Wet blue: The everlasting question Would apply or not a tax be only a detail?

One of the most recurring themes in the foreign trade policy covering the footwear-leather chain is the imposition of a tax on the export of hide at the Wet Blue Stage. At every year end, application or not of a tax on the Wet Blue hide is the key question that is scheduled in the agenda for debates of the tanning industry in Brazil. Application of a tax on export of Wet Blue started in 2001, after years of pressure made by the tanning and footwear industry, mainly the ones of the southern region of the country, not at ease with the extraordinary growth in export of the low added value hide. At that time the CICB – Centro das Indústrias de Curtumes do Brasil – supported the application of a tax, but tried to condition it to the use of its resources in development of commercial promotion policies that aim at the stimulation of export of the higher added value hide. CICB was not successful in its proposal, because the government that always acts as the “Lion of the Income Tax”, has feigned that it did not hear. Since 2001, the application of tax on the Wet Blue has stuffed the public safes, in average with approximately US$ 35 millions / year, with no return in terms of support and incentive to the commercial promotion or of policies that stimulate investments in industrial parks directed to the export of higher added value hide.

Application of the tax – that at the beginning was of 9% – dropped to 7% and was inserted in a reduction schedule that foresees a percentage of 4% by 2007 and 0% by 2008. This position, reflected in Resolution of Camex, is supported by the Foreign Minister of Development, Industry and Commerce. For several industries, this is a dangerous governmental signal in favor of export of low or no added value products. The government, according to some businessmen, is not giving the adequate importance to the potential that the export of the footwear-leather chain has. And thus, Brazil is becoming the worldwide vendor of low value raw material that is transformed into footwear that compete with the local manufacturers.

The ministerial position is focused on the free trading policy. But, what can be said regarding this when we see that more than one third of the Wet Blue hide exported to Italy, is transformed in high value shoes and that a higher percentage goes to China and Hong Kong, which are progressively destroying traditional Brazilian footwear marketplaces in the USA ?

Many other questions remain without replies, such as what should be done with the excess of hide - the hide that remains in the footwear industry and leather manufacture after the internal demand has been satisfied? Under the point of view of the free market policy, everything is valid, this means, the excess should be exported, in any form, even if primary, as low added value. But why the country does not adopt a program that stimulates export of higher added value hide? Thus, even without imposing restrictions to the sale of any type of hide, the government would leverage the noble export for added value products, without accepting to be a mere vendor of low price raw material.

However, the government has been adopting a comfortable position of “washing the hands” as if, in being apparently neutral, is allowing that the market self-adjusts itself and chooses its own way. The result is the adoption, through omission, of a conformist foreign trade policy of the type: “if Brazil does not sell Wet Blue, someone else shall sell”. As long as this omission exists, Brazil gains, as the nominal export of the Wet Blue contributes to the balance of trade, but does not fairly gain (in addition to loosing) in the higher added value marketplace.

COUROBUSINESS, on the brink of changing the calendar, that will reduce application of tax on Wet Blue from 7% to 4% as of January 1st., 2007, has made a few questions to hide export companies as related to the theme and has received the following replies :

 

1. Should the schedule be maintained or an effort should be made to maintain the tax application at a minimum of 7%?

 

From the replies that were received by COUROBUSINESS, 75% believe that the schedule should be maintained, 25% think that the best thing would be to maintain the tax application in at least 7% Within these percentages are not considered the replies sent by AICSUL (Associação da Indústria de Curtumes do Rio Grande do Sul) and of the State of Goias Labor Union, one in favor of the keeping up of the schedule and the other against it.

 

1. Did the tax application achieve its goal to inhibit the exit of Wet Blue and stimulate exit of trimmed?

 

The reader should report to the Point of View written by César Müller of AICSUL, with the very solid arguments that the application of tax has achieved its goal, mainly while the percentage of 9% was in force From the replies that were received by COUROBUSINESS, practically everybody believe that the tax application has not achieved these two objectives. A few replies seem conditioned to the recent rise of the Wet Blue export. Some believe and have replied in this way, that the tax application did not achieve the purpose due to the fact that it is extremely low. Asking which would be the ideal percentage, the reply point out to something above 10%, this means, to inhibit, the percentage of the tax to be applied should be significantly above the current percentage. But some also indicated that “no tax application is capable to inhibit the export of the Wet Blue”.

 

1. Since 2001, on a yearly basis, the private segment pays approximately US$ 35 millions in average, to export WB. The tax application that the segment has requested, without any government counterpart in terms of project can be considered as a historical error?

 

For the owners of tanneries located in the state of Goias, based on the opinion of the President of the Labor Union of that state, João Essado, the application of the Export Tax on Wet Blue "has resulted in no benefit to none as related to added value”. This affirmation is exactly the opposite to the opinion of César Müller, president of the AICSUL, Associação das Indústrias de Curtumes do Estado do Rio Grande do Sul. Müller (see Pont of View in this edition) is emphatic in the defense of the Wet Blue export restriction and shows, with figures, that the tax application has resulted in an expansion in export of high added value hide (Trimmed Hide) and a minor growth in export of Wet Blue. He sees the tax incidence as something necessary, as he believes that a country such as Brazil, cannot be satisfied in being a mere export of raw material, a low added value product such as the Wet Blue. João Essado, president of the State of Goias Labor Union, says that the tax was not created to increase export of higher added value hide, but to "subsidize a small part of a segment that has several states of industrialization, where only a few organizations can benefit of such tax to depreciate the price of raw material, fresh hide, and as always is the case to have our cattle farmer and rural producer pay the account, transferring the revenue of the productive segment to some industrial units”.

With his opinions and arguments diametrically opposite to those of Müller, Essado believes that the schedule related to the reduction in the Export Tax percentage on the Wet Blue should be followed. He foresees that the percentage will fall to 4% in 2007, last year of the tax application validity. Confronted with the added value export thesis, he comments: “We are favorable to the added value, with a governmental policy covering foment and incentive, using the Competitiveness Forum already installed and coordinated by the Ministry of Foreign Development of Industry and Commerce which contemplates all the industries with equality”. And he continues saying that “the unique alternative for not exporting the Wet Blue is to throw it away”. Thus the arguments in favor and against alternate. While the ACISUL believes that the schedule should be reviewed and the tax percentage should return to 9%, or even above this percentage the State of Goias Labor Union would like that the tax application expires on December 31st, starting 2007 in 0%.

In the State of Rio Grande do Sul, represented by César Müller, are located the most traditional tanneries of the country, and the historic defense of the restriction to exit of Wet Blue is a natural consequence of this condition. Investments in technology and professional qualification have always been directed to the added value, and not to sales of raw-material. The displacement of the Brazilian Cattle, however, has enabled installation of tanneries in other regions of the country, has changed the tanning industry map, and the newcomers act free of qualitative historic commitment with the past and, who knows, also free of commitments with the future. For them the present is to export whatever is possible, and this is clearer every day with the indication of slaughterhouses in the list of major exporters of hides, obviously Wet Blue hide.

This condition should be reviewed in depth. From one side, the business vision, divided, fragmented, and on the other side a vision of the country, which should be good for the future. During years, we were sure that detaining the title of the major herd of cattle at worldwide level, having the, so longed for, raw material, this was a comparative advantage. The globalization, followed by the phenomenon China, has cancelled these convictions. The comparative advantage nowadays, is to produce at a minor cost, independently of having or not the production factors or where they may be.

To the exporters of Wet Blue, it is the door through which to ender in the export of higher added value, and thus, it is a type of "business card" of the Brazilian hide. This is how the State of Goias Labor Union believes. The risk is having the export of wet blue only as a “business card” and not inducing the investments to make it a Trimmed hide and qualify the Brazilian export. Or the country accepts, in principle, the concept of being an export of Wet blue.

The preponderant reply to the COUROBUSINESS question is that it was a mistake to accept application of the tax without any counterpart. The majority believe that it was not a historic error. Augusto Coelho, one of the most expert and respected businessmen of the segment says that “in a way, the tax actuates as a barrier, although extremely weak, against eventual intension of global consumers of Brazilian Wet Blue hides to install themselves in Brazil”. According to Coelho, the fact is that “this tax did not achieve its original objective and, without any counterpart, for sure it became an additional burden to the businessman of the segment However, he says I do not believe that it was a historic error, but I have not seen any benefits with this action. Neither do I believe that the local footwear industries have perceived any advantage with the tax. Now, they are suffering more due to the Chinese competition and with the strong Real”.

Another reply provides the reality in an objective manner: “What happened was an analysis error of the global economic scenario. China became a plant of the world and Brazil thought that by having the raw material, it would dominate the global market”.

 

 

 

Editor's Opinion

 

What can be noted is that the question of applying or not a tax on the Wet Blue is only a detail - even if important - of the wide panorama of the Brazilian export in the footwear-leather chain. The fact of the government “washing its hands” and the segment to fragment in unlike positions without a long term planning, is a risk factor for the leather industry. It makes no sense having long debates during internal strategic planning sessions that do not have as priority item, the creation of a matrix of interests of the tannery industry, with focus on the global market, which, above the minor interests, are the legitimate and major interests of the country in repositioning oneself with nobility in this market.

It is evident that there is no minor consensus in the business environment and any formulation of a macro consistent vision seem quite far. In this scenario, prevails the free market. The tannery segment “is ” not divided as related to the theme. It has always been and will always be divided as a part would like to prevail on the other, in a regional unconsequent dispute, in which “A” feels more important than “B”. The reality is unfair but is real. The tanning industry attends the internal market and has no other alternative than the international market. The 2006 export should exceed US$ 1,8 billion and in 2007 for sure will reach the historic milestone of US$ 2 billions. And we cannot forget that the newcomers - the slaughterhouses - do not feel committed with the history of the tanning industry, of which they have always been mere coadjuvants. Tired of this role, they become legitimately actors of this international game.

While this does not happen, what could be a win-win came became a loss-gain play of isolated games. In truth, they all seem to play against each other, a highly interesting behavior for the adversary. The tanning industry should, through its representatives, suggest - in case of maintenance of the 4% or 7% tax application, - that the total amount of the resources be linked to a Fund with specific application in projects of direct interest to the tanning national industry, having as background the improvement in quality of the Brazilian hide and the stimulation to transform the Wet Blue exporter in a Trimmed hide exporter.

In a short time, the exporter will group around a Brazilian Hide Exporter Association, having as assumptions the free trade and the lack of restrictions as well as the commitment to export what exceeds of the internal market demand. In truth, this is what is happening now.

Revista Courobusiness – Ed. 48 – Set/Out 2006