Tax Cuts on Imported Used Cars will Benefit Ukrainian Economy

The arguments for trade liberalization are very strong, while the arguments for putting any additional restrictions on imported used cars are weak at best. In light of recent developments, it is time to expose Ukrainian producer to real competition.

On July 4th the president of Ukraine signed the law cutting tax on imported used cars. Although there are many arguments how this law will impact Ukrainian economy, the common consensus among economists is that trade liberalization is beneficial to economy. Some of the classical arguments for free trade are:

• Free trade increases access to higher-quality, lower-priced goods.
• It increases economic growth.
• It improves efficiency and innovation.
• It promotes competition and fairness on the market.

Are there any negative consequences that may come with this new law? First, one may argue that because of fewer restrictions on imported used cars Ukraine will be flooded by trash cars supposedly turning Ukraine into the garbage damp of Europe. This argument is very weak in view of the situation Ukraine is currently in: Given the need for urgent rearmament the import of well recyclable metal via second-hand cars will help to generate not only a profitable recycling industry (like in many of EU countries), but also to increase defence capacities of Ukraine by recycling the metal of imported cars which after some time of serving as cars can be transformed into tanks.

Second, one may say that trade liberalization will harm Ukrainian car producers. But let’s look at Ukrainian car industry. The producers have enjoyed massive protection by very high tariffs and restrictions for more than 10 years, but were they able to produce any high quality cars? Even the most optimistic people will say no. Ukrainian car producers have enjoyed very high economic rents by selling overpriced cards to the detriment of Ukrainian citizens and channelling resulting profits away from the firms into private pockets – rather than investing in significant improvements of production. The only solution to this problem is to expose the Ukrainian car producers to real competition.

Right now is perhaps the best time to expose Ukrainian car producer to real competition. First, Ukrainian car producers have advantage over foreign car producers due to the new currency exchange rate between Hryvna and currencies in Europe. Given this natural protection of Ukrainian production by a very low Hryvna exchange rate (and in result internationally cheap labour force), any further call for protection appears as bizarre or mislead. Second, there is a potentially very positive spill-over effect from the conflict with Russia: Like never before with high speed and creativity new military technologies are developed to counter the Russian aggression. Some of these innovations have dual applications, and could be used to create a new, innovative, and competitive car production. Exposure to more competition will generate the incentives to Ukrainian car producers to become more innovative and get interested into what is developed in the defence sector. As a result at least one of the Ukrainian car manufactories can turn into a new surprise-champion between the internationally competitive car producers – just by making smart use of all inventions currently developed in the background of the military sector to protect Ukraine. In short, who is seriously concerned about the future of Ukraine’s car industry, should be the first advocate of dropping import tariffs and restrictions.