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RESEARCH PAPER: REASONS BEHIND BAN ON IMPORT OF USED VEHICLES

Abstract

The objective of the REASONS BEHIND THE BAN ON IMPORT OF USED VEHICLES is to explore justification of restriction on import of certain categories of imported vehicles by some countries. In many countries, for example, in Egypt or Saudi Arabia custom authorities do not pass vehicles older than five years. We can classify brand new vehicles in two categories. First one is the locally manufactured vehicles, whose production plant is located within the country, whether its parts are locally manufactured or imported from other countries. This is called a local brand new vehicle. The other one is whose production facilities are not within the country and it is imported in brand new condition from another country. The unused imported vehicle should certainly be treated as a brand new imported vehicle.

The other form of an imported vehicle has used the vehicle which means, a vehicle which is manufactured in another country and remained in use by someone else in another country for a period of time and then the vehicle is sold and imported by some individual in other countries.  There are many countries which impose restrictions on the import of vehicles based on different parameters. Few restrict the import of certain types while most of the countries do not permit vehicle older than 5 years. (Ministry of Commerce, 2011).  The reason behind this is defined by law, but it is also injurious to an economy of the country as well. (financial gazette.co.zw, 2010)

Chapter 1: Introduction

The overall economic and business conditions are not very good resultantly; there is a decrease in profit margins and net income. And this decrease in income does not allow people to spend lavishly. The used imported vehicles have already exhausted their useful life and fully depreciated in books of accounts. Consequently, the prices of these vehicles are lower when compared to brand new vehicles and therefore, are in an affordable range for customers.

There is the requirement of the license for brand new vehicles (as per US Department of Commerce). Therefore, it becomes more convenient to purchase a used vehicle to satisfy personal and official needs of customers.

In case of the ban on import of used vehicles older than five years, there will be a problem for a low-income class to own a vehicle. As the imported vehicle would not be available and local vehicle would be highly priced. The increase in the price of a local vehicle is mainly due to the high cost of production, the high price of imported spare parts, and fluctuation of price due to foreign exchange rate difference.  Further, the demand and supply forces determine the price. In case of the ban on used imported vehicle there would be high pressure on demand, resultantly the local manufacturer will increase prices.

The case is different for the United States. Here local vehicles are of high quality. are made in accordance with the environmental conditions. The vehicles manufactured in the USA are as per specific requirement of the country according to temperature and other weather conditions, while, the imported vehicles normally do not contain such specifications. That is why, people do not prefer imported vehicles in the United States and therefore, the import volume is negligible.

Chapter 2: Related Literature review:

Trade journals, online databases, official websites, government databases, annual reports, academic journals, textbooks, and academic articles will be explored to develop a related literature review.

In most of the countries, the local vehicle manufacturers in the country also use imported parts in the vehicles. The parts are normally imported from China, Taiwan, and Japan. The price of the imported parts varies due to fluctuation in exchange rate. One of the basic reasons for changes in the exchange rate is the appreciation or depreciation of currency of one country in comparison to another country. The exchange difference directly affects the cost of production which translates into high prices of cars.

Due to the imposition of restriction on the import of vehicles older than five years, the customer left with no alternative but to purchase locally manufactured vehicles. Consequent to this, the demand of locally manufactured vehicle enhanced. As a basic principle of economics, the price of product escalates as a result of the increase in demand. Further, as the local manufacturer cannot fulfill the prevailing demand, people have to look for a local second-hand vehicle as well.  The local dealers of the second-hand vehicle would also increase their price due to increase in demand as well as due to the increase in prices of brand new vehicles. The imported vehicles though used for more than five years do have features which are normally not provided by the local manufacturers. However, due to restriction on import of used vehicles, customers are forced to buy relatively low featured used vehicle in the price of comparatively high function imported vehicle.

Chapter 3: Methodology

The researcher will follow an appropriate strategy which goes hand in hand with the chosen sample size and objectives of the research study. Hence the deductive approach accompanied by the exploratory study will be undertaking (Collis & Hussey, 2003).

The research can also make use of various research philosophies such as positivism, realism, and interpretivism. Industry facts and figures about the imported cars will be collected through the following realism, whereas industry experts’ opinions about the current market situation of imported cars will be assessed through interpreters. It is also clear that these philosophies fit the exploratory studies since research can easily clarify the basic concepts of the undertaken research by taking some assumption along with factual data and information (Perry, 1998).

The research will use both primary as well as secondary sources of data. For primary data collection, research will use questionnaires and interviews to get insight into the imported car industry and ban on its import in certain countries of the world (Perry, 1998).

The send phase of the study, primary research will be conducted through administrating questionnaires to a relevant group through random and snowball sampling techniques (Saunders et al, 2007).

In the primary research phase, the research will also conduct interviews with government officials and importers and users of imported vehicles, so that their views could be analyzed to arrive at comprehensive research study and findings. The research will use semi-structured and informal format for conducting interviews (Collis & Hussey, 2003).

Chapter 4: Findings

The following findings have been derived from the initial literature review and analysis of secondary data sources of imported cars throughout the world, and research will try to refine it after taking full research study.

The supporters of restriction policy claim that a vehicle has a useful life of five years. In normal accounting standards, depreciation of 20% is charged to make its book value zero in financial accounts after five years. As the matter of fact, the first user of a vehicle has already charged depreciation on the vehicle both in financial accounts as well as in income tax assessment and charged depreciation as the admissible expense. Therefore as per Generally Acceptable Accounting Rules, an asset on which depreciation has already been charged and book value of vehicle already approached to zero, further depreciation cannot be charged. The asset should not be added in books of accounts again and depreciation should not be charged by the original user or by the second user. The zero book value causes the major reason of restriction on import of more than five-year-old vehicle.

Second major reason also pertains to the useful life of vehicle which is almost five years old and after that, the vehicle requires major overhauling and may require a change of engine. Therefore, it is not appropriate to import such a vehicle. (Chowdhrury, 2011).

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Chapter 5: Summary

The car business is at the boom in the USA, because of higher demand and supply. However, the production of cars is concerned; it is hardly meeting the in-house demand. For the time being, figures for the export of cars stands almost at zero. Further, the imports of cars are also not very high, as the manufacturing countries produce cars according to their own environmental conditions by taking care of USA weather, therefore, the issue of compatibility arises. The vehicles manufactured in States are more comfortable and are low in price as compared to imported vehicles; therefore consumption of local vehicles is high in the United States. Further, as per rules, import of buses, light transport, and cars are not allowed.

The prime reason to restrict used imported vehicles is the issue of useful life of a vehicle and also to reduce the gap between demand and supply of locally manufactured vehicles. However, the ultimate effect of this restriction is increased in demand of locally manufactured vehicle, increase inflation and limiting the choice of people.

References:

Collis , J., & Hussey, R. (2003). Business Research : A Practical Guide for undergraduate an

Post graduate Students. London: Palgrave Macmillan.

Chowdhury , M. H. (2011). Saudi Arabia bans used car imports older than 5 years. Retrieved 24 Octber 2001, from http://www.drivearabia.com/news/2009/06/09/saudi-arabia-ban-used-car-import-older-5-years/

financialgazette.co.zw. (2010). Reality behind importing used cars. Retrieved 23 October 2011, from The financial Gezette: http://www.financialgazette.co.zw/property-report/6149-reality-behind-importing-used-cars.html

globaltradealert.org. (2009). Saudi Arabia: Ban on import of Cars older than 5 years. Retrieved 23 October 2011, from Global Trade Alert: http://www.globaltradealert.org/measure/saudi-arabia-ban-import-cars-older-5-years

Ministry of Commerce. (2011). Import Policy. Japan Auto Appraisal Institute.

Perry, C. (1998). Processes of a case study methodology for postgraduate research in

marketing. European Journal of Marketing. 32 (9/10) .785-802. Retrieved November 20,  2011.

Saunders et al. (2007). Research Methods for Business Students. ( 5th  Edition).  London:

Pearson Education.

United States Department of Commerce. (2008). Compilation of Foreign Motor Vehicle Import Requirements. International Trade Administration Office of Aerospace and Automotive Industries.

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