agreement
subject of intense negotiations, especially in June 2000.
after Brazil launched its own automotive
regime. Brazil’s Executive Decree However, shortly after the
1024/1995 applied a 70 per cent tariff for announcement of the agreement, tensions
non-MERCOSUR vehicle imports. between Argentina and Brazil resurfaced
Furthermore, it granted a preferential tariff over the 30 per cent domestic content clause.
scheme for the import of raw materials and According to Argentina, this figure had to be
capital goods by vehicle producers, and set net of imported pieces, and thereby it should
balanced trade requirements allowing firms not consider imported parts of locally
to compute investments and the purchases of manufactured completely knocked-down
capital goods as exports. Finally, the decree kits. This methodology was meant to provide
established a 60 per cent local content relief to its components industry, which was
requirement. being badly hit by the dual impact of the
local recession and the Brazilian
16
A year later, in January 1996, devaluation.
Argentina and Brazil negotiated a new
agreement which maintained balanced trade Argentina and Brazil were eventually
requirements and established 31 December able to forge a new deal. MERCOSUR’S
1999 as the deadline for the elimination of automotive policy would include both
the national regimes. Before that date, both methodologies for the calculation of local
countries were supposed to outline a content: by process and by net content. If the
common policy for the bloc. However, the computation followed the method by
entry into force was postponed to 2004. The process, minimum local content would be set
need to comply with the provisions of the at 44 per cent of the price of the vehicle (37
TRIMs Agreement, which mandated a per cent for commercial vehicles); if the
phase-out before January 2000, put pressure “piece-by-piece” methodology was used (the
on negotiators. The Argentine request for an one demanded by Argentina), net content
extension filed before the Council of Trade had to be at 30 per cent (25 per cent for
in Goods gave some extra time and allowed commercial vehicles).
3000
2500
2000
1500
1000
500
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
700
600
500
400
300
200
100
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
In the light of the increasing deficit Table II.7. Automobile firms established in
in vehicle trade with Brazil, the Government Argentina, 2005
now insists on the delaying of the entry into Firms Location of the Models produced
Plants
force of free trade within MERCOSUR until
Daimler- González Catán, Sprinter
2008. Chrysler Buenos Aires
Fiat Córdoba, Córdoba At present it is not
E. The automotive industry in Argentina producing vehicles. Plants
are focused on the
The automotive industry is production of engines,
gear levers, etc.
considered to be of strategic importance to
Argentina. It contributes considerably to Ford General Pacheco, Escort, Focus, Ranger
Buenos Aires
export earnings and is an important source of
General Motors Rosario, Santa Fe Corsa, Grand Vitara,
industrial employment, with backward and Córdoba, Córdoba Grand Blazer
forward linkages. To a large extent,
Iveco Ferreyra, Córdoba Iveco 120-720, Powerstar
industrial output is heavily dependent on the
fate of this industry. As of 2005, 10 PSA Peugeot- Villa Bosch, Buenos Berlingo, Peugeot 206,
Citroën Aires Peugeot 307, Peugeot
automobile manufacturers were established Partner
in the country, with a joint capacity to Renault Santa Isabel, Clio, Kangoo, Megane
produce 850,000 vehicles per year (table Córdoba
II.7). About 42,000 workers were directly Scania Colombres, At present it is not
employed by such firms. However, if the Tucumán producing vehicles. Plants
whole automotive sector is considered, are focused on the
production of engines,
including dealers and auto parts producers, gear levers, etc.
this figure rises to 60,000 workers. Toyota Zárate, Buenos Hilux
Aires
The auto parts industry comprises Volkswagen General Pacheco, Polo, Caddy
around 390 firms. About 74 per cent of them Buenos Aires
are located in Cordoba and Buenos Aires.18
As will be shown below, this industry went Source: Own elaboration on the basis of STRAT-
through a dramatic restructuring during the Consulting and ADEFA.
1990s, not only due to the transformations of led to the development of a large auto parts
the local economy but also because of shifts industry which mainly comprised local small
in the strategy of multinational automobile and medium-sized firms. Altogether, by the
manufacturers towards greater early 1970s, the automotive industry had
internationalization of their value chains become the most dynamic manufacturing
(Llach, et al., 1997; Kosacoff, 1998). industry and one of the most important
sources of employment (Vispo, 1999). Local
Argentina was a latecomer in the content requirements and the high tariff
global automobile market. The Big Three – protection enjoyed by automobile
Chrysler, Ford and General Motors, which manufacturers were highly relevant for the
had set up assembly plants in the early 20th development of both branches of the
century – had mostly driven by the cost automotive industry, which, prior to the
savings obtained through the export of semi- onset of the military dictatorship, had
knocked down or completely knocked down achieved a high level of technical maturity
kits compared with those of completely and, stimulated by government tax
built-up vehicles. As a result, in the years incentives, had started to adopt a regional
prior to the depression, Argentina was the outward orientation (Schvarzer, et al., 2003).
second largest destination of United States
automobile exports after Canada (O’Keefe The situation changed after 1975 and
and Haar, 2001). Only in the 1950s and most specifically under the military
1960s did the industry experience a dictatorship (1976–1983). In 1979, the
remarkable development in the country. In military Government passed Law 21932 and
line with the tenets of the import substitution Decree 201/79 for the car industry. It
industrialization strategy pursued by Latin allowed lower local content and devised a
America in the post-war period, the balanced trade scheme for auto parts. Auto
Governments of Argentina, Brazil and part producers were displaced as suppliers of
Mexico provided incentives for the car manufacturers due to the greater
establishment of automobile producers flexibility in the local content requirements
behind high import tariffs. In this vein, the introduced by the 1979 regulations, and
Regime for the Promotion of the Automotive hence moved towards supplying the market
Industry approved by the Frondizi for replacements. Local auto part
administration in 1959 laid the conditions for manufacturers, which had up to then enjoyed
the establishment of foreign firms and the the benefits of local-content requirements
development of the industry. In addition, and high tariffs, had to face foreign
FDI was granted access to preferential credit competition and were often displaced by
mechanisms. As noted above, high local foreign suppliers (Vispo, 1999). The
content requirements were also set. overvalued exchange rate applied until 1981
aggravated the problems generated by the
Despite the stop–go cycles that greater openness established in the new
marked Argentina’s post-war growth pattern, framework. Altogether, the automotive
the automotive industry registered sector was badly affected by a sharp decline
considerable growth during the 1960s and throughout all of the 1980s. Vehicle
1970s. The pattern of production involved producers opted to close down or reduce the
integrated vehicle factories that included all scale of their activities.19
the major operations – stamping, casting,
forging, machining and assembly – Since 1990, the industry has passed
effectively contrasting with the pattern of through different stages. In the first phase
simple assembly plants observed in Chile, (1991–1994), production and sales recovered
Colombia, Peru and Uruguay. The from a sharp decline in sales and output. In
remarkable growth of automobile production the second phase (1995–1998), the industry
experienced a second boom. Recovery was with firms without a previous presence. The
pinned to domestic demand, but it was also enacting of MERCOSUR also spurred
driven by the remarkable increase in exports, business interest (Llach, et al., 1997; Bastos
largely to the Brazilian market. A third phase Tigre, et al., 1998).
began in 1999 with the recession that
concluded with the dramatic collapse in Despite the sharp increase in both
2002. This was characterized by a drop in sales and output, it was not all good news.
both domestic and foreign demand and the While an improved economic environment
continued appreciation of the currency. In benefited the car firms, the auto parts sector
addition, there was a significant contraction went though a drastic process of
in FDI, caused by rising labour costs and the restructuring. Mergers, acquisitions and
pessimistic forecast on the evolution of the strategic agreements led to a transformation
domestic market. Finally, the strong “significantly reducing the number of firms
economic recovery since 2003 signaled and increasing internationalization”
another phase characterized by the (Kosakoff, 1998: 47).
resumption of both domestic and foreign
demand, but without reaching the record The bias in the automotive regime
levels of the 1990s. had imposed a high tariff on finished
vehicles, while at the same time practically
1. Phase 1: Domestic demand-driven shedding all the protection for the auto parts
boom (1991–1994) producer. The bias was especially harmful
for independent auto parts firms, since it led
Beginning with the implementation car producers to increase their reliance on
of the convertibility plan and until the controlled auto part companies with the
Mexican crisis of 1995, the industry two-fold objective of supplying lines of
experienced a remarkable recovery both in production and improving their trade balance
terms of output and sales. The production of with higher exports (Vispo, 1999). The new
vehicles increased by 190 per cent over the regulatory framework also stressed the turn
period, reaching the industry’s historical to greater foreign content of vehicles
record in 1994 with a production of more (Kosakoff, 1998).
than 408,000 units (table II.8).
2. Phase 2: Outward led-growth
Table II.8. Vehicle production 1990–1994 (1995–1998)
Year
Passenger and light Commercial
Total The Argentinean economy was badly
commercial vehicles vehicles
hit by the exogenous shock generated by the
1990 81 107 18 532 99 639 devaluation of the Mexican currency of
1991 114 113 24 845 138 958 December 1994. During 1995, GDP fell by
1992 220 502 41 520 262 022 almost 4 per cent and unemployment jumped
1993 286 964 55 380 342 344 to 18 per cent. The automotive industry was
not immune to the general evolution of the
1994 338 355 70 422 408 777
economy. Production fell in 1995, driven by
a decline in domestic demand (table II.9).
Source: Llach, et al., 1997.
However, the decrease in domestic demand
Car producers that had left the was partially offset by growing vehicle
country staged a comeback hand in hand exports to Brazil.
Table II.9. Vehicle production 1995–1998 allowed a significant increase in the exports
of vehicles (figure II.6).
Passenger and light Commercial
Year Total
commercial vehicles vehicles
The favourable scenario resulted in a
1995 226 656 58 779 285 435 significant increase in investments. The re-
1996 269 439 43 713 313 152 entry of players that had left the country, as
1997 425 224 21 082 446 306
well as the fresh establishment newcomers,
continued. Fiat, Peugeot and Renault
1998 435 003 22 954 457 957
regained control of their operations (Strat
Consulting–Grupo Unidos del Sud, 2002).
Source: Llach, et al. (1997) and ADEFA.
3 000
2 689.10
2 465.70 2 465.91
2 500 2 364.61
2 000
1 320.96
1 500 1 253.63
887.48
1 000 795.20
550.56
399.37 411.85
500 324.31
0
1993 1994 1995 1996 1997 1998
Total vehicle exports Vehicle exports to Brazil
3 000 2 689.10
2 465.91
2 500
2 000
1 544.95 1 591.75
1 500 1 272.62 1 322.48 1 289.31 1 179.12
1 128.81
1 000 682.71
500
0
1998 1999 2000 2001 2002
Total vehicle exports V ehicle exports to Brazil
Firm Project
Table II.11. Vehicle production 2003–2005
Is investing $20 million in the expansion of its
Scania Tucumán plant. The firm is also considering the
Passenger and light Commercial
Year Total production of chassis for buses.
commercial vehicles vehicles
Has invested $37 million for the launch of a new
2003 160 583 9 039 169 622 passenger vehicle in its Zarate plant. Has
Toyota
2004 244 343 16 059 260 402 invested $270 million to produce the Hylux
pickup over 2002–2005.
2005 299 205 20 550 319 755 Has announced investments for $50 million,
Fiat although it will only resume local manufacturing
Source: ADEFA. if the MERCOSUR market continues to expand.
At present, it is executing a $200 million
Figure II.8. Vehicle exports to Brazil/total vehicle Volkswagen investment project for the manufacturing of a
exports (2003-2004) new model in its Pacheco plant.
(Millions of dollars) Peugeot- Is investing €150 million in the manufacturing of
Citroen two new models.
1 600 1 463.35
1 400
Sources: La Nación (17 June 2005); El Cronista (20
1 200
976.54 October 2005).
1 000
800
566.32
600 410.15 F. Assessing the impact of the TRIMs
400 phase-out
200
0
This section analyzes the impact of
2003 2004
Total vehicle exports Vehicle exports to Brazil the removal of TRIMs in Argentina.
Particularly, it attempts to assess the extent
Source: CEP, Ministry of Economy. to which TRIMs affected the magnitude and
quality of FDI inflows. Two caveats are in
Prospects for the industry have order. Firstly, TRIMs were applied to serve
turned around. By June 2005, production had different purposes over time. Secondly, the
grown beyond the more optimistic forecasts, fact that a good deal of the basic elements
and a 20 per cent increase was expected for contained in the Argentinean automotive
2005. Furthermore, as both domestic and regime (due for elimination under the
1 200
1 081.62
1 000
800 773.71
606.00
Deadline Entry in
600
Entry in force for the force of the
373.05 of the WTO elimination MERCOSUR
400 TRIMS 392.12 automotive
of notified 253.00
Agreement TRIMS policy
200 64.04 80.00
116.05 - 16.89
64.78 42.00
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
- 200
- 313.34
- 400
Source: Own elaboration based on data from the Argentina Ministry of Economy.
The shape of TRIMs changed over feasible option. At the time of negotiation,
time to serve different industrial purposes. investment was growing at a rapid pace and
The regulatory moves were accompanied by modernization was under way. The transition
adjustments to the effective rate of period gave both Government and business
protection. Argentina signed the WTO the breathing space to think there was
TRIMs Agreement as part of the enough time for retooling so as to build new
commitments undertaken in GATT’s state-of-the-art factories. Buying time was of
Uruguay Round. The TRIMs agreement the essence. One scholar 24 highlights the
became binding for Argentina in 1995, when reputation effect thought to be embodied in
Congress passed Law 24,425 which ratified international agreements:
the Marrakesh Agreement.
“The Government’s main goal was to
Although the automobile sector was acquire reputation and it was prone to
continuously consulted over the issue so as overact. Of course, on certain issues
to reach a satisfactory settlement over the there was no choice. Some of the
drafting of the TRIMs agreement, remaining conditions stemming from the multilateral
out of its scope was never considered a
system were impossible to avoid or delay the 1989 hyperinflation crisis. This trend
single-handedly.” was reversed during the 1990s. The ratio
rose to 40 per cent by 1994, and peaked at
At the same time, the same expert 77 per cent in 2000. Then it decreased to 60
dismisses the idea that government per cent in 2001 (Schvarzer et al., 2003).
negotiators might have taken into account
industrial policy considerations during the Despite the neglect of a
negotiations leading to the signature of the microeconomic strategy, the managed-trade
TRIMs agreement. In this fashion, he states: regime led to a regional division of labour
whereby the more specialized niche cars
“None of these issues were in the minds came to be manufactured in Argentina, while
of the negotiators during the 1990s. In mass-consumption models were produced in
the best case, there was a concern to Brazil. At the same time, the rosy scenario
capture investment flows without an led to overinvestment in the industry.
ancillary microeconomic strategy at all. Between 1995 and 2000, automobile TNCs
These subjects were best left to the firms invested an estimated $15 billion in the
themselves.” MERCOSUR region. This massive influx of
capital transformed the automotive sector in
The testimony of Javier Tizado, South America’s Southern Cone from an
former Secretary of Industry, reinforces this obsolete and inefficient production base –
picture. Tizado highlights the fact that the surviving on outmoded model lines with a
level of protection granted by the poor reputation for quality and
Government to the automotive industry competitiveness – into a modern production
could only have been justified if it resulted base, manufacturing contemporary models
in a spurt of investment, technology, know- and, in a growing number of cases, world-
how and growth accruing to the bulk of quality products. In Argentina, local
Argentina’s industrial sector, and led to consumers in 1991 had only 21 different
greater integration of the country’s models to choose from, some of which were
automotive production. However, during the 30 years old; by 1997, they could choose
1990s: from 60 distinct products, including the most
modern cars sold on the world market
“Argentina suffered a dramatic process of (O’Keefe and Haar, 2001: 21).
productive disintegration. The production
of engines practically ceased, and the As long as the markets in both
manufacturing of chassis diminished countries were expanding, this worked well
considerably.” and auto trade within MERCOSUR
expanded rapidly, with greater intra-
As a result of the greater exposure of MERCOSUR specialization by firms,
the auto parts industry to international yielding efficiencies. However, the
competition, the higher standards set by Argentinean industry became very focused
automobile manufacturers, the currency on the Brazilian market. When demand
overvaluation and the favourable treatment weakened and the devaluation of the
provided at its onset by MERCOSUR Brazilian real meant that Argentina was
regulations, local sourcing levels of suddenly less attractive as an export base, it
automobile manufacturers decreased meant major problems for the auto industry.
dramatically during the 1990s. Historically,
the ratio between the importation of auto The automotive regime contained
parts to manufacturers’ total purchases of three particularly attractive features: access
auto parts25 had been 20 per cent, achieving to the enlarged market, high protection
a historical minimum of 5 per cent during levels for finished goods and the possibility
for established car manufacturers to import threshold required for each project and the
vehicles with a 2 per cent tariff, as long as reliance of the subsidiary on the
they were balanced by exports. The strength development of a new project to remain in
of these instruments has led some experts to the country. Even in good years, such as
cast doubt on the benefits brought by the 1997 and 1998, this excess capacity entailed
regime in terms of industrialization and problems in terms of costs of production and
transfer of technology: created pressures for tariff protection (Kulfas
et al., 2002).
“[Established car manufacturers] were
granted a market protected by a Automobile investments in Argentina
35 per cent tariff as well as six years to and Brazil between 1995 and 1997 had
benefit from the import business.”26 projected a market of 3 million to 3.5 million
vehicles per year. When the economy
The incentives lay in capturing the collapsed in 2001, a structural overcapacity
rents of protection at both ends in an was magnified:
expanding market. There were no incentives
to develop a chain of suppliers or any other “Firms had assumed that they had to
development objectives. Negative effective operate with a 20–30 per cent permanent
protection cornered components producers excess capacity. Besides, exports outside
(where employment creation was greatest) the regional market had not been
out of the market, indicating the scant envisaged. The 35 per cent tariff was
attention to the issue. generous enough to finance that
inefficiency level. Suddenly, they found
The second round was ushered in by out that they had to work with a spare
recession, the shakeout in the components capacity of 50 per cent rather than
sector and a generally more defensive spirit. 20 per cent. I believe that there was this
When the regional market stagnated in the strong belief in the industry that there
late 1990s, overcapacity led to fears of a had to be an adjustment. In this vein,
drastic shakeout that could result in mergers, there were two possibilities: (a) the
joint production agreements, the elimination disappearance of one big player – in this
of duplicative factories, and/or some regard, nobody wanted to leave the
manufacturers’ being driven completely out regional market since they had all
of the market. In this round, the Government committed large investments; (b) the
used the TRIMs umbrella to negotiate an dismantlement of the operations – the
agreement with Brazil to effectively Argentinean industry fitted perfectly. It
regionalize measures. Hence, the managed- was exactly that: 20–25 per cent of the
trade features ensured that any plant closures installed capacity.”27
would not be confined to Argentina. The
regime maintained the 35 per cent tariff and If in the initial round TRIMs served
incorporated both balanced trade and local as a means of upgrading FDI, by 2000 a
content requirements, which had previously more defensive purpose ensued when the
been embodied in the respective Argentinean scenario of overcapacity backfired. The risk
and Brazilian automobile regimes, although to Argentina was that of becoming a
with certain modifications. Both regional periphery to the Brazilian “core”. The
and national rules of origin were applied. defensive strategy of the Government bore
fruit. Both the recovery of domestic demand
Investment projects assumed a 20 to after 2002 and the Government’s ability to
25 per cent excess capacity. The reasons delay complete liberalization of intra-bloc
behind this level of overinvestment lay in the automobile trade, together with the
conditions set by the automotive regime, the granted a five-year shelf life which expired
greater trade openness and the upgrading of in December 2005. The MERCOSUR
the car industry. Suffering negative effective Common Automotive Policy maintained the
protection, the sector went through a 35 per cent CET. In addition, the fixed share
profound restructuring which entailed in the rules of origin allowed the
greater internationalization and also maintenance of local content requirements
concentration into fewer players. Small and for regional trade. Together with a balanced
medium-sized local firms were either driven trade ratio, these provisions were again
out of business, absorbed by larger defensive measures designed to prevent the
international firms, or displaced to the spare closing of car manufacturers and auto parts
parts market. The slump which began in firms facing the trough in a highly
1998 aggravated the process. It also led to unfriendly economic environment. In this
relocation in Brazil. vein, the adoption of a regional framework
to a certain extent counterbalanced the full
The TRIMs Agreement placed a effect of the elimination of TRIMs mandated
deadline for the phasing-out of balanced by WTO by the end of 2003. Policy
trade and local contents as notified by instruments were given a safe haven within
Argentina. The December 1999 WTO the regional agreements and they remain in
deadline coincided with the date established place. By the time this chapter was
completed, Argentina and Brazil announced
by MERCOSUR to design a common
an extension of the managed-trade scheme,
automotive policy. The recession at the time
and the draft of new regulations, effectively
led to tough bargaining conducted with
delaying the liberalization of automotive
automobile firms, which had clearly over-
trade regulations within the bloc. To sum up,
invested during the 1990s, operating at
the effects of the removal of WTO-notified
50 per cent of their production capacity, TRIMs were partially offset by
threatening to switch their operations to regionalization under the MERCOSUR
Brazil. During this period, TRIMs served to automotive policy. Intense regional
avoid a complete shake-out of the industry in negotiations have replaced multilateral ones.
the midst of a critical situation in which
automobile manufacturers were scaling The recovery of the Argentinean
down their production while auto parts economy after the tailspin in 2002 led both
producers were closing down their plants in to a recovery in the domestic demand for
Argentina and moving their operations to cars and the announcement of new
Brazil. In this context, the maintenance of investment projects by automobile
the local content requirement allowed by manufacturers. The decision to commit
WTO until the end of 2003 served to cushion further investments, though at a much lower
the impact of the 1998–2002 crisis on the level than the preceding decade, shows the
auto parts industry. Prior to the end of continuing sensitivity of investment
convertibility in January 2002, the decisions to domestic demand cycles. In this
Argentinean content clause acted as a cap for regard, domestic and foreign demand cycles
exports and a minimum for local suppliers, (especially after the industry’s adoption of
at a time when the overvaluation of the peso an export-oriented outlook) play a critical
strongly encouraged auto parts imports from role in investment decision, even in a period
Brazil. The agreement itself served as the of slimmer regulatory incentives than in the
legal umbrella to continue negotiating the 1990s. The much-revamped industry now
Common Automotive Policy with Brazil, awaits the result of how the balanced trade
itself a lever of considerable value. ratio under negotiation with Brazil will be
shared in the new MERCOSUR framework,
The agreement with Brazil was while exports to other markets are on a rapid
finally reached at the end of 2000. It was rise.
All told, coupled with high rates of condoned resources to new investments (La
effective protection, TRIMs, in their initial Nación, 03/05/2003; Schvarzer et al., 2003).
15
Interview with Luis Katz.
multilateral format, served to attract and 16
Authors’ interview with Javier Tizado, former
upgrade investment; in their subsequent Trade and Industry Secretary (2000–2001).
17
reduced regional reach and as the market The expectation was that, as the automobile
shrank, they became more defensive, but industry was being badly hit by local recession,
they served to reduce the correlation lifting the cap on exports would serve to offset
the decline in local demand.
between investment and the volatility of 18
Interview with Nicolás Cacace from the Auto-
demand. Not a negligible role, given the Part Producers Association (AFAC).
19
strong effect of FDI flows on long-term The response by vehicle producers to this context
growth in developing countries. was manifold. General Motors and Citroën left
the country. Volkswagen entered the market
through the acquisition of Chrysler (Argentina),
Notes although it later merged its operations with Ford,
creating Autolatina. Peugeot and Fiat also
merged their operations and created Sevel, a firm
1
This chapter is based on a background paper under the economic control of a domestic group.
prepared for UNCTAD by Tussie and Labaqui A local firm also acquired the plants and licenses
(2006). of Renault, which only regained the control of its
2
The 1999 peak, a point in which the economy subsidiary during the 1990s (Vispo, 1999).
20
was being hit by the emerging market crisis, was It is worth noting that in January 1995 the bloc
due to the acquisition of the State-owned oil firm had established a CET and liberalized about
YPF by the Spanish company Repsol. 80 per cent of internal trade.
3 21
See WTO document G/TRIMS/N/1/ARG/1. Originally, during the transition period, auto parts
4
See WTO document G/TRIMS/N/1/ARG/1/ imported from MERCOSUR countries were
Add1. counted as local production for the calculation of
5
Paragraph 2 of Article 5 grants developing regional content.
22
countries a five-year term to phase out all the Interview with Nicolás Cacace from the
notified TRIMs, although according to article 5.3 Association of Auto-Parts Manufacturers
a country “which demonstrates particular (AFAC).
23
difficulties in implementing the provisions of this Former Secretary of Industry Javier Tizado
Agreement” can apply for an extension of the recalls: “We were facing quite a dramatic
transition period to the Council for Trade in situation in terms of costs. We had a highly
Goods. overvalued exchange rate, after Brazil undertook
6
See WTO document G/C/W/176, p. 2. its devaluation... Given the level of tariff
7
See WTO document G/C/W/176, p. 2. protection and the overvaluation of the peso,
8
See WTO document G/L/460. automobiles commanded a higher price than in
9
See WTO document G/C/W/295. Brazil. Of course, production costs were also
10
Argentina at that time was not applying the higher… Fiscal incentives induced low-cost
agreed higher CET on auto parts, but applying a production in Brazil to sell in Argentina at a high
mere 2 per cent tariff in order to provide price. This priced local auto part producers out of
incentives to auto producers to assemble locally. the market… and even led to the emigration of a
11
See WTO document G/L/602. large portion of the auto parts industry to Brazil”
12
Quotas were calculated as a percentage of the (personal interview).
24
previous year’s output starting at 4.5 per cent and Interview with Fernando Porta, Director of
reaching 6 per cent by 1993. Centro Redes, an industry expert.
13 25
The bias was probably either rooted in a “worst The automobile manufacturers’ association does
case scenario” for this industry or in the “lack of not report import values by firm, hence the need
knowledge about the role that productive to resort to this proxy. For more details, see
linkages play in the system’s learning path” Schvarzer, et al. (2003).
26
(Vispo, 1999: 302, translated from Spanish in the Interview with Fernando Porta.
27
original). Interview with Fernando Porta.
14 28
The firms paid the fines but later the Menem Estimates put this level at 30 to 35 per cent
administration pardoned them, condoned the (interview with Luis Katz), although during the
fines and gave them back the money under the 1998–2002 crisis it reached 23 per cent according
excuse that car manufacturers would channel the to Schvarzer et al. (2003).
29
While Daimler, Fiat and Renault expressed a
preference for sticking to the 2006 schedule,
Ford, General Motors and Peugeot–Citröen were
not dissatisfied with the Government’s initiative
(Clarin, 17 June 2005).
policies. Their main objective was to By the end of the 1970s, distortions
promote the expansion of the manufacturing and limitations introduced by the ISI model
sector, improve productivity and generate (mainly the anti-export and anti-agricultural
employment for the growing urban bias as well as high prices for industrial
population. goods) began to become more evident. In
1983, all imports were subject to previous
Manufacturing (especially the heavy approval.3 At that time, a new development
intermediates, consumer durables and capital model began to be implemented when a
goods sectors) benefited from three main consensus within the Government was
mechanisms for the transfer of resources reached that trade restrictions were inimical
(Ros, 1994): (a) high prices for their to further growth. Permits were replaced by
products arising from protection of domestic tariffs, and these were reduced gradually.
industrial markets; (b) lower input costs Trade agreements with other nations began
resulting from energy subsidies, export taxes to be negotiated and in 1986 Mexico joined
and licenses on some agricultural goods and the GATT. Since then, Mexico has made the
minerals; and (c) low prices for imported transition from a highly restrictive policy
capital goods as a result of low exchange environment, in which all imports were
rates and high tariff exemptions on imports subject to licensing requirements, to a
of machinery and equipment which substantially open economy.
facilitated the financing of industrial
investments. Of the trade agreements negotiated,
by far the most important was the North
During the 1960s, the ISI process American Free Trade Agreement (NAFTA)
began to shift from final goods to with Canada and the United States. Since the
intermediate and capital goods. The great majority of Mexican trade takes place
Government stressed the importance of an with NAFTA countries, this was tantamount
inward economic growth through the to the liberalization policies being
implementation of a protectionist trade implemented. The agreement introduced
policy, quotas to imports as a stimulus to changes in the regulatory environment
import-substitution together with high tariffs intended to make the country more attractive
and fiscal holidays, as prescribed in the 1955 to foreign and domestic private investors.
Law for the Development of New and The changes included the creation of a
Necessary Industries. However, as noted by strong regime for intellectual property rights
Solis (2000), even though the protection and a liberal environment towards FDI.
provided to the industrial sector through
import permits (which in 1970 affected 65 Another change can be observed in
per cent of total imports) stimulated the use of industrial policies. Immediately
industrial activities, it had high economic after the beginning of the process of
costs and led to the strengthening of business economic liberalization, policymakers did
groups that continuously lobbied for the not seek to protect particular industries or
indefinite maintenance of such policies. firms from import competition, but rather to
These policies contributed to the create a predictable environment to conduct
establishment of an industrial base and the business.4 Until the late 1990s, two
modernization of the Mexican economy, but exceptions could be identified: programmes
their sustainability in the long term was that target small and medium-sized
inevitably compromised by the limited size enterprises (SMEs),5 and the automobile
of the domestic market and the lack of industry. According to this new perspective,
international competitiveness. industrial policy should concentrate on the
correction of market failures (coordination
The legal aspects affecting FDI were export, employment generation and import-
set out in the 1973 Law to Promote the substitution capabilities (Dussel, 2000).
Mexican Investment and Regulate Foreign
Investment. This law responded to the In 1993, the Mexican Congress
nationalistic concerns with regard to the passed the new Law of Foreign Investment,
growth of FDI in Mexico, the increase in which substantially reduced administrative
acquisitions of existing Mexican firms by procedures and sought to offer legal
TNCs in the 1960s and the associated certainty and transparency. It also
balance of payments problems (Whiting, established that FDI could take place in any
1992). It subjected foreign investors to proportion in activities not included in
registration requirements in all cases and to restricted sectors (petroleum, basic
negotiating performance requirements for petrochemicals, electricity, nuclear energy
cases of majority ownership. generation, radioactive minerals, certain
transport services and a range of other
Even though FDI was allowed to service activities). Restrictions took the form
play a role in the ISI model, a strong of outright prohibition or ceilings on equity
nationalistic view prevailed until the participation. A notable feature of this
mid-1980s. The coincidence of the regime was the absence of incentives (e.g.
breakdown of the ISI strategy, the domestic fiscal) to attract foreign investors and to
impact of the debt crisis and other severe locate in a given region (in contrast to the
external shocks provoked an extensive 1973 law that encouraged FDI to establish
rethinking of the Mexican development outside the industrial areas of Mexico City,
strategy and the official view towards FDI. Monterrey and Guadalajara).
The macroeconomic and institutional aspects
of the economic and trade opening could not Of relevance for manufacturing was
be completed without the recognition that the elimination of restrictions of majority
internal savings in Mexico were low (Solis, foreign ownership in secondary
2000). Thus, the inflow of productive petrochemicals, the auto parts industry, and
resources through foreign investment had to the manufacture of buses and trucks. With
be promoted. Since then, as part of the the exception of basic petrochemicals and
package of economic reforms, relevant laws the manufacture of armament and
and regulations were modified to encourage explosives, the manufacturing sector was left
FDI inflows within the constitutional limits almost completely open to FDI (Moreno-
imposed on foreign ownership and control of Brid, 1999). According to article 29 of the
certain national assets. law, the National Foreign Investment
Commission should evaluate the requests of
The 1973 law was modified several foreign investors according to four criteria:
times during the 1980s. In 1984, the (a) the impact of the project on employment
National Foreign Investment Commission and labour training; (b) the contribution to
established that (a) previous authorization the development of technological
was no longer necessary when foreign capabilities; (c) respect of environmental
capital would represent less than 49 per cent laws and regulations; and (d) the overall
of the capital in the enterprise in question, contribution to increase the competitiveness
with the exception of restricted sectors; and of the country’s productive structure.7
(b) foreign investment would be allowed –
even encouraged – with participation higher NAFTA is the first agreement of its
than 50 per cent of the total capital in kind to provide for international investment
enterprises with important technological, rules and a liberalized environment for trade
in services (Moeser, 1997). It includes a
chapter on investment that lays down a at promoting capital flows, providing legal
framework for the treatment of foreign certainty to investors of those countries, and
firms.8 Under NAFTA, investors receive include some provisions similar to those
national treatment or most favoured nation contained in chapter XI of NAFTA.
(MFN) treatment, whichever is most
favourable. The right of expropriation is The impacts of changes in policies
limited only to actions that have an explicit can be seen in the FDI flows to Mexico,
public purpose, followed by just and prompt which have increased dramatically since the
compensation. Also, existing performance beginning of the 1980s. During the period
requirements are eliminated, and new 1980–1985, when the economy was still
performance requirements prohibited.9 closed, the average inflow was $1.3 billion.
Sectors exempted from these rules include Once the country was admitted to GATT,
Mexico’s energy and rail industries,10 United this average increased to $3.5 billion during
States airlines and radio communications, 1986–1993. In 1994, inflows reached
and Canada’s cultural industries. $15 billion following the enactment of the
new Law of Foreign Investment in 1993 and
The 1996 Reform to the 1993 Law of NAFTA entering into force.
Foreign Investment, as well as the rules of
implementation approved in 1998, assured Figure III.1 shows the annual flows
the compatibility of the Mexican regulatory of FDI to Mexico for the period 1994–2004.12
framework and NAFTA, including aspects They declined in 1995–1996 as a
related to intellectual property rights. The consequence of the financial crisis that
reforms implemented in 1996 allowed a momentarily reduced the attractiveness of
greater participation of foreign capital in the country. After recovering in 1997, they
several activities in the financial industry (49 began to decline again in 1998–1999,
per cent as compared to the original ceiling partially as a result of the increased
of 30 per cent established in the 1993 law). attractiveness of other emerging markets
Such a ceiling was again raised in 1999, (most notably Brazil). The steep rise in 2001
allowing majority foreign ownership in can be attributed to a single operation worth
many activities in the financial industry. $12.5 billion, the acquisition of Banamex
These changes paved the way for massive (the main commercial bank in Mexico) by
acquisitions from foreign companies in the Citigroup. This transaction was possible
Mexican financial sector (among them, the thanks to the reforms made to the law
biggest bank in Mexico). regarding the foreign participation in the
financial sector, as described above.
As a reflection of the new
development strategy implemented since the TNCs have followed two main
early 1980s that placed more emphasis on strategies when investing in Mexico:
international trade and FDI as sources of efficiency-seeking (especially in the
growth, and since the implementation of automobile, auto parts, apparel and
NAFTA, the Government has been one of electronics sectors) producing mostly for
the main promoters of the deregulation of export; and market-seeking (steel, food and
international investment. Besides the beverages, pharmaceutical, wood and paper,
negotiation of numerous trade agreements,11 tobacco, petrochemical and financial
it has been active in the negotiation of services) producing predominantly to supply
Treaties for the Promotion and Reciprocal the domestic market. This should be
Protection of Investments, which have been contrasted with the natural-resources-
subscribed with countries such as Spain, seeking investments of the early decades of
Switzerland and Argentina. Such treaties aim the 20th century.13
25,000
Millions of dollars
20,000
15,000
10,000
5,000
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
The sectoral distribution of the stock Figure III.3 shows the country of origin
of FDI is displayed in figure III.2 for the of the FDI stock for the period 1994–2004. By
period 1994–2004. This figure reveals the far the greatest contributor is the United
historical preference of foreign investors for States, accounting for 63 per cent of the total
the manufacturing sector (which accounts stock. The European Union is the second
for almost half of the total stock), although most important investor in Mexico, with 24
its share has been declining in favour of per cent of the stock. Within the European
investment in the service sector. Union, the top sources are Spain (8.5 per
cent), the Netherlands (7.8 per cent), the
United Kingdom (3.6 per cent) and Germany
(2.6 per cent).
Construction Manufacture
0.9% 49.4%
Transp. & Comm. Commerce Elect. & Water
5.3% 10.3% 0.9%
Switzerland
Other Canada
Japan 1.8% 4.3% 3.3%
European
2.5%
Union
24.2%
India
1.1%
United States
62.8%
Source: Ministry of Economy.
The main piece of legislation that The decree also contained local
established TRIMs was the Decree for the content requirements. With the purpose of
Development and Modernization of the encouraging the use of parts and components
Automotive Industry (the Auto Decree). It produced by domestic suppliers and the auto
was enacted during the administration of parts industry, the national added value of
Carlos Salinas de Gortari and had as its main these parts and components incorporated in
objective to consolidate the advances the vehicle assembly industry were to be not
achieved in the automotive industry and to less than 36 per cent (article 7).
increase its participation in international
markets. The automotive industry comprises
In addition to the Auto Decree, the
the vehicle assembly and auto parts
other relevant piece of legislation was
industries. As detailed below, the TRIMs
appendix 300-A.2 of NAFTA. It established
included were local content and trade-
that Mexico could maintain until 1 January
balancing requirements.
2004 the provisions of the Auto Decree.
Once NAFTA came into effect in 1994, the
Article 5 of the Auto Decree
local content requirement of 36 per cent
established that the enterprises in the vehicle
established in the Auto Decree was reduced
assembly industry could not sustain deficits
to 34 per cent. This percentage remained
in their respective trade balances. There was
unchanged for a five-year period with an
a provision that balances could be
annual reduction of 1 per cent afterwards to
transferred between enterprises. In addition,
reach 29 per cent in 2003. The requirement
from 1992, the trade balance of an enterprise
was eliminated in 2004.
could be increased by the accumulation of
surpluses from past years (article 10).
Trade-balancing requirements were
Finally, those enterprises that invested to
also gradually reduced by virtue of the treaty
increase their productive capacity using
until its complete elimination in 2004. In
fixed assets of national origin would be able
addition, article 17 eliminated any restriction
to add up to 30 per cent of such investments
that limited the number of vehicles that an
in the calculation of their respective trade
enterprise could import to Mexico in relation
balances (article 11). The value of total
to the total number of vehicles that the
imports that a given enterprise could realize
enterprise sells in the domestic market (as
was detailed in the resolution that establishes
article 12 of the Auto Decree established).
the rules of implementation of the Auto
Decree and took into account the trade
Regarding the auto-transportation
balance of that enterprise, the transfer of
vehicles industry, NAFTA allowed Mexico
balances from other enterprises with
to adopt or maintain restrictions on the
surpluses, and the amount of investment on
imports of auto-transportation vehicles from
fixed assets of national origin, among other
any of the parties, according to Article 21.
variables.
Nonetheless, these measures were eliminated
on 31 December 1998.
D. TRIMs impact assessment: the case standards make the automobile industry
of the automotive industry attractive for the advancement of the process
of industrial development. The Government
The effectiveness of the policies of Mexico recognized the potential benefits
implemented regarding FDI can be assessed that could be generated from this industry
at two levels (OECD, 2002): and implemented a number of policy
x Do they encourage or discourage the measures to foster its development.
flows of FDI?
x Do they achieve the development Several stages can be identified in the
objectives for which they were development of the Mexican automotive
initially intended? industry. The first took place between 1925
and 1962 (Peres, Nuñez, 1990). It was
Also, as expected, government policy characterized by the shaping of an assembly-
and its effects are highly industry-specific. type industry using imported assembly kits.
Among the options traditionally available to The strategy followed by foreign investors
government policymakers (at least until the was market-seeking, in anticipation of the
process of economic liberalization began) domestic market growth. Under this strategy,
were the enactment of performance the use of domestic parts was small, reaching
requirements towards TNCs (generally a maximum of 20 per cent.
through sectoral programmes), the level of
enforcement of industrial property rights and The second stage comprised the
the regulation of technology transactions, period 1962–1977, and it saw the origins of
among others. For the case of the automotive an active industrial policy. The assembly
industry, the main objective of implementing industry was then transformed into a
TRIMs was to increase the degree of manufacturing one. The industry seemed like
national integration in the production of an ideal candidate to deepen the ISI process,
vehicles and auto parts while maintaining a and in 1960 an inter-ministerial committee
positive trade balance. headed by the main development bank
(NAFIN) presented a set of proposals to
This section discusses the impacts of articulate a policy for the auto industry,
the elimination of TRIMs for the only including local content requirements. The
industry included in the notifications 1962 Automotive Decree included measures
submitted to the WTO by Mexico: the aiming at increasing the degree of Mexican
automotive industry. It starts with a value added in the manufacture of motor
historical perspective of its development, as vehicles to 60 per cent.
well as a brief review of its trade
performance and the role of FDI. It then Foreign TNCs agreed to undertake
turns to the impacts of the TRIMs and of local production. This decision has been
their elimination. The section ends with a explained by the “follow-the-leader”
discussion on substitute measures applied. behaviour of automotive firms (Whiting,
1992). Since Ford moved early to comply
1. Historical perspective with the requirement in a bid to capture the
market, other firms had to follow suit in
The manufacture of automobiles order to defend their competitive positions.
requires steel, aluminum, glass, fibre, However, the 1962 decree did not improve
electronic components and other the balance of payments for the auto
technologically advanced supplies. The high industry. A plan was therefore formulated in
number of components, large volume of 1969 to promote exports by requiring that
production required, and stringent quality firms increasingly compensate with exports
for the imported content of the vehicles resistance to the Government’s push for
manufactured. A 1972 decree mandated that, exports from the part of American
by 1974, vehicle manufacturers should use automotive firms, General Motors (whose
40 per cent of their foreign exchange managers realized the need for extreme cost-
earnings to buy auto parts and other goods cutting efforts in order to remain competitive
and services from Mexican suppliers. in the face of Japanese competition) broke
Exports grew from $26 million in 1970 to ranks with the rest of the companies and
$122 million in 1975, but the auto trade announced new investments in Mexico.
deficit surged to $1 billion (Moran, 1999). Within months, Ford, Chrysler and
Volkswagen followed suit. The presence of
At the beginning of the 1970s, the these companies stimulated complementary
automotive industry was the largest investments by foreign firms producing auto
manufacturing activity, accounting for parts. The creation of backward linkages was
5.3 per cent of the value of production and extensive, since within five years there were
more than 60,000 jobs (Peres Nuñez, 1990). 310 domestic producers of parts and
However, even though the goal of national accessories (110 of which had annual sales
integration was achieved, the industry of more than $1 million) (Moran, 1999).
suffered from persistent trade deficits due to These suppliers were introduced to the
the almost exclusive orientation towards the industry’s best practices as part of the
domestic market and plants with small training provided by the foreign companies.
production scales that limited their
performance. The competitive advantage obtained
by Japanese automotive firms by the
The third stage of the industry’s implementation of new production systems
development took place between 1977 and (e.g. “lean manufacturing” implemented by
1982, and was characterized initially by the Toyota) allowed them to make inroads into
persistent trade deficit and the foreign- the OECD market, especially the American
exchange crisis of 1976. At that time, one. This is clearly seen in table III.3, where
Mexican authorities were frustrated by the a fall in the participation of exports from the
reluctance of auto companies to increase the United States is also evident. The results of
level of sourcing for the United States the strategy implemented by American firms
market. A new policy set out in the 1977 consisting in moving export operations to
decree raised the requirements for developing countries (including Mexico) are
integration of national parts, established reflected in the increasing share of
foreign exchange budgets for each producer, automotive goods produced in Mexico.
and eliminated production quotas and price Table III.3. OECD market shares in traded
controls in order to encourage productivity automotive goods, 1963–1995 (%)
gains. In effect, the decree made access to
the Mexican market contingent upon export Country 1963 1971 1980 1990 1995
expansion. To such an end, a trade-balancing Japan 0.6 7.8 19.3 21.9 18.6
TRIM was established requiring that imports United States 21.4 19.0 14.9 10.0 10.9
be matched with exports. Mexico 0.0 0.2 0.4 2.3 3.6
affected by the 1982 debt crisis, when its 20 per cent to 10 per cent, and this tariff
output dropped by more than 20 per cent level was to be phased out over time.
(Peres Nuñez, 1990). By 1981, the industry
accounted for more than half of the As part of the Mexican compromises
commercial trade deficit (Whiting, 1992). under NAFTA, the local content requirement
level was reduced to 34 per cent. This
A fourth stage of development began percentage was set to remain unchanged for
in 1983 with a new decree. The new policy a five-year period with an annual reduction
tried to solve several of the problems of 1 per cent afterwards to reach 29 per cent
affecting the industry: insufficient on 2003 and to be eliminated the year after.
incorporation of national parts, non- Thus, since 2004, only the regional content
competitive prices, and excessive number of has to be followed. The rules of origin
lines and models, among others. In established under NAFTA aim at promoting
September 1983, the Decree for the further integration between the three
Rationalization of the Automobile Industry countries’ industries. It was established that,
was promulgated in response to the balance- for vehicles, engines and transmissions, rules
of-payments deficit and the urgent need for of origin were such that 50 per cent of the
foreign exchange. The decree increased local net cost of production should come from
content requirements from the 50 per cent North American-made inputs during the first
set in the 1977 decree to 55 per cent for 1986 four years, then increased to 56 per cent and
and 60 per cent in 1987. In addition, firms finally set at 62.5 per cent. Also, in January
were still required to compensate imports 1994, trade balancing requirements were
with exports. To encourage the increase in reduced to $.80 of exports for every dollar
exports and local content levels, the decree imported. These would be brought down to
also reduced the number of makes and $.55 by 2003 and eliminated in 2004. On 1
models. It was hoped that this rationalization January 2004, all the dispositions contained
would lead to higher local content. in the 1989 decree had to be made
compatible with NAFTA, which implicitly
The export requirements contained in implied its elimination.
the 1977 decree as well as the provisions of
the 1983 decree were successful in One of the main impacts of NAFTA
persuading the international auto firms to was to convince international investors of
give Mexico an important place in the global the decision of the United States
production schemes of the main auto Government to incorporate the Mexican
companies (Whiting, 1992). The 1989 Auto economy as an export platform to the
Decree (described in section C) had three American market, as long as the
key provisions: import restrictions, trade- manufactured goods had a minimum level of
balance requirements and local content regional content. In the automotive industry,
requirements. this had as a consequence that companies
from outside the NAFTA region would have
A new stage in the development of to develop a network of local suppliers in
the automotive industry began with the order to comply with the regional content.
negotiation of NAFTA. NAFTA facilitated
the integration of the automobile industry in About a decade after the
North America by allowing significant implementation of NAFTA, the Mexican
reductions in tariffs and non-tariff barriers. automotive industry is more integrated and
At the time the agreement went into effect, has higher levels of competitiveness in
Mexico lowered its tariff on autos from international markets, as shown by the
indicators presented in table III.4 for the complementary role based on cost-reducing
final assembly sector. strategies, while the suppliers located in the
Table III.4. Comparative statistics for the Mexican United States retained a decisive role in
auto industry (final assembly), 1994 and 2002 assembly operations in Mexico (Mortimore
and Barron, 2004).
1994 2002
Production (millions of units) 1.1 1.77 2. Trade implications
Exports (millions of units) 0.57 1.31
Internal Market (millions of 0.59 0.98 Since the beginning of the process of
units) economic liberalization that culminated with
Domestic Value Added (%) 41 51 the implementation of NAFTA, the
Trade Balance (millions of 4 471 13 297 automotive industry has been one of the
dollars) engines behind the export dynamism
experienced by Mexican manufactures.
Source: Ministry of Economy, INEGI. Whereas in 1994, of the 1,096,791 units
produced, 53 per cent were destined for
However, during the past decade, the export; in 2002, 74 per cent of the total
gap in performance between the final production of 1,774,369 units was exported.
assembly and the auto parts sectors has been Figure III.4 presents an international
growing. During 1990–2000, labour comparison of production and internal sales
productivity and value added increased more in the automotive sector for 2002. As can be
in the final assembly sector (Mortimore and seen, of the countries included, only the
Barron, 2004), whose competitive position Republic of Korea has a higher ratio of
improved above that experienced by the auto production/internal sales, which reveals the
parts segment of the industry. This was due definitive export orientation of the industry
in part to the fact that the base of suppliers in Mexico.
located in Mexico specialized in labour-
intensive activities, playing only a
Figure III.4. International comparisons of production and internal sales in the automotive sector, 2002
16,847
20,000
1.93 2.00
1.80 1.76
Production/Internal Sales
16,000
12,328
1.54
10,240
12,000
Thousands of units
1.50
1.31
1.16
5,814
5,460
8,000 1.00
3,525
3,551
3,148
1.00
2,914
2,916
2,716
2,624
0.73
1,770
1,724
1,704
1,632
1,489
4,000
981
0 0.50
Rep. of MEXICO Japan Canada Germany France Brazil China United States
Korea
The trade balance of the automotive 91 per cent. This explains the persistent trade
industry has been positive since 1995 (figure surpluses for the industry. From 2000, the
III.5). During 1994–2003, exports increased value of the surplus has remained more or
189 per cent whereas imports increased by less constant at $9 billion.
Figure III.5. Trade balance for the automotive industry, 1994–2003
34,000
29,000
Millions of dollars
24,000
19,000
14,000
9,000
4,000
-1,000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
There are, however, significant The case of the auto parts segment
differences in the trade performance of the cannot be more of a contrast, since it
final assembly and auto parts sectors. The experienced trade deficits for the entire
trade balance for both industry segments is period. Exports showed a constant growth
shown in figures III.6 and III.7 respectively. (with only a slight decline in 2001), but the
amount and rate of increase were not enough
to eliminate the persistent trade deficit. The
The final assembly sector showed a
decrease in imports experienced since 2000
positive trade balance for the entire period.
has contributed to the reduction of the trade
Even though the growth of exports was more
deficit. This fall in imports is mirrored by
or less constant, the growth of the trade
the decrease in exports of finished vehicles.
surplus was not as spectacular, due to the
The continued reliance on imports to source
increase in imports since 2000. Still, by
auto parts is an indicator of the existing
2003, the value of exports of vehicles was
opportunities to develop domestically-based
2.7 times that of imports. The main markets
suppliers, but at the same time it is an
for exports are Canada and the United States,
expression of the difficulty experienced by
Mexico’s NAFTA partners. In 2003,
them to meet the quality, prices and time
10.6 per cent of the total of units exported
delivery requirements demanded by final
went to Canada, and 84 per cent were
assemblers and suppliers in the first tier.
destined to the United States market.
Figure III.6. Trade balance for the final assembly segment, 1994–2003
25,000
20,000
Millions of dollars
15,000
10,000
5,000
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Figure III.7. Trade balance for the auto parts segment, 1994–2003
20,000
15,000
Millions of dollars
10,000
5,000
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-5,000
-10,000
2,500
2,000
Millions of dollars
1,500
Auto parts
Vehicle Assembly
1,000
500
0
1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Ministry of Economy. The category “Vehicle Assembly” includes class 384110 of the Mexican
Classification of Activities and Products; the category “Auto parts” includes classes 384121, 384122,
384123, 384124, 384125 and 384126.
The behaviour of FDI inflows is not Cumulative flows of FDI for 1999–
surprising, considering the variety of factors 2004 in the sector ($9.4 billion, which
that come into play in the decision to invest accounts for 21.2 per cent of total FDI
in a country: the situation of the American inflows in the manufacturing sector during
market, the production capacity in other the same period) reveal that the United
countries, the relative attractiveness of other States was the main investor, with
countries and the investment plans of 57.6 per cent of the total, followed by Japan
individual firms, to name just a few. (18 per cent), Canada (8.9 per cent) and
Germany (6.6 per cent). Thus, the American
After a sudden increase in 1999, FDI dominance in the Mexican automotive
inflows steadily decreased until 2003. industry is clear.
However, FDI in 2004 in the auto industry
more than doubled from 2003, to reach the By December 2004, there were 609
highest level since 1999 (coincidentally, enterprises with FDI in the Mexican
2004 was the first year without TRIMs in the automotive industry, representing 2 per cent
Mexican regulation). According to industry of the total of enterprises with foreign capital
analysts, the enterprises investing the most established in the country (30,939). About
are those with existing operating plants in 64.5 per cent of these enterprises were
the country (Ford, Nissan, Volkswagen and owned from the United States, 11.3 per cent
Chrysler, among others) that are introducing from Germany, and 5.7 per cent from
new models. This surge in investment shows Canada.
that Mexico is still an attractive location for
the international automotive industry, mainly The main foreign firms in the
due to its cheap and skilled labour, a industry are also positioned among the most
favourable regulatory framework and its important in the Mexican economy (in terms
geographic proximity to the American of sales). According to the 2005 ranking
market (Reforma, 2005). prepared by the business magazine
Expansión, the five most important firms in Estado de Mexico, Coahuila, Puebla and
the automotive sector are General Motors Nuevo Leon). From the figure, we can
(ranked No. 6), Daimler Chrysler (No. 7), observe that the States which host the
Nissan (No. 14), Volkswagen (No. 15) and greatest number of enterprises in the sector
Ford (No. 24). With the exception of Delphi are located in the central and north-east
Automotive Systems (No. 10), auto parts regions of the country. Important
firms rank lower in importance. manufacturing facilities, however, are
located in States not included in the group
The geographical distribution of the (for example, Sonora or Baja California). In
enterprises with foreign participation is terms of the total FDI flow received during
shown in figure III.9, which indicates the 1999–2004, the central region received more
number of enterprises in each State. It should than half of the total (Distrito Federal with
be noted that 60 per cent of the total number 45.5 per cent and Puebla with 10.5 per cent
of firms in the sector are located in just 5 of the total).
States (marked in black: Distrito Federal,
Figure III.9. Geographical distribution of the 609 enterprises with foreign participation in the
automotive sector, 2004
BAJA CALIFORNIA
SONORA 1–5
CHIHUAHUA
6 - 25
COAHUILA
26 – 50
NUEVO
LEON
> 50
TAMAULIPAS
SINALOA
YUCATAN
SAN LUIS POTOSI
DURANGO
HIDALGO
NAYARIT
PUEBLA
JALISCO
AGUASCALIENTES
GUANAJUATO
QUERETARO DF
TLAXCALA
EDOMEX MORELOS CHIAPAS
4. TRIMs and their elimination plants with full economies of scale, the cost
and quality of manufacturing a range of
The time since the elimination of components began to rival imported
TRIMs has been relative short. Therefore, an alternatives. In addition, as Japanese imports
impact assessment is preliminary. How in the United States increased competitive
much did TRIMs implementation advance pressures, expanding sourcing patterns to
the objectives for which they were include production sites in Mexico began to
established? As noted, domestic content be considered. Hence, the expansion of the
requirements and trade balancing were operation of TNCs in the sector and the
established in an attempt to increase the increase in national integration came as a
degree of national integration of the industry result of corporate decisions rather than as a
without putting pressure on the balance of direct result of the requirements established.
payments through excessive trade deficits.
Even ahead of the deadline for the
One reason for the perceived elimination of TRIMs, domestic content
negative impact of domestic content requirements did not play a role in the
requirements is that they may make it more behaviour of most enterprises. This can be
difficult for firms to capture full economies observed in figure III.10, which shows that
of scale to become internationally the real domestic value added for assemblers
competitive. During the 1960s and early of vehicles (i.e. that reported by enterprises
1970s, Mexico set domestic content in the industry) was above the required
requirements at 60 per cent. However, many levels (according to the schedule for their
of the auto parts manufactured in the country elimination set in NAFTA) for the entire
turned out not to be competitive in price and period of 1994–2002. The gap between both
quality (de María y Campo, 1991). On the values even widened from 7 per cent in 1994
other hand, as Moran (1999) notes, as the to 21 per cent in 2002.16
size of the domestic market grew to support
Figure III.10. Required and real domestic value added in the automotive industry, 1994–2002
55
51
50
50
46
45
44 44
45 43
41 41
%
40
34 34 34 34 34
35 33
32
31
30
30
25
1994 1995 1996 1997 1998 1999 2000 2001 2002
Required Real
Source: Ministry of Economy.
In interviews conducted for this 6,800 new jobs – and Volkswagen, Toyota
study, the most important areas of and Nissan, which at the time of preparing
improvement identified in the auto parts this text were in the process of expanding
firms were quality improvement, ability to their operations in Mexico.
meet delivery times, acquisition of financial
capability and an entrepreneurial culture, and 5. Substitute policy measures for
technological development. In general, TRIMs
experts interviewed did not credit the use of
TRIMs as a real force that affected the To what extent has the Government
development of the sector. adopted other policy measures to
“compensate” for the elimination of TRIMs?
Some representatives from the Given the fact that it faces a limited range of
industry have proposed other alternatives to policy instruments to implement an
help improve supplier performance. One “activist” policy as in the past, the current
approach is to contribute to the expansion of approach towards the automotive industry
the operations of final assemblers. For can be characterized as relatively passive.
example, suppliers to Ford contributed $400
million for the development of 14 buildings As discussed above, on 31 December 2003,
that will provide parts to the newly expanded the 1989 Automotive Decree that established
plant in Hermosillo (where Ford invested TRIMs was abrogated. On the same day, the
$1.2 billion). Needless to say, only the most Decree to Support the Competitiveness of
advanced suppliers (mainly in the first tier) the Vehicle Assembly Industry and the
can adopt this strategy. Thus, the Development of the Internal Market for
Government has a key role to attract further Automobiles was published on the Official
investments in this industry. Journal of the Federation. The preamble of
this decree recognizes the national content
Finally, regarding whether the and trade balance requirements established
removal of TRIMs has enhanced the ability in the 1989 Auto Decree as well as the need
to attract FDI in the automotive industry, to eliminate them in order to fulfill Mexico’s
other reasons seem to explain the FDI surge international compromises. It creates a
in 2004 (see figure III.8), such as the start of registry of manufacturing enterprises.18 The
the manufacture of new car models by registered enterprises obtain some benefits
several companies. According to officials regarding the conditions for importing
from the Ministry of Economy, however, the vehicles, especially if they invest in human
elimination of TRIMs has had a positive and technological development through
impact on FDI inflows. Since their worker training, transfer of technology to
elimination, the productive capacity has suppliers, or support for design centers.
increased and investments for $2.7 billion Benefits include: (a) fiscal advantages; (b)
have been realized, generating 11,640 new imports of supplies with preferential (low or
jobs (Secretaría de Economía, 2004). even zero) tariffs through the Programme of
Sectoral Promotion of the Automotive and
Investments announced by several Auto Parts Industry; and (c) imports of
enterprises confirm that Mexico maintains vehicles with zero tariff.
its attractiveness as an export platform.
Examples of new investments planned The Ministry of Economy
include Ford – which will expand the subsequently formulated the
capacity of its plant in Hermosillo from Competitiveness Programme for the
100,000 to 300,000 units per year through a Automotive Industry, whose main objective
$1.6 billion investment, which will generate is to consolidate Mexico as a world-class
Since the use of TRIMs is highly From the three main pieces of legislation
industry-specific, for illustrative purposes, enacted to control the perceived high
the cases of the pharmaceutical and dominance of TNCs (the 1972 Technology
electronics industries in Mexico are Transfer Law, the 1973 Foreign Investment
presented in this annex. Both are regarded as Law, and the 1976 Law on Inventions and
crucial by policymakers – the first because Trademarks), the technology transfer law
of its importance in the building of a national was considered the most successful (Gereffi,
health system, and the second for its 1983). The other laws suffered from
contribution to the development and loopholes and difficulties in their
consolidation of a modern industrial base. implementation. The technology transfer law
Consequently, both were targeted through established a process of review of all
the implementation of specific industrial agreements in which a foreign company
policies where domestic content and trade charged a Mexican company for
balancing requirements were common. technological know-how. If the terms of the
TRIMs in these two industries were never agreement were judged unfair by a registry
notified to WTO, however, as they had established by the law, the transaction was
already been abolished by 1994. not authorized and had to be redrawn and
submitted in terms more favourable to the
Pharmaceutical industry Mexican party.22 This practice helped
domestic manufacturers to select the best
The Mexican Government’s policies technological supplier, and to pay fair prices
had a decisive impact on the growth and in more advantageous terms.
development of the pharmaceutical industry
through import restrictions, tax incentives, All these policies were enacted
cheap loans, associated legislation on during the administration of President Luis
technology transfer, foreign investment and Echeverría. New administrations were not
intellectual property rights, as well as the willing to continue this confrontation. On the
implementation of a sectoral programme. contrary, they were eager to restore
investors’ confidence. To this end, the
The 1973 Foreign Investment Law dismantling of these policies began during
required that pharmaceutical and the late 1980s. Before that, a sectoral
pharmochemical companies operating in programme was issued in February 1984.
Mexico had to be at least 51 per cent
Mexican owned. Foreign firms established The programme identified four main
before the enactment of the law were problems: (a) market domination by foreign
exempted, but they were not allowed to enter firms; (b) dependence on external sources of
new manufacturing activities. Regarding technology; (c) a growing trade deficit
foreign trade regulations, Mexico had caused by the imports of active ingredients;
required, since the 1940s, import permits for and (d) an excessively discretionary
foreign-finished pharmaceuticals. These application of price controls, which often
permits were rarely granted. Trade caused equivalent products to have different
restrictions forced TNCs to buy from prices. Consequently, the main objectives
Mexican manufacturers products that they were to achieve (a) the promotion of
themselves produced elsewhere. In 1987, Mexican laboratories; (b) the rationalization
some pharmaceuticals (antibiotics, antacids, of the drugs supply to the market; (c) the
vitamins) were freed from such restrictions. expansion of domestic production of
substitution were high and they also small Mexican personal computer
regarded it (and its related technological manufacturers was protected, they could not
fields) as an effective platform for future benefit from scale economies, leading to
industrial development. expensive and poor quality products. In
addition, the policy was not uniformly
The sectoral policy was governed by applied, and each firm had to negotiate with
a programme approved in 1981: the the Government concerning the amount of
“Development Programme for the the investment, exports and local content
Manufacturing of Electronic Computer requirements. In one such negotiation, IBM
Systems, their Main Modules and Peripheral achieved an historic agreement in 1985,
Equipment”. Its objectives were to (a) when the Government granted permission to
improve the computer industry’s retain 100 per cent ownership of its Mexican
contribution to the balance of payments and affiliate. It marked a change in the regulation
increase exports; (b) increase national of foreign investment from an emphasis on
integration; (c) develop a component supply joint ownership requirements toward
industry; and (d) encourage local allowing fully-owned subsidiaries. It aimed
technological development. at inducing foreign investors who were
reticent to enter into joint ventures with
In order to achieve these goals, the Mexican counterparts.25
Government provided tax incentives and
trade protection, and implemented TRIMs, Apple and Hewlett-Packard had
especially in the form of local content already entered the market under joint
requirements. Import permits were venture terms, and they strongly opposed the
established for imports of computers, IBM proposal. They argued that the IBM’s
monitors, printers, keyboards, modems and investment would crowd out existing
memory units. Computer firms operating in producers and monopolize the market. A
Mexico were also required to have at least revision of the original proposal was
51 per cent Mexican equity capital and to submitted and approved. IBM increased its
export an increasing percentage of their original investment and committed itself to
production. The decree set strict local export more than 90 per cent of the plant’s
content regulations by requiring foreign output. Hewlett-Packard and other
manufacturers of minicomputers to use at competitors soon followed suit and acquired
least 30 to 40 per cent Mexican components 100 per cent ownership of its Mexican
(set to increase over time). Foreign firms operations.
were also required to spend between
5 per cent and 6 per cent of the value of sales As a result of Mexico’s decision to
on research and development in Mexico.24 open up the country to foreign trade and its
Thus, the whole programme of ownership accession to GATT in 1986, the industry
restriction, import substitution and export suddenly faced international competition and
promotion was replicated in a single suffered a number of plant closures and loss
industrial policy (Whiting, 1992). of jobs. The Mexican consumer electronics
industry was transformed from one where
The Government’s hopes that import 50 per cent of the national demand was met
restrictions would foster the development of with imports and the other half had
a domestic supply network for components 80 per cent of domestic content, to another
were not materialized, however. Most firms one with 90 per cent of the demand being
operated just above the margin of survival met with imports and less than 15 per cent of
and they could not afford the risk of trying domestic content in the 10 per cent produced
local suppliers. Also, since the existence of domestically (Warman, 1994).
In the end, the attempt to develop the industries, the initial reason for the
industry along import-substituting lines did elimination of TRIMs was a change in
not produce the results anticipated. The main government strategy. In the electronics
personal computer manufacturers were industry, the ineffectiveness of measures to
reluctant to accept minority capital achieve the proposed domestic content levels
shareholding positions. The rapid was also a factor. In addition, the intent was
technological changes in the industry and the to create a friendly environment for foreign
drastic fall in domestic disposable income as investors, which necessarily implied the
a result of the debt crisis were other elimination of restrictive performance
contributing factors. requirements in most industries.
Notes
set of obligations that includes outright bans on
1
certain performance requirements, including
This chapter is based on a paper prepared for exports, minimum domestic content, domestic
UNCTAD by Murillo (2006). sourcing, trade balancing and technology
2
According to data compiled by the Economic transfer. In addition, these provisions cover both
Commission for Latin America and the goods and services.
Caribbean (ECLAC), during the period of 2001– 10
The rail sector was subsequently opened to
2004, the regional leadership regarding attraction foreign investment.
of foreign resources has alternated between 11
For instance, with regard to the regulation of
Mexico and Brazil. TRIMs specifically, the 1994 free trade
3
This was also linked to the need to protect the agreement between Colombia, Mexico and the
low levels of international reserves in the Bolivarian Republic of Venezuela includes, in its
aftermath of the debt crisis. article 17-04, the same measures covered by the
4
As noted by the Organization for Economic TRIMs Agreement. It states that no party shall
Cooperation and Development (OECD, 1996), impose performance requirements by adopting
three factors distinguish “modern” industrial investment-related measures that are mandatory
policy from past practices: (a) it makes minimal or required for the establishment or operation of
use of subsidies, placing emphasis instead on an investment, or for which compliance is
facilitation; (b) it does not attempt to defend the necessary in order to obtain or maintain an
market positions of incumbent producers that advantage or incentive. The 2000 treaty with the
seek protection from the Government; and (c) it European Union, on the other hand, does not
is not aimed at particular sectors or firms, but contain a ban on performance requirements. The
rather at activities believed to generate high agreement simply states that the existing
social or private returns. restrictions on investment will be progressively
5
The rationale for targeting SMEs is that they eliminated and no new restrictions will be
employ a large portion of the workforce adopted.
(contributing to a more equitable income 12
In 1994, the Ministry of Economy made a
distribution), and generate positive externalities methodological change in the way FDI was
to the rest of the economy through the measured. For this reason, the figure does not
development of labour skills. include inflows before this year, since they would
6
This shift in policy formulation is discussed in not be directly comparable.
Peres (1997) for several Latin American 13
Dunning (1992) identifies four strategies that
countries. He refers to the new approach as guide TNCs’ activities in host countries: (a)
formulating “industrial competitiveness policies” natural-resources-seeking; (b) market-seeking;
to differentiate them from traditional industrial (c) efficiency-seeking; and (d) strategic asset or
policies. Whereas the old approach aimed at capability-seeking.
creating new productive sectors, the new one 14
This notification is contained in the WTO
aims at increasing the efficiency of existing ones. document G/TRIMS/N/1/MEX/1. The same day
7
This “evaluation” process is mostly symbolic, a revision (G/TRIMS/N/1/MEX/1/R) was issued
since the same law establishes that, if no answer because the order of two pages was inadvertently
is given to the request within 45 working days, it reversed in the original version.
can be considered automatically approved. 15
This ministry changed its name to Ministry of
8
A whole chapter of the treaty is devoted to Economy.
investment (chapter XI). Regarding negotiations 16
It should be noted that, since 2004, enterprises
on this issue, the main objectives of the Mexican have no obligation to report domestic content to
delegation were (ITESM, 1994): (a) to keep the the Ministry of Economy; consequently, it is not
activities reserved for the State according to the possible to check changes in this trend after the
constitutional framework; (b) to create an elimination of TRIMs.
environment of certainty and trust for foreign 17
Vallejo Carlos (2005) proved statistically for the
investors; (c) to generate more and higher quality Mexican case that firms in the first tier of
jobs; and (d) to guarantee for Mexican investors suppliers (i.e. those which are directly related to
in Canada and the United States the same the final assemblers) are more likely to conduct
treatment granted to North American investors in research and development activities than firms
Mexico. located at lower levels of the automotive supply
9
The list of prohibited performance requirements chain.
in NAFTA (article 1106) goes beyond that of the 18
Some of the requisites to be part of the registry
TRIMs Agreement. Actually, United States trade and access the benefits specified in the decree
agreements establish, in effect, a “TRIMs-Plus” include: (a) a production of at least 50,000 units
24
during the preceding year; (b) an investment of at Various activities could qualify as research and
least $100 million in fixed assets; and (c) brands development expenditures: development of
registered in the Mexican Institute of Industrial machinery and equipment, the adaptation of a
Property. system, or the funding of computer research and
19
These and other proposals are explored in more development in authorized research centers. The
detail in CEC (2004). type of research and development activity
20
Even though the most recent data reveal an undertaken by the firm also had an effect on the
improved position of Mexican exports to the calculation of the degree of national integration
American market (Reforma, 2006), the through a multiplier factor “T”. Thus, a high “T”
difficulties in the global auto industry persist. factor could offset a low value of domestic
The main reason for the increase in the component content.
25
participation of Mexican exports in the American See Whiting (1992) for a detailed analysis of the
market from 6.2 to 11 per cent lies in the fact that rationale behind the IBM decision.
26
several investment projects in Mexico to produce As one anonymous reviewer stressed, probably
models for export (e.g. the Zephir and Milan the main criticism of TRIMs in Mexico (and in
from Ford, and the Silverado 1500 from General Latin America in general) is that they were not
Motors) reached maturity. implemented in an internationally competitive
21
These two essential points were stressed by an way (as compared to several countries in Asia,
anonymous reviewer. for example). Thus, it can be argued that it is the
22
The Registry of Technology Transfer created by implementation more than the instruments per se
the 1972 Law of the Registry of Technology that can be criticized.
27
Transfer and the Use and Exploitation of Patents The ranking, based on sales, is from the Mexican
and Trademarks had as its main objective to business magazine Expansión.
establish an official register with the purpose of
regulating and monitoring the imports of foreign
technology and to strengthen the bargaining
power of national enterprises. In the framework
of this law, although the parties to a contract may
have already reached an agreement before
presenting their documents to the Registry, the
Government reserved the right to reopen the
negotiations. Additionally, several restrictive
clauses commonly found in technology contracts
were prohibited. The registry also tried to reduce
the excessive duration of, or payments for, such
contracts. In 1991, the Law of Industrial Property
was enacted superseding the 1972 law and
eliminating the Registry of Technology Transfer
along with the regulation of technology contracts.
This new law, through the Mexican Institute of
Industrial Property, provides legal protection for
the exclusive use of inventions and trademarks,
and streamlines the process for the licensing of
patents and trademarks. It is considered the main
expression of the new policy favouring a more
liberal environment for the transfer of
technology.
23
As noted by UNCTC (1992), the 1984
pharmaceutical programme was different from
those of other targeted industries (mainly the
electronics and automotive industries) in the
sense that it was more typical of an import
substitution policy with strong constraints on
TNCs’ behaviour and expansion. The main
objective was to increase the national self-
sufficiency for pharmaceuticals, and only
secondarily to promote the internationalization of
the industry.
The deletion programme was implemented under the statutory authority of the Federal
Government under the Customs Act and the Sales Tax Act. The Ministry of Industries and Production of
the Federal Government is responsible for overseeing its implementation. The programme encompassed
the engineering, electrical goods and automobiles industries, and came into effect in August 1987. It does
not specify a phasing-down provision. An Indigenization Committee – with representatives of the
Ministries of Industries and Production, Commerce, Finance/Central Board of Revenue and Defense
Production, the relevant vendor associations and the enterprises concerned – is responsible for formulating
the programme, which aims to facilitate rising standards of living, increased employment opportunities
and a growing volume of real incomes.
Source: UNCTAD.
This chapter analyses how the country. The relevant TRIMs are discussed in
removal of TRIMs in different industries has section D and a case study of the automobile
affected the development goals of Pakistan. It industry is presented in section E. The
is organized as follows. Section B and C chapter concludes with a summary and some
review the regulatory framework and policy considerations.
investment policies in Pakistan along with a
brief description of inward FDI flows to the
70 Elimination of TRIMs: The experience of selected developing countries
B. Investment policies and the an Export Processing Zone (EPZ) was set up
regulatory framework in Karachi. The concessions and facilities
offered by the EPZ included duty-free
Pakistan has moved to an increasingly imports and exports of goods and tax
liberal investment regime in recent years. exemptions. Despite these incentives, the
Until the late 1980s, it was more selective as regulated nature of the economy remained a
regards FDI projects. The procedure for deterrent to FDI.
obtaining permission to set up an enterprise
was restrictive, and FDI was regulated At the end of the 1980s, Pakistan
through investment licensing, with a view to began to implement a more liberal foreign
ensuring optimal utilization of resources. investment policy as part of an overall
While this led to a lengthy administrative economic reform programme. A new,
process, proposals were practically always market-based industrial policy package was
accepted. Thus, it served little purpose but to introduced in 1989. A number of policy and
delay the implementation of investment regulatory measures were taken to improve
projects. the business environment in general and to
attract FDI. A Board of Investment was set
Government approval for some up to help generate opportunities for FDI and
categories of investment was considered to provide services to investors. A “one-
essential to ensure that projects of national window facility” (or one-stop shop) was
significance were established with established to overcome difficulties in setting
government knowledge and involvement. up new enterprises. The requirement of
Industries specified for reasons of separate authorization for each investment
overcapacity, price regulation and project was eliminated in May 1991. In
implementation of a programme of assembly- general, no special registration was required
cum-manufacture were required to get for FDI, and the same rules and regulations
government approval. Projects involving were applied to FDI as to domestic investors
foreign private investment and those costing (Esfahani, 1995).
Pak rupees (PRs) 300 million or more also
required government permission. Foreign The requirement for government
private investment was encouraged in the approval was removed except in the case of a
form of joint equity participation with local few industries, such as arms and ammunition,
investors and in areas involving advanced security printing, currency and mint, high
technology, managerial and technical skills, explosives, radioactive substances and
and marketing expertise. alcoholic beverages. These industries were
also closed to domestic private investors. In
The Investment (Promotion and all other industries, foreign equity
Protection) Act of 1976 provided enhanced participation of up to 100 per cent was
security against expropriation and, in case of allowed and foreign investors were permitted
expropriation, guaranteed adequate to purchase equity in existing industrial
compensation. It also provided for the companies on a repatriable basis. In non-
remittance of profits and capital, and relief industrial sectors, FDI was excluded from
from double taxation for countries with agricultural land, forestry, irrigation, as well
which Pakistan had such an agreement. as real estate including land, housing and
Foreign investment was encouraged in commercial activities. A so-called no-
industrial projects involving heavy capital objection certificate was required only for
outlays, such as engineering, basic chemicals, FDI in a few areas that are in the negative list
petrochemicals and electronics. In order to of the relevant provincial Government.
encourage FDI in export-oriented industries,
1800
1600
1400
1200
1000
800
600
400
200
0
-200
1985-86
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
-400
The sectoral distribution shows that operating locally if their right to impose
the power, chemical, transport, textile and TRIMs or other investment measures were
financial business sectors dominated FDI removed. Some of the policies, such as local
inflows from 1997 to 2005 (table IV.1). content requirements, are considered essential
industrial policy tools. It has been argued that
D. Trade-related investment measures their use effectively links FDI with domestic
in Pakistan economic activities. Pakistan therefore wants
to use TRIMs flexibly in pursuit of various
Pakistan has used some TRIMs to development objectives. The Government
induce foreign firms to meet a minimum level believes that the TRIMs Agreement
of performance in various areas (table IV.2). established uniform obligations for all
members and does not take account of
Pakistan has linked tariff exemptions structural inequalities and disparities in levels
with local content requirements in a number of development, differences in technological
of industries, including automobiles, capabilities or of differing social, regional
electronic goods, electrical goods and and environmental conditions. In short, the
machinery. It notified WTO of the agreement is not seen to incorporate a
elimination of most of these TRIMs as of meaningful development dimension.
2005. However, TRIMs and other investment Moreover, from the national standpoint, it is
measures are viewed as domestic issues in not clear that the implementation of an
Pakistan as the mandate of WTO is perceived agreement as a priority represents the best use
to be confined to trade but not investment of the limited resources and political
issues. This view is based on the fear that the goodwill available to the Pakistani
country would be deprived of a major means Government (Government of Pakistan, 2005).
of exercising control over foreign firms
Industries 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 Total
Power 244.8 239.5 131.4 67.4 40.3 36.4 32.8 14.2 73.3 861.7
Chemical, pharm. & fertilizer 51.7 72.1 54.1 119.9 26.3 17.8 92.4 28.5 89.0 570.9
Construction 14.5 21.5 13.9 21.1 12.5 12.8 17.6 32.0 42.7 194.8
Mining & quarrying – oil explor. 37.7 99.1 112.8 79.7 84.7 274.8 188.2 203.5 194.3 1 314.6
Petrochemical & refining 1.5 1.6 38.8 12.0 8.7 5.0 3.0 72.4 24.8 174.2
Food, beverages & tobacco 51.5 19.1 7.4 49.9 45.1 5.1 7.0 4.5 22.9 207.0
Textile 12.4 27.3 1.7 4.4 4.6 18.4 26.1 35.4 39.3 173.3
6.4 10.2 33.3 31.0 81.5 35.2 114.1 230.7 531.9 1 138.0
Transport, storage & comm. it
Machinery other than electrical 2.0 - 0.9 3.1 0.3 0.1 0.4 0.7 2.8 10.7
Electronics - 2.7 1.2 2.3 2.8 15.9 6.7 7.5 10.3 53.2
Electrical machinery 4.1 8.7 1.9 1.5 2.1 10.5 10.5 8.7 3.4 51.6
Financial business 106.5 20.4 24.4 29.6 34.9 3.5 207.5 242.1 269.4 887.6
Trade - 12.6 5.5 7.6 13.2 34.2 39.1 35.6 52.1 220.3
Tourism / paper & pulp 7.4 5.7 - 0.7 1.4 0.8 1.5 1.8 - 19.9
Cement / sugar 49.4 3.0 2.0 6.1 15.2 0.5 1.3 2.3 17.3 100.4
Others 92.2 57.8 43.0 33.6 18.6 23.9 49.8 57.9 150.5 551.7
Total 682.1 601.3 472.3 469.9 322.4 484.7 798.0 949.4 1 524.0 6 529.9
extension, Pakistan sought a further extension result of the TRIMs, the local content in
of three years for maintaining its programme many engineering products started increasing
for this industry. Earlier, the extension and in certain engineering subsectors, local
granted to Pakistan from the WTO Council content reached around 80 per cent.
for Trade Goods up to 31 December 2003
was for a complete phase-out of deletion In 1995, the Government set up the
programmes in order to be fully compliant Engineering Development Board for
with the TRIMs Agreement. Before the providing policy direction and impetus for
expiry of the special extension, Pakistan growth of the engineering sector. The board
approached WTO through the Ministry of used an integrated approach by focusing on
Commerce for another extension of three the overall development of all the subsectors
years up to December 2006. At the time of of the engineering industry and acted as a
writing this chapter, a decision on this request bridge between the Government and the
was still pending at WTO. entrepreneurs/investors to ensure
achievement of set objectives. The board
2. Pakistan’s progress on the principally agreed to remove all the TRIMs in
elimination of TRIMs the industry to make it more competitive. On
its recommendations, a plan was chalked out
Local content requirements are the to phase out slowly the deletion programmes
TRIMs that have been most frequently used by 2000. Slow implementation stretched the
in the engineering and auto industries of plan slightly and the programmes in 86
Pakistan. Under the indigenization/deletion products were phased out from the purview
programme for these industries, companies of deletion policy between 30 June 2002 and
are obligated to use a certain amount of local 31 December 2003. Since then, there is no
inputs in production. The deletion deletion programme for the engineering
programmes for engineering products were industry (Government of Pakistan, 2004).
formulated and implemented since 1987
against the backdrop of the fact that the The TRIMs used in the subsectors of
engineering industry was noncompetitive, the engineering industry have been helpful in
due to a lack of technology, raw material, a number of ways. The contribution of the
trained manpower, vendor capacity and engineering industry to the economy and
economies of scale.7 employment has increased. It currently
contributes about $2 billion to the GDP of
Considering its growth potential, Pakistan and employs more than 600,000
engineering goods production has been people. The share of engineering goods in
accorded top priority in the successive Pakistan’s exports is around 3 per cent.
industrial policies and a number of incentives Pakistani exports of engineering goods were
announced to attract FDI in the industry $270 million in 2004. These are expected to
(Board of Investment, 2004b). At the same rise to $1.5 billion in the next five years. In
time, a comprehensive deletion plan was also terms of import substitution, Pakistan saves
worked out for the industry to move towards $3.75 billion per annum. The trade deficit,
more indigenization. In the production of which in the first nine months of fiscal year
engineering goods, foreign firms were 2005/06 reached $6 billion, has been
encouraged to invest in the country through attributed mainly to the imports into the
joint ventures and technical collaborations engineering industry, which accounts for
with local firms. These collaborations were more than $3 billion. These imports mainly
helpful for the local industry to increase the comprise machinery and raw materials to
share of engineering goods in the total build the local engineering industry on
exports, employment and overall GDP. As a modern lines to meet the rising demand (local
and international) of engineering goods. The higher technological orbit from the transfer of
present share of the local engineering technology. Other benefits are trained
industry in meeting the total demand is 25 per manpower and an uninterrupted supply of
cent (expected to rise to 35 per cent in the raw materials. The exports are also increasing
next five years). thanks to the integration of local products in
the international supply chain (Government
The vendor development programme of Pakistan, 2005).
of the engineering sector has helped local
industry to move towards the production of According to the Government, the
quality products for local industry and deletion policy in the auto industry has
exports. Under this programme, firms played a significant role and contributed to
producing engineering goods are required to the country’s economy in the form of
develop components locally or use employment creation, technology transfer,
components made by local industry. A revenue contribution, GDP contribution,
healthy vendor industry is emerging in savings in foreign exchange, increased
different parts of the country due to the foreign and local investment, training and
programme. Locally produced components manpower development. As a result, the
are increasing in production, helping the automobile industry has shown accelerated
industry to achieve economies of scale and growth over the years. The industry is
increasing vendor capacity. gradually moving to maturity and the
elimination of TRIMs is not expected to
The phasing out of Pakistan’s deletion affect its performance in a major way
programme should not be a difficult task, as it (Government of Pakistan, 2005). The full
has already achieved its objective to a implementation of the TRIMs Agreement is
significant extent. The local content achieved also expected to imply that FDI into Pakistan
is 100 per cent in the areas of transformers, will grow at a faster pace and its positive
electric motors, and pumps. 8 In the case of implications for the economy in terms of real
tractors, electricity meters, sugar plants, deep growth, employment and the balance of
freezers, refrigerators, air conditioners, fruit payment will be significant. The examination
juice extractors and electric irons, it ranges of the automobile industry in the following
between 70 per cent and 90 per cent. The section highlights the progress made.
subsectors in the automobile industry with
less than 80 per cent local content include E. Automobile industry and elimination
trucks and buses (58 per cent), motorcycles of TRIMs
(72 per cent) and motor vehicles (64 per
cent). However, the remaining indigenization 1. Automotive production trends
could be achieved through the provision of
incentives rather than local content Automobile production in Pakistan is
requirements. essentially an import-substitution industry
catering to the domestic market and
Pakistan is complying with the comprising original equipment manufacturers
TRIMs Agreement as far as engineering (OEMs), component producers (vendors),
goods are concerned, while still watching out sales dealers and after-sales services. 9 At
for the interest of local industry. The present, there are four main assemblers of
Government is also moving ahead in the auto cars and three main assemblers of
industry to phase out the deletion programme motorcycles in Pakistan. They produce cars
in the minimum required time. The and motorcycles of various cylinder
elimination of TRIMs is therefore almost capacities. While there are different brands of
completed. The industry is moving to a cars, their features are relatively similar and
there is very little difference in price. have technical assistance agreements with the
Domestic prices of all cars and motorcycles collaborating foreign firms. 10 The value of
are generally above world market prices. gross production in the automobile industry
in 2004 was PR 70 billion. Its contribution to
The OEMs produce completely built GDP has been estimated at around PR 22
units (CBUs) and some components, while billion. 11 The manufacturers claim that the
the remaining components are acquired from industry contributes roughly PR 31.4 billion
vendors or imported. Component to the national budget (Pakistan Automobile
manufacturers generally have agreements Association, 2005). The assemblers provide
with various OEMs and sometimes joint employment to 10,000 persons and the
ventures with foreign firms, but generally vendor industry employs 116,200 persons.
Cars and
Year LCVs Motorcycles Trucks Buses Tractor
jeeps
1989/90 27 328 11 609 92 783 1 715 626 19 376
1990/91 27 962 11 862 98 647 2 059 843 13 753
1991/92 30 685 11 411 97 162 1 627 1 114 9 817
1992/93 28 269 11 478 95 763 2 222 1 177 17 127
1993/94 20 330 5 128 63 958 1 394 427 14 907
1994/95 22 265 5 154 60 960 703 312 17 144
1995/96 33 353 6 834 121 809 3 030 438 16 093
1996/97 34 254 9 817 117 188 2 916 362 10 417
1997/98 34 340 9 886 96 991 1 850 425 14 144
1998/99 39 304 8 079 93 167 1 131 1 220 26 885
1999/2000 32 841 6 656 94 881 977 1 508 35 038
2000/01 40 032 6 965 117 858 952 1 337 32 553
2001/02 41 171 8 491 133 334 1 141 1 099 24 331
2002/03 63 267 12 174 176 591 1 954 1 346 26 501
2003/04 (E) 100 000 15 000 350 000 3 000 1 500 34 000
2004/05 (P) 140 000 18 000 500 000 3 500 2 200 40 000
Source: Pakistan Statistical Year Book 2004, Federal Bureau of Statistics and for the last two years, the
manufacturers. E is used for estimated figures and P for provisional figures.
Until 2002/03, the automobile automobiles were as follows: 58.1 per cent
industry of Pakistan stagnated and showed for cars, 23.2 per cent for light commercial
wide fluctuations because of frequent vehicles (LCVs), 98.2 per cent for
changes in government policies regarding the motorcycles, 53.5 per cent for trucks, 11.4
import of vehicles. For example, under the per cent for buses, and 28.2 per cent for
Yellow Cab scheme, the CBUs were tractors. The manufacturers expected a
imported with low duties and thus the further sharp increase in 2004/05
demand for locally produced vehicles (Government of Pakistan, 2005).
slumped from 30,685 cars in 1991/92 to
20,330 cars in 1993/94 (table IV.3). From Despite the recent sharp increase in
1994/95 to 1999/2000, demand increased to the production of cars and jeeps, the market is
around 33,000 cars. More recently, still too limited for producers to achieve a
production has grown significantly. Annual minimum efficient plant size. For example,
growth rates in 2003/04 for different types of India produced 794,450 passenger vehicles
during 2002/03, out of which passenger cars of the inability of vendors to supply
accounted for 588,628; by 2011-12, the total components in required quantity.
production of passenger vehicles in India is
forecasted to reach around 1.5 million, of 2. Japanese investment in the
which about 1.2 million shall be passenger Pakistani auto industry
cars. As a comparison, Pakistan’s projected
output of 140,000 cars and 18,000 LCVs for Some major international auto
2004/05 is very small. Moreover, the companies, especially from Japan, have
passenger-car market is shared between a invested in Pakistan. Nearly all their imports
larger number of OEMs, which tends to raise have been replaced by local production.
the cost of production of each of them. There is an extensive local vendor industry
Except for Suzuki Mehran and Toyota producing a wide range of components, and
Corolla, production of each brand was less some component producers are even
than 10,000 units in 2002/03 (table IV.4). A exporting to other countries.12 With the recent
reduction in the number of different models accelerated growth of demand, production of
and sizes may help improve efficiency by cars and components and employment in car
increasing the production volume. manufacturing has expanded rapidly and
large new investments are under way. There
Table IV.4. Production of cars by brands have been impressive transfers of technology
and technological know-how, with benefits
Brands 2001/02 2002/03 that go well beyond the car assembly and
Honda Civic 4 615 4 610 component industries. This has been due
Honda City 3 386 3 786 especially to the efforts of the Japanese
Suzuki Baleno 1 240 2 608 TNCs, which have been active in sending
Suzuki Khyber/Cultus 5 441 8 097 workers, supervisors and managers for
Suzuki Alto 2 816 4 775 training in Japan, brought Japanese
Suzuki Mehran 10 143 16 748 technicians and managers to work in the
Toyota Corolla 5 763 12 861 Pakistani plants, and provided technical,
Daihatsu Cuore 2 845 4 580 marketing and financial support and training
Datsun Sunny 81 51 for Pakistan-owned component producers
Kia Spectra 2 091 384
(Government of Pakistan, 2005).
Kia Classic -- 459
3. Policy environment
Kia Sportage 513 820
Santro Plus 16 667 3 114
Although Pakistan allows the imports
Source: Pakistan Statistical Year Book 2004, of CBUs, few new cars have been imported
Federal Bureau of Statistics. due to prohibitive import duties ranging from
75 per cent to 150 per cent until 2003/04.13,
The sharp increase in demand for While a reduction of import duties in the
automobiles in the past couple of years has 2004/05 budget in the range of 50 to
resulted from improved availability of 100 per cent may seem steep, the remaining
consumer finance for the purchase of tariffs will still be high enough to preclude
automobiles. Increased demand has led to the import of cars. After the reduction,
greater output through better capacity producers have not been compelled to reduce
utilization. However, there is still an excess their prices nor has there been any reduction
demand for locally manufactured in the premium on various brands of cars.
automobiles. There are supply bottlenecks
and only the additional investment can While imports of new cars are
remove them. Bottlenecks also exist because allowed in principle, imports of second-hand
cars are officially banned, except under the Table IV.5. Duty and taxes in Pak rupees
Gift Scheme and the Transfer of Residence
(TR) Scheme. For 22 months with old cars, Vehicle Duty and taxes in Pak
depreciation of 50 per cent can be claimed. rupees
Almost 19 per cent of all cars are imported, Up to 800 cc 4 000
new and old, under these two schemes. It was From 801 cc to 1000 cc 5 000
expected that, because of lower import duties From 1,001 cc to 1,300 cc 10 000
and 50 per cent depreciation of 22-months- From 1,301 cc to 1,600 cc 18 000
old cars, the imports under TR and gift From 1,601 cc to 1,800 cc 22 000
scheme would surge. However, because of
Source: Central Board of Revenue, Ministry of
the depreciation, rules have been changed and Finance, Government of Pakistan, 2005.
the determination of the import duty would
no longer be invoice-based and as such the As mentioned above, in 2003/04, an
incidence of the duty may have gone up on anomalous situation arose when the import
second-hand cars. duties on parts were reduced to 25 per cent
but the assemblers were obliged to import
As per the new rules, the depreciation CKD kit at 35 per cent. Therefore, producers
allowed up to 1,800 cc shall be 1 per cent for not bound by deletion agreements could
each completed month calculated from the import parts at 25 per cent and assemble cars
date of first registration abroad until the date and motorcycles at lower production cost
of entry into Pakistan, subject to a maximum compared to the organized producers. Since
of 50 per cent. For 1,800 cc and above, the vehicles not approved by the Engineering
monthly rate is 2 per cent subject to a Development Board could not be registered
maximum of 50 per cent. The duty rates for with the traffic authorities, assembly based on
second-hand cars are presented in table IV.5. imported components has not been
significant. The duty structure prevailing in
2003/04 and 2004/05 is shown in table IV.6.
Table IV.6. Import duty structure on automobiles
Tariffs (%)
OEMs vehicles (new) CBU* CKD
Cars and Vans 2003/04 2004/05 2003/04 2004/05
Up to 1,000 cc 75 50
1,001 to 1,500 cc 100 50
1,501 to 1,600 cc 125 70 35 35
1,601 to 1,800 cc 125 80
1,801 and above 150 100
Motorcycles 90 90 30 30
Trucks 60 60 20 20
Buses and coaches 20 20 20 20
LCVs 60 60 20 20
Tractors 30 30 0 0
Component producers
Components deleted from CKDs (only for OEMs) 75, 100, 125 50, 70,
80, 100
Spare parts tariffs 25 35
Key raw materials – steel, plastics 20 or 25 10, 10
Key raw materials with subcomponent deletion 5 5
Machinery 5 5
Source: Central Board of Revenue, Ministry of Finance, GOP, 2005.
* CBU capital value tax on imports: 3.75%, 5%, 6.25%, 7.5%, and sales tax 15%
4. The deletion programme and the they paid on their imported CKD packs
TRIMs Agreement (35 per cent at present). Credits towards the
deletion percentages were also awarded for
The deletion programme for the auto exports.
industry started in 1983, with a revised policy
announced in 1987. Assemblers setting up Similar to the OEM assemblers,
automobile units in Pakistan were required to component manufacturers also followed a
replace imported components by local deletion programme. Initially, they imported
sourcing either by manufacturing them in- sub-components for producing the
house or buying them from local suppliers. In components but they gradually had to
1995, in the Engineering Development produce the sub-components as well.
Board, a Committee on Indigenization was Sometimes, they also had vendors who
formed. It developed the Industry Specific provided them the sub-components. As long
Deletion Programmes (ISDPs) and the Unit as they followed the programme, they were
Deletion Programme. The ISDPs specify the allowed to import their raw materials and
cumulative deletion required for cars and intermediate products duty-free.
other automobiles of different cylinder
capacities in various years. The ISDPs were The policy has been successful in the
published and OEMs could decide which sense that indigenization levels now range
components to source locally, as long as the from 56 to 70 per cent for cars and from 81 to
proportion prescribed was met. The ISDPs 88 per cent for motorcycles (table IV.7). 15
allocated a percentage to each of the However, while the deletion levels ranged
components in the total CKD kit. These from 56 to 70 per cent, the cost of remaining
percentages were arrived at by taking into CKD was almost twice the cost of locally-
consideration the average prices of procured components. 16 Whereas this suggests
components of various makes prevailing at that the cost of deleted components is low,
the time when the ISDPs were designed. because of the quality differential, it is not
certain how efficient the deletion has been.
Assemblers who failed to follow the Higher costs of CKD kits may reflect transfer
programme had to import the component at pricing, lower prices of components produced
the CBU rate of import duty. Sometimes, in the domestic market, or higher percentages
over and above the CBU import duty, allocated to deleted products.
penalties were also imposed if the assemblers
did not adhere to the deletion programme. Table IV.7. Deletion programme and cost of CKD
New firms were given two years to catch up, (%)
but they had to start with a minimum deletion
Deletion CKD Cost of
level prescribed by the Engineering levels Cost* domestic
Development Board.14 Under the Unit Level components
Deletion Programme, assemblers could Bikes 81–88 73.8 26.2
choose from which components they would
Suzuki car 56–70 65.3 34.7
like to delete from the list of CKD items.
They had to meet the required target Honda car 56–70 72.4 27.6
aggregate deletion percentage for car models Toyota car 56–70 65.0 35.0
in a certain cylinder capacity group. This Dewan car 56–70 65.0 35.0
target is a function of time and aggregate
production of all the models in the group. As *CKD cost includes the import duty.
an incentive for increased indigenization, a Source: Automobile Manufacturers Association,
formula rewarded assemblers that exceeded 2005.
the group target with a reduction of the tariff
The indigenization (deletion) policies 5. Future course for the auto industry
have acted as non-tariff barriers to imports, as in Pakistan
they did not allow the import of deleted parts.
Whereas it is difficult to determine the extent The Pakistani auto industry is
to which the programmes have acted as expanding at a rapid pace. A robust growth of
effective barriers, it seems that the 30 per cent was recorded only in 2004/05
programme has become redundant. Firstly, (Government of Pakistan, 2005). With rising
both assemblers and component demand and additional capacity, production
manufacturers pointed out in interviews that, of passenger cars, motor bikes and other
even after the abolition of the programmes, vehicles is expected to increase further.
subcontracting relationships will be Pakistan has to build on the strengths and
maintained because the domestic prices are weaknesses of the sector and ensure that it
lower compared to prices of imported has an efficient, low-cost and progressive
components, and because the supply is auto industry. The foreign auto companies
assured. That a number of component have demonstrated that they are willing and
manufacturers have been able to export also able to transfer technologies and
indicates that domestic prices would be management, marketing and other skills to
below the international market prices. Pakistan. Pakistan’s labour force, including
Secondly, although the duty on spare parts unskilled workers, skilled technicians,
has been lower than those on CKDs over the supervisors, managers, and entrepreneurs,
past year, domestic producers have still been both in the assembly companies and in the
able to compete. Nevertheless, OEMs are not component industry, have also adapted well
allowed to import the deleted components. to changes that are under way.
The landed cost of some of the components,
especially those requiring large volumes, may Pakistan has to ensure a viable auto
also be lower than the domestically produced industry so that domestic producers are able
components. to compete with imported products. The
reduction in import duty rates in the 2004/05
The 2004/05 budget provided for budget may not be sufficient to bring
differentials in imported duties on raw competition from imported products and to
materials, sub-components and force producers to take a long-term view. It is
intermediaries, sub-assemblies and imperative that a detailed policy framework
assemblies, and components with import duty for the next 5 to 10 years is provided to
rates of 5 per cent, 10 per cent, 20 per cent investors for optimizing the overall economic
and 35 per cent, respectively. This cascaded growth. Such a framework should encompass
tariff structure would result in the dispersion all stakeholders – including consumers,
of effective protection rates and may result in assemblers and component producers who are
production of those components in which the interested in profitable, growing and
country may not have a long-term reasonably stable production conditions – and
comparative advantage and thus resulting in the Government.
inefficient production structure. Since the
differences in various sub-processes are For realizing the objectives of an
sometimes blurred, it may also open the way efficient automobile industry, the
to corruption. Government may continue to rationalize the
tariff structure and eventually let the industry
be free from local content requirements. The The Government believed that the industries
trade policy framework could consist of a which opted for the programme had
gradual reduction in tariff rates and significantly benefited from it, while the
eventually mildly cascaded tariff rates country as a whole benefited through job
applied to imports of built up cars, SKD creation and support for underdeveloped
units, CKD units, components and areas. Against this background, the
replacement parts. The removal of TRIMs Government maintained that the abolition of
has shown positive results in the development the programme would be detrimental to the
of the industry; therefore, remaining TRIMs industries concerned and the economy.
must be eliminated in the shortest possible
time to achieve maximum advantage. Normal Pakistan has so far successfully
drawback and other export facilitation deleted 86 programmes relating to machinery
measures can also apply to the auto industry and domestic appliances. However,
exports. The Government may introduce a difficulties were encountered in phasing out
tariff reduction on CBU and CKD imports. In 16 programmes related with the auto
the not-too-distant future, duties on all types industry. Slow movement on this front was
of cars and the parts should be made uniform. justified by the need to help local vendors
Such an announcement may provide a prepare themselves to compete in domestic
framework to investors for an optimal and international markets.
investment and production mix.
Thus, at the time of writing, only the
F. Summary and conclusions automobile sector was still following the
Indigenization/Deletion Policy. It has made
contributions by providing employment,
Inflows of FDI into Pakistan are technology transfer, revenues and GDP
relatively modest, despite the significant growth, foreign exchange savings, increased
steps taken to liberalize and privatize. Over foreign and local investment, training and
the past two decades, Pakistan has human capital development (Government of
significantly reformed its regulatory Pakistan, 2005).
framework; it has privatized a number of
public enterprises and intends to privatize the The TRIMs used by Pakistan in
remaining ones, including utilities, some of different industries played an important role
which may still be considered natural in the overall industrial development. The
monopolies. Reforms in the financial sector main benefit of the TRIMs has been the local
have been significant. Similarly, supervision production of engineering, electrical and
by the Securities and Exchange Commission electronic goods. There was no vendor
has helped to improve investor confidence. development in the early phase of
industrialization. With the help of the
Pakistan has traditionally used some deletion programme, Pakistan has moved
TRIMs to protect and develop its industry. It from small-scale to large-scale production.
maintained links between certain tariff The development of infrastructure, the
exemptions and local content requirements in production base, and skilled labour in the
a number of industries, including particular fields has been credited to the
automobiles, electronic goods, electrical TRIMs. The local automobile industry is
goods and machinery. It notified to WTO the another significant beneficiary because
elimination of most of these TRIMs in 2005. production of parts by local vendors has
The reason for continuing some of them – substantially reduced the price of vehicles
especially the deletion programme for the and local producers of automobiles have
auto industry – was their deemed usefulness. earned good profit. It is now time for the
Pakistani automobile industry to move into overall effect of the phasing-out of the
the export market after meeting the local TRIMs should therefore be good for the
demand. The benefits of TRIMs enjoyed by industry and force it to become competitive
the industry should be enough to enable the domestically as well as in the international
industry to stand on its own feet rather than market.
looking towards the Government for support
in terms of tariff and non-tariff measures. The
Notes
1 10
This chapter is based on a paper prepared for Under these agreements, foreign firms provide
UNCTAD by Nasir (2006). local firms the expertise and technical support to
2
Local content requirements are contained in manufacture components in Pakistan.
11
deletion programme. Under a deletion Value added has been estimated on the basis of
programme, entrepreneurs undertake to utilize a 18.5 per cent value added coefficient derived from
progressively higher proportion of domestically the Census of Manufacturing Industries for 2000–
produced components in the production of certain 2001.
products, subject to specific incentives in the form 12
Exports of auto parts increased from $7 million in
of concessionary tariffs on imports of raw 1998–1999 to $31 million in 2002–2003.
materials and other components. 13
Besides import duties, a sales tax of 15 per cent on
3
The State Bank of Pakistan publishes direct and the duty-paid values is also imposed. Moreover,
portfolio investment separately from 1984/85 car and van owners have to pay capital value tax
onwards. at the rates of 3.75 per cent for cars up to 1,000 cc,
4
See WTO doc. G/TRIMS/N/1/PAK/1, 7 April 6.25 per cent for cars from 1,000 to 1,500 cc and
1995. 7.5 per cent for all the other categories. These are
5
See WTO notification G/C/W/173, 11 January applicable to imports as well as domestically-
2000. produced cars. The new assemblers are allowed
6
See WTO notification G/L/466 dated 7 August import of 100 CBUs.
2001, G/C/W/294 dated 31 August 2001 and 14
For example, “Centro” had to start with
WTO decision notification G/L/501 dated 9 45 per cent deletion levels, but in a couple of
November 2001. years, it had to achieve the industry level deletion
7
Because of the small scale of production, the local programme, which was 65 per cent. Similarly, in
industry was not in a position to lower the cost of 2004–2005, the new assemblers in tractors were
production and enjoy economies of scale. allowed at an initial deletion level of 40 per cent,
8
The list of deletion-free commodities by 2003 but after two years they had to go up to
includes: electronic calculators, microwave ovens, 85 per cent.
caller line identification apparatus, car 15
These deletion levels refer to the percentages of
cassette/stereo players, cassette players, pocket the value of parts produced in Pakistan as given in
size cassette players, compact disc players, hi-fi the ISDPs and that may deviate from the
systems, VCR/VCPs, laser video disc players, proportionate value of the parts if the entire kit
digital video disc players, cellular/mobile was imported.
telephones, radio and cassette players, television 16
The deleted parts themselves generally comprise
sets, reception apparatus for receiving satellite assembly of the imported components.
signals of a kind used with television and cameras.
9
Agreements with OEMs did not include any
condition regarding exports and buy-back
arrangements. Nevertheless, limited completely
built units have been exported to countries such as
Afghanistan, Bangladesh, Nigeria and Rwanda by
two assemblers.
The Philippines has a long colonial “The major structural change since the
past. During this period, the economy failed war has been the growth of domestic
to develop, with industrial development manufacturing. Organized manufacturing
limited to the initial processing of sugar, (15 workers and over), which was limited
copra, hemp, tobacco and indigo for export. to processing of agricultural products
(In the 1930s, copper and gold entered into before the war, expanded more than 10
the trade picture.) In 1946, the country per cent per year during the 1950s. By
acquired political independence. However, 1960, it had become a significant segment
the young republic was immediately hit by a of the economy, accounting for 12.7 per
deep politico-economic crisis engendered by cent of the net domestic product that year.
86 Elimination of TRIMs: The experience of selected developing countries
A vigorous entrepreneurial class has for future growth. But the price exacted by
emerged and the nucleus of a skilled the IMF was stiff – the lifting of controls and
labour force has been formed…” the devaluation of the peso, from P2.00 to $1
to P3.50 to $1, ostensibly to discourage
Table V.1. Average annual growth rates of GNP, imports and promote exports. The
1946-2000 devaluation, however, failed to correct the
Years GNP
trade deficits and the economy remained
overwhelmingly import dependent. When
1946–1950 17.2 President Macapagal saw the deleterious
1951–1955 9.3 effects of the peso devaluation on the local
1956–1960 5.0
1961–1965 5.5
industrialists, he turned around and enforced
1966–1970 4.8 a system of protection for the locals by
1971–1975 6.5 erecting uniformly high tariff walls.
1976–1980 6.3
1981–1985 -1.7 Although intended to protect the
1986–1990 5.4
economy and local industry, the high-tariff
1991–1995 2.9
1996–2000 2.8 regime had some negative repercussions.
Firstly, it did not distinguish between the
Source: NEDA statistical compilations. good and bad performers. All received
protection. Second, there was no schedule
Nonetheless, the first ISI decade did announced for the eventual elimination of
not resolve the balance of payments problem, tariff protection. In short, the tariff regime
as the industrial structure, based on light was neither performance- nor time-bound.
finishing and assembling industries, was
heavily dependent on imported machines, Thus, throughout the 1960s, the
tools and industrial raw materials. Thus, the economy grew but at a slower pace. More
crises recurred in 1959–1960. importantly, the trade and payments crises
recurred in 1969–1970, forcing the
The dilemma then was: where should Government to go back once more to the
the Philippines go? One choice was to go for IMF, which, in turn, asked the Government to
export-oriented manufacturing, in order to float the peso, leading to the devaluation of
correct the trade and payments deficits. the peso to P6.50 to the dollar. Poverty,
Another was to deepen the industrial unemployment, and labour and social unrest
structure through the development of swelled in the early 1970s.
intermediate and basic industries, so as to
lessen the dependence on industrial imports 2. The shift to EOI
and increase industrial capacity. A third
choice was to do both. Japan and, later, the When martial law was declared in
Asian newly industrialized countries (NICs), 1972, the Government engineered a shift in
did both, applying protectionism on both their economic orientation from the inward-
domestic and export industries and looking ISI policy of the 1950s and 1960s to
consciously building up the depth and a more outward-looking export-oriented one.
breadth of their industrial structures. This shift was managed by a group of
Western-educated technocrats and enjoyed
One of the first acts of then-President the support of the World Bank, which set up
Diosdado Macapagal was to go to the with the IMF a Consultative Group of
International Monetary Fund (IMF) to borrow Creditor Countries for the Philippines
some $300 million to cover the country’s (CGCCP). The EOI shift was originally
payments deficits and provide added capital baptized the labour-intensive export-oriented
industrial strategy (LIEO). The technocrats adoption of the structural adjustment program
used the works of Gustav Ranis of Yale’s (SAP) aimed at deepening:
Growth Center, Hla Myint of the Asian x Trade liberalization via tariff reduction
Development Bank and Hollis Chenery of the and phasing-out of import restrictions;
World Bank to justify the shift.2 x Investment liberalization through laws
eliminating equity restrictions;
The LIEO strategy was meant to both x Privatization of government-owned
take advantage of the huge global market and corporations and assets (and later,
to absorb excess labour. A leading role in the services and public works); and
industrialization process was assigned to x Deregulation in various sectors, such as
foreign capital and FDI enticed to invest in finance and agriculture.
the newly-established export-processing
zones (EPZs) or to register in the bonded Despite the collapse of the Marcos
warehousing manufacturing programme, regime in 1986, the Aquino administration
which allowed duty-free importation for (1986–1992) continued with the SAP
those engaged in re-export manufacturing. programme. It issued Proclamation No. 50
Finance capital provided by the multilateral removing the legal and labour obstacles to the
and the bilateral agencies grouped under the implementation of the privatization
CGCCP were meant to finance the cost of programme. It removed around 2,000
restructuring the economy to make it more products from the pre-EOI list of restricted
efficient and outward looking. Thus, the EOI imports. It issued Executive Order No. 226 or
shift in the 1970s gave birth to new economic the 1987 Omnibus Investments Code, which
actors in the Philippines: (a) the international “simplified” the various investment
creditors (IMF, World Bank and Paris Club facilitation measures and extended to non-
creditor members), (b) the Japanese,3 who export-oriented foreign investors some fiscal
returned to the Philippines as investors and incentives. In 1991, the administration
ODA givers, and (c) the TNCs engaged in engineered in Congress a Foreign
production in the duty-free and tax-free Investments Act (FIA), which allowed 100
location sites in EPZs. per cent foreign equity even in non-pioneer
undertakings in any area of the economy,
The labour-intensive export-oriented except those listed in a “short negative list”.
programme had a modest impact on the
economy, which grew in the 1970s through Under the Ramos administration
an infrastructure development binge financed (1992–1998), the SAP’s economic
by foreign borrowing. The country remained liberalization programme was pursued even
heavily import-dependent, with the new more relentlessly. The tariff reduction
export-oriented garments industry engaged programme was accelerated under the Tariff
primarily in re-export manufacturing based Reform Program (TRP). Started in 1981, the
on imported duty-free textiles and other TRP brought down tariffs to an average of 28
materials. Thus, the trade and payments per cent in 1985; in 1993, tariffs went down
crises recurred in 1979–1980. to an average of 23.5 per cent; and in 1994, a
third TRP established a tariff liberalization
The World Bank came in and offered schedule aimed at bringing tariffs to a
the Philippines a new lending facility – the uniform 5 per cent by 2004. As of 2000, the
structural adjustment lending programme. average was already down to 7.96 per cent
According to the World Bank, even if the (see table V.2).
official policy regime was LIEO, the
economy failed to take off because it was not In spite of the 1997–1998 Asian
open or outward-looking enough. Hence, the financial crisis, the Estrada administration
(1998–2001) maintained the SAP continued it, which brought down tariffs for
programme, including its tariff and many industrial products at “nuisance” rates
investment liberalization programmes. The of 0–5 per cent in 2002-03 and for
Arroyo administration (2001–present) also agricultural products at less than 10 per cent.
Table V.2. Average nominal tariffs by sectors and years
(%)
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Agriculture 35.95 40.94 36.91 32.86 27.99 28.29 25.28 18.91 16.33 14.40
Manufacturing 24.61 23.21 21.46 17.62 13.96 13.37 11.38 9.36 8.98 6.91
Overall 25.94 25.55 23.50 19.72 15.87 15.55 13.43 10.69 9.98 7.96
manufacturing. About 122 of them were from into “special economic zones” (SEZs), which
the United States and 96 were Japanese. In provide the same fiscal and duty-free
the EPZs, the Government allowed FDI to privileges to investors-locators. Thus, with
come in with 100 per cent foreign equity or SAP and general investment liberalization,
through joint ventures. In non-EPZ the Philippines was one of the most open
enterprises, joint venture was the preferred economies in Asia by the mid-1990s. FDI
government mode of enticing foreign fueled the growth of the “non-traditional”
investments, justified in the name of export sector, composed mainly of
technology transfer. Joint ventures were electronics and garments, which succeeded in
usually on a 60–40 basis, with majority replacing the colonial minerals and
equity ownership held by Filipinos. The joint agricultural crops as the country’s leading
venture scheme was the main modality used export products. Electronics, accounting for
in promoting the auto assembly industry, two thirds of total exports, is considered the
supplemented by a programme requiring Philippines’ success story under the SAP.
investors to use locally-produced parts in
increasing quantity (see section C). During the super-liberalization decade
of the 1990s, total exports quadrupled in
Table V.3. Number of newly-registered domestic eight years, from $8.8 billion in 1991 to
corporations with foreign equity (DCFEs), foreign
corporations (FCs), regional headquarters of
$35.1 billion in 1999 (see table V.4).
multinational corporations (RHMs) and However, imports also tripled in only six
representative offices (ROs), 1946–1977 years, from $12.1 billion in 1991 to $35.9
billion in 1997. Imports only went down in
Years DCFE FC RHM* RO the Asian crisis years of 1997–2000, the
1946–1966 NA 510 NA NA years the country registered a modest trade
1967 186 24 NA NA
1968–1972 997 69 NA NA
surplus. From 1991 to 1997, the period when
1973–1977 2,582 168 150 86 deep tariff cuts were made and most of the
import restrictions were removed, the
3,579 791 150 86 Philippine trade deficit ballooned from
$3.2 billion to $10.7 billion.
Source: Mamoru Tsuda et al., The Impact of TNCs in
the Philippines: A Study of Major Foreign Table V.4. Philippine trade 1990–2003
and Foreign-Affiliated Corporations in the (billions of dollars)
Philippines. UP Law Center, June 1978, t.1.
* Presidential Decree 218, promulgated in 1973, Exports Imports
grants incentives to overseas corporations to Total Balance
Year Value % total trade Value % total
trade of trade
establish their regional headquarters in the trade
Philippines. 1990 20.4 8.2 40.1 12.2 59.9 -4.0
1991 20.9 8.8 42.3 12.1 57.7 -3.2
1992 24.3 9.8 40.3 14.5 59.7 -4.7
The succeeding Aquino, Ramos, 1993 29.0 11.4 39.3 17.6 60.7 -6.2
Estrada and Arroyo administrations tried to 1994 34.8 13.5 38.7 21.3 61.3 -7.8
1995 44.0 17.4 39.7 26.6 60.3 -9.2
deepen the investment liberalization 1996 53.0 20.5 38.8 32.5 61.2 -12.0
programme in line with the SAP programme 1997 61.1 25.2 41.2 35.9 58.8 -10.7
1998 59.2 29.5 49.9 29.7 50.1 0.2
put in place in 1980–1981. The 1980s and 1999 65.8 35.1 53.2 30.7 46.8 4.4
1990s also witnessed the proliferation of 2000 72.6 38.1 52.4 34.5 47.6 3.6
2001 65.2 32.1 49.3 33.1 50.7 -1.0
around 60 private industrial parks registered 2002 70.6 35.2 49.8 35.4 50.2 -0.2
with the EPZA, mainly in Regions III 2003 73.2 37.2 48.8 37.5 51.2 -1.8
The reason for the surge in trade decades of the 1950s and the 1960s and
deficits can be gleaned in the composition of lowest during the SAP decades of the 1980s
the country’s exports and imports. The and 1990s. FDI grew substantially in the
phenomenal export growth was accounted for 1970s to the 1990s (see table V.5). However,
mainly by one item – electronics, consisting Malaysia, Thailand and China have been
of assembled semiconductor devices or chips more successful in attracting FDI, which
and varied electronic parts or components. partly explains why these countries have
From $3.78 billion in 1993, electronics bypassed the Philippines in economic growth
exports went up to $25.4 billion in 1999. On terms. Even Viet Nam is lately attracting
the import side, the most important items more FDI.
were telecom materials and electrical parts
needed by the electronics industry. This is the After three decades of EOI–SAP, the
basis for the observation that the value added Philippines had failed to achieve industrial
in the industry is estimated to be between 10 transformation. Dr. Josef Yap, now President
and 20 per cent or even less. One study found of the Philippine Institute of Development
that the local content “is in most cases less Studies (PIDS), noted that mainstream
than 5 per cent” (Morisawa, 2000). For economists have been in the driver’s seat of
example, the local content is only 5–6 per economic governance for over a quarter of a
cent at Texas Instruments Philippines, the century, and yet the country has failed to
country’s biggest electronic exporter, and less achieve industrial transformation. Table V.6
than 1 per cent in the case of ROHM shows that the share of manufacturing to total
Electronics Philippines, Inc. Philippine output went down from 27.6 per
cent in 1980 to 24.1 per cent in 2002,
Outside electronics, the growth of whereas those of Indonesia and Malaysia
other export products has been weak or increased by 10 to 11 percentage points for
marginal. In particular, garments, the the same period and that of Thailand by a
country’s leading exports in the 1980s, have remarkable 14 percentage points.
been declining since 1995, when the value of
garments exports reached $2.57 billion. This Table V.5. Comparative FDI, 1970–2003
is due to the rise of cheaper production sites Per Total FDI Total FDI Total FDI Total FDI 2003
in Asia (China, Viet Nam, Bangladesh, etc.) capita inflow inflow inflow inflow FDI
income 1970-79 1980-89 1990-97 1998-2002 inflow
and elsewhere (Eastern Europe, Caribbean, Countries ($) ($ billion) ($ billion) ($ billion) ($ billion) ($ billion)
etc.) and the anticipation of the phasing-out China 923.07 0.00008 16.2 200.6 224.4 53.5
of the Multi-Fibre Arrangement (MFA) under Indonesia 680.24 2.0 3.3 23.7 -12.4 -0.6
Malaysia 3 676.47 3.3 2.6 35.2 14.1 2.5
the WTO’s Agreement on Textiles and
Philippines 911.88 0.8 2.1 8.4 7.4 0.32
Clothing (ATC). Garments have been Thailand 1 875.82 0.8 2.8 17.2 21.8 2.0
overtaken by “machinery and transport Viet Nam 413.84 0.008 0.1 10.1 7.0 1.45
equipment”, which consists mainly of auto
Source: World Bank, World Development Indicators
parts producers such as those making wire Database, 2004 and UNCTAD, Database
harnesses, anti-brake systems, transmissions, 2004.
etc. Machinery and transport equipment Note: Malaysia’s 2000 FDI net inflows were $3.8 billion.
increased its share of the total exports from
Table V.6. Share of manufacturing to total output
3 per cent in 1993 to 10 per cent in 1997 and
(%)
20 per cent in 2003.
Year Indonesia Malaysia Thailand Philippines
4. Brief assessment of the EOI–SAP policy 1980 15.2 19.6 23.1 27.6
2002 26.6 30.0 37.1 24.1
Overall, the economy has not fared Source: ADB key indicators, as cited Josef Yap, “A
well under the EOI–SAP. As shown in table Generation of Economic Orthodoxy: Time to
Take Stock”, 21 September 2003, Philippine
V.1, growth was highest during the ISI Daily Star.
There are many possible reasons for subcontractors transferred, after three decades
the lackluster performance of the economy of operations in the Philippines, is the
under the EOI–SAP, both economic and technology of assembling semiconductor
political, which are beyond the scope of this devices, electronic transistors and computer
paper. However, two explanations which are parts, or the technology of testing some
very much related to the automotive industry processes. In the absence of any conscious or
need to be highlighted here: neglect of deliberate effort on the part of the host
promoting domestic capabilities and the lack country to deepen forward and backward
of technology transfers from TNCs. linkages, the foreign investors simply stuck to
their limited development agenda in a limited
In Japan and the Asian NICs, market, as happened in the case of the local
including China today, export orientation was content programme for the auto industry.
promoted alongside the system of domestic
protection. These countries calibrated their C. TRIMs, economic deregulation and
liberalization measures based on the growing the local content programme collapse
capacity of their domestic industries to
survive and compete. Often, liberalization 1. Philippine car assembly and the
took place only after the industries had local content programme
become globally competitive. In the case of
the Philippines, however, the ISI industries Before and after World War II, the
were virtually neglected. They were not Philippines imported CBUs of cars and other
consulted on the schedule, pacing, motor vehicles, mainly from the United
sequencing and timing of the EOI–SAP States. But starting in 1951, CBU imports
liberalization programme. Philippine tariffs were banned, in line with the prohibition on
were reduced to rates way below other the importation of finished products under the
ASEAN and Asian neighbours. For example, ISI programme. In 1952, CBUs were even
Philippine tariffs are only a third of those of reclassified from “non-essential consumers
Thailand, both in industry and agriculture. goods” (NEC category) to “unclassified or
Worse, the Government has been unable to banned consumer goods” (UI category),
clamp down on the operations of smugglers, meaning products with the lowest priority in
who deprive the country of as much as P175 the entitlement for dollar rations. The CBU
billion annually in foregone value added ban paved the way for development of car,
taxes and customs revenues, according to truck and motorcycle assembly industries, all
studies by the Federation of Philippine of which engaged in the assembly of
Industry, the Fair Trade Alliance and the imported CKDs and SKDs, mainly from the
Government’s task force against smuggling. United States. The new assembly plants were
Finally, domestic industry is now bearing the classified as “new and necessary industries”,
full brunt of taxation since the free trade and given their share of dollar allocations. In
zones and industrial parks engaged in re- turn, the assemblers used their foreign
export manufacturing enjoy fiscal incentives exchange allocations to import CKD/SKDs.
while importers avoid paying taxes due to
low tariffs and smuggling. A Filipino company, Fabar Inc., was
the first to go into the assembly business by
Another explanation is the unrealistic venturing into the assembly of Austin and
assumptions by the EOI–SAP proponents that Studebaker cars. Later, the American pre-war
FDI would fuel a spiral of industrial growth car exporters – General Motors, Chrysler and
in the host country. The reality has been Ford – established assembly plants. A
different. As demonstrated by the electronics number of enterprising Filipino industrialists
assembly industry, what the TNC also set up plants. By 1960, there were 12
Because the PCMP participants were with Ford Australia as the lead market. The
the only ones allowed to import CKDs, the plant was capable of producing over 80
non-PCMP assemblers either closed down or different body stampings, including roof and
tried to survive by merging with the PCMP wheelhouse panels. General Motors ventured
participants or by doing subcontracting work into the manufacture of engine transmissions,
for them. The CKD imports were allowed on which were exported to Australia, New
the condition that these imports were partly Zealand and other Asian countries.
paid through the foreign exchange earnings
generated by exports made by PCMP Table V.7. Foreign investments in the Philippine
participants. Since PCMP participants were car market, 1974-1994
(Millions of dollars)
not in the business of assembling cars for
export, they set up related car-part production Year Investments
businesses such as the manufacture or 1974 84.3
assembly of transmissions, diesel engines and 1975 45.2
1976 31.2
other critical auto parts exported to other 1977 35.6
Asian countries, usually subsidiary 1978 22.5
assemblers of the transnational car makers. 1979 23.4
1980 21.8
1981 24.0
The PCMP took off auspiciously in 1982 21.7
1974, with foreign investors putting up $84.3 1983 11.4
1984 6.6
million (see table V.7). A number of car-part 1985 10.5
makers mushroomed, with the PCMP 1986 5.0
participants themselves leading the way. 1987 3.6
1988 2.6
1989 7.0
PAMCOR, through its affiliate, Asian 1990 6.4
Transmission Corporation (ATC), set up an 1991 6.5
1992 6.8
engine transmission manufacturing plant in 1993 7.3
Calamba, Laguna. The engine transmissions 1994 8.0
and related transmission components (such as
rough forgings and castings) were marketed Source: CRC research unit.
to the local PAMCOR’s assembly plant and
to Mitsubishi Japan and other Mitsubishi Independent Filipino car-part
subsidiaries in Asia. Delta Motor established producers, with licenses or in joint ventures
an automotive engine plant producing engine with the big car makers, concentrated on less
assemblies fitted with Delta-manufactured sophisticated car parts such as mufflers, floor
engine packs, cylinder heads and bearing carpets, horns, silencers, etc. The local parts
caps, as well as clutch housings for other generated by PCMP included engine support,
PCMP participants. DMG invested on press- accelerators, clutch pedals, fan belts, axle
forming facilities to produce varied engine boots, headlights, coil/leaf springs, glass, seat
parts and stamped and pressed steel body assemblies, seat frames and adjusters,
components for its “Sakbayan” passenger harnesses, wheels, tires, batteries, pipes and
cars. Partial machining of the Volkswagen tubes, rubber hoses, radiators, door trims,
engine was also undertaken. Ford brake drums/discs, fuel tanks, air
incorporated Ford Ensite Limited, a car body conditioners, car stereos, speakers, rubber
stamping company based at the Bataan bumpers, shock absorbers, trunk trims, shelf
Export Processing Zone. The plant trims and weather strips.
manufactured Cortina sheet metal body
stampings and sub-assemblies for export to There were 32 car-part makers in
1974; by the end of the 1970s, there were
Ford’s affiliates in the Asia-Pacific region,
more than 200. In the 1980s, over 250 car-
part makers had registered with the BOI. vehicles called the Asian utility vehicles
Moreover, there were unregistered backyards (AUVs), which are ideal as family vehicles or
or small car parts producers doing contracting all-round vehicles for small enterprises.
work for the bigger part makers. All the
PCMP, PTMP and PMMP participants Despite its success in the 1970s, the
claimed they were able to attain a 40 per cent PCMP programme collapsed in the first half
local content – the minimum requirement – in of the 1980s. Problems started in 1979–1980,
the second half of the 1970s. This was during the second oil shock, which depressed
difficult to verify, especially for the PTMP the car and vehicle market. The Philippine
participants. car market got further depressed in 1980–
1986, due to the political crisis of the Marcos
In the case of the motorcycle regime; and the debt crisis in 1983–1985,
assembly, the PMMP participants proudly which precipitated an economic recession and
claimed to have attained over 50 per cent uncertainties over the future of the country.
local content, which is understandable given
the lower technological makeup of In 1983–1985, the debt crisis became
motorcycle production. The PMMP a letter-of-credit crisis, meaning importers
participants included Norkis, a licensee of had to deal with the outside world on a cash
Yamaha and a 100 per cent Filipino firm. The basis. This greatly affected the operations of
others were joint ventures with Kawasaki, CKD importers and local parts assemblers,
Honda and Suzuki, all Japanese motorcycle who also had to deal with a fast-shrinking
makers. Table V.8 shows the localization market. This was the period when three of the
success in the motorcycle assembly. The five PCMP participants dropped out. Ford
localization success was partly fueled by the and General Motors closed its operations and
domestic market growth for motorcycles, justified this as part of their global
especially for the three-wheeled ones (or streamlining programme. Delta Motors,
“tricycles”) which are extremely popular as assembler of Toyota cars, had to mothball its
public conveyances in many towns and side facilities because of massive indebtedness
streets of metropolitan Manila. triggered by the peso devaluation and the
depressed market.
Table V.8. PMMP local content and sales
As indicated in table V.7, FDI
Local content (%) Sales dramatically declined from the mid-1980s to
Year Prescribed Attained (No. of
units)
the first half of the 1990s. During the crisis
1973 10 21 19 796 years of the 1980s, the Government was
1974 20 22 29 075 virtually unable to monitor and enforce the
1975 30 33 29 456 local content programme for the original
1976 40 45 31 028 PCMP, PTMP and PMMP participants.
1977 50 46 42 188
1978 50 52 51 769
1979 50 54 49 059 2. CDP and the automotive
1980 50 55 44 774 liberalization/deregulation
programme
Source: Virginia Pineda, Motorcycle and Parts
Industry, PIDS (1994).
In 1987, the Aquino administration
As to the progressive truck tried to revive the PCMP. It was re-baptized
manufacturing program (PTMP), the the Car Development Programme (CDP), but
Government had been sparing in reporting, with essentially the same implementation
ostensibly due to the limited assembly work elements – a ban on CBUs, local content
in the bigger vehicles such as buses and targets and foreign exchange earnings
trucks, most of which were imported in CBU through exports. CDP covered passenger cars
forms. However, there is great localization with engine displacement of up to 2,800
success in the production of commercial
cubic centimeters. The CDP participants were proper, at the higher engine category, after a
limited to three – PAMCOR, Nissan while. Thus, by 1990, there were officially
Philippines and Toyota Motors Philippines eight car assemblers and 26 commercial
(which took over the idle facilities of Delta vehicle assemblers.
Motors). Local content levels were set as
follows: 32.26 per cent for 1988, 36.58 per In 1992, the CDP was further
cent for 1989 and 40 per cent for 1990. amended, this time to allow the assembly of
high-end passenger cars with engine
The CDP participants were also asked displacement greater than 2800 cc. This
to generate 50 per cent of their foreign allowed the entry of Volvo International
exchange requirements through their own (Sweden) and Daimler Benz (Germany).
exports, with the auto parts exports
accounting for the entire 50 per cent by 1993. Finally, in 1994, the CDP was
Further, the CDP participants were required amended to allow the entry of new
to invest in the development of at least one assemblers under the ASEAN Industrial Joint
major auto component that would account for Venture (AIJV) scheme. A joint venture with
at least 9 per cent of the net local content. Proton of Malaysia was set up but never took
off. Officially, the number of the CDP
At about the same time and together participants had reached 11 by 1994, from the
with the CDP, the Commercial Vehicle original three in 1987.
Development Program (CVDP) was launched
to replace the Progressive Truck The reality, however, was that the
Manufacturing Programme. Like the CDP, CDP had become meaningless in 1991, with
the CVDP increased the 1990 local content the passage of the Foreign Investments Act,
targets – ranging from 13.7 per cent to 54.8 which allowed 100 per cent foreign
per cent for various categories of vehicles. investment in all activities not falling under
The CVDP also required producers to earn at the “short negative list”.
least 25 per cent of their foreign exchange
requirements through exports. In the meantime, as part of the general
Philippine commitment to SAP, tariffs for
In the motorcycle assembly, the cars had been going down. It should be
PMMP was replaced by the Motorcycle recalled that CBU imports were banned in the
Development Programme (MDP). The local first ISI decade. This ban was subsequently
content target for MDP producers was 55 per replaced by a high tariff of 100 per cent, and
cent by 1990. As in the 1970s, this was easily even higher tariffs for luxury vehicles. In the
exceeded by the MDP participants, given the 1980s, the tariffs started to decline, as part of
lighter nature of the industry. the general Philippine commitment to the
SAP. Thus, in 1981, tariffs on cars went
In 1990, the CDP was amended to down to 70 per cent, to 50 per cent in 1982
include the assembly of smaller cars called and to 40 per cent in 1993.
“people’s car”, with an initial price ceiling of
P175,000. New car assemblers joined the However, tariff rates for CKD imports
“people’s car programme”, including Honda went down even faster. They averaged 30 per
Motors, Columbian Autocar (to assemble cent in the 1980s, dropped to 20 per cent in
Kia), Transfarm (Norkis Gurkel), Italcar 1993–1994 and 10 per cent in 1995 before
Philipinas (Fiat) and Asian Carmakers reaching only 3 per cent in 1996–1997. These
(Daihatsu). Participation in the programme CBU and CKD tariffs were the lowest among
meant eligibility for inclusion in the CDP all the ASEAN car producers.
Despite the recovery of the Asian and One major victim of this “reform”
Philippine economy from the 1997–1998 was the Philippine production of the Asian
regional financial crisis, the local assembly utility vehicles (AUVs), which were
industry had been operating below capacity, classified under the low-end category of
estimated by local informants as only 40 per commercial vehicles. The AUVs were
cent capacity up to the present. One reason products of earlier ASEAN industrial
was the flood of imported brand new vehicles complementation schemes, which were
and parts. developed in the 1970s and 1980s. In the
1990s, these AUVs, which enjoyed fiscal
With declining tariffs and a general incentives, experienced a sales boom. With 8-
perception that imported vehicles and auto 10 seats and new stylish designs, they
parts were better in quality than locally- became “hot” items for big Filipino families,
produced ones, imported brand new vehicles small family enterprises and operators of the
and CKD packages began hurting and new “mega” taxis, which bring white-collar
displacing the local producers, eroding the commuters to their places of work or at home
“progressive” intent of the CDP. Hence, the along specified routes. By the second half of
campaign was launched among the the 1990s, more than half of the locally-
assemblers for the upward recalibration of the assembled vehicles were accounted for by the
tariffs. Subsequently, the Government raised AUVs. Moreover, the local contents of
in 1998 the tariffs for CKD packages to 7 per Toyota’s Revo, Mitsubishi’s Adventure,
cent and to 10 per cent in 1999. These rates Honda’s CRV and Isuzu’s Crosswind reached
were still low compared to other Asian 50 per cent or more. Isuzu even claimed that
producers, most of which were hovering at 30 the popular Crosswind was essentially a
per cent or higher.
Given the shrinking car market in a However, official spokesmen for the
liberalized and globalized environment, the car assembly industry have been articulating
automotive workers, mostly from the car the need for the maintenance of protective
assembly industry, started taking up the issue auto tariff rates up to 2005 and beyond. For
of tariff reduction. Since 2000, AIWA, with example, the Philippine tariff rate in 2002
some support from the industry, had been was 30 per cent, compared to Thailand’s 80
agitating for a postponement of the reduced per cent, Indonesia’s 45-80 per cent and
tariff rates for the car industry under AFTA Malaysia’s 140–300 per cent.
and WTO.
Despite the deep downsizings and
AIWA is an alliance of trade unions massive retrenchments that hit the industry in
in the car assembly industry, all of which 1997–1999 as a result of the Asian financial
suffered during the painful restructuring of crisis, layoffs in the industry appear to be
the industry in 1997–1998. A number of car continuing (see table V.13). AIWA laments:
assemblers either closed shop, such as “In the 1960s, we were second to Japan in
Hyundai, or temporarily shut down, such as Asia in the vehicle assembly. In the 1970s,
Nissan. Mitsubishi was hit by a one-month we were overtaken by the Republic of Korea;
strike, after it had laid off nearly a third of its in the 1980s, by Malaysia; and in the 1990s,
workforce. In the other car assembly plants, by Indonesia and Thailand. Today, Viet Nam
such as Honda, strikes were only prevented might overtake us.”
because the Secretary of Labour assumed
jurisdiction over their disputes. Many car-part Table V.13. Layoffs in automotive industry by
makers, including big export-oriented ones, establishment and displaced workers 1999-2002
such as UE Tech, went out of business. Year Establishment Displaced workers
Overall, the car assembly industry recorded Closure Reduction of Closure Reduction of
workforce workforce
over 3,000 job losses in 1997–1999, and the 1999 0 15 234 224
auto-parts industry over 4,000 losses. 2000 7 10 784 274
2001 4 15 492 502
Thus, with the scheduled further trade 2002 5 26 79 596
liberalization in the industry in 2001–2004, Source: Yearbook of Labor Statistics 1999–2002.
the AIWA affiliates saw bleaker prospects on Note: Classification of the industry into minor
the horizon – hence, their decision to forge an industries was implemented only in 1999.
From 1990 to 1998, classification is by major
alliance and to force the Department of
industry.
Labour and Employment to set up a Tripartite
Industry Council for the Automotive
In 2003, AIWA extended its advocacy considered low in the South-east Asian
for the protection of the car assembly region. Such a demand will always require
industry by denouncing the new excise tax on that some assembly work be done locally.
motor vehicles. According to AIWA, the tax Secondly and more importantly, the car
rationalization program was “irrational” industry is heavily regionalized and
because it imposed a measly 2 per cent tax on internationalized. Japanese car makers will
the cheapest-selling cars, most of which were continue to maintain or even expand their
imported, and radical tax increases of close to investments in the Philippines as part of their
20 per cent for the AUVs, which were regional and global operations. In fact, the
assembled locally. Philippines, in the 21st century, is now an
exporter of CBUs in the region! Ford
E. Philippine car assembly and car parts Philippines started it, and Japanese car
production in a changing Asian and makers are now slowly doing the same,
global car market deciding on which car models to assemble for
export and which to import. However, the
The plan to have a Filipino car by the volume of CBU exports is much smaller than
end of the 20th century, with 80 per cent or the CBU imports.
so local content started with the wrong gears.
It was assumed that TNCs, mainly the 1. The changing Asian strategies of
emergent Japanese car makers, would Japanese and other car makers
transfer the technology on an increasing rate
via joint ventures and rules on local content In the 1970s and 1980s, when the
and foreign exchange earnings. Japanese began relocating car assembly and
parts production facilities offshore, the idea
This was not exactly how the was to avoid the prohibitive cost of labour in
Japanese and other car makers viewed the Japan and develop the car markets in the
programme when they invested in the emerging economies of Asia.
Philippines and joined the PCMP and CDP
(and PTMP/CVDP and PMMP/MDP). At the In particular, in the 1980s, following
beginning, their plan was to penetrate the the revaluation of the yen as a result of the
Philippine domestic market, which, under ISI Plaza Accord of 1985, some $15 billion of
and later PCMP, was protected by the CBU Japanese FDI was ploughed into South-east
ban and high tariff walls. The only major Asia (Bello et al., 2004). Unfortunately for
modification to the programme was the the Philippines, Japanese TNCs found
transformation of the Philippines as a Thailand a more attractive location, with its
production hub of select auto parts destined booming market and better infrastructure.
for the global market such as wire harness Thailand became the South-east Asian car
and transmission. hub of Japanese companies, a platform for
the assembly and export of popular brands
However, despite liberalization/ such as Toyota Alti or Mitsubishi Lancer to
deregulation and the phasing-out of local other Asian countries and to North America.
content and foreign exchange requirements,
the local car assembly industry and auto parts However, the Japanese companies
manufacturing industry are not about to took care that they set up assembly plants in
collapse or disappear. the different South-east Asian countries,
given the high tariffs and various forms of
Firstly, there will always be a demand protection that had been erected. They also
for vehicles in the Philippines; even a brought in, either wholly or in joint venture,
demand for just over 100,000 units a year is facilities for the production of auto parts,
with different Asian countries specializing on The process was aided by the decision
certain parts. It is in this context that the in 1996 by ASEAN to have an ASEAN
Philippines became a major production base Industrial Cooperation (AICO) scheme,
for Mitsubishi and Toyota transmissions. which grants preferential tariffs of 0–5 per
cent for companies with subsidiaries in two
There have recently been strategic or more ASEAN countries. The purpose of
adjustments in the Asian car programmes of AICO is to promote a regional division of
the Japanese and returning American and labour for the production of parts and final
European car makers. With tariffs in ASEAN products. Accordingly, an AICO product
down to 5 per cent, the region of over 500 must have at least 40 per cent ASEAN local
million people has become attractive as a content. To date, most of the AICO
market and is increasingly treated as one participants are Japanese car makers (see
market – for CBUs assembled in one country. table V.14). In fact, in the Philippine list of
Thus, some Japanese car makers are AICO companies, only 5 of 31 registered in
consolidating the production of popular 1999–2002 are non-auto-related.
brands in Thailand, while allocating one or
two exportable brands to each of the ASEAN
countries based on capacities and market
demands.
Table V.14. List of Philippine AICO projects, 1999-2002
Philippines Co-participating countries Products
Auto-related
Phil Auto Components Denso Thailand Instrument clusters, dial, bulbs
Honda Cars Philippines Malaysia Oriental and Honda Cars Thailand CKD for OEM of Honda Accord, City and Civic
Malaysia Assembly and CKD for OEM of Toyota Utility Vehicle and Corolla
Toyota Motor Philippines Toyota Thailand CKD for OEM of Hi-lander
Isuzu Philippines Isuzu Thailand Clutch assembly, bracket, rotor assembly, vacuum pump
Laguna Auto-Parts Indonesia Lippo and Thai Mitsubishi Electric CKD for OEM of L-200 and Lancer
Mitsubishi Motors Phil Thailand MMC Sittipol Parts and CKD for OEM of TUV, Corolla, Camry,
transmission
Toyota Motor Phil and Toyota (of Indonesia, Malaysia and Thailand) CKD for OEM of Lynx and pick-ups
Toyota Autoparts Phil
Ford Motor Philippines Auto Alliance Thailand
Honda Cars Philippines Indonesia Honda Prospect, Parts for OEM of Civic, City and Accord
Malaysia Honda Autoparts Parts for OEM of Sentra, Sunny and pick-ups
Nissan Motor Philippines Siam Nissan, Malaysian Tan Chong & Son CKD for OEM of L200, L300 and Adventure/Kuda
Mitsubishi Motor Phil Indonesia Krama Yudha
Toyota Motor Philippines Indonesia Toyota Astra, Malaysia Assembly, Siam Toyota CKD for OEM for Corolla, Camry
Autobus Industries Thailand Arvin Exhaust Exhaust system parts
Honda Cars Philippines Thailand Honda, Malaysian Assembly/Honda Parts Parts for OEM of Honda cars
Mitsuba Mfg. Ltd. Thai Summit Mitsuba Parts for wiper assembly
Nissan Motor Philippines Malaysia Tan Chong, Siam Nissan Parts for OEM of Nissan
Toyota Motor Philippines Indonesia Toyota Astra, Malaysia Assembly, Siam Toyota CKD for OEM of Corolla
Honda Cars Philippines Indonesia Honda Prospect, Thailand Honda Parts for Civic, Accord
Ford Motor Co. Phil Thailand Auto Alliance Parts for OEM of Escape, AUV
Honda Cars Philippines Indonesia Honda Prospect, Malaysia Assembly, Thailand Parts for OEM of CRV
Honda
Toyota Motor Philippines Malaysia Assembly, Thailand Toyota Parts for OEM of Camry and Corolla
Honda Cars Philippines Indonesia Honda Prospect, Thailand Honda Parts for OEM of CRV
Phil Auto Components Denso Thailand Evaporators, radiator tanks
Honda Cars Philippines Indonesia Honda Prospect, Thailand Honda Parts for OEM of Civic, CRV
Toyota Motor Philippines and Malaysia Assembly, Thailand Toyota Parts for OEM of TUV, Camry, Corolla
Toyota Autoparts
Honda Cars Philippines Honda (Thailand, Malaysia, Indonesia) Parts for OEM of Civic, CRV
Non-auto
Matsushita Electric Indonesia National, Matsushita (Malaysia, Thailand) Electric fans and parts
Goya Inc. Nestle (Indonesia, Thailand), Malaysia Packaging Cocoa blend, skimmed milk powder, laminates, wrappers
Republic Asahi Glass Thailand Safety Glass Glass for motor, kitchen
Goya Philippines Nestle Indonesia Packaging materials, confectionary products
Bataan Polyethelyne Malaysia Polyethelyne, Different grades of HDPE and LLDPE
Indonesia Petrokimia
the way. Secondly, from five car assemblers, and regional plans. Unlike the Asian NICs,
the number grew to 20. With a stagnant the Philippines failed to develop its own
economy and too many players, most of the export and domestic champions. In
assemblers had a production capacity of only electronics, it failed to scale up the value
around 10,000 units per assembly plant per chain, to graduate from assembly work to
year, with actual production much smaller. OEM to product application and so on, just
what the Republic of Korea did and what
As to the increased localization of car China is in the process of doing. The
content, the plan was never carried out in a Philippines was an assembler 30 years ago;
consistent and sustained manner. today, it still is. Thus, the enclave nature of
Performance was hardly ever monitored. the export sector has been maintained.
There were no clear incentives for local parts
manufacturers outside the fiscal ones, such as For the Philippines to acquire or
research and development assistance or develop the full technology or higher value
negotiations with the car assemblers on added segments of a production process, local
technical assistance and industry linkages. industry and Government need to work
together. This was the main finding of the
Moreover, the tariffs for CKD parts ADB’s special report on competitiveness
were lowered in the mid-1990s at a rate much (Asian Development Bank, 2003). The issue
faster than those of CBUs. This, in effect, is not whether FDI should be allowed to
rendered the local content requirement policy operate in some industrial enclaves, but how
meaningless. While there were some petitions to transform low-skill, low-technology and
for the extension of the deadlines for the cheap-labour-based export enclaves into
implementation of TRIMs in the Philippines high-skill, high-technology and professional-
beyond 2003, these were largely ignored. labour-based areas with better linkages with
With or without the TRIMs, the car parts the economy to trigger, in the words of ADB,
manufacturing programme is unlikely to “a sequence of beneficial changes throughout
prosper based on local content requirements the economy” (p. 233). Another challenge is
given the unilateral tariff reduction how to encourage local enterprises to learn
programme of the country, reinforced by the from FDI and acquire the skills, know-how
AFTA–CEPT programme and the widespread and market for their own products.
smuggling of second-hand vehicles and
surplus parts. The local content requirements are
among the traditional instruments used by
The few successful parts developing countries in speeding up and
manufacturers are the selected in-house deepening the industrialization process.
manufacturers of Japanese auto TNCs (based Handled properly, they can help promote
on their global and regional plans), and the industrial linkages and, therefore, the growth
global parts exporters, which are not of new local suppliers and subcontractors.
necessarily tied to the local car assembly They may shorten the learning process in the
industry, such as the wire harness producers. mastery of a production process through the
transfer of technology and skills. This is what
Above all, the car industry has not Malaysia and Indonesia had been trying to
developed because, as in the rest of the accomplish (with some measure of success in
country, there has been a lack of industrial the case of the former) in the development of
vision and strategic plan for the industry. It their national car projects in the 1990s.
was not realistic to expect a Philippine car
industry to develop merely by depending on As to the trade-balancing requirements,
the investment plans of transnational car it is only natural for developing countries
makers, who, naturally, have their own global short of foreign exchange to seek a win-win
solution on investments requiring heavy use parts and components such as wire harness,
of foreign exchange, that is, for the investors transmission, tire or batteries. If the
themselves to earn the foreign exchange their Philippines can not be a regional hub for the
projects would need. production of cars and commercial vehicles,
maybe it can be a hub for the production of
So, what can the Philippines do, if it more auto parts and components. What is
wants to achieve a higher level of assembly needed is increased strategizing by the
work and more employment in the Government and the private sector on how
automotive industry? the Philippines can be marketed in the
production of global parts and components
A first step could be to promote better and how some Philippine producers such as
utilization of existing production capacity. Yazaki-Torres can graduate into higher value
The existing assembly plants of Toyota, added parts production.
Honda, Mitsubishi, Isuzu and other car
makers are underutilized, some as low as 40 Thirdly, the production of AUVs
per cent or thereabouts. On the other hand, could be leveraged better. Of all the vehicles
these “surviving” assemblers are not prepared assembled locally, the Philippines has
to abandon these assembly plants in favour of registered the greatest success in the
the import-and-distribute business mode, production of the AUVs. The Filipino
which car makers from the Republic of Korea automotive engineers, technicians and
and elsewhere seem to have adopted. designers have managed to improve the
marketability of the AUVs and increased the
One effective way of increasing the local content to more than 50 per cent. What
capacity utilization of these plants is to has dampened the demand for AUVs in
reduce the smuggling of used vehicles, which recent years are the higher excise taxes on
outnumber the locally assembled and the AUVs (and lower excise taxes on imported
brand new legitimate CBU imports. What is bantam cars, which are mostly imported) and
needed is the political will to stop the the unchecked entry of smuggled, used
smuggling of these second-hands. vehicles, most of which are 8–10 seaters.
There may be a need to rethink the excise tax
Aside from their campaign against system, which tends to penalize local
smuggling, the AIWA unions have also been assemblers and reward importers. Once this
negotiating with the Japanese car makers to problem and the smuggling issue are
assign more car models and more auto parts addressed, the Government and the local
to be produced in the Philippines, including assembly industry should explore how the
those for export to the ASEAN region. This is AUV industry can be strengthened and how
a step in the right direction. Japanese the regional and global markets for
management is using the demand for more Philippine-made AUVs can be developed.
models/parts (or work to be done) by asking
the unions, in turn, to help Philippine-based In conclusion, in a liberalized
assemblers become more productive and Philippine economy and globalizing world
competitive ASEAN- and Asia-wide. A win- economy, the national leaders need to come
win or mutually-beneficial solution to this is up with new and innovative measures to
not impossible to forge. compete in the national and global markets.
They must strategize industrial development
A second approach could be to in the context of the realities of globalization,
consolidate the role of the Philippines as a and draw lessons from other countries, as
regional hub. The country has shown its well as from the country’s own mistakes.
capacity to produce world-class automotive
Notes
1
This chapter is based on a paper prepared for 5
The Philippines also had a 1987 executive order
UNCTAD by Ofreneo (2006). requiring the soap and detergent industry to use a
2
Gustav Ranis collaborated with Gerardo Sicat, the minimum of 60 per cent of raw materials that do
country’s founding Director-General of the not endanger the environment, and prohibits the
National Economic Development Authority imports of laundry soap and detergents containing
(NEDA) constituted under martial law. Ranis less than 60 per cent of such raw materials. Meant
produced a book, Sharing in development: A to promote the fuller utilization of Philippine
programme of employment, equity and growth for coconut-based active agents, this order was never
the Philippines, Manila: NEDA, 1974, which taken seriously by the industry and was never
became the EOI reference book. But the ideas enforced by the trade and industry officials.
contained in the Ranis Report were virtually the 6
In particular, from the perspective of the car
same as those contained in the following: a) Myint makers, given the fact that these are operating
H. 1971. Southeast Asia’s Economy: Development regionally and globally, there is no reason why
Policies in the 1970s. New York: Praeger they would seek an extension of the local content
Publishers; b) Sicat G 1972. Economic Policy and programme and the requirement to earn foreign
Philippine Development. Quezon City: UP Press, exchange to be able to import CKDs/SKDs, as this
1972; and c) the various works of Hollis Chenery affects their overall capacity to manage regional
for the World Bank. and global business operations more flexibly.
3
After World War II, no Japanese openly set foot 7
For example, Yazaki Torres in Laguna and EDI in
in the Philippines. Diplomatic and trade ties were Cavite have thousands of workers producing wire
normalized only in the 1970s. harnesses destined for different automakers
4
Interviews with officials at the Bureau of worldwide.
International Trade Relations of the Department
of Trade and Industry (DTI) and the Motor
Vehicles Division of the BOI-DTI about the
notification process suggest that the notification
was not a difficult process, involving a short
communication to WTO on the Philippine intent
to avail itself of article 5 of the TRIMs
Agreement. The request did not elicit any
objection from any WTO members because the
Philippines explained that there was no intention
to prolong the promotion of mandatory targets on
local content and foreign exchange earnings for
the passenger car, truck and motorcycle industry
beyond the five–year period, in line with the
Philippines commitment to the general
liberalization of the economy.
incentive structure for attracting foreign and domestic investors without any limitation
investment. Section D reviews the Ethiopian on generation capacity.5 Manufacturing of
investment regime in the light of the TRIMs weapons and ammunitions, as well as the
Agreement. Specifically, it evaluates if local provision of telecommunication services, are
content requirements, trade-balancing open to both foreign and domestic investors,
requirements, foreign exchange and export but only through joint venture with public
restrictions exist in the Ethiopian trade and bodies. A number of sectors are reserved for
investment regime. Section E examines the domestic investors: (a) wholesale trade and
incidence of performance requirements in a distribution (excluding fuel and the domestic
few other African developing countries. sale of locally produced goods from FDI
Section F presents some concluding remarks. plants); (b) importing (except material inputs
for export product); and (c) exports of raw
B. Ethiopian regulatory framework coffee, oil seeds, pulses, hides and skins, (if
bought from the market) and live sheep, goats
The regulatory regime governing FDI and cattle (if not fattened by the investor).
in Ethiopia has undergone significant changes
as part of the reform process that started in Foreign investors are also excluded
1992–1993. The present regime is based on from the following services and
investment proclamations issued between manufacturing activities: (a) construction
1996 and 2003.3 Together, these laws (excluding grade one contractors) and
establish which industries are open to FDI, building maintenance; (b) tanning hides and
the financial limits and requirements for FDI, skins up to crust level; (c) hotels other than
the monitoring and reporting requirements star designated; (d) motels, tearooms, coffee
and the available financial incentives. shops, bars, night clubs and restaurants,
excluding international and specialized
1. Industries closed to FDI restaurants; (e) tour and travel operators; (f)
car-hire, taxis and commercial road and water
Foreign investors are encouraged to transport; (g) grain mills; (h) barber and
invest in all industries, except those currently beauty shops; (i) goldsmiths; (j) non-export
reserved for domestic private and State tailoring; (k) saw milling and non-export
investment. The domestic private investor forest products; and (l) customs clearance
category includes foreign nationals who are services, museums and theaters operation and
permanent residents in Ethiopia.4 There is a the printing sector. Banking and insurance
continuous review of the industries closed to businesses, broadcasting services, air
FDI. While more industries are now open to transport services with seating capacity of up
FDI, those currently reserved for domestic to 20 passengers are open only to Ethiopian
private and public investors are still nationals. This large exclusion of FDI is
numerous. Thus, the FDI regulatory designed to encourage indigenous
framework in Ethiopia is still highly entrepreneurship and the domestic private
restrictive compared to many other sector.6
developing countries, including those in the
region (UNCTAD, 2006). 2. Ownership limitations and
requirements
Industries exclusively reserved for
public investment include transmission and Under Proclamation 280/2002, a
supply of electrical energy and postal minimum investment amount is required for
services, with the exception of courier both wholly owned operations and joint
services. However, generation of electricity ventures with Ethiopian companies or
from hydropower is allowed for both foreign individuals. The value of the investment must
be either in cash or in-kind. However, the one to five years (depending on the industry
Government has relaxed the minimum capital and region within Ethiopia). In addition,
required for foreign investors. Accordingly, foreign investors can carry forward initial
the latest proclamation specifies that for operating losses and can use any depreciation
wholly owned FDI into the open industries, method in their financial statement. These
an initial investment of $100,000 is required. incentives apply to industries open to FDI.
For joint ventures with Ethiopian investors,
the foreign partner is expected to contribute a Investment guarantees for FDI
minimum equity of $60,000, in either cash or include full repatriation of capital and profits.
capital equipment. In areas of engineering, This encompasses profits, dividends, interest
architectural, accounting and audit services, payments on foreign loans, asset sale
project studies and management consultancy proceeds and technology transfer payments.
services, $50,000 is required if the There is also a guarantee against
investment is wholly owned by the foreign expropriation, except in major cases of public
investor and $25,000 if it is made jointly with interest when full market value compensation
a domestic investor. This minimum capital will be paid promptly.8 Ethiopia has signed
requirement is not applicable for a project the Convention on the Settlement of
that reinvests its profits or dividends or Investment Disputes. The country is also a
exports 75 per cent of his production.7 Apart member of the World Bank-affiliated
from these minimum capitalization Multilateral Investment Guarantee Agency,
conditions, the investment code does not which issues guarantees against non-
require FDI to meet specific performance commercial risks to enterprises that invest in
goals or impose guidelines for their signatory countries. Ethiopia has also
operations. concluded bilateral investment promotion and
protection agreements with a number of
3. Treatment of foreign investors developed and developing countries, and the
and government incentives Government is keen to conclude similar
treaties with more countries.
Unlike many other developing
countries, Ethiopia has no separate law for C. FDI performance
FDI; the Investment Proclamation governs
both domestic and foreign investment. The FDI inflows amounted to $205
incentives system is also the same for million in 2005 (UNCTAD, 2006 – WIR06).
domestic and foreign investors. There are, Capital registered for approved projects was
however, discriminations against FDI in steadily growing until a sharp decline was
terms of sub-industry restrictions (see above). observed in 1998/99 and 2001/02 (table
VI.1). This could be largely attributed to the
Ethiopian FDI policy does not border conflict between Ethiopia and Eritrea
explicitly require foreign firms to meet and the subsequent economic slowdown.
specific performance goals or guidelines, for According to the Ethiopian Investment
instance, in terms of exports, foreign Commission, a total of 10,594 projects
exchange, local content levels in involving Birr 111 billion in capital were
manufactured goods, or employment limits licensed during 1992/93–2003/04. The shares
on expatriate staff. With regard to investment of domestic private capital, FDI and public
incentives, foreign investors are fully capital were 64.2 per cent, 19.7 per cent and
exempted from customs duties and other 16.1 per cent, respectively.
import taxes on all capital equipment and up
to 15 per cent on spare parts, as well as from Only 59 (19.1 per cent) new and
export taxes. Income tax holidays vary from expansion FDI projects worth Birr 3.8 billion
have become operational during the 1992/93– lower than what was intended in the
2001/2002 period, compared to over 1,803 investment project plan.
domestically funded projects. FDI held about
28 per cent of the value of operational project The country has witnessed a big gap
investment in Ethiopia, and concentrates in a between the number of projects approved and
relatively large investment projects. Of the those that commenced operations. This could
6,338 projects approved during the period be due to the unfavourable global economic
1992–2002, only 1,891 (22 per cent of total trends, in particular the conflict between
capital of approved projects) have Ethiopia and Eritrea. Joint venture projects
commenced operation. The share of were found to be relatively better
operational and under-implementation implemented in Ethiopia compared to wholly
projects together constituted about foreign-owned projects. This might be due to
50 per cent of the total approved projects up the fact that, while foreign investors take care
until the end of 2002. Operational projects of the delivery of equipment and machinery,
have already created temporary employment their domestic counterparts follow the
opportunities for about 308,587 people construction and other assignments in the
(60 per cent of the total approved), although country.
permanent employment was proportionally
contributing factors for the low private FDI in Agreement from the date of accession
the sector. without recourse to any transitional period is
a precondition to ensure accession.9
According to the Ethiopian Moreover, in accession negotiations, some
Investment Commission, around 20 per cent WTO members have requested TRIMs plus
of both wholly owned and joint venture commitments to eliminate or refrain from
projects involve investors from two introducing export performance
(occasionally three) countries. This makes it requirements, even if they are not linked to
difficult to classify accurately capital inflows import volume or value. Such measures are
by source country or region. A review of beyond the scope of the TRIMs Agreement.
investment applications and direct contact Furthermore, requests for liberalization of the
with investors revealed that a large number of investment regime and application of national
these multi-nation FDI consortia are treatment to foreign investments have been
expatriate Ethiopians (sometimes from a made in the accession negotiations, although
single family) initiating steps to invest in new the TRIMs Agreement does not require
projects or rebuild long-established Ethiopian commitments in these areas. Acceding
businesses. countries have also been asked to provide
extensive information on their foreign
Middle Eastern investors accounted investment laws, beyond the scope of the
for one third of the new FDI projects and TRIMs Agreement.
contributed about 57 per cent of the capital.
Saudi Arabia is by far the largest source of As already noted, Ethiopian FDI
investment, with Birr 7,201 million of policy does not generally require foreign
committed capital to date, or 52 per cent of firms to meet specific performance goals or
the overall FDI approved. The second most guidelines, for instance, in terms of export,
important source of FDI in Ethiopia over the foreign exchange restrictions for imports,
period 1992/93 to 2000/01 is investors from minimum local content levels in
the European Union, with a share of about 28 manufactured goods, or employment limits
per cent of the projects but only 15 per cent on expatriate staff.
of the new capital approved. Within the
European Union, no single country had a 1. Local content requirements
dominant role, and investors from all major
States invested in the country. Expatriate The Ethiopian Investment
Ethiopians also invested jointly with Proclamation does not impose any significant
investors from one or more countries. The requirement for the utilization of locally
remaining 28 per cent of FDI capital produced raw materials or other input.
originated from North America, Asia Beyond the Investment Proclamation, it is
(predominantly India), and non-European also important to consider other relevant
Union European countries. legislation for any local sourcing
requirements. In this regard, Proclamation
D. The TRIMs Agreement and Ethiopia No. 249/2001 grants certain tariff
exemptions. The Export Trade Duty
Ethiopia is currently in the process of Incentive Scheme aims to expand the exports
acceding to WTO. The country will be of manufactured goods and to attract
required to ensure full compliance with the domestic and foreign investors engaged in
WTO TRIMs Agreement, with possible foreign exchange-earning activities. There are
resort to a transition period. However, three types of incentives: Bonded
judging by the experience of recently- Manufacturing Warehouse, Duty Draw Back
acceded countries, enforcement of the TRIMs and Voucher. The schemes are intended to
provide exporters with direct tax and duty This article gives power to the Federal
free access to least cost inputs from all Investment Board to issue directives that
sources regardless of origin.10 According to grant goods of foreign origin treatment less
this proclamation, “Persons or Organizations favourable than that accorded to similar
wholly, partially or occasionally engaged in products of national origin. However, the
exporting their products will be beneficiaries power of the Federal Investment Board is
of the Duty Drawback Scheme… only to bar the duty free importation of
Notwithstanding this, persons or capital goods and hence apply the MFN tariff
organizations partially or occasionally on these goods where they are locally
engaged in exporting their products shall not produced. Since this is a border measure,
be beneficiaries of the schemes established there appears to be no violation of the
by this Proclamation, where raw materials national treatment provision of article III.4 of
equivalent in price and quality to those they GATT and of the TRIMs Agreement.
imported are locally available.”
2. Trade-balancing requirements
The tax exemption advantage that
comes with producing for export is not The examination of Ethiopia’s import
available if local inputs similar to imported trade regime shows that importers are
ones are available. This could arguably required to obtain a license from the Ministry
qualify as a measure contrary to the of Trade and Industry, pursuant to
provisions of the TRIMs Agreement as it has Proclamation No. 67/1997 (Amendment
the effect of indirectly requiring the use of Proclamation No. 376/2003) and Council of
local inputs. Ministers Regulations No. 13/1997
(Amendment Regulation No. 95/2003). The
Another provision that might importation of certain goods and materials is
contradict the TRIMs agreement is article 8 regulated by sectoral government offices and
of Regulation No. 84/2003 (Council of authorities. For example, imports of motor
Ministers Regulations on Investment vehicles and transport machinery need
incentives and Investment Areas Reserved for authorization from the Road Transport
Domestic Investors). It provides that: “(1) an Authority. However, Ethiopia does not
investor shall be allowed to import duty free currently have any trade-balancing
capital goods and construction materials requirements. Similarly, there are neither
necessary for the establishment of a new quantitative import restrictions nor import
enterprise or for the expansion or upgrading quotas. However, there is an import
of an existing enterprise. (2) In addition an prohibition for items such as opium, ethyl
investor granted with customs duty alcohol, narcotic drugs, other spirits
exemption privilege shall be allowed to denatured or of any strength, worn clothing
import duty-free capital goods necessary for and worn textile articles and rags.11
his enterprise. (3) Notwithstanding the
provisions of Sub Articles (1) and (2) of this 3. Foreign exchange restrictions
Article the Board [the Federal Investment
Board] may, by its directives, bar the duty- There is no clear provision in
free importation of capital goods and Ethiopia’s investment code which is related
construction materials where it finds that they to foreign exchange restrictions. However,
are locally produced with competitive price, there are other regulations that may be
quality and quantity.” relevant. For example, according to the
Its elimination would affect all the industries a. The Hong Kong (China)
in the leather value chain and deserves further Ministerial decision
examination.
At the 2005 Ministerial Conference in
Article XI:1 of GATT prohibits Hong Kong (China), it was agreed that LDCs
quantitative restrictions on exports of goods. shall be allowed to maintain on a temporary
Paragraph 2(c) of the Illustrative List of the basis existing measures that deviate from
Agreement on Trade-Related Investment their obligations under the TRIMs Agreement
Measures prohibits measures that are until the end of a new transition period,
inconsistent with Article XI of GATT that lasting seven years, so long as they notify the
involve restrictions on the exportation of measures to the Council for Trade in Goods
goods, or sale for export of goods, by an (CTG). Moreover, the transition period may
enterprise, whether specified in terms of be extended by the CTG, taking into account
particular products, volume or value of the individual financial, trade, and
products or in terms of proportion of volume development needs of the member in
or value of its local production. question.
(China) Ministerial Decision and all the tanneries are already producing and exporting
rights and privileges in the WTO Agreements finished leather. Two have started expansion
for that matter relates to WTO member programmes for the production of finished
countries but not necessarily to acceding leather and five are expanding such projects.
countries.
In addition to the tanneries, the leather
b. The case of raw hides and skins product industries are found in the leather
value chain. The leather product industry in
What would be the possible Ethiopia includes the manufacture of leather
development impact of elimination of the ban shoes, shoe uppers, leather garments, bags
on export of raw hides and skins? It is and stitched upholstery. The producers
important to first understand the domestic belong to the formal and the informal sectors
interests that are at stake. There are three of the economy. The industry may be
major industrial components of the system: considered as composed of two groups: the
the tanneries producing the leather, the larger mechanized footwear industries and
footwear manufacturers and the leather the remaining production units that comprise
products manufacturers. There are large and SMEs.
medium-sized plants in the formal sector and
micro-enterprises operating in the informal The perception of the Ethiopian
sector of the economy, particularly in entrepreneurs and traders is that the full
footwear manufacturing. exploitation of the leather and leather goods
markets in Ethiopia is limited by the lack of
There are currently 20 tanneries in raw material, and that this is caused in turn
operation in Ethiopia with direct job by constraints such as the pre- and post-
opportunities for about 4,000 people. Of mortem defects found on raw hides and skins,
these, nine are 100 per cent export-oriented in inadequate curing and improper handling.
semi-processed skins and 14 have facilities
for the treatment of effluents. A further four Conversely, the tanners believe that
are expected to start operations in the near the local market for processed leather is
future and licenses have been issued for the unstable, due to the weakness of the
establishment of an additional 18. The ban on manufacturers of leather products, who
the export of raw hides and skins is one of the cannot, or will not, pay adequate prices for
principal reasons for the establishment of the quality finished leather. In turn, the producers
tanneries, as it assures a continued non- of leather products feel that the lack of
disrupted supply of raw materials. However, finished leather is due to inadequacies in the
the processing capacity of the tanneries far tanning sector, as this is too focused on the
exceeds the supply of hides and skins, production of semi-processed leather for the
particularly raw sheep and goatskins. This export market.18
has created an unhealthy competition among
tanners, with the result that skin prices are The lack of finished leather is a
high. This raises the price of leather to the constraint to the operation and to the
local manufacturers of leather products and development of the leather product industry.
affects the capacity to compete in the export Industry experts recommend that in the short
market. term, finished leather should be imported in
order to facilitate the expansion of this sector
The Ethiopian tanning industry (footwear in particular). The Government has
addresses two market segments: (a) exports also provided incentives to encourage import
of semi-processed and finished leather, and of finished leather products (see below).
(b) the local market for finished leather. Ten
One of the problems facing the leather inputs. In order to facilitate the
industry is the lack of raw material inputs. expansion of this sector (footwear in
Hides and skins are not only of poor quality, particular), the Government also decided to
but also inadequate in quantity. Marketing of eliminate the existing tariffs on imports of
hides and skins is itself inefficient, and the finished leather.
pricing system adversely affects both primary
producers and factories. In an attempt to The industry fears that lifting the ban
resolve these problems, the Government will have a devastating impact on the local
enacted a new proclamation to create a tanneries, and leather and leather product
situation where the marketing chain between industries. The development impact of its
the primary producer and tanning factories elimination may be the following:
would be significantly shortened and more x It may considerably undermine the
efficient. production capacity of the Ethiopian
tanneries. All of the tanneries in Ethiopia
The Ethiopian industrial strategy has are working with only half of their
identified the leather industry as one capable capacity. Lifting the ban would lead to
of accelerating economic development by the closure of more of than half of the
creating more employment, generating tanneries.
income through exports, and offering x It may seriously reduce the quality of the
investment potential. The Government wants products of Ethiopian leather and leather
to put Ethiopia’s leather industry at the product industries and tanneries. If
forefront of the leather sector development of exports are permitted, raw hides and skins
the Eastern and Southern African region. that will be exported will be of high
Already, the Ethiopian leather products quality. The hides and skins that will be
industry has reached an advanced stage of available locally will be the leftovers and
development compared to industries in the of poor quality. Any increase of export in
region, and has a reputation for excellence in the context of continual deterioration of
the international market (especially for skins the quality of raw hides and skins may
leather for the gloves industry). ultimately affect the competitiveness of
the related industries.
Two concrete steps have been taken x Ethiopia may lose its international name
to support the industry. Firstly, it has for high quality goat and sheep skins to
established the Leather and Leather Products other countries. Ethiopia is endowed with
Technology Institute, whose principal both a good quantity and quality of sheep
function is to create technical capabilities and goat skins. If raw hides and skins
needed to improve the competitiveness of the were to be exported, other countries will
industries. Secondly, customs duties on exploit the reputation of Ethiopian
import of raw hides and skins have been highland sheepskins and goatskins after
lifted. In spite of the high livestock importing them.
endowment, the availability of hides and x It may undermine efforts to generate
skins to be processed into leather is low in employment. While exporting raw hides
Ethiopia, due to low off-take ratios, a and skins requires limited manpower,
dominant factor among other factors. domestic tanneries and leather and leather
Industry experts recommended increased product industries generate significant
imports of raw hides and skins because the employment opportunities: they currently
tanneries currently operate under capacity employ between 6,000 and 7,000 people.
and because the leather and leather product Encouraging the industry to participate in
industries currently lack sufficient processed the export market by maintaining the ban
on export of raw hides and skins may industry is growing in Northern Africa.
generate more employment. Ethiopia is at forefront and could quickly
x There is a fear that lifting the ban will familiarize itself with the know-how
arrest the growth of the Ethiopian leather needed.
and leather products industries. The
Ethiopian Government is taking a number E. Incidence of TRIMs: comparison
of measures to support the growth of with other African countries
these industries. One is the directive that
permits the industry to import finished As shown above, apart from
leather without limitation. However, the minimum capitalization conditions, the
industries can not afford to buy better Ethiopian investment regime does not require
finished leather. Under the current FDI to meet specific performance goals or
circumstances, what will make them operations guidelines. There are no
profitable is to source the finished leather requirements in terms of export levels,
from domestic tanneries instead of foreign trade balancing, foreign exchange
importing it. To source the finished restrictions for imports, minimum local
leather domestically, there needs to be content levels in manufactured goods, or
adequate supply of finished leather with employment limits on expatriate staff. Once
acceptable quantity and quality. an investment project is established and
Exporting raw hides and skins may operational, it is left to the company’s
undermine this effort. managers to make all key decisions without
x Lifting the ban may also arrest the government authorization or interference. If
transition to export of higher value added there is a TRIM, it will be found in other laws
products. Finished leather, crust, wet and not in the investment law.
blue, pickled hides and skins, raw hides
and skins command higher prices in that The overall incidence of performance
order. It may therefore be attractive to requirements on FDI approvals in general,
encourage the domestic leather industry and use of TRIMs in particular, declined
to use locally produced raw hides and sharply during the 1990s in other African
skins rather than export them in raw form. countries as well.19 According to trade policy
x Some industry experts believe that lifting reviews of different African countries
the ban might hinder transfers of conducted by WTO, the majority of African
technological know-how. Processing raw countries do not maintain any TRIMs at
hides and skins into finished leather present. Exceptions include Egypt, Senegal,
demands considerable technological Gambia, Zambia and Nigeria.
know-how. It involves leather
technologists, engineers and chemists. On Egypt has notified WTO that it
the other hand, exporting raw hides and maintains incentive measures in the form of
skins involves simply salting hides and customs duty reductions to promote the
skins and exporting them. The leather and establishment and development of certain
leather product technology can easily be industries.20 The reductions in customs
adapted by developing countries. duties, which are offered to assembly
Historically, the technology has passed industries, depend upon the proportion of
from European to Asian countries. local content and can go up to a maximum of
Countries such as the Republic of Korea 75 per cent of the full tariff rate. The
and Japan, who first adapted the incentives were originally aimed at
technology, are now moving to other facilitating the exploitation of available
products. In the future, the technology resources, transfer of technology, and
will be transferred to Africa. Indeed, the remedying what was viewed as a chronic
trade deficit. The authorities indicate that tendering system. In an amendment to the
these incentives have lost their importance in Investment Act (1996), special incentives for
the light of the recent tariff reductions and investment in import-substitution industries
thus will be reconsidered in the near future using a significant proportion of local raw
(WTO, 2005a). material and resulting in net foreign exchange
savings were withdrawn (WTO, 2002).
In Senegal, enterprises approved
under the Investment Code are eligible for a The Government of Nigeria has
number of benefits under the common regime notified the Committee on TRIMs that it has
and one or more of the four privileged no local content laws or regulations pursuant
regimes. The privileged regimes correspond to article 5.1 of the WTO TRIMs Agreement
to the four priority objectives of the (WTO, 2005b). However, under the
Investment Code: the promotion of SMEs, Investment Act, certain incentives are subject
the upgrading of local resources through to the use of local raw materials. For
processing in Senegal, the development of instance, a tax credit of 20 per cent is granted
technological innovation through research or for five years to industries that use a certain
the use of research findings and the minimum level of local raw material. The
establishment of economic activities in minimum levels of local raw materials are, by
regions in the interior of Senegal. Although sector: agri-allied (70 per cent), engineering
Senegal has not notified the WTO of any (60 per cent), chemicals (60 per cent) and
TRIMs, one of the conditions of approval of petrochemicals (70 per cent) (WTO, 2005b).
projects under the privileged regime for the
upgrading of local resources through F. Conclusions
processing in Senegal is that 65 per cent (in
value terms) of intermediate consumption In recent years, there has been a
should be of Senegalese origin or that the general decline in the incidence of
cost of imported products should represent performance requirements21 and use of
less than 35 per cent of the total cost of the TRIMs in particular. The review of the case
products obtained after processing in Senegal of the African continent seems to confirm
(WTO, 2003). this. This trend can be explained by several
factors, including (a) the need to comply with
Under the Gambian Investment international commitments (the WTO
Promotion Act of 2001, when awarding a agreement in particular has prompted
certificate of special investment (for Governments to withdraw the specified
incentives purposes) one of the factors taken TRIMs); (b) the participation in regional
into account by the Gambia Investment integration and bilateral agreements, which
Promotion and Free Zones Agency is the has forced certain countries to phase out
extent to which the applicant would use local performance requirements; and (c) the
raw materials, supplies and services. increased competition countries face for FDI
However, no formal quantitative benchmark inflows.
is used, and investors may still be granted a
special certificate of investment if they are In the Ethiopian context, the limited
deemed to have satisfied some of the other use of TRIMs is not due to Ethiopia’s
requirements set out in the act (WTO, 2004). international commitments. Nor is it a result
of Ethiopia’s participation in regional
In Zambia, a local content of at least integration and bilateral agreements. As has
40 per cent makes local suppliers eligible for been pointed out in this chapter, until 1991,
a 15 per cent price preference under Zambia’s the Ethiopian economy was socialist-oriented
with economic restructuring based on a foreign investors who are unable to meet the
centralized planning system. After 1991, this minimum requirement.
8
See article 21 of Proclamation 280/2002.
policy direction was completely reversed. 9
See UNCTAD (2004). Both Nepal and Cambodia
Encouragement and promotion of investment committed themselves to fully implementing the
has become necessary to accelerate the TRIMs Agreement, waiving the seven-year
economic development of the country. To transition period allowed for LDCs under it. In
widen the scope of participation of foreign choosing such a policy course, the two countries
have decided to forego allowable policy space in
and domestic investors and improve the an issue area where the debate about post-
investment environment, the current Uruguay Round implementation has been
Government has revised the law on prominent. The decision of both countries would
investment several times. In the Ethiopian appear to be motivated by the absence of any
context, therefore, the reason for the limited current measures deemed inconsistent with the
TRIMs Agreement.
and almost non-usage of TRIMs is linked to 10
Ethiopian Ministry of Trade and Industry (2003),
the desire to avoid any requirement that p. 46.
11
would have a deterring effect on inward FDI. Ethiopian Ministry of Trade and Industry (2003),
TRIMs are not applied for fear that p. 47.
12
performance requirements may discourage National Bank of Ethiopia. Directive to Transfer
NBE’s Foreign Exchange Functions to
FDI inflows or affect the quality of the Commercial Banks Directive No.FXD/07/1998,
investments. In the course of WTO accession article 5.1. The import documents essentially
negotiations, Ethiopia may further reflect on includes an application form duly filled, three
the need to achieve the right balance between copies of pro forma invoices, photocopy of valid
the liberalization and protection approach trade licenses, insurance certificate, and
clearance certificate.
followed in the past few years and the 13
Importers who wish to import goods by advance
preservation of a degree of freedom to payment are required to submit a letter of
impose development-oriented obligations on undertaking for the entry of the goods into the
foreign investors. country in addition to the documents indicated in
footnote 8. Other requirements include: (a)
Ministry of Health certificate if the import of the
good is medicines and other related medical
Notes equipments; (b) Ministry of Agriculture certificate
for the import of agriculture chemical and
1
This chapter is based on a paper prepared for veterinary medicines; (c) Quality and Standard
UNCTAD by Mihretu (2006). Authority certificate for import of goods such as
2
Ethiopian Ministry of Trade and Industry (2003), food, matches, nails, galvanized corrugated sheets,
p. 1. scales, etc, which require standardization; (d)
3
The key proclamations of these changes are Road Transport Authority approval as per Road
Proclamations 7/1996, 37/1996, 35/1998, Transport Regulation Proclamation No. 14/992;
36/1998, 16/1998, 168/1999 and 280/2002 and and (e) a copy of a loan or grant agreement
375/2003. concluded between Governmental Agencies and
4
Foreign nationals of Ethiopian origin will be foreign financing organizations. See Article 5.5 of
considered as domestic investors pursuant to NBE Directive No FXD/07/1998.
14
Proclamation 270/2002 even when they are not Article 19 of Investment Proclamation
permanent residents of Ethiopia as long as they No.280/2002.
15
have an Identification Card attesting their Article 20 of Investment Proclamation
Ethiopian origin. No.280/2002.
5 16
See Article 5 of Proclamation 280/2002. The operation of Foreign Exchange Bureaux
6
Council of Ministers Regulation No. 84/2003. Directive No.FXD/09/1998, Article 5.
7 17
The intention behind setting a certain threshold AfDB/OECD (2004), p. 140 et seq.
18
level for FDI might be to attract large foreign They say instead of concentrating on producing
projects and reserve small-scale ventures to only semi-finished leather (wet-blue/crust), there
domestic investors. However, given the limited must be an increase of the production of finished
resources to undertake promotional activities, leather, thus boosting the local leather products
imposing such a requirement might also restrict industry.
19
UNCTAD (2003), p.16. In 1991, 33 per cent of
FDI approvals contained performance
requirements. This proportion has fallen gradually
to just about 9 per cent by 2000.
20
WTO document G/TRIM/N/1/EGY/1, 9 October
1995.
21
UNCTAD (2003), p. 18.
protection, over a third of the sugar mills 1996 and, most recently, in 2000. 4 In
have often been making big losses.2 addition, State bodies at different levels of
Government have issued hundreds of
Finally, from a macroeconomic procedural documents on issues related to
perspective, if the TRIMs have had some foreign investment.
positive impacts, such as in the areas of
foreign exchange savings, employment and The LFI stipulates that foreign
tax revenues, as policymakers also intended, investors are allowed to invest in all sectors
these positive effects were relatively of the economy, except in areas where it may
moderate. harm national defense, security, cultural and
historical monuments, traditions and the
This chapter analyses the impact of environment. A foreign investment project is
TRIMs in Viet Nam. It considers the motives encouraged if it belongs to one of the
for introducing the measures, as well as the following groups: (a) export-oriented
reasons for their failures and successes. The production of goods; (b) agricultural, forestry
investment policy has been designed to serve and aquatic sectors; (c) high-tech facilities,
Viet Nam’s industrialization and protecting ecological environment, or
modernization efforts. The chapter focuses on performs research and development; (d) users
the challenges directly related to the of intensive labour or natural resources of
elimination of existing TRIMs and is Viet Nam; and (e) builders of infrastructure
organized as follows. Section B provides a and the industrial base. In addition, the
general background to foreign investment in Government encourages foreign investment
Viet Nam, and describes the Law on Foreign in areas with difficult social and economic
Investment. Section C focuses on the conditions and in special industrial zones and
regulations which would likely fall under the export-processing zones (EPZs). In such
purview of the TRIMs Agreement. 3 It also areas, investors are given preferential
considers the ideas behind individual TRIMs treatment, often by way of, for example, easy
implemented in Viet Nam and how they have licensing, provision of land, favourable land
worked in practice. Section D presents an rents, lower enterprise income taxes, or tax
industry-based analysis of TRIMs and the rebates.
possible impacts of their elimination. Finally,
section E offers some concluding remarks. Foreign enterprises are exempted
from tariffs on imported goods that are used
B. Foreign investment in Viet Nam as fixed assets (e.g. machinery, equipment,
transport equipment and building materials
1. General policies on foreign that cannot be produced in Viet Nam).
investment Projects in the geographical areas where
investment is encouraged and projects for the
A year after launching Doi Moi production of mechanical, electrical and
(Vietnamese version of economic electronic components and spare parts are
renovation), in December 1987, the National also exempted from tariffs in the first five
Assembly of Viet Nam passed the Law of years of operation. The regular rate of
Foreign Investment (LFI) with the aim of corporate income tax is 28 per cent, which
expanding economic cooperation with other applies to foreign and domestic enterprises
countries, fostering industrialization and alike. However, lower rates apply to
modernization of the economy, while relying encouraged investment projects under certain
on the development and efficient utilization conditions. 5 Enterprises licensed after
of the country’s resources. The LFI was December 2003 and located in EPZs or
further improved and amended in 1990, 1992, industrial zones pay only 20 per cent income
tax over the first 10 years of operation. 2. Foreign investment in Viet Nam
Moreover, they are exempted from paying the
tax in the first two years with taxable income, Capital inflows to Viet Nam over the
and enjoy a 50 per cent reduced rate in the last decade are shown in Figure VII.1. As of
three following years. The tax rate after 10 April 2005, there were 5,324 foreign invested
years of operation is the regular rate of 28 per projects in operation, with total registered
cent. Additional incentives are provided at capital of about $48 billion. Manufacturing,
the sub-national level. These incentives often energy and construction had been the most
involve reduced rents and income tax rebates. attractive areas for foreign investors,
accounting for over two thirds of the total
According to Government Decrees number of projects, and 57 per cent of total
No. 24 of 2000 and No. 27 of 2003, and their foreign registered capital. The service sector
supporting documents, for some foreign accounted for 19.5 per cent of all projects,
investment projects certain conditions are and 35 per cent of the total registered capital.
imposed.6 There are restrictions on the legal Agriculture, forestry and fishery made up 14
forms foreign investors are allowed to use to per cent of projects and 7 per cent of the total
invest in Viet Nam. The permitted forms registered capital.
include business cooperation contracts, joint
venture enterprises and foreign invested The environment for FDI varies by
enterprises. Joint-venture enterprises and region. The main southern economic area,
FIEs have to be limited liability companies.7 which consists of Ho Chi Minh City, Dong
Nai, Binh Duong and Ba Ria-Vung Tau, is
The LFI also contains provisions on considered the most liberal. It has received 56
fair treatment of foreign investors and the per cent of total FDI. The main Northern
protection of property rights. Viet Nam economic area, Ha Noi, Hai Phong, Hai
guarantees that foreign investors’ capital and Duong, Vinh Phuc and Quang Ninh has
other assets shall not be confiscated through attracted 26 per cent of total foreign
administrative measures, and that FIEs shall registered capital. There are many industrial
not be nationalized. Foreign investors are zones and EPZs in Viet Nam, hosting about
entitled to remit their invested capital, profit, 1,400 foreign invested projects (excluding
and other lawful incomes abroad. projects in infrastructure development) for an
amount of $11 billion, or about 28 per cent of
Together with the gradual total foreign investment.
improvement of the legal system related to
foreign investment, the Government of Viet Over the past 15 years, foreign
Nam has concluded 46 bilateral agreements investment has played an important role in
on the promotion and protection of Viet Nam by contributing much-needed
investments. In addition, the Viet Nam– capital. Viet Nam could not have grown at
United States bilateral trade agreement the rate it has without FDI. According to data
(BTA) includes a chapter on investment. of the General Statistical Office (GSO), 42.5
With respect to multilateral cooperation, the per cent of the industrial output growth over
Government has signed the ASEAN the five-year period 1999–2003 can be
Framework Agreement on Investment, and attributed to the foreign-owned sector
participates in the programme of actions for (Statistical Yearbook, 2002; GSO, 2004).
the promotion of Asia–Europe investment. Over the period 1996–2004, foreign invested
The country is also working on the national capital made up 20 per cent of total
programme of actions for investment investment. As more capital became
liberalization within the Asia Pacific available, domestic resources (labour, land
Economic Cooperation. and others) have been utilized more
efficiently. The contribution of FIEs in the 6.3 per cent in 1995, 10.1 per cent in 1998,
GDP of Viet Nam has increased over time: and 14.8 per cent in 2004.
$Million
10,000
Committed capital
8,000
6,000
4,000
2,000
Delivered capital
0
1991 1993 1995 1997 1999 2001 2003 2005
contingent upon localization ratios in the area Box VII.1. Protection in the motor vehicle industry
of two-wheel motorcycle parts was lifted. 12
For automobile parts and mechanical, electric For the motor vehicle industry, while
and electronic components, the regulations, domestic motorcycle assembly enterprises
imported CKD spare parts and paid tariff duties at
however, continue to be in effect until the
a rate of 55–60 per cent, FIEs imported IKD and
completion of a certain period of transition paid a lower rate of tariff at 10–30 per cent.
following the date of WTO accession. However, in order to qualify for the importation
of IKD, the enterprises had to conduct certain
There are some supporting measures operations such as pressing, painting, welding,
that relate to the import substitution policy. etc. in Viet Nam, and had to declare the ratio of
For example, the tariff rate on imported sugar local content. That caused their costs to increase.
was 10 per cent in 1992, but increased to In 2000, imported Chinese motorcycles (made in
45 per cent in 1999. Moreover, sugar imports China or assembled in Viet Nam using imported
are subject to non-tariff barriers, which are Chinese IKD) increased rapidly and achieved
determined by individual permits by the about the same market share as Honda. For a
number of reasons, motorcycles with components
Ministry of Trade. Decisions on sugar
made in China are sold at a very low price in Viet
imports are often taken in consultation with Nam, and that has disrupted the businesses of
the Ministry of Agriculture and Rural both Vietnamese and Japanese motorcycle
Development, as well as with the Association producers in the country.
of cane sugar producers on the basis of
supply and demand trends. The Vietnamese authorities’ policy was
to create incentives for using the locally-produced
The excise tax is another form of spare parts by setting tariffs on the basis of the
restriction. An 80 per cent excise tax is local content level. However, this created a
imposed on imported new cars, and a 200 per burden on both the Vietnamese assembly plants
cent tax on imported second-hand cars. While and on the FIEs. While Vietnamese authorities
have argued that the FIEs can buy many of the
the effectiveness of the tariff system on
spare parts from local producers, Japanese
production is not immediately clear, it raises producers found that even if they wanted to order
the price of the affected products, thus locally-produced spare parts to cut costs, the
favouring local production. quality of such products was not acceptable.
Thus, in case of the motor vehicle industry, the
The above-mentioned measures tariff policy goals could not be achieved.
support the contention that the Government Source: Hirofumi (2003).
wanted not only to hold on to the production
of import substitutes, but also to promote
these industries. For instance, the Assessment of LCRs
Government aims to foster the auto industry,
and even if there is currently little An explicit list of stated policy
opportunity for Vietnamese enterprises to objectives for the TRIMs does not exist.
produce whole vehicles, it seeks to expand However, the purposes of the localization
the production of vehicle parts (see box measures can be inferred from the
VII.1). While Viet Nam is committed to Government’s description of the localization
integrating in the global economy, it has not process, which is stated to be the “production
been willing to stop completely fostering its or assembly of import substitutes”. 13 The
infant industries. goals behind the production localization
measures and the development of local raw
materials were increased exports, reduced report that, in 2003, 80 per cent of Viet Nam-
imports, employment protection, absorption made electronic goods were assembled from
of advanced technologies and industrial CKD components and the rest from either
upgrading. Policymakers seem to have been SKD or IKD components. The authors
influenced by the desirability of these concluded that Viet Nam did not seem to
objectives, while underestimating their have any special comparative advantage, as it
feasibility. In particular, it was difficult for only had cheap labour to offer. Other
policymakers to forecast the need for natural important factors of this industry, such as
resources (in terms of raw materials) to technology and trademarks, were not among
support larger scale production in the relevant Viet Nam’s strengths. The situation in the
industries and in the context of greater automobile industry is also not very
openness of the economy. Market size is an encouraging because of the poor quality of
important factor behind the success or failure local products (see box VII.1).
of LCRs. As the subsequent section will
show, different market size helps to explain Thus, Vietnamese enterprises have
the diverging impacts of TRIMs applied in not been modernized to the extent hoped for,
the automobile and motorcycle industry, and for that reason, the pressure created by
respectively. LCRs has not been very helpful. As
mentioned earlier, the mandatory LCRs were
Only a few enterprises responded to subsequently supplemented by additional
the LCRs. According to the Government incentives in terms of a scheme of
notification under article 5.1 of the TRIMs preferential tariff rates dependent on the ratio
Agreement 14 , by October 2003, “there have of local content. Due to its adverse effect, the
been 100 enterprises registering scheme is no longer applied to the motorcycle
implementation of localization programme, industry. Experts in the Ministry of Finance
of which 64 per cent are FDI enterprises and stress that preferential tariff has not paid off
36 per cent are local enterprises. These in the automobile industry.15 More generally,
enterprises have registered LC ratios for 700 there is no report on any positive impact of
products, most of which are motorcycle spare the preferential tariff on the concerned
parts, electronics products, refrigerators and sectors.
air conditioners, household appliances”.
Thus, local enterprises participating in the 2. Regulations on foreign exchange
programme represent only a fraction of the and trade balancing
enterprises in the respective industries.
Given its limited reserves of hard
Even though it is time for Viet Nam foreign currencies to meet the demand for
to implement fully the Viet Nam–United imports, and the constant attention to
States BTA and to deliver according to the macroeconomic stability, which can be
terms of its WTO accession, there has been threatened by disturbances in foreign
little reflection on the progress of Vietnamese reserves, the authorities have sought to limit
enterprises, in either the automobile or the outflow of foreign currency. For this
electronic industry, in terms of production or reason, the Government introduced
acquisition of advanced technology. The requirements on trade balancing and foreign
effect of localization regulations on exchange balancing by enterprises.
modernization appears limited. Vietnamese
enterprises participate only in the low-tech The LFI prior to 2000 stipulated that
segments of either automobiles or consumer “[e]nterprises with foreign-owned capital and
electronic production. In this regard, Nguyen parties to business cooperation contracts
Thi Thanh Ha and Nguyen Van Tien (2004) shall, by themselves, meet the demand of
foreign currency for their operations” (article industry, but instead aimed to safeguard
33 of the 1996 LFI). This seemingly loose foreign exchange reserves. 17 However, in
provision should be read in conjunction with 2001, this requirement was eliminated, partly
the concurrent restrictions on access to in conjunction with the implementation of the
foreign currencies. Foreign exchange earners Viet Nam–United States BTA. As a result,
had to sell to State banks a portion of their Viet Nam does not appear to have any
revenues in foreign currencies (the so-called foreign exchange or trade balancing
foreign exchange surrender requirement). The requirements in force that would be in
FIEs and foreign parties in Business violation of the TRIMs Agreement.
Cooperation Contracts (BCC) could purchase
foreign currencies only from authorized Assessment of regulations on foreign
commercial banks that were licensed to trade exchange and trade balancing
in foreign currencies in Viet Nam. In this
way, the above-mentioned article 33 of the While there may be good reasons for
LFI was close to a foreign exchange a Government to care about a country’s
balancing requirement. foreign reserves, it may be difficult to apply
foreign exchange restrictions at the level of
Control of access to foreign exchange individual enterprises. Enterprises have
was gradually eased. By 1998, the foreign diversified activities. Some export and others
exchange surrender ratio was 80 per cent. It import, so they may offset each other’s
was reduced to 50 per cent in August 1999, to demand for foreign exchange. The
40 per cent in 2001, and to 30 per cent in requirements on foreign exchange
2002. Finally, by the Prime Minister’s substantially limited the activities of FIEs
Decision 46 of 2003, the foreign exchange that were subject to the regulation. In
surrendering obligation was totally addition, remittance inflows are significant
eliminated. Prior to that, the 2000 amendment for Viet Nam. It is estimated that from 1991
to the LFI had already eliminated the to 2004, total overseas remittances were
requirement of self-balance in foreign about $15.5 billion, 18 which was enough to
exchange, allowing FIEs and foreign partners make up for the total trade deficit over the
in BCC to purchase foreign currencies from period. Thus, the existence of regulations on
any commercial bank to meet their needs. foreign exchange and trade balancing may
have been unnecessarily stringent, as it may
Even though the LFI contains no have harmed growth prospects in the private
provision on trade balancing in general, some sector.
regulations affect foreign traders and travel
company representative offices and branches Another aspect in this context is the
in Viet Nam. These Vietnamese entities with existence of a parallel market for foreign
foreign exchange earnings deriving from the exchange, through which traders can
exportation of Vietnamese goods were circumvent the regulation. Dollarization has
allowed to import goods for sale in Viet Nam been relatively high in Viet Nam, between 20
(if so permitted by the Ministry of Trade), but and 24 per cent in the mid-1990s and
the values of the imports could not exceed the increasing over the course of the Asian
values of their exports. 16 However, this financial crisis. In August 2001, dollarization
regulation is also no longer effective. had reached 34 per cent (IMF, 2002). With
such significant circulation of foreign
In addition, Viet Nam previously currency in the market, private agents can
applied a number of measures to restrict easily access them informally. The regulation
imports, including non-tariff measures, which is likely to have fuelled this parallel market,
were not meant to protect any particular
while at the same time made enterprises in equal commercial condition to some
Viet Nam less competitive. domestically made product, this may lead to
the rejection of the proposed projects or in
3. Restrictions on imports delays for the operation of existing ones.
Viet Nam has been using quantitative Furthermore, Viet Nam does not
restriction on imports of sugar (Dimaranan, possess large iron ore resources suitable for
Le Thuc Duc and Martin, 2005). Sugar large-scale steel production. The available
imports are currently subject to Government iron ore mines are reported to be of low
authorization. When supply is short in the quality and dispersed. Import of scrap metal
domestic market, the Ministry of Trade, upon by steel producers was not allowed until
the Prime Minister’s agreement, can issue April 2004.
licenses to State trading enterprises with
identified amounts they are allowed to Assessment of import restrictions
import.
Consumers have borne the burden of
In Viet Nam, State-owned enterprises the protective policies. Negative impacts may
(SOEs) have significant privileges, not only come in terms of high prices, as
particularly in the area of foreign trade. For Government agencies are often required to
instance, the Viet Nam Cement Corporation take measures to keep markets under control.
(VNCC) has decisive influence on the For instance, Government Decree 170 of
allocation of quotas for clinker imports to 2003 stipulates that the price of cement
enterprises in the cement industry. 19 This should be stable within a certain range. 21
industry has been regulated by the VNCC, as When prices exceeded the limits because
the corporation has been controlling the supply was short and imports not allowed, the
domestic resource utilization, as well as the Ministry of Finance often exercised its “price
importation of inputs. stabilization” function and allowed
taxpayers’ money to subsidize cement.
Regulation on procurement is also a
form of import restriction. For the purpose of The effect of this policy on the growth
local resource utilization, the LFI before 2000 of infant industries has been weak. Currently,
required that FIEs, in their purchases, gave the cement industry is protected by a 30 per
priority to domestic over imported products, cent tariff and it is not sure whether
if commercial conditions were equivalent. Vietnamese cement enterprises will survive
However, the 2000 amendments eliminated when the tariff rate is reduced to 21 per cent
the requirements on purchasing local in 2006 as required by the Viet Nam–United
commodities and replaced them with an States BTA. For the cane sugar industry,
encouragement to purchase Vietnamese while the world price of sugar fluctuated
products instead of importing in case of between $200 and $315 per ton over the
equivalent commercial conditions.20 This was period 1997–2000, the price of sugar in Viet
a vague provision, as it was difficult to Nam never dropped below $350 per ton.
ascertain what was meant by “same Local sugar mills are only partly responsible
commercial conditions”. It created significant for the lack of competitiveness of the
scope for arbitrary decisions by provincial Vietnamese sugar industry, as it is also due to
officers in departments of planning and land and climatic conditions.
investment, and of customs officers in
relation to licenses and tariff rates. If some Some FIEs have benefited from the
item is vital for proposed or existing projects, import restrictions. FDI in Viet Nam has been
and the authorities believe the item to be in directed towards industries with relatively
high levels of protection (Fukase and Martin, trioxide, fluorspar, bismuth and copper
1999). For instance, it was observed that containing gold after smelting.23
among the five industries, which were the
highest recipients of FDI in the traded goods Export restrictions have had some
sector — cement, fuels, vehicles, electrical positive effects. In the past, the Government
machinery and beverages – all but the fuel banned exports of scrap metals. This helped
sector were producing import-substituting to keep the domestic price of scrap low, and
goods (McCarty, 1998). billet production reasonably competitive
because of access to under-priced scrap.
4. Regulations on exports However, as the stock of scrap metals is
running out, the competitiveness of
The Government of Viet Nam Vietnamese steel producers can hardly be
regulates exporting activities in two ways: it maintained. Hence, the positive effects of
prohibits the exportation of certain export restrictions may be short-lived.
commodities and requires that the FIEs
produce certain other commodities to export b. Export requirements
most of their outputs.
Although generally not prohibited
a. Export restrictions under the TRIMs Agreement, an obligation to
export is a discriminatory measure against
In line with the general policy on FIEs. In the past, it was required that foreign
encouragement of exports, there are no investment projects producing items which
provisions limiting export for either domestic were in sufficient supply (in both quality and
enterprises or FIEs. However, while quantity) in the domestic market export at
encouraging enterprises to export processed least 80 per cent of their output. The
products, which are believed to incorporate regulation aimed at protecting local
value added, Viet Nam banned exportation of enterprises, increasing exports and sorting out
raw materials, such as minerals, wood and technology. 24 The requirement served not
others. The effect of this regulation on export only as a condition for receiving a license,
is ambiguous because the material can be but also as the qualification for preferential
used in products for export. enterprise income tax treatment. Eligible
FIEs would pay income tax at the rate
Because of the regulation, some applicable to the list of specifically
domestic enterprises conducted processing encouraged types of foreign investment.
operations solely for making the commodities
exportable, and in that sense, the regulation According to Decision 229 of April
gave rise to inefficiencies. By Circular 02 of 1998 by the Ministry of Planning and
March 2000 of the Ministry of Industry, the Investment, the 80 per cent export
restriction was amended to allow FIEs to requirement applied to 24 products. 25
export certain minerals and to narrow the list However, under the terms of the Viet Nam–
of materials banned from exportation. 22 United States BTA, which took effect in
Subsequently, in February 2004, a joint 2001, the list was reduced to 14 products.26 In
Canadian–Vietnamese corporation was December 2001, the ministry revised the list
licensed to open the country’s largest mineral of products subject to export requirement. 27
mining project. According to the plan, the Finally, in 2003, the requirement was
company will export more than 80 per cent of eliminated and the obligation is no longer a
its products, which consist of tungsten condition for licensing.
Table VII.2. Commitments on localization made by auto industry, has paid off. In 2005,
automobile producers/assemblers32 protection remained heavy: while the tariff
Local contents (%) in years from starts of production
rates were as low as 20 per cent for CKD and
Enterprise 1 2 3 4 5 6 7 8 9 10 5 per cent IKD for components, the rate for
Isuzu - - - - - - - - - 30 imported complete automobiles was 100 per
Mekong Auto - - - - - - - - - - cent. Moreover, imported complete cars are
VMC - - - - - - - - - - subject to an excise tax of 80 per cent, while
VIDAMCO - - - - - - - - - -
the excise tax rate on automobiles assembled
VinaStar - - - - - - - - - -
Mercedes-Benz - - - - 5 - - - - 4033
in Viet Nam was as low as 40 per cent.35 It is
VIDAMCO - - - - 5 - - - - 35 estimated that car prices in Viet Nam in 2004
Suzuki - - 22.8 - - 29.6 - - - 38.2 were about 1.5 to 2 times higher than those of
Ford - - - - - - - - - 30 comparable products in the Thai market. 36
Toyota - - - - - - - - - 30 The protection mostly results in higher
Hino - - - - 10 - - - - 30
revenues for auto assemblers. The LCR has
not proven sufficient for the development of
Source: Department of Foreign Investment, Ministry
of Planning and Investment (2003). the infant automobile industry of Viet Nam.37
Even though it is clear that not all the auto
The small domestic market for assemblers fulfill their promises, there is no
automobiles is a drawback for the realization record of any penalty ever imposed on auto
of the localization programme. Given the assemblers. That might be due either to lack
diversity in car models, each containing a of transparency or to lax law enforcement.
large number of quality components/spare
parts, many highly specialized component There might have been fewer
producers are required. June 2005 data of the automobile manufacturers/assemblers in Viet
Ministry of Industry indicate that Viet Nam Nam today if the TRIMs had not been used.
had 60 enterprises producing automobile However, that does not mean the measures
components.34 The supply of components and have benefited the economy, since
spare parts had been limited to a range of Vietnamese consumers have had to pay much
simple ones. Hence, the automobile higher prices for automobiles than world
production base is thin, and the ability to market prices.
deliver at acceptable quality often
insufficient. Automobile-producing Big challenges lie ahead for Viet
enterprises share the opinion that component Nam’s automobile industry. As the TRIMs
suppliers in Viet Nam have not been able to elimination nears, it is likely that Viet Nam
meet the quality standards required by the will be unable to complete the localization
industry. Moreover, in the light of economic programme. As shown in Table VII.1, in all
integration in general, and Viet Nam’s WTO automobile enterprises, except VIDAMCO,
accession in particular, it is becoming even State bodies have an ownership participation
less attractive to invest in the production of of 20 per cent or more. State ownership has
spare parts/components necessary to meet the been an important asset, but may turn into a
LCRs, as the related benefits will soon come drawback in a new business environment.
to an end. Thus, a major industry restructuring is almost
certain. As the surviving automakers, if any,
In 2009, Viet Nam will open its will most probably turn out to be mostly
automobile market completely. So far, there foreign-owned, this may cast doubts on the
is little evidence that the preferential merit of TRIMs in fostering an indigenous
treatment, in terms of protection given to the automobile industry.
Table VII.4. Current rate of tariff on complete Table VII.5. Local content realization by FIE, 2003
motorcycle (1998–2003)
Foreign investment enterprises Local content (%)
Localization MFN import tariff rates Honda 64.1 to 66.1
ratio (%) contingent on localization Yamaha 48.3 to 61.3
(%) GMN 49.7
Up to 20 60 VMEP 43.7 to 77.1
20 to 30 50 Suzuki 45.8 to 51.2
30 to 40 40 Vian-Siam 40.8
40 to 50 30 Lifan 41.2
50 to 60 20
60 to 70 10 Source: Department of Foreign Investment –
70 to 80 5 Ministry of Planning and Investment
Above 80 3 (2004).
acquiring modern technologies and (China), New Zealand and the Netherlands.
equipment, improved their coordination with Even though the FIEs have a 25 per cent
cow-rearing farms aiming at the expansion of market share, only four of them have sub-
local supply of raw materials. A report by the projects in the development of cow
Ministry of Planning and Investment population for supply of raw materials. The
indicated that, in the past decade, milk FIEs mainly use imported raw milk materials
production grew annually at between 8 and or purchase them from independent
12 per cent. In 2004, there was a cow households. Growth rates of cow population
population of about 56,000. The majority of have been lower than of milk production and
cow-rearing households are around Ho Chi the operations of FIEs have led to increased
Minh City and Ha Noi, where the opportunity imports of milk materials.
costs of grazing are obviously high. At the
same time, there are areas elsewhere with Currently, domestic supply accounts
unused comparative advantages. for 95 per cent of the final milk product
market. Viet Nam exports small amounts of
Import substitution has been a major milk products to the Middle East, Japan, the
policy strategy in this sector. As guidelines to United States and China. The price of
the implementation of the LFI, Government Vietnamese milk is currently about 17 per
Decree No. 27 of March 2003 stipulated that cent higher than the world average 50 and
projects in dairy production and processing milk-processing enterprises therefore import
are required to include investment in such inputs, even if this goes against the raw
development of raw material sources. The materials localization policy. In practice, the
regulation applies to all projects, regardless recent trend for the industry has been to
of whether the outputs are to be sold import 90 to 95 per cent of raw milk
domestically or exported. The biggest materials to a value of $80 million to $100
programme in this area relates to the million per year.51 Even though not all FIEs
development of the cow population over have followed the requirements, no action has
2001–2010. 49 The Prime Minister’s decision been taken against the importation of milk
emphasizes the importance of local provision materials.
of raw materials and the gradual increase of
export and decrease of import. Particularly, If Viet Nam had a comparative
the decision requires that “the factories for advantage in the production of raw milk
milk processing be based in areas with materials, it should have emerged over the
concentration of grazing farms” so that “Viet past decade, when measures were taken to
Nam will be, by 2010, able to supply 40 per encourage the development of the cow
cent of domestic demand in fresh milk from population. There is no evidence of either
domestic cow population”. This target serves high productivity or good quality of large-
as a guideline in the consideration of foreign scale raw milk materials production. Imports
investment projects in this sector. of raw material have been necessary. Thus,
there may be little rationale for maintaining
As of the end of 2004, there were nine the LCRs. The elimination of such TRIMs
FIEs active in milk processing or in operation may make the milk production easier, thus
related to milk products. Total registered helping to cut cost and prices of milk
capital of the FIEs is $160 million. Four of products in the domestic market.
them were 100 per cent FIEs from Hong
Kong (China), Taiwan Province of China, 5. Cane sugar processing
Australia and the United States. The others
were joint ventures with partners from The cane sugar industry in Viet Nam
Taiwan Province of China, Hong Kong is not internationally competitive, but the
per cent per year. Local products currently there is ample availability of human capital.
supply about 95 per cent of the market and In fact, wood products are among the top
can be exported. FIEs have been playing an earners of foreign exchange for Viet Nam.
important role in the development of this The sector is attractive to foreign investors
industry. The Government has licensed five and there are as many as 225 FIEs currently
foreign investment projects, with a total of operating in Viet Nam. The total registered
$77 million in registered capital. Three of the capital of the FIEs is $765 million.56 A large
FIEs are 100 per cent foreign owned, and two number of the foreign investors in wood
are joint ventures. The foreign partners are processing come from Taiwan Province of
from Malaysia, the Republic of Korea, China, with others coming from Australia,
Singapore and Taiwan Province of China. Malaysia, New Zealand, Singapore, Japan
and the Republic of Korea. As the data imply,
The Government’s Decree No. 27 of the projects are typically small.
March 2003 provides that foreign-invested
projects in vegetable oil include investment More than in other industries, wood
in the development of raw material sources production is sensitive in terms of
for their input. The scales of such investment environmental considerations. The local
in raw material sources are often for the content regulation for this industry can be
investment authorities to decide and the found in Government Decree No. 27 of
localization policy is not effectively March 2003, which requires that wood
implemented. Enterprises in this industry processing projects (except for projects using
import most of the raw materials needed for imported wood) include investment in
their production. A calculation in a recent development of raw material sources.
report by the Ministry of Industry revealed However, the regulation has not been
that by 2005, local raw materials were able to enforced strictly and the FIEs have not
meet only 14 to 15 per cent of the industry’s entirely fulfilled their obligations.
demand and that, for 2010, that ratio is Afforestation regulations are difficult to
estimated to be in the range of 18 to 33 per implement by individual enterprises, which
cent. 55 Local supply for commercial are generally small, while forest development
production of vegetable oils is insufficient in needs to be carried out on a large scale. In
both quantity and quality, also due to natural such cases, free riding can be a problem.
conditions. At the current scale, which is
larger than in the past, there is little evidence Having recognized the reality, the
of any comparative advantage in the Government has let enterprises import wood
production of raw materials for vegetable oil materials as inputs, with cost savings as a
processing. Thus, regulations on the result. Nowadays, wood-processing FIEs,
development of local input supply have not particularly those in the south of Viet Nam,
been very helpful. The effect of full trade use mostly imported wood for their export
liberalization on the production of vegetable production. Only a fraction of their inputs are
oils should be small. the products of local afforestation.
enforce strict forest protection measures, Thirdly, stiff competition limits the
which apply to all economic agents. There willingness of foreign investors in sharing
could also be reasonable taxes on exported proprietary knowledge, especially when
wood products, so that tax revenue can be intellectual property rights are poorly
used for forest protection. managed. Finally, the insufficient financial
strength of local enterprises, which are
E. Conclusions mostly small or medium-sized firms, prevents
them from acquiring both expensive
The TRIMs used in Viet Nam were advanced technology and the necessary skills
intended to contribute to the modernization of and absorptive capacity.57
the economy, increased foreign exchange
reserves, more employment and a more The much smaller gap between
efficient use of local resources. Some of the domestic and foreign motorcycle firms helps
measures employed belong to the list of to explain the difference between the
WTO prohibited TRIMs. The application of performances of TRIMs in the motorcycle as
TRIMs over the past decade and a half compared, for instance, to the automobile
resulted in considerable drawbacks and, at the industry. The gap between Viet Nam and
same time, moderate benefits. The effects of neighbouring countries in terms of e.g. the
TRIMs are significant only for a small group technology-production base and human
of industries, and often only temporary in capital relevant to motorcycle production is
nature. The limited positive effects will likely relatively smaller than that related to the
disappear when Viet Nam removes the production of automobiles. In addition, the
TRIMs as a result of WTO accession. market for motorcycles is much larger than
for cars. For the motorcycle industry, TRIMs
The implementation of TRIMs in Viet have in the main already served their purpose
Nam can give the impression that they have and local content levels as high as 60 to 70
been helpful in achieving policy targets. In per cent have been achieved. Hence, some of
substance, however, the merits of TRIMs the motorcycle producers are now basically
may have been overrated. For instance, FIEs ready for competition under WTO rules.
have increased exports of electronic goods While the impact of the elimination of
and that is often considered positively. Major TRIMs is likely to be adverse for Vietnamese
electronic exporters are isolated from the rest enterprises in automobile and the consumer
of the economy as they import nearly all their electronic industries, it should not be a
inputs and export all of their outputs, serious problem for the motorcycle producers
contributing few positive production in Viet Nam.
externalities to the local economy. In
addition, the high growth rates of exports The regulation on the obligation in the
have happened mainly in labour-intensive development of local raw materials has
industries, which are often competitive even certainly been a drawback for foreign
without a foreign presence, thus leading to investors, even though it has not been fully
caution against overestimating the FIEs’ role implemented. Viet Nam does not have
in export performance. comparative advantages in the production of
raw materials of milk, sugar and vegetable oil
There are several reasons for the products. Given the ineffectiveness of
limited FDI spillover effects. Firstly, there is existing measures, their elimination will
a lack of local human resources capable of make little difference for the production of
assimilate advanced technologies. Secondly, vegetable oils, milk and wood products. For
the wage gap has limited movements of sugar cane, however, the application of
employees from FIEs to domestic enterprises. LCRs, together with other measures of
Preferential tariff rates contingent upon localization ratios with respect to products and
parts of mechanical/electric/electronic industries (since 1998)
Achieved MFN import tariff rates contingent upon localization ratios (%)
localization Parts subject to Parts subject to Parts subject to Parts subject to
ratio MFN tariff rate MFN tariff rate MFN tariff rate MFN tariff rate of
(%) of 30% of 40% of 50% 60%
Up to 15 20 20 30 40
15 to 30 15 15 20 20
30 to 40 10 10 10 10
40 to 50 5 5 5 5
Above 50 3 3 3 3
Source: Ministry of Planning and Investment (2003).
Notes
15
See “Higher Tariff Makes It More Difficult for
1
This chapter is based on a paper prepared for the Automobile Industry”, VietNamNet
UNCTAD by Duc and Hung (2006). 08/11/2003.
2
These are the State-owned enterprises and the 16
See Government Decree 45 of 2000, and Inter-
shortage of cane supply is reported to be the main ministerial Circular 20 of 2000.
reason for their losses. 17
For instance, there was a requirement that total
3
The discussion is not intended to provide any imports of consumption goods should not exceed
detailed legal analysis of individual measures. 20 per cent of the total value of export.
4
With the united Investment Law that came into 18
Viet NamNet, 2 January 2005.
effect on 1 July 2006, foreign investment is 19 According to some experts, clinker imports are
governed by the same law as domestic investment. based on decisions of the Ministry of
5
For example, a rate of 15 per cent for the first 12 Construction. However, consultations with VNCC
years of operation, with “grace periods” (zero rate are always necessary.
in first two profitable years and 50 per cent 20
See article 71 of the Government Decree No. 24
reduced income tax rate over the three following of year 2000.
years), is applied to certain types of projects. The 21
See article 6 of the Government Decree No. 170
first group consists of projects employing labour of year 2003.
intensively and using the abundant natural 22
There remain regulations listing prohibited items,
resources effectively. The second group consists locations not to be mined for export, as well as the
of those exporting 30 per cent or more of their conditions for mineral export license.
output and using domestically-sourced inputs 23
Viet Nam News, 27 February.
amounting to 30 per cent or more of the cost of 24
The foreign investors without technological
production. strength, foreseeing difficulty in meeting the
6
A more detailed description of some such obligations, would choose not to enter.
conditions is given in section C. 25
See Ministry of Planning and Investment’s
7
In 2003, the Government issued Decree 38 on the Circular No. 229 of April 1998.
transformation of part of the FIEs into joint-stock 26
The list includes (a) cement production; (b) paints
companies. and construction paints; (c) toiletry tiles and
8
In this period, programmes of localization and ceramics; (d) PVC and other plastics; (e)
development of local resources of raw materials footwear; (f) clothing; (g) construction steel; (h)
were not required, but served to increase the detergent powder; (i) tires and inner tubes for
chances of being licensed and, if approved, to automobile and motor bikes; (j) NPK fertilizer; (k)
qualify for preferential treatment in terms of lower alcoholic products; (l) tobacco; and (m) papers,
corporate income tax. including printing, writing and photocopy paper).
9
Legally, Circular 215 had expired because it Such requirements may be maintained for up to
served as a guideline to Government Decree seven years from the entry into force of the BTA.
18/CP, which was subsequently replaced by two 27
According to Decision 718 by the Ministry of
other Government Decrees: 12/CP of 1997 and 24 Planning and Investment, Viet Nam had an 80 per
of 2000. However, in practice, it remains in use in cent export requirement for (a) motorcycles,
licensing procedures. minibuses and trucks (less than 10 ton); (b) some
10
These requirements remain on the list of irrigating pumps; (c) medium-voltage, low-
conditional sectors for investment. The list is an voltage and normal electric transmission cables;
annex to the Government Decree 24 of July 2000, (d) cargo ships; (e) audio-visual products; (f)
and Decree 27 of March 2003, which guide the aluminium profiles products; (g) construction
application of the LFI in Viet Nam. glass; (h) NPK fertilizers; (i) PVC; (j) bicycles
11
In the regulation, the percentage values of and bicycle parts; (k) transformers under 35 KV;
products, components or spare parts are based on and (l) diesel motors under 15 CV. This was not
cost of production. For the values of intermediate entirely a progress in the direction of
goods, the CIF price is applied for imported liberalization, as some of the products identified
goods, while, value added taxes are excluded if in Decision 718 were not in the list agreed upon in
the intermediate goods are purchased the BTA.
domestically. 28
Ministry of Finance, unpublished reports.
12
By Government Decision No. 27/2003/NĈ-CP of 29
Not counting Chrysler which left.
March 2003. 30
Prime Minister Decision No. 175 of 2002.
13
See Circular 176/1998/TTLT-BTC-BCN-TCHQ. 31
Prime Minister Decision No. 177 of 2004.
14
See Ministry of Trade (2003).
32 48
For the enterprises which were licensed before Much of the intermediate good is used for the
1994, the regulation on local content does not production of locally consumed products; see
apply. Ministry of Foreign Affairs News 10/6/2005.
33 49
In the case of Mercedes-Benz, the period is 15 Prime Minister’s Decision 167 of October 2001.
50
years. Viet NamNet 15/5/2005.
34 51
Ministry of Industry, unpublished report (2005). Unpublished report by the Department of
35
The newly approved tax law establishes that from Industry, Ministry of Planning and Investment
1 January 2006, excise taxes of 50 per cent will be (2004).
52
applied to both imported and domestically For instance, in early September 2005, a kilogram
produced cars. For vans and mini-buses, the rates of sugar sold in Ho Chi Minh City for VND
will be 30 per cent and 15 per cent, respectively. 9,000, while the price at the Viet Nam-Cambodia
36
Viet NamNet, 19/11/2004. border was VND 6,000. See “Sugar smuggling
37
The President of Viet Nam Automobile increase dramatically as domestic price high”.
Manufacturers’ Association, Sasagawa Makoto, VietNamNet 9 September 2005.
53
said that the regulation on local content is not a Unpublished report by the Department of Foreign
correct orientation for the industry (VNExpress Investment, Ministry of Planning and Investment
26/11/2004). (2004).
38 54
Circular No.215UB/LXT. Viet Nam Economy, 11 April 2005.
39
Inter-Ministerial Circular No. 176, December 55
“Development Plan for Vegetable Oil Industry to
1998. 2010”. Report by Ministry of Planning and
40
By Government Decision 27 March 2003. Investment, Viet Nam Industry, 7 November
41
One license was revoked in 2002 and is not 2004.
counted here. 56
Unpublished report by Department of Foreign
42
Data of the Department of Foreign Investment – Investment, Ministry of Planning and Investment.
Ministry of Planning and Investment, 2003. 57
In fact, Vietnamese enterprises are often not very
43
Ministry of Industry, News online, 14 July 2005. interested in technology. A survey of 41,000
44
Nhan Dan Newspaper, 1 June 2005. enterprises located in Northern provinces of Viet
45
Unpublished report by the Viet Nam Electronic Nam, conducted by Ministry of Planning and
Industries Association (VEIA). Investment in 2005, indicates that only 26 per cent
46
State Committee for Cooperation and Investment of the surveyed enterprises have any interest in
Circular 215 of 1995. information on new technologies.
47
Estimation by the Viet Nam Electronic Industries
Association based on 2003 data.
References
AfDB/OECD (2004). African Economic Outlook. Economy of the Mexican Auto Industry. Princeton.
Paris. OECD. Princeton University Press.
AIWA (2001a). Petition to Repeal/amend Executive Board of Investment (2004a). Pakistan: Investment
Order (EO) 334 in re: Tariff Taxes on Local and Policies, Incentives and Facilities. Islamabad:
Imported Vehicles. (Position paper). Prime Minister’s Secretariat, Government of
Pakistan.
AIWA (2001b). Appeal in re: Tariff Taxes on
CKD/CBU and Importation Policies Relative to Board of Investment (2004b). Why Invest in Pakistan?
the Automotive Industry. (Amended position Islamabad: Prime Minister’s Secretariat,
paper). Government of Pakistan.
Aldaba R (2000). Increasing Globalization and AFTA Board of Investment (2005). Foreign Investment in
in 2003: What Are the Prospects for the Philippine Pakistan. Islamabad: Prime Minister’s Secretariat,
Automotive Industry? DP Series 2000-42. Makati Government of Pakistan.
City. Philippine Institute for Development Studies.
Bouzas R and Chudnovsky D (2004). Foreign direct
Antonio E et al. (2001). Directions for industrial investment and sustainable development: the
restructuring in the twenty-first century: the recent Argentine experience. Country Report,
Philippine case. In Masuyama, Seiichi et al., eds, International Institute for Sustainable
Industrial Restructuring in East Asia: Towards the Development.
21st Century. Singapore: Institute of South-east
Bouzas R and Fanelli J (2001). Mercosur. Integración
Asian Studies.
y Crecimiento. Buenos Aires. Fundación Osde.
Argentina: Ministerio de Economía (2003). La
Bureau of Labor and Employment Statistics (2003).
Inversión Extranjera Directa en Argentina 1992–
2003 Yearbook of Labor Statistics. Manila. BLES,
2002. Ministerio de Economía de la República
DOLE.
Argentina. Available at www.mecon.gov.ar.
Business International (1974). The Philippines:
Asian Development Bank (2001). Key Indicators 2001
Operating for Profit in the New Society. Hong
of Developing Asian and Pacific Countries.
Kong, China. BI.
Manila. Asian Development Bank.
Calderón A, Mortimore M and Peres W (1996).
Asian Development Bank (2002). Key Indicators of
Mexico: Foreign Investment as a Source of
Developing Asian and Pacific Countries 2002.
International Competitiveness. In Dunning J and
Manila. Asian Development Bank.
Narula R (eds.). Foreign Direct Investment and
Asian Development Bank (2003). “Competitiveness in Governments: Catalysts for Economic
Developing Asia”. in Asian Development Outlook Restructuring. Routledge, London.
2003. New York. Oxford University Press.
Cardoso E. (1999). Brazil’s Currency Crisis: The Shift
Balisacan A and Hill H (2003). The Philippine from an Exchange Rate Anchor to a Flexible
Economy: Development, Policies, and Challenges. Regime. In Wise C and Riordan R (eds.).
Quezon City. Ateneo de Manila University Press. Exchange Rate Politics in Latin America.
Brookings Institution Press, 2000.
Bastos Tigre P Laplane M, Lugones G and Porta F
(1998). Cambio tecnológico y modernización en la CEC (2004). El Sector Autopartes en México:
industria automotriz del MERCOSUR. In Diagnóstico, Prospectiva y Estrategia. Centro de
Integración y Comercio No. 7/8. Estudios de Competitividad-ITAM. Mexico City.
Bautista C (1993). Coping with AFTA: Trade Central Board of Revenue (2005). CBR Quarterly
Liberalization and its Implications for Philippine Review. No. 3, Vol. 2, Islamabad: Ministry of
Industrial Restructuring. Pasay City. Philexport. Finance, Government of Pakistan.
Bello W et al. (2004). The Political Economy of Centro de Estudios para la Producción (2005). La
Permanent Crisis in the Philippines. Quezon City. industria Argentina: Balance 2004 y Perspectivas
UP Department of Sociology and Focus on the para 2005. Secretaría de Industria, Ministerio de
Global South. Economía.
Bennett D and Sharpe K (1985). Transnational Clarín (2005). Los autopartistas se agrandan con 110
Corporations versus the State: The Political millones de dólares. 3 May.
Clarín (2005). Autopartistas: de locales a globales”. 11 El Cronista (2004). La ex Perkins exportará autopartes
May. al Reino Unido. 27 October.
Clarín (2004). Las automotrices están divididas por la El Cronista (2005). El libre comercio de autos con
apertura al MERCOSUR y Europa. 17 June. Brasil deberá esperar hasta 2008. 31 May.
Clarín (2005). Apuesta en autopartes. 20 September. Engineering Development Board (2004). Development
of Engineering Industries in Pakistan. Islamabad:
Cororaton C and Abdula R (1999). Productivity of
Ministry of Industries and Production,
Philippine Manufacturing. Makati City. Philippine
Government of Pakistan.
Institute for Development Studies.
Engineering Development Board (2005). Automobile
Croome J (1995). Reshaping the World Trading
Manufacturing in Pakistan. Islamabad: Ministry of
System: A History of the Uruguay Round. Geneva.
Industries and Production, Government of
World Trade Organization: 138.
Pakistan.
Dapice D. (2003). Viet Nam’s Economy: Success
Erickson C et al. (2003). From core to periphery?
Story or Weird Dualism? A SWOT Analysis.
Recent developments in employment relations in
United Nations Development Program. May.
the Philippines. In Industrial Relations. Berkeley.
De Dios LC (1994). A Review of the Remaining Import University of California.
Restrictions. Research Paper Series No. 94-08.
Esfahani HS (1995). Institutions, private sector
Makati City. Philippine Institute for Development
participation, and infrastructure development in
Studies.
Pakistan. Background Paper for Pakistan 2010
de María y Campo M (1991). “Reestructuración y Project. Washington, D.C. The World Bank.
Desarrollo de la Industria Automotriz Mexicana en
Etchemendy S (2001). Construir coaliciones
los Años Ochenta: Evolución y Perspectiva.”
reformistas: la política de las compensaciones en
Estudios e Informes de la CEPAL No. 83,
el camino argentino hacia la liberalización
Economic Commission for Latin America and the
económica. In Desarrollo Económico. Vol. 13 N°
Caribbean, Santiago de Chile.
160.
Dimaranan B, Le Thuc Duc and Martin W (2005).
Ethiopia: Federal Democratic Republic of Ethiopia. A
Potential economic impacts of merchandise trade
Proclamation to Amend the Investment Re-
liberalization under Viet Nam’s accession to the
enactment Proclamation No. 280/2002. Addis
WTO”. May. Washington, D.C.
Ababa.
Domingo RW (2004). Foreign investments flow to RP
Ethiopia: Federal Democratic Republic of Ethiopia.
“declining dramatically” – UNCTAD. In
Council of Ministers Regulations on Investment
Philippine Daily Inquirer. Makati. PDI Publishing.
incentives and Investment Areas Reserved for
Domestic Investors, 84/2003.
DTI Motor Vehicle Product Team (2001).
Development Plan: Philippine Motor Vehicle Ethiopia: Federal Democratic Republic of Ethiopia.
Industry. Makati City. DTI. Investment Proclamation No. 375/2003. Addis
Ababa.
Le Thuc Duc and Tran Hao Hung (2006). trade related
investment measures in Viet Nam: the effects of Ethiopia: Federal Democratic Republic of Ethiopia.
eliminating the prohibited”, paper prepared for The Export Trade Duty Incentive Scheme
UNCTAD, mimeo. Proclamation No. 249/2001. Addis Ababa.
Ethiopia.
Dunning JH (1992). Multinational Enterprises and the
Global Economy. Reading: Addison-Wesley Ethiopia: Ministry of Trade and Industry (2003). Draft
Publishing Company. Memorandum of Foreign Trade Regime of
Ethiopia.
Dussel E (2000). La Inversión Extranjera en México.
Serie Desarrollo Productivo No. 80, Comisión Ethiopia: National Bank. Directive to Transfer NBE’s
Económica para América Latina y el Caribe, Foreign Exchange Functions to Commercial
Santiago de Chile. Banks Directive No.FXD/07/1998. Addis Ababa.
El Cronista (2005). La industria automotriz sumará Ethiopia: National Bank. The operation of Foreign
2000 operarios hasta 2007. 12 July. Exchange Bureaux Directive No. FXD/09/1998.
Addis Ababa.
El Cronista (2005). Fiat invierte US$ 50 millones pero
para fabricar más autopartes. 16 May. Experts Advisory Cell (2005). Report on the
Automobile Sector of Pakistan. Islamabad:
Khan AH (2000). FDI flows: the case of Pakistan. Estudio 1EG.33.6. Serie Estudios Sectoriales.
Research Report, Pakistan Institute of Oficina CEPAL-ONU, Buenos Aires.
Development Economics. Islamabad.
Magallona M (1996). The Dismantling of the
Kosakoff B (coordinador) (1998). Hacia un mejor Philippine State and the Impact on Civil Society.
entorno competitivo de la producción automotriz Quezon City. Foundation for Nationalist Studies.
en Argentina. CEPAL-Oficina Buenos Aires.
McCarty A (1998). ASEAN and Foreign Direct
Koulen M (2001). Foreign investment in the WTO. In Investment in Viet Nam. Neal Forster (ed.)
Nieuwenhuys and Brus. Multilateral Regulation of Vietnam’s Integration with ASEAN: A Policy
Investment. Reader, Ha Noi.
Sulfas M, Porta F and Ramos A (2002). Inversión Medalla E et al. (1995). Catching Up with Asia’s
extranjera y empresas transnacionales en la Tigers. Makati. Philippine Institute for
economía argentina. CEPAL, Serie Estudios y Development Studies.
Perspectivas N° 10, Buenos Aires.
Mihretu M (2006). Trade-Related investment measures
Kumar N (2003). Use and effectiveness of in Africa: the case of Ethiopia. Paper prepared
performance requirements: what can be learnt for UNCTAD, mimeo.
from the experiences of developed and developing
Miller D (1986). Mexico. Rushing F and Ganz Brown
countries. UNCTAD (2003) The Development
C (eds.), National Policies for Developing High
Dimension of FDI: Policy and Rule-making
Technology Industries: International Comparisons
Perspectives. Proceedings of an Expert Meeting.
(Boulder: Westview Press).
New York and Geneva. United Nations: 72.
Ministry of Industry (2000). Circular 02/2000/TT-
La Nación (2005). En plena expansión, la mayoría de
BCN: Guidelines on export and
las automotrices planea inversiones. 17 June.
import of commodity minerals in 2000. March
Lal Das B (1999). The World Trade Organization: A 2000, Ha Noi.
Guide to the Framework for International Trade.
Ministry of Planning and Investment (1998). Decision
London. Zed Books.
229/1998/QĈ-BK: on the List of Products the
Lara de Sterlini M (2005). The agreement on trade- Export of which must be at least 80%. April 1998,
related investment measures. Macrory P, Appleton Ha Noi.
A and Plummer M. The World Trade
Ministry of Planning and Investment (2001). Decision
Organization: Legal, Economic and Political
718-2001-QD-BKH: On the List of Industrial
Analysis. Vol. I. New York. Springer: 437–483.
Products Subject to 80% Export Requirement,
Lengyel M (2004). The implementation of WTO December 2001. Ha Noi.
Agreements: the cases of Argentina, Peru and
Ministry of Planning and Investment, Information on
Costa Rica. Latin American Trade Network
FDI, various years, Ha Noi, URL:
Working Paper N° 30.
http://www.mof.gov.vn/.
Lim J (2000). Markets, institutions and an alternative
Ministry of Trade (2001). Viet Nam–United States
international economic system. Issues & Letters.
Bilateral Trade Agreement (BTA). Ha Noi.
Quezon City. Philippine Center for Policy Studies.
Ministry of Trade (2003). Notification under Article
Llach J, Sierra P and Lugones G (1997). La industria
5.1 of the Agreement on Trade-Related Investment
automotriz argentina. Evolución en la década del
Measures. October 2003, Ha Noi.
noventa, perspectivas futuras y consecuencias
para la industria siderúrgica. Mimeo. Moeser H (1997). Investment Rules in the NAFTA. In
Investment Policies in Latin America and
Low P and Subramaniam A (1996). TRIMs in the
Multilateral Rules on Investment. Paris.OECD.
Uruguay Round: an unfinished business?” In The
Uruguay Round and the Developing Economies. Moran TH (1999). Foreign Direct Investment and
Martin and Winters (eds.). World Bank Discussion Development: The New Policy Agenda for
Papers 307, Washington, D.C. Developing Countries and Economies in
Transition. Washington, D.C. Institute for
Macaranas F and Silva J (2002). The State of
International Economics.
Philippine Competitiveness 2002. Makati City.
AIM Policy Center. Moran T, Graham E and Blomström M (2005).
Conclusions and implications for FDI policy in
Maceira D (2003). “Costos de transacción y
developing countries, new methods of research,
competitividad en el sector autopartista argentino.
and a future research agenda. In Moran T, Graham
E and Blomström M, eds. (2005). Does Foreign
Direct Investment Promote Development? Nguyen Thi Thanh Ha and Nguyen Van Tien (2004).
Washington, D.C. Institute for International Major challenges to the competitiveness of
Economics. Vietnamese enterprises. Viet Nam’s Socio-
Economic Development. No.38, Summer 2004:
Moreno-Brid JC (1999). Reformas Macroeconómicas e
35–43.
Inversión Manufacturera en México. Serie
Reformas Económicas No. 47, Comisión OECD (1996). Trade Liberalization Policies in
Economica para América Latina y el Caribe, Mexico. Paris
Santiago de Chile.
OECD (2002). Foreign Direct Investment for
Morisawa, Keiko (2000). The Philippine electronics Development: Maximising Benefits, Minimising
industry and local suppliers: developing Costs. Paris.
supporting industries through foreign capital-led
Ofreneo R (1993). Labor and the Philippine Economy.
industrialization. Discussion Paper No. 0011, UP
PhD dissertation, College of Social Sciences and
School of Economics.
Philosophy, University of the Philippines.
Morrissey O (2001). Investment and competition
Ofreneo R (2003). Governance: Critical Issues for the
policy in the WTO: issues for developing
Public and Private Sectors. Background Paper for
countries. Development Policy Review, Vol. 20,
the 24th National Conference of Employers, New
No. 1.
World Hotel, unpublished.
Mortimore M (1998). Corporate strategies and regional
Ofreneo R (2006). FDIs, TRIMs and the Philippine
integration schemes in developing countries: the
Auto Industry. Paper prepared for UNCTAD,
case of NAFTA and MERCOSUR automobile
mimeo.
industries. Science, Technology and Development,
Ofreneo R and Samonte I (2002). Empowering Filipino
Vol. 16, No.2: 1–31.
Migrant Workers: Policy Issues and Challenges.
Mortimore M and Barron F (2004). Informe sobre la Research Report submitted to the ILO Manila
Industria Automotriz Mexicana. manuscript. Office, Makati.
Mukoyama H (2004). The changing dynamics of O’Keefe T and Haar J (2001). The impact of
ASEAN economic integration. Pacific Business MERCOSUR on the automobile industry. North
and Industries. Tokyo. Japan Research Institute South Center Agenda Paper N° 50.
Economics Department.
Paderanga C, ed. (1996). The Philippines in the
Murillo D (2006). The elimination of trade-related Emerging World Environment. Quezon City. UP-
investment measures: an analysis of the case CIDS-UP Press.
of Mexico. Paper prepared for UNCTAD,
Pakistan Automobile Association (2005). State of
mimeo.
Automobile Industry in Pakistan. Karachi.
Nasir Z (2006). Foreign direct investment, elimination
of TRIMs and its impact: a case study of Peres Nuñez W (1990). Foreign Direct Investment and
Pakistan. Paper prepared for UNCTAD, Industrial Development in Mexico. Development
mimeo. Centre Studies. Paris. OECD.
National Assembly, various years. Law on Foreign Peres W, ed. (1997). Políticas de Competitividad
Investment 1987, (1987, 1990, 1992, 1996, 2000). Industrial: América Latina y el Caribe en los Años
Ha Noi. Noventa. Siglo Veintiuno Editores. Mexico City.
NEDA (1999). Medium-Term Philippine Development Pieper U (1998). Openness and structural dynamics of
Plan 1999-2004 (Pasig City: NEDA). productivity and employment in developing
countries: a case of de-industrialization?
NEDA (2001). Medium-Term Philippine Development
Employment and training papers. Geneva. ILO.
Plan 2001-2004 (Pasig City: NEDA). (Note: This
is the adjusted MTPDP, after the downfall of Pineda V (1994). Motorcyle and Parts Industry:
President Joseph E. Estrada.) Impact of Trade Policies on Performance,
Competitiveness and Structure. Makati City.
Ng J (2004). RP competitiveness falls in global survey.
Philippine Institute for Development Studies.
BusinessWorld. 15–16 October. Quezon City.
BusinessWorld Publishing. Pineda V (1997). Effects of the AFTA-CEPT scheme
on Philippine manufacturing industries. Journal of
Ng J (2004). RP stuck in tail-end of contest for capital.
Philippine Development. XXIV, No. 1, First
BusinessWorld. 25 October. Quezon City.
Semester. Makati City: Philippine Institute for
BusinessWorld Publishing.
Development Studies.
Prime Minister of Viet Nam (2001). Decision No State Committee for Cooperation and Investment of
167/2001/QĈ-TTg: On some measures and Viet Nam (1995). Interministerial Circular
policies for developing milk cow breeding in 215UB/LXT: guidelines for foreign investment, 8
Vietnam for the period of 2001–2010, October February. Ha Noi.
2001, Ha Noi.
Strat Consulting-Grupo Unidos del Sud (2002).
Prime Minister of Viet Nam (2002). Decision Estudio de Familia de Productos: Industria
175/2002/QĈ-TTg: Approval of the strategy on Automotriz. Mimeo.
development of Vietnam's Automobile Industry
Sy M (2004). Palace downplays drop in RP ranking in
till 2010 and the vision to 2020, December 2002,
WB’s investment destinations. The Philippine Star
Ha Noi.
Business. Manila. Philippine Star Publishing.
Prime Minister of Viet Nam (2004). Decision
Takacs W (1994). Domestic content and compensatory
177/2004/QĈ-TTg: Approval of the plan on
export requirements: protection of the motor
development of Viet Nam’s automobile industry
vehicle industry in the Philippines. The World
till 2010 and the vision to 2020, October 2004, Ha
Bank Economic Review. Vol. VIII, No. 1.
Noi.
Washington D.C. World Bank.
Prime Minister of Vietnam (2003). Decision
Tan E (2001). Is the Philippines prepared for
46/2003/QĈ-TTg: On the compulsory ratio of
globalization? an assessment of its science and
foreign exchange earnings of residents, economic
technology capabilities. The Philippine Economy:
and social organizations to be sold to State Bank
Alternatives for the 21st Century. Quezon City.
of Viet Nam. April 2003, Ha Noi.
University of the Philippines Press.
Purisima C (2004). Trade and Industry. The
Tussie D and Labaqui I (2006). Complying with the
Macapagal-Arroyo Presidency and
TRIMs Agreement: how important for the
Administration. Quezon City: University of the
Argentinean automobile industry? Paper
Philippines Press.
prepared for UNCTAD, mimeo.
Reforma (2005). Duplican IED en Industria
UNCTAD (1994). World Investment Report 1994:
Automotriz. Business Section, 20 May, Mexico
Transnational Corporations, Employment and the
City.
Workplace. New York and Geneva. United
Reforma (2005a). Enciende alarma sector automotriz. Nations.
1 November, Mexico City.
UNCTAD (2001). World Investment Report 2001:
Reforma (2005b). Reconoce la SE falla automotriz. 2 Promoting Linkages. New York and Geneva.
November, Mexico City. United Nations.
Reforma (2006). Meten la reversa y salen del bache. UNCTAD (2002). Investment and Innovation Policy
Business Section, 16 March, Mexico City. Review. Ethiopia. New York and Geneva. United
Nations.
Ros J (1994). Mexico’s trade and industrialization
experience since 1960. In G.K. Helleiner (ed.). UNCTAD (2003). Foreign Direct Investment and
Trade Policy and Industrialization in Turbulent Performance Requirements: New Evidence from
Times. Routledge, London. Selected Countries. New York and Geneva. United
Nations.
Schvarzer J, Rojas-Breu M and Papa J (2003). La
industria argentina en perspectiva. La reconversión UNCTAD (2004). Least Developed Countries Report.
de la década del 90 como prólogo a la crisis actual. New York and Geneva. United Nations.
Documento de Trabajo Número 5, Centro de
UNCTAD (2005). World Investment Report 2005:
Estudios de la Situación y Perspectiva Argentinas.
Transnational Corporations and the
Secretaría de Economía (2004). Acciones Concretas Internationalization of R&D. New York and
para Incrementar la Competitividad, Subsecretaría Geneva. United Nations.
de Industria y Comercio, Mexico City.
UNCTAD (2006). World Investment Report 2006: FDI
Solís L (2000). La Realidad Económica Mexicana: from Developing and Transition Economies –
Retrovisión y Perspectivas. Fondo de Cultura Implications for Development. New York and
Económica, Third Edition, Mexico City. Geneva. United Nations.
State Bank of Pakistan, various years. Foreign UNCTAD (2006). Measuring restrictions on FDI in
Liabilities and Assets and Foreign Investment in services in developing countries and transition
Pakistan. economies. New York and Geneva. United
Nations.
Interviews (chapter V)
A. Serial publications
World Investment Report 2007. Transnational World Investment Report 2002: Transnational
Corporations, Extractive Industries and Development. Corporations and Export Competitiveness. 352 p. Sales
Sales No. E.07.II.D.9. $80. No. E.02.II.D.4. $49.
http://www.unctad.org/en/docs//wir2007_en.pdf. http://www.unctad.org/en/docs//wir2002_en.pdf.
World Investment Report 2007. Transnational World Investment Report 2002: Transnational
Corporations, Extractive Industries and Development. Corporations and Export Competitiveness. An
An Overview. 48 p. http://www.unctad. Overview. 66 p.
org/en/docs/wir2007overview_en.pdf. http://www.unctad.org/en/docs/wir2002overview_en.pdf.
World Investment Report 2006. FDI from Developing World Investment Report 2001: Promoting Linkages.
and Transition Economies: Implications for 356 p. Sales No. E.01.II.D.12 $49.
Development. Sales No. E.06.II.D.11. $80. http://www.unctad.org/wir/contents/wir01content.en.htm.
http://www.unctad.org/en/docs//wir2006_en.pdf.
World Investment Report 2001: Promoting Linkages.
World Investment Report 2006. FDI from Developing An Overview. 67 p.
and Transition Economies: Implications for http://www.unctad.org/wir/contents/wir01content.en.htm.
Development. An Overview. 50 p. http://www.unctad.
org/en/docs/wir2006overview_en.pdf. Ten Years of World Investment Reports: The
Challenges Ahead. Proceedings of an UNCTAD special
World Investment Report 2005. Transnational event on future challenges in the area of FDI.
Corporations and the Internationalization of R&D. UNCTAD/ITE/Misc.45. http://www.unctad.org/wir.
Sales No. E.05.II.D.10. $75.
http://www.unctad.org/en/docs//wir2005_en.pdf. World Investment Report 2000: Cross-border Mergers
and Acquisitions and Development.
World Investment Report 2005. Transnational 368 p. Sales No. E.99.II.D.20. $49.
Corporations and the Internationalization of R&D. An http://www.unctad.org/wir/contents/wir00content.en.htm.
Overview. 50 p.
http://www.unctad.org/en/docs/wir2005overview_en.pdf. World Investment Report 2000: Cross-border Mergers
and Acquisitions and Development. An Overview. 75 p.
World Investment Report 2004. The Shift Towards http://www.unctad.org/wir/contents/wir00content.en.htm.
Services. Sales No. E.04.II.D.36. $75.
http://www.unctad.org/en/docs//wir2004_en.pdf.
World Investment Directories
World Investment Report 2004. The Shift Towards (For more information visit
Services. An Overview. 62 p. http://r0.unctad.org/en/subsites/dite/fdistats_files/WID2.
http://www.unctad.org/en/docs/wir2004overview_en.pdf. htm)
World Investment Report 2003. FDI Policies for
World Investment Directory 2004: Latin America and
Development: National and International Perspectives. the Caribbean. Volume IX. 599 p. Sales No.
Sales No. E.03.II.D.8. $49.
E.03.II.D.12. $25.
http://www.unctad.org/en/docs//wir2003_en.pdf.
World Investment Directory 2003: Central and Eastern
World Investment Report 2003. FDI Polices for
Europe. Vol. VIII. 397 p. Sales No. E.03.II.D.24. $80.
Development: National and International Perspectives.
An Overview. 66 p.
http://www.unctad.org/en/docs/wir2003overview_en.pdf.
Investment Policy Review – Tanzania. 109 p. Sales No. International Investment Instruments: A Compendium.
E.02.II.D.6 $20. Vol. VI. 568 p. Sales No. E.01.II.D.34. $60.
http://www.unctad.org/en/docs/ps1dited2v6_p1.en.pdf
Investment Policy Review – Botswana. 107 p. Sales No. (part one).
E.01.II.D.I. $22.
International Investment Instruments: A Compendium.
Investment Policy Review – Ecuador. 136 p. Sales No. Vol. V. 505 p. Sales No. E.00.II.D.14. $55.
E.01.II D.31. $25.
International Investment Instruments: A Compendium.
Investment and Innovation Policy Review – Ethiopia. Vol. IV. 319 p. Sales No. E.00.II.D.13. $55.
130 p. UNCTAD/ITE/IPC/Misc.4.
Investment Policy Review – Uganda. 71 p. Sales No. An Investment Guide to Tanzania: Opportunities and
E.99.II.D.24. $15. Conditions. 82 p. UNCTAD/ITE/IIA/2005/3.
Investment Policy Review – Uzbekistan.. 65 p. An Investment Guide to the East African Community:
UNCTAD/ITE/IIP/Misc. 13. Opportunities and Conditions. 109 p.
UNCTAD/ITE/IIA2005/4.
International Investment Instruments An Investment Guide to Mauritania: Opportunities
(Fore more information visit and Conditions. 80 p. UNCTAD/ITE/IIA/2004/4.
http://www.unctad.org/iia)
International Investment Instruments: A Compendium. Guide de l’investissement au Mali: Opportunités et
Vol. XIV. Sales No. E.05.II.D.8. 326 p. $60. Conditions. 76 p. UNCTAD/ITE/IIA/2004/1.
An Investment Guide to Uganda: Opportunities and Dispute Settlement: Investor-State. 125 p. Sales No.
Conditions. 89 p. UNCTAD/ITE/IIA/2004/3. E.03.II.D.5. $15.
An Investment Guide to Bangladesh: Opportunities Transfer of Technology. 138 p. Sales No. E.01.II.D.33.
and Conditions. 66 p. UNCTAD/ITE/IIT/Misc.29. $18.
http://www.unctad.org/en/docs/poiteiitm29.en.pdf.
Illicit Payments. 108 p. Sales No. E.01.II.D.20. $13.
An Investment Guide to Ethiopia: Opportunities and
Conditions. 90 p. UNCTAD/ITE/IIA/2004/2. Home Country Measures. 96 p. Sales No.E.01.II.D.19.
$12.
Issues in International Investment Agreements Host Country Operational Measures. 109 p. Sales No
(Fore more information visit E.01.II.D.18. $15.
http://www.unctad.org/iia)
Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.
Investor-State Disputes Arising from Investment
Treaties: A Review. 106 p. Sales No. E.06.II.D.1 $15 Environment. 105 p. Sales No. E.01.II.D.3. $15.
South-South Cooperation in Investment Arrangements. Transfer of Funds. 68 p. Sales No. E.00.II.D.27. $12.
108 p. Sales No. E.05.II.D.26 $15.
Employment. 69 p. Sales No. E.00.II.D.15. $12.
The REIO Exception in MFN Treatment Clauses. 92 p.
Sales No. E.05.II.D.1. $15. Taxation. 111 p. Sales No. E.00.II.D.5. $12.
International Investment Agreements in Services. 119 International Investment Agreements: Flexibility for
p. Sales No. E.05.II.D.15. $15. Development. 185 p. Sales No. E.00.II.D.6. $12.
State Contracts. 84 p. Sales No. E.05.II.D.5. $15. Taking of Property. 83 p. Sales No. E.00.II.D.4. $12.
No. 17. The World of Investment Promotion at a No. 16. Tax Incentives and Foreign Direct Investment:
Glance: A survey of investment promotion practices. A Global Survey. 180 p. Sales No. E.01.II.D.5. $23.
UNCTAD/ITE/IPC/3. Summary available from
http://www.unctad.org/asit/resumé.htm.
C. Individual Studies
Globalization of R&D and Developing Countries.. 242 TNC-SME Linkages for Development: Issues–
p. Sales No. E.06.II.D.2. $35. Experiences–Best Practices. Proceedings of the Special
Round Table on TNCs, SMEs and Development,
Prospects for Foreign Direct Investment and the UNCTAD X, 15 February 2000, Bangkok, Thailand.113
Strategies of Transnational Corporations, 2005-2008. p. UNCTAD/ITE/TEB1. Free of charge.
74 p. Sales No. E.05.II.D.32. $18.
Measures of the Transnationalization of Economic
World Economic Situation and Prospects 2005. 136 p. Activity. 93 p. Sales No. E.01.II.D.2. $20.
Sales No. E. 05.II.C.2. $15. (Joint publication with the
United Nations Department of Economic and Social The Competitiveness Challenge: Transnational
Affairs.) Corporations and Industrial Restructuring in
Developing Countries. 283p. Sales No. E.00.II.D.35.
Foreign Direct Investment and Performance $42.
Requirements: New Evidence from Selected Countries.
318 p. Sales No. E.03.II.D.32. FDI Determinants and TNC Strategies: The Case of
$35.http://www.unctad.org/en/docs//iteiia20037_en.pdf Brazil. 195 p. Sales No. E.00.II.D.2. $35. Summary
available from
FDI in Land-Locked Developing Countries at a http://www.unctad.org/en/pub/psiteiitd14.en.htm.
Glance. 112 p. UNCTAD/ITE/IIA/2003/5.
FDI in Least Developed Countries at a Glance: 2002. Studies on FDI and Development
136 p. UNCTAD/ITE/IIA/6.
http://www.unctad.org/en/docs//iteiia6_en.pdf. TNCs and the Removal of Textiles and Clothing
Quotas. 78 p. Sales No. E.05.II.D.20.
The Tradability of Consulting Services. 189 p.
UNCTAD/ITE/IPC/Misc.8. Measures of Restrictions on FDI in Services in
http://www.unctad.org/en/docs/poiteipcm8.en.pdf. Developing Countries. 56 p. Sales No. E.06.II.D.13.
Foreign Direct Investment in Africa: Performance and The Universe of the Largest Transnational
Potential. 89 p. UNCTAD/ITE/IIT/Misc.15. Free of Corporations, 70 p. Sales No. E.07.II.D.6.
charge. Also available from
http://www.unctad.org/en/docs/poiteiitm15.pdf. FDI in Tourism: The Development Dimension, 186 p.
Sales No. E.07.II.D.17.
D. Journals
Transnational Corporations Journal (formerly The CTC Reporter). Published three times a year. Annual subscription
price: $45; individual issues $20. http://www.unctad.org/en/subsites/dite/1_itncs/1_tncs.htm.
United Nations publications may be obtained from bookstores and distributors throughout the world. Please
consult your bookstore or write:
Sales Section
United Nations Office at Geneva
Palais des Nations
CH-1211 Geneva 10
Switzerland
Tel: (41-22) 917-1234
Fax: (41-22) 917-0123
E-mail: unpubli@unog.ch
For Asia and the Pacific, the Caribbean, Latin America and North America to:
Sales Section
Room DC2-0853
United Nations Secretariat
New York, NY 10017
United States
Tel: (1-212) 963-8302 or (800) 253-9646
Fax: (1-212) 963-3489
E-mail: publications@un.org
For further information on the work of the Division on Investment, Technology and Enterprise Development,
UNCTAD, please address inquiries to:
QUESTIONNAIRE
In order to improve the quality and relevance of the work of the UNCTAD Division on
Investment, Technology and Enterprise Development, it would be useful to receive the views of
readers on this publication. It would therefore be greatly appreciated if you could complete the
following questionnaire and return it to:
Readership Survey
UNCTAD Division on Investment, Technology and Enterprise Development
United Nations Office at Geneva
Palais des Nations, Room E-9123
CH-1211 Geneva 10, Switzerland
Fax: 41-22-917-0194
Excellent Adequate
Good Poor
6. Please indicate the three things you liked best about this publication:
7. Please indicate the three things you liked least about this publication:
8. If you have read other publications of the UNCTAD Division on Investment, Enterprise
10. Are you a regular recipient of Transnational Corporations (formerly The CTC Reporter),
UNCTAD-DITE’s tri-annual refereed journal?
Yes No
If not, please check here if you would like to receive a sample copy sent to the name and
address you have given above: