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Free Trade Agreement car savings explained

The 5 per cent tariff reduction is not taken off the final sale price of a new car.

Last week's decision by some Japanese brands to reduce prices as a result of the new Free Trade Agreement between Australia and Japan caused quite a stir, with some observers claiming the car companies were pocketing half of the 5 per cent tariff reduction.

They weren't. It was just that the 5 per cent reduction is based on what they call the "landed price" of cars not the recommended retail price. The real story, according to industry insiders, is that the "landed price" seems to be roughly half what customers pay.

That hatchback you bought for $20,000 actually cost $10,000 before it landed here

Yes, that hatchback you bought for $20,000 actually cost $10,000 before it landed here — and before customs, government, the local distributors, the dealers, the transport companies and the myriad marketing agencies took their cuts.

The other untold story of last week is that the Koreans, to a brand, didn't pass on any savings. Again, there's a good reason for that. For the past year or so, the Japanese have been reaping the rewards of a weak yen, buying cars more cheaply from head office and making more profit. But the Korean won — and the euro and US dollar for that matter — has been much stronger than the Australian dollar, squeezing profit margins.

So while it was good PR for the Japanese to pass on the tariff savings, truth is they were merely giving back some of those fatter margins. The Koreans, on the other hand, saw the tariff cut as a chance to claw back some profit.