Strains on trade: frictions and policy in the Ugandan vehicle sector

Project Active from to Firms and Trade

The secondary markets for motor vehicles and their spare parts loom large in Uganda, as they do in many other low-income countries. In 2015, second only to petroleum products, vehicles represented one of the top imports by value, with most of them being in used condition. The relative affordability of used vehicles allows for deeper penetration into the Ugandan population, of which only every 30th person owns a vehicle. However, the age and depreciation of used vehicles entail market frictions and externalities with potential implications for gains from trade, and ultimately, growth. This project studies some of these frictions and externalities and associated policy interventions.

First, the researchers will analyse the impact and effectiveness of trade policy interventions on vehicle imports and the domestic market, as the Uganda government raised the environment levy on vehicles older than five years in July 2015 and banned the imports of certain vehicles older than 15 years in October 2018.

Secondly, the researchers will examine the network externalities of vehicle manufacturers, the availability of used vehicle parts, and drivers. Drivers benefit from a greater network of drivers with the same vehicle model since the distribution of parts becomes denser, and thus, reduces search costs in the case of repairs. The study explores this effect to inform how a highly unbalanced fleet of vehicles may reduce potential gains from trade.

Lastly, the project studies industrial policy and entry into the global manufacturing value chain. The Ugandan government is promoting the development of vehicle manufacturing through the Kiira Electronic Vehicle Project. Additionally, vehicle parts may also be a candidate for manufacturing, as it requires lower fixed investment and potential for exporting. The study provides statistics with the goal to inform conditions under which local parts manufacturing might be feasible.

At the core of this project lies the estimation of a structural model of the vehicle sector, which includes an encompassing demand for imported vehicles, a demand and supply domestically, and the supply of used parts. To estimate this model, the researchers will combine several sources of administrative data from the Uganda Revenue Authority (URA), survey evidence on the distribution of vehicle parts, and domestic prices from online sales platforms.