On Tuesday, May 9, 2023, Ambassador Marianne Van Steen, Delegation of the European Union (EU) to Jamaica, announced that consumers will be able to import European cars into Jamaica free of duty. The duty-free importation of cars from the EU is part of the Cariforum-EU Economic Partnership Agreement (EPA) which was signed in 2008.

The Cariforum group of countries consists of the members of the Caribbean Community (Caricom) (except Montserrat) and the Dominican Republic. As countries with lower levels of development than their European partners, the Cariforum countries are allowed 15-25 years to gradually remove duty on EU imports except for some Cariforum products which will enjoy permanent protection. At the same time, all Cariforum exports enter the EU free of duty.

I suppose this announcement was greeted by cheers. The DJ in attendance might have played Beenie Man’s hit single, Who Am I, with the signature hook, “Sim simma, who got the keys to my bimmer?” Maybe a few seconds of Bounty Killer’s Benz and Bimmer too. That two of Jamaica’s top 90s dancehall artistes sang about Mercedes Benz and BMW is indicative of the love for German cars in Jamaica. These cars are as much a part of Jamaican culture and life as ackee and saltfish, and Clarks.

However, as all of this is happening in Jamaica, the EU car market is going through a period of significant change as the bloc does its part to reduce carbon emissions.

Germany’s volte face

On Wednesday, June 8, 2022, the EU Parliament voted to ban the sale of new diesel and gasoline cars by 2035. The law was formally approved by the EU Parliament on February 14, 2023. Germany has since pushed back against the view that all internal combustion engines (ICE) must be banned and argued for the continued use of ICE vehicles powered by green fuels, formally known as synthetic fuels.

Synthetic fuels are made using hydrogen and carbon dioxide. The carbon dioxide used in the production process is removed from the atmosphere, earning these synthetic fuels the carbon-neutral label. The production of synthetic fuels is extremely expensive, relative to fossil fuels; however, costs are expected to come down significantly within the next decade. It should be noted that synthetic fuels can be used in fossil fuel-powered vehicles and can be dispensed from the same gasoline pumps currently in use today. Indeed, the chemical composition of synthetic fuels is the same as fossil fuels.

Most countries, Jamaica included, do not have any legislation close to the ambitious European plan for reducing carbon emissions. Since European law will only prohibit the sale of fossil fuel-powered vehicles in Europe, it is quite possible that fossil fuel-powered vehicles could be produced in Europe and sold to countries outside of Europe.

Germany, Europe’s largest economy, is heavily dependent on its car industry. To be sure, Germany’s main merchandise export is cars. Car exports constitute about 10 per cent of Germany’s total merchandise exports of about US $1.6 trillion, add other vehicles and vehicle parts and that number jumps up to about 16 per cent of total merchandise exports. Germany also has an open economy, with the export and import of goods and services amounting to about 89 per cent of gross domestic product (GDP) in 2021. This same measure was about 25 per cent during the same period for the United States, making it a relatively closed economy.

Jamaica’s purchase of German cars accounts for significantly less than 1 per cent of Germany’s total car exports, but in the world of business, every unit sold matters, every repeat customer is welcomed, every customer is a brand ambassador.

The Jamaican context

While the removal of import duty will also be applied to electrical vehicles (EVs), once they meet the strict rules of origin criteria, it is unlikely that this will significantly change the minds of those people who are not already contemplating the purchase of an EV. Currently, the price of an EV is greater than that of ICE cars, notwithstanding, of course, the reduced cost to power EVs.

When considering the purchase of a car, a consumer must consider not only the initial cost but also insurance premiums and maintenance costs, inclusive of labour costs. Every day we hear Jamaican entrepreneurs lament about how hard it is to find skilled labour, it stands to reason, therefore, that it will take years before there is a sufficient cadre of local mechanics skilled in maintaining electrical vehicles. There is also the issue of availability of charging stations. On the upside, EVs need less maintenance than ICE vehicles as they have fewer moving parts to maintain.

The removal of import duty brings into focus the issue of government revenues. It is estimated that the import duty on European cars was about $1.5 billion for the fiscal year 2022/2023. This is about 1 per cent of the estimated expenditure of the Ministry of Education for 2023/2024. It should be noted, however, that the $1.5-billion figure includes revenue earned from European cars which do not meet the strict rules of origin criteria and will, therefore, not be allowed duty-free entry. The rules of origin require that a European car is primarily manufactured in Europe. Import duty aside, there is an array of other duties and charges which still apply, such as general consumption tax and special consumption tax.

The removal of duties on EU-made cars will be phased out over 15 years, thereby preventing a shock to government revenues. Additionally, the reduced cost for European cars could lead to an increase in volume, thereby increasing the amount of revenue earned from the other duties and charges.

It is crucial that Jamaican firms take greater advantage of the provisions provided by the EPA and increase their exports to the EU. The days of preferential trade are effectively over, the age of reciprocal trade is here.

Dr Samuel Braithwaite is a lecturer in the Department of Economics at The University of the West Indies, Mona. He is also a technical consultant at Growth Perspectives Limited. Send comments to the Jamaica Observer or braithwaitesamuel@gmail.com.