The government is bragging about its shiny new free trade deal with Japan by suggesting the price of the average Japanese car will be $1500 cheaper.

They’re wrong.

Either those within the government spruiking the $1500 figure don’t understand how the current 5 per cent tariff on imported vehicles is applied (highly unlikely) or they don’t understand the economics of the car industry (possible, but still unlikely). Or they could simply have been going for political points (highly likely).

First, some background.

Japanese cars sold in Australia fall into five broad categories:

Small cars, typically priced between $15,000 and $30,000

Mid-sized SUVs, typically priced between $30,000 and $45,000

Mid-sized sedans and hatches, typically priced between $30,000 and $45,000

Large SUVs, typically priced between $40,000 and $60,000

Large off-roaders, typically priced between $60,000 and $100,000

There are others, but they’re generally much smaller players.

Japanese brands also account for a large chunk of the 180,000-odd utes sold in Australia each year – the Toyota Hilux and Mitsubishi Triton, for example - although almost none are produced in Japan, so any FTA will have no impact. Similarly, some Japanese-branded vehicles, such as the Nissan Pulsar, Honda CR-V and Honda Civic, are produced outside Japan, so will not be impacted by recent FTA announcements.

Australia's highest selling car - the Toyota Corolla - won't necessarily be cheaper once the free trade agreement with Japan commences.

Of the categories listed above, it’s the small cars and mid-sized SUVs that account for most of the 370,000-odd Japanese cars sold in Australia annually. While car makers won’t reveal how much they’re paying in tariffs for each car (it would reveal the wholesale prices they pay) best estimates have it at about 3 per cent of the price the customer pays for a car.

So the savings on the majority of Japanese cars by the elimination of import tariffs would be between $450 and $1350. Think something like $750 off your average Corolla or Mazda3 and closer to $1000 off a typical SUV – that’s still well short of the government’s more impressive $1500 projected savings.

But – and this is the big but... That’s assuming the car makers will pass on the savings.

In February this year Australia’s biggest car importer and Japan’s largest car maker, Toyota, showed that free trade agreements don’t necessarily lead to cheaper cars. The Japanese giant began importing its Corolla sedan from Thailand (with no tariffs), yet it was $750 more expensive than the Corolla hatch that comes out of Japan and is slugged with a 5 per cent import tariff.

Theoretically the car should have been $700 cheaper – at least that’s what the Federal Government would have you think – but instead it was $750 more expensive.

Toyota tried to justify the move by fitting extra equipment, such as a reversing camera. But there’s little doubt much of the savings that many expected to be passed on to buyers was heading directly towards fattening profits.

At the time, Toyota Australia marketing director Tony Cramb said it was about positioning the car against competitors: “We think we’ve priced this vehicle to the market, and we think at that price it’s terrific value and better than what the customer can currently get.”

Toyota Australia spokeswoman Beck Angel today refused to say whether other Toyota models impacted by the Japanese FTA would be cheaper in future.

“It’s too early for us to speculate on pricing because we need time to assess the implications of the free trade agreement,” said Angel.

The reluctance to cut prices is largely about maintaining price points and keeping an eye on competitors. Car makers hate venturing too far from established price points - $25,000 for a small car, $35,000 for a city SUV, and so-on - because reducing prices can impact resale values (the biggest cost of owning a new car) and reduce profits.

Toyota Corollas

In a familiar industry response (Hyundai and Kia say they won’t necessarily reduce prices when the South Korean free trade agreement kicks in) Mazda Australia spokesman Steve Maciver also refused to commit to price reductions.

“We need to wait to see what the market’s doing, what our competitors are doing and also taking into account the exchange rate,” said Maciver. “A 5 per cent reduction in import duties may not be as significant as a longer term change in exchange rates; exchange rates are one of the biggest stresses we’re going to deal with in terms of pricing cars.”

And it’s those broader economic conditions that are most likely to impact vehicle prices as we head towards the end of vehicle manufacturing in Australia.

The Australian dollar is the biggest factor in setting vehicle prices in Australia.

If it goes up dramatically, car prices will generally trend down or car makers will raid the parts bins to fit more gear, such as satellite-navigation or leather seats. If it goes down, manufacturers will start tearing out equipment or looking to slowly step prices up.

If any economist can accurately predict what the exchange rate is likely to do over the next few years then we’ll have a much clearer picture of what we’ll be paying for cars years for now.