Pakistan’s accession to the United Nations Economic Commission for Europe (UNECE) WP-29, a global framework for harmonizing vehicle regulations, marks a pivotal moment for the country’s automotive industry. WP-29 sets international standards for vehicle safety, environmental protection, energy efficiency, and anti-theft measures, and its implementation in Pakistan is expected to align the country’s automotive sector with global norms. This alignment presents a significant opportunity for Pakistan to boost its automotive exports and establish itself as a competitive player in the global market.
Key Aspects of WP-29 Implementation in Pakistan
1. Regulatory Alignment: Pakistan is actively working to harmonize its vehicle safety and environmental regulations with UNECE’s WP-29 standards. This alignment involves adopting technical regulations related to vehicle safety, emissions, and energy efficiency, ensuring that vehicles manufactured in Pakistan meet international standards.
2. Legislative and Administrative Changes: To comply with WP-29 regulations, the Pakistani government is expected to introduce new laws and amend existing ones. These changes will likely impact vehicle manufacturing, import standards, and testing procedures, requiring local manufacturers to upgrade their processes and technology to meet the stringent requirements.
3. Impact on the Automotive Industry: Local manufacturers will need to adapt their production processes to comply with WP-29 standards. This adaptation may involve significant investments in technology, adopting new testing protocols, and ensuring compliance with stringent safety and environmental criteria. While this presents challenges, it also positions Pakistan’s automotive sector to compete in international markets.
4. Consumer Benefits: With WP-29 implementation, consumers in Pakistan can expect access to safer and more environmentally friendly vehicles. Additionally, the alignment with international standards will facilitate the export of Pakistani-made vehicles to countries that adhere to UNECE regulations, potentially increasing the availability of diverse vehicle models in the domestic market.
5. Challenges: Implementing WP-29 standards poses several challenges, including the need for significant investment in technology and infrastructure by local manufacturers. The transition period may require substantial support from the government and industry stakeholders to ensure a smooth shift to these new standards.
6. Global Integration: By adopting WP-29, Pakistan is moving towards greater integration with global automotive markets. This step is likely to attract foreign investment, foster collaborations with international automotive companies, and enhance the country’s export potential.
Addressing Contractual Limitations to Unlock Export Potential
One of the major hurdles for Pakistan’s automotive sector is the restrictive contract agreements between local manufacturers and their international principals. These contracts often limit production to the domestic market, severely restricting export opportunities. The Auto Industry Development and Export Policy (AIDEP) 2021-26 highlights this issue and calls for renegotiating these agreements to allow for exports, thus contributing to the growth and global competitiveness of Pakistan’s automotive industry.
Export Mandates and OEM Contract Renegotiations: Under the AIDEP 2021-26, Pakistan has introduced mandatory export targets for OEMs, starting with a 2% export ratio of total imports in 2022-23, rising to 10% by 2025-26. To encourage compliance, early achievement of these targets will be incentivized. The government is urging local OEMs to renegotiate existing contracts that currently restrict exports, aiming to remove barriers and promote exports to targeted international markets.
Tensions with Japanese Automakers and WTO Concerns
Despite these efforts, Japanese car assemblers in Pakistan have been reluctant to meet export targets. This reluctance led to a temporary suspension of their import quotas by Pakistan’s Ministry of Industries and Production (MoI&P). In response, the Japanese government raised a Specific Trade Concern (STC) with Pakistan, arguing that the mandatory export requirements violate WTO agreements. If unresolved bilaterally, this dispute could escalate to the WTO dispute settlement body, a process that could take up to a year to commence.
Challenges Faced by OEMs
OEMs in Pakistan have identified several challenges in meeting the export targets set by the government:
- Lack of Free Trade Agreements (FTAs): The absence of FTAs that include automotive parts makes Pakistan-origin parts and vehicles less competitive in international markets.
- Absence of Local Raw Materials: The lack of locally available raw materials, such as steel, copper, and aluminum, increases production costs, making exports less viable.
- Limited Markets for Right-Hand Drive Vehicles: The limited number of markets that use right-hand drive vehicles further restricts export opportunities.
To address these challenges, the automotive sector has proposed several measures, including:
- Establishing zero-rated FTAs for auto parts with ASEAN, GCC, and African regions.
- Safeguarding local investments and localized parts in any FTA negotiations.
- Extending zero-rated export incentives to tier-1 and tier-II suppliers of OEMs.
- Developing local industries for essential raw materials and processing industries for resin and rubber materials.
Legal Challenges
The automotive sector in Pakistan is also facing legal hurdles, with 25 cases currently in local courts. Of these, 23 cases involve new entrants to the market, while two have been filed by existing assemblers. These legal challenges further complicate the industry’s path to export growth and highlight the need for a supportive legal framework to facilitate the transition to a more export-oriented industry.
The Impact of Economic Crisis and WP-29 Standards on Local Manufacturers
The economic crisis in Pakistan has exacerbated the challenges faced by local vehicle manufacturers. The imposition of WP-29 standards by the Engineering Development Board has further strained the industry. Notably, a major Japanese car manufacturer in Karachi has succeeded in achieving the WP-29 standard, while others have struggled to comply. The largest car manufacturing company in Karachi, for instance, failed to meet the standards, leading to the closure of its plant on July 28, except for a brief reopening during a federal minister’s visit. According to company sources, vendors failed to deliver four critical parts as per the WP-29 standard, contributing to the plant’s closure.
In response to these challenges, both auto manufacturers and parts suppliers have requested the government to extend the deadline for WP-29 compliance. This extension would provide the industry with the necessary time to adjust to the new standards and avoid further disruptions in production.
Takeaway of the article:
Pakistan’s accession to WP-29 and the subsequent push to transform its automotive sector into an export-oriented industry represent significant steps towards integrating with global markets. However, achieving these goals will require overcoming substantial challenges, including renegotiating OEM contracts, addressing legal disputes, and developing local industries to support export competitiveness. The ongoing negotiations with Japanese automakers and the potential WTO dispute underscore the complexities involved in this transformation. With strategic planning, cooperation between stakeholders, and government support, Pakistan’s automotive sector has the potential to emerge as a key player in the global market, driving economic growth and job creation in the process.
This exclusive article has been written by @asif-mehmood and published in Automark magazine’s September-2024 printed/digital edition.