Will Vietnam's Car Prices Ever Fall?

Transportation - Vietnam: Feb. 15, 2016

It is said that a middle income Indonesian has to save all his/her salary (while not spending a penny) for almost six years in order to buy a new Innova imported to Indonesia. Guess how much time it takes his Vietnamese friend in order to realise the same dream? 17 years!1 What can explain this difference? One answer may be the higher average income in Indonesia.

The price of imported cars in Vietnam is almost two times higher than that in Indonesia. It should be noted that taxes and fees (which account for 40 - 50% of car prices in Vietnam) contribute largely to the fact that an imported car in Vietnam is more expensive than in other countries in the region.

Some will argue that as Vietnam participates in international trade agreements, which aim at the reduction of trade barriers, things may change. To name a few, besides the need to respect the WTO and the ASEAN commitments for some new cars, Vietnam also has to eliminate import tax if the car is imported from the European Union (EU) no later than 10 years after the ratification of the Vietnam – EU free trade agreement (FTA). If the car is imported from South Korea, import tax must be eliminated no later than 10 years after the ratification of the Vietnam – South Korea FTA. And of course, if the car is imported from TPP members, then import tax is eliminated no later than 10 – 13 years after the ratification of this agreement. Accordingly, people are sitting on their money, expecting the price of cars to go down.

However, it seems that we shouldn’t count too much on trade agreements, at least in the near future. It is necessary to note that import tax is only one of many elements which contribute to the high price of cars. Besides, while eliminating this tax, the government has a variety of instruments to restrict car importation and compensate the budget reduction, including non-tariff barriers (such as conditions imposed on car importers), fees and taxes. The luxury tax is an example. From the 1st of January, 2016, Decree 105/2015/ND-CP entered into force, ushering a new way of calculating luxury taxes imposed on imported cars that have less than 24 seats. The result has been that the luxury tax increased substantially, which meant an increase in the price of new cars.

What if you want to buy a used imported car? Remember that like many other countries, Vietnam doesn’t like used cars. Therefore, a strict quota on importation of used cars is applied. For instance, according to the TPP agreement, on the 16th year after the ratification of the agreement, only 150 used cars will benefit from the tax reduction. If your car is the 151st, you’ll have to pay the MFN tax prescribed by the Vietnam’s WTO commitments.

Are you bored of going to work by motorcycle? You have two options: (i) waiting for the price of cars to decrease through the reduction of taxes and fees or, (ii) work harder now to have much more money to buy it sooner. The second option sounds more realistic than the first. Oh yes, you may also have another option: wait for the metro lines to be finished (2019?). This sounds more realistic than the first one, too. And, of course, better for the environment.

 

1 Central Institute for Economic Management (CIEM) of the Ministry of Planning and Investment, conference related to the Situation and policy of development of car and spare parts industry in Vietnam, organized on the 8th of December, 2015.