Export duty

3 September 2007

Kenya and Uganda have recently doubled their export duty on raw hides and skins and are presumably contemplating the introduction of an export duty on wet-blue in order to boost the value addition to their leather industry. Although tariffs are against everything that 'free trade' stands for I must admit that in certain cases tariffs are justified. Some countries need to protect themselves from being deprived of their natural resources. Kenya and Uganda were exporting the great majority of their natural resources of hides and skins in the raw while well equipped local tanneries had a very hard time to compete with the raw hide and skin exporters on the local market for supply. The result was that several tanneries had to close. The fact that a tannery like Bulleys, which was fully equipped for the export of finished leathers, was unable to keep its head above water, shows that it is not automatic that you can compete on the raw market by processing finished leather. It seems incredible, however, that a tannery in China can buy Kenyan raw hides at incredible prices, transport the hides over 8,000 nautical miles and transform them to sell at a price that competes with locally processed leather in Kenya! But who benefits if tariffs are introduced? Hides, skins and, partly, also processed leather are market commodities which strictly follow a pattern that is formed by offer and demand on the international market. Each origin commands its own price basis which is formed by the quality of the raw material in that particular region but valued within the complexity of the international market. Depending on the demand for finished leather, prices increase or decrease from region to region, apparently one independently from another but in reality closely connected. Right now we see raw hides from so called good quality markets weakening whereas prices from low quality markets (East Africa) remaining steady and are even increasing. The explanation is that the demand for finished leather at this moment is for printed and patent leathers at a thickness that demands spready hides rather than thick hides. If you split a thick well nourished hide to a relatively low substance, the fibre structure of the grain is not as strong as leather produced from an underfed animal with a relatively thin thickness but processed merely by shaving without splitting. There you have your African hide versus the Angus or Friesian cattle hide. Today. Tomorrow will tell. As said, prices are formed by offer and demand from the international market and only marginally by local situations. Hence if, like recently happened, Kenya (or whatever other country) decides to increase the export duty on their hides by 20%, the price at which these raw materials are sold into the international market before and after the introduction (or increase) of export duty does not change or only slightly. This is logical because if an importer buys hides at, let us say, $1 from country A, he decides to do so because in the competitive environment he prefers to buy from country A (at $1) rather than from country B (at $1.05) based on the price/quality comparison. If this comparison price/quality changes between countries A and B because country A increases its export price from $1-$1.20 in which the 20 cents represent 20% export duty, the buyer either confirms his willingness to buy from country A at $1 up to $1.05 or if he can't then he will go to country B and buy at $1.05. If country A does not accept the buyers' price proposal of $1/1.05 then the buyer will stop buying and move his purchases to a more convenient country like B with a comparative type of leather characteristic. Stocks build up in country A increasing the offer with a lower demand as buyers are now buying from country B. In this situation the price must drop in A to match B in order to become competitive again. Since the export price includes 20% (or whatever) duty, the net price that the exporter fetches is $0.83 (after duty paid) against his previous net price of $1 before duty. In short it's the exporter, and the value chain upstream who pay the duty to their own government. This means that the weight of export duty imposition is passed on to the whole value chain and in the end it is the butcher (the grass root poor) who introduces his hide into the value chain who pays the heaviest toll. In fact, all intermediate steps in the value chain from the butcher to the exporter or tanner will always make money once the dust has settled as they work on a commission. So in the end the buck always stops at the butcher, in good times and bad times. The benefit of a drop in the market price at local level in the country that imposes an export duty goes to the local tanners, who before the introduction of the export duty were apparently unable to compete in the raw market with the raw hide exporters. With prices dropping, the local tanners come back into the picture due to the absence of natural competition. This may have a small beneficial effect on the local raw market but never enough to take away the whole loss caused by the duty. This of course doesn't take into account the fact that many hides will start finding their way out of the country via informal channels in order to search for better prices. Kenya have, at this moment, successfully stopped the export of raw hides and skins as a comprehensive export duty of the levied 40% cannot be absorbed. Raw materials would be costing close to nothing at the production level. Kenyan tanners have regained access to the natural resource of their country and that doesn't seem a crime to me. The exporters are obviously not pleased and will be paying the ultimate price if this policy is maintained without a compromise that gives them some leeway. KRA, Kenya Revenue Authority, who cash the export duty, is another victim of the export duty. They are left without a job since revenue from exports of raw hides and skins has effectively come to a complete halt. What surprises is that KRA are adding insult to injury. Kenya benefited from value addition by contract tanning raw hides and skins from surrounding countries, but KRA are making continuation of this impossible by demanding import duty on transit skins. The excuse for this levy is that KRA suspects local tanners of using the transit contract tanning in a fraudulent way. KRA doesn't bother to explain what that is, because the transit material is for processing not for export in the raw. The opposite of imposing export duty on raw materials is the case when an import duty on raw hides and skins is imposed. Tanners see their import prices increase with the import duty which only they are to absorb because the international market doesn't compensate. Tanners become less competitive on the international market with their tanned products, hence they must buy from the local raw market who get the actual benefit of the import duty. Tariffs are an extremely sensitive subject and should be carefully evaluated as to whether to not they should be imposed. Since trade has become international, these matters should be dealt with on the highest international political level and tariffs should be permitted only to those countries that really need them to protect their own industry from destruction. They should not be allowed to countries that just want to protect their industries from competition. Sam Setter [email protected]

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