Domestic content and compensatory export requirements : protection of the motorvehicle industry in the Philippines

1% 900 THE WORLD BANK ECONOMIC REVIEW, VOL. 8, NO. 1 127-149 FILE COPY i'l' Domestic Content and Compensatory Export Requirements: Protection of the Motor Vehicle Industry in the Philippines Wendy E. Takacs The motor vehicle industry in the Philippines is protected by a virtual embargo on the importation of new vehicles but operates under the burden of domestic content and compensatory export requirements that protect Philippine producers of automotive components. This article develops a model to assess the net impact of this complicated protective regime. Estimates indicate substantial benefits to the assembly and compo- nents industries and losses to vehicle purchasers. Reform of the system to eliminate the embargo as well as the domestic content and compensatory export restraints at current tariff rates would benefit vehicle purchasers but would increase the effective rate of protection to assembly operations by decreasing prices of components. Reform mea- sures to eliminate the domestic content and compensatory export requirements should be accompanied by simultaneous reductions in tariffs on assembled vehicles. The motor vehicle protective regime in the Philippines is made up of a compli- cated set of regulations. Imports of assembled vehicles are prohibited, with certain exceptions. Imports of sets of components (kits) to be assembled within the country are subject to tariffs. Firms are constrained as to the number of models produced and the amounts of imported, compared with domestic, com- ponents used. Also, firms assembling motor vehicles in the Philippines must export automobile industry products equal to given percentages of the value of imported kits. Similar protective regimes have been used in several countries, especially in Latin America.1 The set of restrictions affects both the sales price of the finished vehicles and the cost conditions of domestic assembly operations. The restric- tion on imports of assembled vehicles drives up the domestic prices of motor 1. See Lloyd (1973) for a description of the Australian system. Munk (1969) provides a survey of Latin American cases. For descriptions of the Brazilian, Argentine, and Mexican protective regimes for auto- mobiles, see Mericle (1984: 29-32), Jenkins (1985: 59-61), and Bennett and Sharpe (1985), respectively. For Uruguay, see Takacs (1991). Wendy E. Takacs is with the Department of Economics at the University of Maryland, Baltimore. This article was prepared while the author was a consultant with the Policy Research Department at the World Bank. She would like to thank Eric Abalahin for research assistance and Renato Schulz, Erika Jorgensen, and the anonymous referees for numerous suggestions.