AM Online

Problem of price disparity will remain after review

"The European Commission (not to mention the UK's Trade and Industry Department) is wasting its breath asking for pre-tax car prices to be uniform throughout the EU.

The difference in prices comes about because various member states – but still separate nations – have different taxes and laws. The Commission is still trying to make the Treaty of Rome work as if there were truly a single EU market.

In the revision of automotive Block Exemption, the Commission is behaving as if the European Union was totally integrated in the same way as the United States of America. Though there are differences in sales taxes levied on new cars in various American states, the difference is never more than eight percentage points.

Therefore, it is no great problem to charge the same pre-tax price to prevent arbitrage and to live with the slight differences in post-tax prices.

Of course, there is no exchange rate problem in the US creating price differentials. However, even the introduction of the euro as the medium of exchange in the EU's Euroland will not solve the problems of different prices.

The point is that within the EU there are massive differences in sales taxes on cars with some countries like the UK, France, Italy or Germany only levying VAT (albeit at different rates). Others, like Denmark, the Netherlands and Ireland levy VAT and an often high supplementary tax.

Countries get away with charging different tax rates because consumers cannot force them to equalise them. Customers must pay the tax in the country of registration and usage. Therefore the Danes cannot vote with their feet by buying cars at a much lower tax-inclusive price in Germany. All this is to protect the tax-raising powers of the high tax countries. So the tax variations remain.

The result is obvious to any student of economics: the higher the tax, the lower the pre-tax price. Therefore, as long as huge variations in taxes remain, so will differences in pre-tax prices, as long as arbitrage is limited.

Personal importers can avail themselves of the pre-tax differences but such is the limited volume of this trade, the pre-tax prices are not moved. This would require commercial arbitrage where the extra buying in the low price market and extra selling in the high price market would equate prices.

This does not occur because of selective and exclusive distribution (car manufacturers appointing dealers who have defined sales territories). It is unlikely that commercial arbitrage outside the, albeit extra, dedicated sales channels allowed post-September 2002 will do this. Hence different pre-tax and, of course, post-tax prices will remain.

The shape of the replacement for the current Block Exemption should be in place by the spring. The Commission, having thought it knew best, was confronted with the awkward possibility that what it wanted could, in the long run, leave consumers worse off.

The Commission's proposals should be revealed by the end of the year. A consultation period will follow, and then the proposals will be adapted with or without amendments. The Commission does not have to listen to the European Parliament's views, but would be pretty stupid not to. The Commission is still on track to have its revised scheme for car sales and service in place by October 2002."

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