Report On Impact Of Import Restrictions On Dawshawl Motors

Report on Impact of Import Restrictions on Dawshawl Motors

Executive Summary

United States of America and Canada form 28% of Dawshawl’s Motors products. However, in recent months, these two countries have imposed import restrictions on cars from this Australian based company. The US restrictions have involved increasing import duty tax by about 50%, while Canada has increased by 70%. These changes have had profound effect on this company. The revenue for the second half off this year has decreased by 30% as compared to the same period last year. Prices for the company’s cars in America have increased by an average of 30%, while they have increased by an average of 40% in Canada. 10% of workers in this company have been retrenched. This is especially the workers working in the assembly lines. Several projects that had been initiated have stalled or abandoned due to reduced capital for investment. The report recommends that the company open factories both in United States and Canada so that the vehicles no longer attract the taxes. New markets, especially the local one and the emerging economies of Africa, should be sought. Lobbying of government to enter into agreements with these governments is another recommendation that was made. This will ensure that exports from Australia are not treated unfairly.

Introduction

In spite of the proliferation of free trade agreements in the international market, there are countries in the world which continue to impose trade restrictions in their areas. This is in spite of the agreements like the North American Free Trade Agreement and such bodies as the World Trade Organization that is mandated with overseeing exchange of goods and services between international markets.

The governments, which are the major sources of the restrictions, are motivated by various factors as they make the decisions to impose trade restrictions on various goods and services. Majority are interested in protecting their local industries, while other decisions are informed by

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Report on Impact of Import Restrictions on Dawshawl Motors

the concerns for safety of the citizenry. There are various methods that are adopted by these governments to impose the trade barriers. These include increased tariff on the item that the government wishes to restrict. The other is allocation of quotas, which mean that only a specified amount of goods can be imported to the country. This creates an artificial shortage of the item in consideration and raises the prices of the commodity in the local market. This way, the local manufacturers will be the ones to reap the benefits of the increased prices.

An embargo can also be imposed to attain the same effects. This is where the import of a particular product from a particular country is imposed by the host government. In extreme cases, the embargo can take the form of total trade restriction on any form of exchanges between the two countries.

Where restrictions have been placed on imports from a particular region or for a particular good, the government might require licenses to be obtained by the aspiring importers. This is when the restriction of the importation takes the form of a control, rather than a total ban. The licenses are regulated such that only a few of the traders in the country may be issued with them. This way, the government ensures that the import is controlled to its desires.

This practice of imposing restrictions on importation has effects both on the local economy and the international one. The country exporting the restricted commodity is affected, while at the same time, the economy of the importing country is also affected. Some of the effects include improvement of the local industry, where they have been sheltered from outside competition. The price of the banned commodity may also rise, if the local industry has no capacity to meet the demand. Also, the safety of the public is ensured, for example where regulations are imposed based on safety standards of vehicles.

Effects are also felt on the economy of the exporting country. The revenues of the companies whose products have been restricted goes down. This means that profitability also goes down. The product is in large supply in the local market, and so the price of the same falls. This report is going to examine the effects that restrictions on car importation to United States of America

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Report on Impact of Import Restrictions on Dawshawl Motors

and Canada on Dawshawl motors. The two countries have banned the entry of certain classes of cars to their country based on several reasons. These cars from this Australian based company are restricted on the basis that they do not meet the safety requirements of the countries or other laid down criteria. The impact of this practice on the company cannot be ignored.

Objectives of the Report

This report was prepared by the manager in charge of the international operations of Dawshawl motors. It was requested by the president of the company, and several objectives were laid down to guide it. These objectives are as listed below:

Import Restrictions Imposed by the United States  of America Authorities

In the financial year 2009/2010, the American federal government has increased the duty tax on vehicles that are to be imported from Australia. For vehicles up to 1200 cc, the import duty that will be levied on them was increased by 50% (Gibbons 2009). For the cars above 1800 cc, the penalty is even greater. The import duty tax was raised by 75% (Gibbons 2009).

Given the fact that majority of the cars that Dawshawl was importing to this country were on this range, the company was hit directly by the increases. 40% of the vehicles that were exported to the United States prior to the restrictions were above 1200 cc. 30% of them were above 1800

cc. this means that 70% of the vehicles that were been exported to America by this company have been affected by the increased duty tax.

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Report on Impact of Import Restrictions on Dawshawl Motors

These hikes in import duty tax were an additional to the already existing restrictions based on safety standards. A vehicles that is manufactured outside the country needs to conform to certain safety regulations as laid down in the country’s Motor Vehicle Safety Act of 1966 (Capling 2008). There are other standards that have to be met. Others are like the ones laid down in the Clean Air Act of 1968. This requires that the vehicle imported to this country emit carbon and other pollutants below a specified range. Another act is the Motor Vehicle Information and Cost Savings Act of 1978 (Winston & Granville 2008: 139).

It is very hard for any one vehicle to meet all these standards of the American market. This means that the company has to remodify its vehicles after they come out of the assembly line so that they can conform to the American market requirements. This adds extra costs to the company because the vehicles are modified specifically for sale to this country, and not for the other markets (Lafford 2008: 72). When this is added on top of the new tax regime, the effects on the company are aggravated.

Import Restrictions Imposed by Canada on Vehicles from Dawshawl

Canada, like the United States of America, has some restrictions on imported vehicles, especially from Australia, which is a non-member state to the country’s trading block (Winston & Granville 2008: 139). Most of the restrictions imposed on this country are based on taxation, rather than safety considerations or any other motives.

Canada requires that a vehicle coming from countries that are non-members to the trading block that it belongs to pay higher taxes than those of other countries. Given that Australia has not entered into agreements of this nature with Canada, the imported cars from Australia continue to attract punitive duty taxes. These new measures took effect on March 2009 (Adeloitte 2009: 14).

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Report on Impact of Import Restrictions on Dawshawl Motors

According to these new regulations, a vehicle manufactured outside the trading block region will be paying 70% higher duty taxes than those vehicles coming from the region (Trela & Whalley 2009: 22). This will depend on the class that the vehicle belongs to. Given the fact that Dawshawl comes from outside the region, these import duty taxes have really made our vehicles expensive, as compared to other vehicles that access the Canadian market.

The motivation behind the Canadian increased taxes is to protect its local car manufacturing industry (Adeloitte 2009: 14). Its fledgling car manufacturing industry was facing a lot of threat from countries that are outside her trading block. The countries in the trading bloc do not have strong car manufacturing industries, and they pose no greater threat to this industry (Adeloitte 2009: 14).

Impacts of Import Restrictions on Dawshawl Motors

These new restrictions have affected the company negatively, especially because they were unexpected. The effects range from decreased revenue, decreased sales and a fledgling balance sheet. Brownski (2008: 8) says that there are effects of import restrictions that are not directly felt by the economy of the affected nation, but they era there nonetheless. Dawshawl has experienced them all.

To gauge the nature of the impacts of these import bans, the writer of the report interviewed several staff members of the company and reviewed various documents at his disposal. He first of all consulted the sales managers on charge of the respective regions, then the overall sales manager of the company. The financial flow documents that pertained to the period under investigation were also availed to the writer. The following are the effects that the writer was able to identify:

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Report on Impact of Import Restrictions on Dawshawl Motors

1: Decreased Revenue

The company has experienced decreased revenue in the period that these restrictions have been in force. The sales for the second half of this year reduced by 30% as compared to the same period last year. The sales that have reduced are especially those that are made to these two countries. It is a fact that there is a credit crunch doing the rounds currently, and some of the lost revenue can be attributed to this. This is because as compared to other companies that are exporting vehicles to other countries, the decline of Dawshawl’s revenue was not proportionate to the industry’s decline.

2: Increased Prices of Vehicles in these Countries

Perhaps the above effect of declined revenue can be partly attributed to the increased cost of vehicles from Dawshawl in these countries. Hirschi (2008) is of the view that one of the first effects of import regulations is increase in prices of the commodity that has been regulated. This comes automatically as the forces of the market come in to equalize the effects of the change in one of the market factors.

The vehicles in America have increased their prices by about 30%, average, after the introduction off the new tax regime. Those in Canada have increased by an average of 40%, average, also after the new tax regime took effect. What this has meant is that consumers can no longer afford the vehicles from this company in these markets. There are other cheaper alternatives, especially those assembled locally.

3: Retrenchment of Workers

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Report on Impact of Import Restrictions on Dawshawl Motors

A look at the human resource department’s files revealed that 10% of the workforce has been retrenched in the past seven months. These retrenchments are attributed to fall in the revenue of the company and also decreased work available for the workforce. Masswohl (2007: 130) opines that one of the effects of import regulations on a country comes in when the labor force loses employment. The human resource department opines that more retrenchments are on the way if the situation does not improve. Most of the staff members that have been retrenched are those that their duties revolve around the assembly line. Since there are fewer and fewer vehicles rolling out of the assembly line, most of these workers found themselves jobless.

4: Stalled Projects

Dawshawl Motors had a number of projects that were on progress before the new tax regimes came in force. These projects involved expansion of the assembly line and opening of new factory in the western region of the country. But since the introduction of the taxes, and considering the fact that these two markets formed 28% of our total market share, capital availability have gone down. There is no capital for these expansions, and they have literally been abandoned, or are progressing at a much slower rate.

Conclusion

United States and Canada formed 28% of Dawshawl Motors Company before the import restrictions came into force. The United States increased the amount of import duty tax levied on vehicles from this company by an average of 50%. This coupled with the already existing Acts that had standards to be met by cars entering the market, has reduced the sales of our vehicle in this market. The same has happened in Canada. The tax revenue that is now charged to our vehicles has increased by an average of 70%. This is because Australia has not entered into agreements with Canada to this effect.

The effects of these restrictions cannot be downplayed as far as the company is concerned. The sales have reduced by a considerable margin. Workers (10%) have been retrenched, and

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more retrenchments are expected. Projects that have been started by this company have been stalled as capital decreased.

Recommendations

These are the recommendations that the report came up with based on the study of the facts on the ground:

1. The company should open an assembly line in America. This way, the vehicles will not attract the heavy taxes since they will no longer have the import tag.

2. Another assembly plant should be opened in Canada or in a country that belongs to Canada’s trading bloc. Again, this will reduce the amount of taxes charged on these vehicles since they are no longer imports.

3. The company should actively lobby the government to enter into trade agreements with Canada and America so that the taxes can be revised. This is given the fact that these two countries do export to Australia and they are not treated the same way.

4. Diversification of market should be sought. More efforts should be made to popularize the products in the local market. New international markets, especially in the emerging economies in Africa and other regions, should be established. This way, changes in one market will not negatively affect the company’s operations.

Bibliography

Adeloitte, Grossman K. An Analysis of the Motor Industry in Australia, Sidney: University of Australia Press, 2009.

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Brownski, Bobby T. Canadian Motor Industry and its Role in the International Market,

Durban:

University of Durban, 2008.

Capling, Brown U. “Effects of Trade Regulations in the International Market.” The Economic

Journal, 2 no. 3 (June 2008), 234-237.

Gibbons, Victor B. export and Import Regulation in North America, Chicago: University of Chicago Press, 2009.

Hirschi, Gregory F. Mechanisms of the World Market, Lubbock: Cengen Books, 2008.

Lafford, Michael T. International Free Trade Agreements: Opportunities and Challenges,

Sidney: University of Australia Press.

Masswohl, Ingram Y. Globalization and Integration of World Economies, New  York:

McGraw-Hill, 2007.

Trela, Beatrice V. and Whalley, Patrick L. “International Marketing and Regulations.” The

Tribune, O ctober 23

rd

2009. 20-25.

Watson, Wallace D. A Review of World Market Regulations: A Case Study of Australia Export

Market,                                                  Melbourne: Wiley Books, 2009.

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Winton, Sandra C. and Granville, Newton I. “A Study of International Market Regulation on Australia.” The Register Guard, 3 no. 5 (October 2008), 139-145.

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